>right to bring actions; for the sake of venue: the place

I. GENERAL PROVISIONS of business of the suing corporation is considered its

residence
1. Definition of a Corporation
SEC. 2, RCCP: A corporation is an artificial being >right to acquire and possess properties
created by operation of law, having the right of succession and While a share of stock represents a proportionate
the powers, attributes, and properties expressly authorized by interest in the property of the corporation, it does
law or incidental to its existence. not vest the owner thereof (even assuming that
it/he is the controlling shareholder) with any legal
FOUR ATTRIBUTES OF A CORPORATION right or title to any of the properties of the
corporation owned by the latter as a distinct
1. An artificial being juridical person (Saw vs. CA, 1991).

“Doctrine of corporate entity”

>personality separate and distinct from its members and
stockholders; a juridical person capable of having rights
Corporation as a “person-” it is regarded as a person
and obligations
within the purview of those terms as used in
constitutional or statutory provisions, whenever this
>Doctrine of Limited Liability- stockholders are not
becomes necessary in order to give full effect to the
personally liable for corp’s obligations and cannot be
purpose or spirit of the Constitution or statute.
held liable to third persons who have claims against the
EXPN: in so far as liberty is concerned; in purview of
corporation beyond their agreed contribution to the
Sec. 17, Art. III of the Constitution against self-
corporate capital.
incrimination
>a suit against certain stockholders of a corp
Corporation as a “resident-” a corporation formed in
cannot ipso facto be a suit against the unpleaded
one State may be, for certain purposes, domiciled or a
corporation (The corpo should be impleaded,
resident in another State in which it has its offices and
otherwise it’s a violation of their right to due
transacts business, notwithstanding the fiction of the law
process)
that a corporation dwells only in the State of its creation
>properties of the corp are not properties of the
and cannot migrate therefrom. *A foreign corp licensed
stockholders or members and may not be sold by
to do business in the Phil is not a nonresident within the
the stockholders or members without express
meaning of Sec 1, Rule 57 of the Rules of Civil
authorization of its board of directors or trustees.
Procedure--- check sa 2019 amendments.
Their interest is, if any, indirect, inchoate, and
contingent.
Corporation as a citizen
 Citizenship is the status of a citizen with its rights and
privileges and corresponding duties and obligation.
Citizen implies membership in a political body and,
therefore, does not ordinarily include a corporation,
unless the general purpose and import of the statue in
which the term is found seem to require it.
A corporation is a citizen within the meaning of a
statute conferring rights, defining the jurisdiction
of courts, or otherwise relating to citizen, if the
purpose and intent of the statute renders it
applicable, and for such purpose it is, as a
general rule, a citizen of the State or country by
or under the laws of which it was created and
exists without regard to the citizenship of its
stockholders or members.
Citizen, as used in connection with corporations
is synonymous with domicile or residence.
2. Created by operation of law
>mere consent of the parties is not sufficient; there
should be a special law or general law enabling its
creation
3. With right of succession
>its continued existence during the term stated in its
article of incorporation cannot be affected by any change
in the members or stockholders; nor by the transfer of
shares by a stockholder to a third person
4. Only has powers, attributes and properties expressly
authorized by law or incident to its existence
>mere creature of the law; it can exercise only such
powers as the law may choose to grant it, either
expressly or impliedly
>the test to be applied is whether the act of the
corporation is in direct and immediate furtherance of its
business, fairly incidental to the express powers and
reasonably necessary to their exercise.
A. Theories in the formation of a corporation
I. Theory of concession (Tayag vs. Benguet
Consolidated Inc., 26 SCRA 242, 1968)
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.
Before a corporation may acquire juridical
personality, the State must give its consent either
in the form of a special law or a general enabling
act, and the procedure and conditions provided
under the law for the acquisition of such juridical
personality must be complied with. The failure to
comply with the statutory procedure and
conditions does not warrant a finding that such
association achieved the acquisition of a
separate juridical personality, even when it
adopts sets of constitution and by-laws.
II. Theory of Enterprise Entity
 Corporations are composed of natural persons
and the legal fiction of a separate corporate
personality is not a shield for the commission of
injustice and inequity, such as the use of
separate personality to avoid the execution of the
property of a sister company.
A corporation is but an association of
individuals, allowed to transact under an
assumed corporate name, and with a distinct
legal personality. In organizing itself as a
collective body, it waives no constitutional
immunities and perquisites appropriate to such a
body.
B. Artificial Being
CASE: CHING V. THE SEC OF JUSTICE, GR
NO. 164317, Feb. 6, 2006
FACTS: Ching was the Senior Vice-President of
Philippine Blooming Mills, Inc. (PBMI). Sometime
in September to October 1980, PBMI, through
petitioner, applied with the Rizal Commercial
Banking Corporation (respondent bank) for the
issuance of commercial letters of credit to finance
its importation of assorted goods. Under the
receipts, petitioner agreed to hold the goods in
trust for the said bank, with authority to sell but
not by way of conditional sale, pledge or
otherwise; and in case such goods were sold, to
turn over the proceeds thereof as soon as
received, to apply against the relative
acceptances and payment of other indebtedness
to respondent bank. In case the goods remained
unsold within the specified period, the goods
were to be returned to respondent bank without
any need of demand. Thus, said “goods,
manufactured products or proceeds thereof,
whether in the form of money or bills,
receivables, or accounts separate and capable of
identification” were respondent bank’s property.
When the trust receipts matured, petitioner failed
to return the goods to respondent bank, or to
return their value amounting to P6,940,280.66
despite demands. Thus, the bank filed a criminal
complaint for estafa6 against petitioner in the
Office of the City Prosecutor of Manila.r to
October 1980, PBMI, through petitioner, applied
with the Rizal Commercial Banking Corporation
(respondent bank) for the issuance of
commercial letters of credit to finance its
importation of assorted goods. Under the
receipts, petitioner agreed to hold the goods in
trust for the said bank, with authority to sell but
not by way of conditional sale, pledge or
otherwise; and in case such goods were sold, to
turn over the proceeds thereof as soon as
received, to apply against the relative
acceptances and payment of other indebtedness
to respondent bank. In case the goods remained
unsold within the specified period, the goods
were to be returned to respondent bank without
any need of demand. Thus, said “goods,
manufactured products or proceeds thereof,
whether in the form of money or bills,
receivables, or accounts separate and capable of
identification” were respondent bank’s property. 
When the trust receipts matured, petitioner failed
to return the goods to respondent bank, or to
return their value amounting to P6,940,280.66
despite demands. Thus, the bank filed a criminal
complaint for estafa6 against petitioner in the
Office of the City Prosecutor of Manila.
Petitioner further claims that he is not a person
responsible for the offense allegedly because
"[b]eing charged as the Senior Vice-President of
Philippine Blooming Mills (PBM), petitioner
cannot be held criminally liable as the
transactions sued upon were clearly entered into
in his capacity as an officer of the corporation"
and that [h]e never received the goods as an
entrustee for PBM as he never had or took
possession of the goods nor did he commit
dishonesty nor "abuse of confidence in
transacting with RCBC.
ISSUE: WON THE CONTENTION OF THE
PETITIONER IS CORRECT
HELD: NO.
Petitioner’s being a Senior Vice-President of the
Philippine Blooming Mills does not exculpate him
from any liability. Petitioner’s responsibility as the
corporate official of PBM who received the goods
in trust is premised on Section 13 of P.D. No.
115, which provides:
Section 13. Penalty Clause. The failure of an
entrustee to turn over the proceeds of the sale of
the goods, documents or instruments covered by
a trust receipt to the extent of the amount owing
to the entruster or as appears in the trust receipt
or to return said goods, documents or
instruments if they were not sold or disposed of
in accordance with the terms of the trust receipt
shall constitute the crime of estafa, punishable
under the provisions of Article Three hundred
and fifteen, paragraph one (b) of Act Numbered
Three thousand eight hundred and fifteen, as
amended, otherwise known as the Revised Penal
Code. If the violation or offense is committed by a
corporation, partnership, association or other
juridical entities, the penalty provided for in this
Decree shall be imposed upon the directors,
officers, employees or other officials or persons
therein responsible for the offense, without
prejudice to the civil liabilities arising from the
criminal offense.
Though the entrustee is a corporation,
nevertheless, the law specifically makes the
officers, employees or other officers or persons
responsible for the offense, without prejudice to
the civil liabilities of such corporation and/or
board of directors, officers, or other officials or
employees responsible for the offense. The
rationale is that such officers or employees are
vested with the authority and responsibility to
devise means necessary to ensure compliance
with the law and, if they fail to do so, are held
criminally accountable; thus, they have a
responsible share in the violations of the law.
If the crime is committed by a corporation or
other juridical entity, the directors, officers,
employees or other officers thereof responsible
for the offense shall be charged and penalized
for the crime, precisely because of the nature of
the crime and the penalty therefor. A corporation
cannot be arrested and imprisoned; hence,
cannot be penalized for a crime punishable by
imprisonment.49 However, a corporation may be
charged and prosecuted for a crime if the
imposable penalty is fine. Even if the statute
prescribes both fine and imprisonment as
penalty, a corporation may be prosecuted and, if
found guilty, may be fined.
A crime is the doing of that which the penal code
forbids to be done, or omitting to do what it
commands. A necessary part of the definition of
every crime is the designation of the author of the
crime upon whom the penalty is to be inflicted.
When a criminal statute designates an act of a
corporation or a crime and prescribes
punishment therefor, it creates a criminal offense
which, otherwise, would not exist and such can
be committed only by the corporation. But when
a penal statute does not expressly apply to
corporations, it does not create an offense for
which a corporation may be punished. On the
other hand, if the State, by statute, defines a
crime that may be committed by a corporation
but prescribes the penalty therefor to be suffered
by the officers, directors, or employees of such
corporation or other persons responsible for the
offense, only such individuals will suffer such
penalty.51 Corporate officers or employees,
through whose act, default or omission the
corporation commits a crime, are themselves
individually guilty of the crime.52
The principle applies whether or not the crime
requires the consciousness of wrongdoing. It
applies to those corporate agents who
themselves commit the crime and to those, who,
by virtue of their managerial positions or other
similar relation to the corporation, could be
deemed responsible for its commission, if by
virtue of their relationship to the corporation, they
had the power to prevent the act. 53 Moreover, all
parties active in promoting a crime, whether
agents or not, are principals. 54 Whether such
officers or employees are benefited by their
delictual acts is not a touchstone of their criminal
liability. Benefit is not an operative fact.
In this case, petitioner signed the trust receipts in
question. He cannot, thus, hide behind the cloak
of the separate corporate personality of PBMI. In
the words of Chief Justice Earl Warren, a
corporate officer cannot protect himself behind a
corporation where he is the actual, present and
efficient actor.55
CASE: Filipinas Broadcasting Network, Inc. V. Ago Medical
and Educational Center, GR No. 141994, January 17, 2005
FACTS: Petitioner’s broadcasters Rima ang Alegre broadcast in
two separated dates malicious and libelous remarks against the
respondent and its owner. Respondent filed an action against
the petitioner for damages for the libelous remarks. The RTC
ruled in favor of the Respondent and award Moral damages to
the Respondent only and not its owners. Petitioner and
Respondent went to the CA to appeal the case. CA rendered in
favor of the Respondent awarding moral damages to it but not
its owners. Petitioner went to SC raising the issue that the
respondent is Corporation and not entitled to Moral Damages.
ISSUE: WON the CA is correct that respondent, being a
Corporation, is not entitled to Moral Damages
HELD: No. AMEC is entitled to moral damages.
A juridical person is generally not entitled to moral damages
because, unlike a natural person, it cannot experience physical
suffering or such sentiments as wounded feelings, serious
anxiety, mental anguish or moral shock.
Nevertheless, AMEC’s claim for moral damages falls under item
7 of Article 221943 of the Civil Code. This provision expressly
authorizes the recovery of moral damages in cases of libel,
slander or any other form of defamation. Article 2219(7) does
not qualify whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for
moral damages.
Whether FBNI is solidarily liable with Rima and Alegre for moral
damages, attorney’s fees and costs of suit
SC: The basis of the present action is a tort. Joint tort feasors
are jointly and severally liable for the tort which they
commit. Joint tort feasors are all the persons who command,
instigate, promote, encourage, advise, countenance, cooperate
in, aid or abet the commission of a tort, or who approve of it
after it is done, if done for their benefit. Thus, AMEC correctly
anchored its cause of action against FBNI on Articles 2176 and
2180 of the Civil Code.
As operator of DZRC-AM and employer of Rima and Alegre,
FBNI is solidarily liable to pay for damages arising from the
libelous broadcasts. As stated by the Court of Appeals,
"recovery for defamatory statements published by radio or
television may be had from the owner of the station, a
licensee, the operator of the station, or a person who procures,
or participates in, the making of the defamatory
statements."54 An employer and employee are solidarily liable
for a defamatory statement by the employee within the course
and scope of his or her employment, at least when the employer
authorizes or ratifies the defamation.55 In this case, Rima and
Alegre were clearly performing their official duties as hosts of
FBNI’s radio program Exposé when they aired the broadcasts.
FBNI neither alleged nor proved that Rima and Alegre went
beyond the scope of their work at that time. There was likewise
no showing that FBNI did not authorize and ratify the
defamatory broadcasts.
C. DOCTRINE OF DISTINCT AND SEPARATE JURIDICAL
PERSONALITY | EXCEPTIONS
CASE: Lumanlan v. Cura, GR No. L-39681, March 21, 1934
Lumanlan had unpaid subscriptions.  Company’s receiver sued
him for the balance and won.  While the case was on appeal,
the company and Lumanlan entered into a compromise (a) there was commingling in fact of assets and liabilities of the
whereby Lumanlan would directly pay a creditor of the debtor and the related enterprise prior to the commencement of
company.  In exchange, the company would forego whatever the proceedings;
balance remained on the unpaid subscription.  Lumanlan
agreed since he would be paying less than his unpaid
subscription.  Afterwards, the corporation still sued him for the
balance because the company still had unpaid creditors.  (b) the debtor and the related enterprise have common creditors
Lumanlan’s defense was the compromise agreement. and it will be more convenient to treat them together rather than
separately;

The Court held that the agreement cannot prejudice creditors. 

The subscriptions constitute a fund to which they have a right to
look to for satisfaction of their claims.  Therefore, the
corporation has a right to collect all unpaid stock subscriptions
and any other amounts which may be due it, notwithstanding
the compromise agreement.
(c) the related enterprise voluntarily accedes to join the debtor
as party petitioner and to commingle its assets and liabilities
with the debtor's; and

(d) The consolidation of assets and liabilities of the debtor and

the related enterprise is beneficial to all concerned and
SEC. 7, FINANCIAL REHABILITATION AND INSOLVENCY promotes the objectives of rehabilitation.
ACT (FRIA)

Provided, finally, That nothing in this section shall prevent the

Section 7. Substantive and Procedural Consolidation. - Each court from joining other entities affiliated with the debtor as
juridical entity shall be considered as a separate entity under the parties pursuant to the rules of procedure as may be
proceedings in this Act. Under these proceedings, the assets promulgated by the Supreme Court.
and liabilities of a debtor may not be commingled or aggregated
with those of another, unless the latter is a related enterprise
that is owned or controlled directly or indirectly by the same
interests: Provided, however, That the commingling or
SEC. 58, FINANCIAL REHABILITATION AND INSOLVENCY
aggregation of assets and liabilities of the debtor with those of a
ACT (FRIA)
related enterprise may only be allowed where:
(G) Avoidance Proceedings.
Section 58.Rescission or Nullity of Certain Pre-
commencement Transactions. Any transaction occurring prior to
commencement date entered into by the debtor or involving its
funds or assets may be rescinded or declared null and void on
the ground that the same was executed with intent to defraud a
creditor or creditors or which constitute undue preference of
creditors. Without limiting the generality of the foregoing, a
disputable presumption of such design shall arise if the
transaction:
(a) provides unreasonably inadequate consideration to the
debtor and is executed within ninety (90) days prior to the
commencement date;
(b) involves an accelerated payment of a claim to a creditor
within ninety (90) days prior to the commencement date;
(c) provides security or additional security executed within
ninety (90) days prior to the commencement date;
(d) involves creditors, where a creditor obtained, or received the
benefit of, more than its pro rata share in the assets of the
debtor, executed at a time when the debtor was insolvent; or
(e) is intended to defeat, delay or hinder the ability of the
creditors to collect claims where the effect of the transaction is
to put assets of the debtor beyond the reach of creditors or to
otherwise prejudice the interests of creditors.
Provided, however, That nothing in this section shall prevent the
court from rescinding or declaring as null and void a transaction
on other grounds provided by relevant legislation and
jurisprudence: Provided, further, That the provisions of the Civil
Code on rescission shall in any case apply to these
transactions.
SECTION 30, RCCP
Section 30. Liability of Directors, Trustees or Officers.
Directors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of
the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and
other persons.
A director, trustee, or officer shall not attempt to acquire, or
acquire any interest adverse to the corporation in respect of any
matter which has been reposed in them in confidence, and upon
which, equity imposes a disability upon themselves to deal in
their own behalf; otherwise the said director, trustee, or officer
shall be liable as a trustee for the corporation and must account
for the profits which otherwise would have accrued to the
corporation.
SECTION 99, RCCP
SEC. 99. Agreements by Stockholders. –
(a) Agreements duly signed and executed by and among all
stockholders before the formation and organization of a close
corporation shall survive the incorporation and shall continue to
be valid and binding between such stockholders, if such be their
intent, to the extent that such agreements are consistent with
the articles of incorporation, irrespective of where the provisions
of such agreements are contained, except those required by this
Title to be embodied in said articles of incorporation.
(b) A written agreement signed by two (2) or more stockholders
may provide that in exercising any voting right, the shares held
by them shall be voted as provided or as agreed, or in
accordance with a procedure agreed upon by them.
(c) No provision in a written agreement signed by the
stockholders, relating to any phase of corporate affairs, shall be
invalidated between the parties on the ground that its effect is to
make them partners among themselves.
(d) A written agreement among some or all of the stockholders
in a close corporation shall not be invalidated on the ground that
it relates to the conduct of the business and affairs of the
corporation as to restrict or interfere with the discretion or
powers of the board of directors: Provided, That such
agreement shall impose on the stockholders who are parties
thereto the liabilities for managerial acts imposed on directors
by this Code.
(e) Stockholders actively engaged in the management or
operation of the business and affairs of a close corporation shall
be held to strict fiduciary duties to each other and among
themselves. The stockholders shall be personally liable for
corporate torts unless th67e corporation has obtained
reasonably adequate liability insurance.
DOCTRINE OF PIERCING THE CORPORATE VEIL
The doctrine that a corporation is a legal entity distinct from the
persons composing it is merely a legal fiction for purposes of
convenience and to subserve the ends of justice. This fiction
cannot be extended to a point beyond its reason and policy.
 APPLICATION OF DOCTRINE IN THREE AREAS:

When legal fiction to be DISREGARDED

1. Defeat of public convenience- when the corporation is

used as a vehicle for the evasion of an existing
When used as a cloak or cover for fraud or illegality; obligation;
defeat public convenience, justify wrong, protect
fraud or defend crime.

2. Fraud cases- the corp is used to justify a wrong,

protect fraud or defend a crime;
RATIONALE: to remove the barrier between the
corporation from the persons comprising it to thwart the
fraudulent and illegal schemes of those who use the
corporate personality as a shield for undertaking certain 3. Alter ego cases- where a corporation is merely a farce
proscribed activities. since it is a mere alter ego or business conduit of a
person or of another corporation

>For the corporate legal entity be disregarded, the

wrongdoing must be clearly and convincingly >When the veil of corporate fiction is pierced, the corporate
established, it cannot be presumed. character is not necessarily abrogated. The corporation
continues for legitimate objectives.

>burden of proof: on the party seeking to have the

court pierce the veil CASE: PNB v. Hydro Resources Contractors Corp., GR No.
167530, March 13, 2013

>EFFECT AS TO LIABILITY: Liability will attach

personally or directly to the officers and stockholders FACTS: Sometime in 1984, petitioners DBP and PNB
foreclosed on certain mortgages made on the properties of
Marinduque Mining and Industrial Corporation (MMIC). As a
result of the foreclosure, DBP and PNB acquired substantially
all the assets of MMIC and resumed the business operations of
the defunct MMIC by organizing NMIC. DBP and PNB owned
57% and 43% of the shares of NMIC, respectively, except for
five qualifying shares. As of September 1984, the members of
the Board of Directors of NMIC, namely, Jose Tengco, Jr.,
Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino
Agbada, were either from DBP or PNB.
Subsequently, NMIC engaged the services of Hercon, Inc., for
NMIC’s Mine Stripping and Road Construction Program in 1985
for a total contract price of P35,770,120. After computing the
payments already made by NMIC under the program and
crediting the NMIC’s receivables from Hercon, Inc., the latter
found that NMIC still has an unpaid balance of P8,370,934.74.
Hercon, Inc. made several demands on NMIC, including a letter
of final demand dated August 12, 1986, and when these were
not heeded, a complaint for sum of money was filed in the RTC
of Makati, Branch 136 seeking to hold petitioners NMIC, DBP,
and PNB solidarily liable for the amount owing Hercon, Inc. The
case was docketed as Civil Case No. 15375.
Subsequent to the filing of the complaint, Hercon, Inc. was
acquired by HRCC in a merger. This prompted the amendment
of the complaint to substitute HRCC for Hercon, Inc.
Thereafter, on December 8, 1986, then President Corazon C.
Aquino issued Proclamation No. 50 creating the APT for the
expeditious disposition and privatization of certain government
corporations and/or the assets thereof. Pursuant to the said
Proclamation, on February 27, 1987, DBP and PNB executed
their respective deeds of transfer in favor of the National
Government assigning, transferring and conveying certain
assets and liabilities, including their respective stakes in NMIC.
In turn and on even date, the National Government transferred
the said assets and liabilities to the APT as trustee under a
Trust Agreement. Thus, the complaint was amended for the
second time to implead and include the APT as a defendant.
In its answer, NMIC claimed that HRCC had no cause of action.
It also asserted that its contract with HRCC was entered into by
its then President without any authority. Moreover, the said
contract allegedly failed to comply with laws, rules and
regulations concerning government contracts. NMIC further
claimed that the contract amount was manifestly excessive and
grossly disadvantageous to the government. NMIC made
counterclaims for the amounts already paid to Hercon, Inc. and
attorney’s fees, as well as payment for equipment rental for four
trucks, replacement of parts and other services, and damage to
some of NMIC’s properties.
For its part, DBP’s answer raised the defense that HRCC had
no cause of action against it because DBP was not privy to
HRCC’s contract with NMIC. Moreover, NMIC’s juridical
personality is separate from that of DBP. DBP further interposed
a counterclaim for attorney’s fees.
PNB’s answer also invoked lack of cause of action against it. It
also raised estoppel on HRCC’s part and laches as defenses,
claiming that the inclusion of PNB in the complaint was the first
time a demand for payment was made on it by HRCC. PNB also
invoked the separate juridical personality of NMIC and made
counterclaims for moral damages and attorney’s fees.
After trial, the RTC of Makati rendered a Decision dated
November 6, 1995 in favor of HRCC. It pierced the corporate
veil of NMIC and held DBP and PNB solidarily liable with NMIC.
ISSUE: WON there is sufficient ground to pierce the veil of
corporate fiction
HELD:
A corporation is an artificial entity created by operation of law. It
possesses the right of succession and such powers, attributes,
and properties expressly authorized by law or incident to its
existence. It has a personality separate and distinct from that of
its stockholders and from that of other corporations to which it
may be connected. As a consequence of its status as a distinct
legal entity and as a result of a conscious policy decision to
promote capital formation, a corporation incurs its own liabilities
and is legally responsible for payment of its obligations.40 In
other words, by virtue of the separate juridical personality of a
corporation, the corporate debt or credit is not the debt or credit
of the stockholder.This protection from liability for shareholders
is the principle of limited liability.
Equally well-settled is the principle that the corporate mask may
be removed or the corporate veil pierced when the corporation
is just an alter ego of a person or of another corporation. For
reasons of public policy and in the interest of justice, the
corporate veil will justifiably be impaled only when it becomes a
shield for fraud, illegality or inequity committed against third
persons.
Any application of the doctrine of piercing the corporate veil
should be done with caution. A court should be mindful of the
milieu where it is to be applied. It must be certain that the
corporate fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in disregard of
its rights. The wrongdoing must be clearly and convincingly
established; it cannot be presumed. x x x.
Sarona v. National Labor Relations Commission46 has defined
the scope of application of the doctrine of piercing the corporate
veil:
The doctrine of piercing the corporate veil applies only in
three (3) basic areas, namely:
1) defeat of public convenience as when the corporate
fiction is used as a vehicle for the evasion of an existing
obligation;
2) fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime; or
 3) 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. 
In this connection, case law lays down a three-pronged test to
determine the application of the alter ego theory, which is also
known as the instrumentality theory, 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;
INSTRUMENTALITY OR CONTROL TES
>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."
(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
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."
(3) The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss complained of.

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.
In applying the alter ego doctrine, the courts are concerned with
reality and not form, with how the corporation operated and the
individual defendant’s relationship to that operation. With
respect to the control element, it refers not to paper or formal
control by majority or even complete stock control but actual
control which amounts to "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." In addition, the control must be shown
to have been exercised at the time the acts complained of took
place.
This Court has declared 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." This Court has
likewise ruled that the "existence of interlocking directors,
corporate officers and shareholders is not enough justification to
pierce the veil of corporate fiction in the absence of fraud or
other public policy considerations."
In this case, nothing in the records shows that the corporate
finances, policies and practices of NMIC were dominated by
DBP and PNB in such a way that NMIC could be considered to
have no separate mind, will or existence of its own but a mere
conduit for DBP and PNB.
In relation to the second element, to disregard the separate
juridical personality of a corporation, the wrongdoing or unjust
act in contravention of a plaintiff’s legal rights must be clearly
and convincingly established; it cannot be presumed. Without a
demonstration that any of the evils sought to be prevented by
the doctrine is present, it does not apply.
It is a recognition that, even assuming that DBP and PNB
exercised control over NMIC, there is no evidence that the
juridical personality of NMIC was used by DBP and PNB to
commit a fraud or to do a wrong against HRCC.
As a general rule, a corporation will be looked upon as a legal
entity, unless and until sufficient reason to the contrary appears.
When the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the
law will regard the corporation as an association of persons.
Also, the corporate entity may be disregarded in the interest of
justice in such cases as fraud that may work inequities among
members of the corporation internally, involving no rights of the
public or third persons. In both instances, there must have been
fraud, and proof of it. For the separate juridical personality of a
corporation to be disregarded, the wrongdoing must be clearly
and convincingly established. It cannot be presumed.
As regards the third element, in the absence of both control by
DBP and PNB of NMIC and fraud or fundamental unfairness
perpetuated by DBP and PNB through the corporate cover of
NMIC, no harm could be said to have been proximately caused
by DBP and PNB on HRCC for which HRCC could hold DBP
and PNB solidarily liable with NMIC.
CASE: Heirs of Fe Tan Uy v. International Exchange Bank,
G.R. No. 166282, February 13, 2013.
FACTS: Respondent International Exchange Bank (iBank),
granted loans to Hammer Garments Corporation (Hammer),
covered by promissory notes and deeds of assignment. The
loans were likewise secured by a P 9 Million-Peso Real Estate
Mortgage executed by Goldkey Development Corporation
(Goldkey) over several of its properties and a P 25 Million-Peso
Surety Agreement signed by Chua and his wife, Fe Tan Uy
(Uy).
However, Hammer defaulted in the payment of its loans,
prompting iBank to foreclose on Goldkey’s third-party Real
Estate Mortgage. The mortgaged properties were sold for P 12
million during the foreclosure sale, leaving an unpaid balance of
P 13,420,177.62.9. For failure of Hammer to pay the deficiency,
iBank filed a Complaint for sum of money on December 16,
1997 against Hammer, Chua, Uy, and Goldkey before the
Regional Trial Court, Makati City (RTC).
Hammer did not file any Answer, thus it was held in default. On
the other hand, Uy claimed that she was not liable to iBank
because she never executed a surety agreement in favor of
iBank. Goldkey also denies liability, averring that it acted only as
a third-party mortgagor and that it was a corporation separate
and distinct from Hammer.
RTC decision: ruled in favor of iBank. The lower court said that
while it made the pronouncement that the signature of Uy on the
Surety Agreement was a forgery, it nevertheless held her liable
for the outstanding obligation of Hammer because she was an
officer and stockholder of the said corporation. The RTC agreed
with Goldkey that as a third-party mortgagor, its liability was
limited to the properties mortgaged. It came to the conclusion,
however, that Goldkey and Hammer were one and the same
entity.
Aggrieved, the heirs of Uy and Goldkey (petitioners) elevated
the case to the CA.
CA decision: affirming the findings of the RTC. The CA found
that iBank was not negligent in evaluating the financial stability
of Hammer. According to the appellate court, iBank was induced
to grant the loan because petitioners, with intent to defraud the
bank, submitted a falsified Financial Report for 1996 which
incorrectly declared the assets and cashflow of Hammer.
Because petitioners acted maliciously and in bad faith and used
the corporate fiction to defraud iBank, they should be treated as
one and the same as Hammer.
Hence, the present petitions filed separately by the heirs of Uy
and Goldkey which later on consolidated by this Court.
ISSUE(s):  (1) the complainant must allege in the complaint that the
I. Whether or not the doctrine of piercing the corporate veil
should apply in this case?
II. WON Goldkey is a mere alter ego of Hammer
HELD:
I. NO.
Basic is the rule in corporation law that a corporation is a
juridical entity which is vested with a legal personality separate
and distinct from those acting for and in its behalf and, in
general, from the people comprising it. Following this principle,
obligations incurred by the corporation, acting through its
directors, officers and employees, are its sole liabilities.
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:
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.
At most, Uy could have been charged with negligence in the
performance of her duties as treasurer of Hammer by allowing
the company to contract a loan despite its precarious financial
position. Nonetheless, these shortcomings of Uy are not
sufficient to justify the piercing of the corporate veil which
requires that the negligence of the officer must be so gross that
it could amount to bad faith and must be established by clear
and convincing evidence. Gross negligence is one that is
characterized by the lack of the slightest care, acting or failing to
act in a situation where there is a duty to act, wilfully and
intentionally with a conscious indifference to the consequences
insofar as other persons may be affected.
*the piercing of the veil of corporate fiction is frowned upon and
can only be done if it has been clearly established that the
separate and distinct personality of the corporation is used to
justify a wrong, protect fraud, or perpetrate a deception.
II. Yes.
Under a variation of the doctrine of piercing the veil of corporate
fiction, when two business enterprises are owned, conducted
and controlled by the same parties, both law and equity will,
when necessary to protect the rights of third parties, disregard
the legal fiction that two corporations are distinct entities and
treat them as identical or one and the same.
While the conditions for the disregard of the juridical entity may
vary, the following are some probative factors of identity that will
justify the application of the doctrine of piercing the corporate
veil, as laid down in Concept Builders, Inc. v NLRC:
(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,
and
(4) Methods of conducting the business.
These factors are unquestionably present in the case of
Goldkey and
Hammer, as observed by the RTC, as follows:
1. Both corporations are family corporations of
defendants Manuel Chua and his wife Fe Tan Uy. The
other incorporators and shareholders of the two
corporations are the brother and sister of Manuel Chua
(Benito Ng Po Hing and Nenita Chua Tan) and the sister
of Fe Tan Uy, Milagros Revilla. The other
incorporator/share holder is Manling Uy, the daughter of
Manuel Chua Uy Po Tiong and Fe Tan Uy;
 2. Hammer Garments and Goldkey share the same
office and practically transact their business from the
same place.
3. Defendant Manuel Chua is the President and Chief
Operating Officer of both corporations. All business
transactions of Goldkey and Hammer are done at the
instance of defendant Manuel Chua who is authorized to
do so by the corporations.
4. The assets of Goldkey and Hammer are co-mingled.
The real properties of Goldkey are mortgaged to secure
Hammer's obligation with creditor hanks.
5. When defendant Manuel Chua "disappeared", the
defendant Goldkey ceased to operate despite the claim
that the other "officers" and stockholders like Benito
Chua, Nenita Chua Tan, Fe Tan Uy, Manling Uy and
Milagros T. Revilla are still around and may be able to
continue the business of Goldkey, if it were different or
distinct from Hammer which suffered financial set back.
3. Step Transaction Principle
CASE: Liddell & Co., Inc. v. CIR, G.R. No. L-9687, June 30,
1961
FACTS: This is an appeal from the decision of the Court of Tax
Appeals imposing a tax deficiency liability of P1,317,629.61 on
Liddell & Co., Inc.
Liddell & Co. Inc., (Liddell & Co. for short) is a domestic
corporation established in the Philippines... with the limited paid-
in capital of P20,000, Liddell & Co. was able to declare a 900%
stock dividend after which declaration, Frank Liddell's holdings
in the company increased to 1,960 shares and the employees,
Charles Kurz, E.J. Darras, Angel Manzano... and Julian Serrano
at 10 shares each. The declaration of stock dividend was
followed by a resolution increasing the authorized capital of the
company to P1,000,000 which the Securities & Exchange
Commission... approved on March 3, 1947. Upon such
approval, Frank Liddell... subscribed to 3,000 additional shares,
for which he paid into the corporation P300,000 so that he had
in his own name 4,960 shares.
Frank Liddell, on one hand and Messrs.Kurz, Darras, Manzano
and Serrano on the other, executed an agreement (Exhibit A)
which was further supplemented by two other agreements
(Exhibits B and C) dated May 24, 1947 and June 3, 1948,
wherein Frank Liddell... transferred (On June 7, 1948) to various
employees of Liddell & Co. shares of stock.
At the annual meeting of stockholders of Liddell & Co. held on
March 9, 1948, a 100% stock dividend was declared, thereby
increasing the issued capital stock of said corporation to
P1,000,000. The stockholders also approved a resolution
increasing the... authorized capital stock from P1,000,000 to
P3,000,000 which increase was duly approved by the Securities
and Exchange Commission on June 7, 1948. Frank Liddell
subscribed to and paid 20% of the increase of P400,000.
Stock dividends were again issued by Liddell & Co.in
accordance with a resolution of a special meeting of the Board
of Directors of Liddell & Co. stock dividends were again
declared. As a result of said declaration and in accordance with
the agreements, Exhibits, A, B, and C, the stockholdings in...
the company appeared... when the purpose clause of the
Articles of Incorporation of Liddell & Co. Inc., was amended so
as to limit its business activities to importations of automobiles
and trucks, Liddle & Co. was engaged in business as an
importer and at... the same time retailer of Oldsmobile and
Chevrolet passenger cars and GMC and Chevrolet trucks.
On December 20, 1948, the Liddle Motors, Inc. was organized
and registered with the Securities and Exchange Commission
with an authorized capital stock of P100,000 of which P20,000
was subscribed and paid for as follows: Irene Liddle, wife of
Frank Liddell, 19,996 shares and Messrs, Marcial P. Lichauco,
E. K. Branwell, V. E. del Rosario and Esmenia Silva, 1 share
each.
Messrs. Manzano, Kurz and Kernot resigned from their
respective positions in the Retail Dept. of Liddell & Co. and they
were taken in and employed by Liddell Motors, Inc., Kurz as
Manager-Treasurer, Manzano as General Sales Manager for...
cars and Kernot as General Sales Manager for trucks.
Beginning January, 1949, Liddell & Co. stopped retailing cars
and trucks; it conveyed them instead to Liddell Motors, Inc.
which in turn sold the vehicles to the public with a steep mark-
up. Since then, Liddell & Co. paid sales taxes on the basis of its
sales to Liddell Motors, Inc. considering said sales as its original
sales.
Upon review of the transactions between Liddell & Co. and
Liddell Motors Inc., the Collector of Internal Revenue
determined that the latter was but an alter ego of Liddell & Co.
Wherefore, he concluded, that for sales tax purposes, those
sales made by Liddell Motors, Inc. to the public were considered
as the original sales of Liddell & Co.
Accordingly, the Collector of Internal Revenue assessed against
Liddell & Co. a sales tax deficiency, including surcharges, in the
amount of P1,317,629.61. In the computation, the gross...
selling price of Liddell Motors, Inc. to the general public from
January 1, 1949 to September 15, 1950. was made the basis
without deducting from the selling price, the taxes already paid
by Liddell & Co. in its sales to the Liddell Motors, Inc.
The Court of Tax Appeals upheld the position taken by the
Collector of Internal Revenue.
ISSUE: whether or not Liddell Motors, Inc. is the alter ego
of Liddell & Co. Inc.

HELD: YES. we are fully convinced that Liddell & Co. is wholly
owned by Frank Liddell. As of the time of its organization, 98%
of the capital stock belonged to Frank Liddell. The 20% paid-up
subscription with which the company began its business was
paid by him. The subsequent subscriptions to the capital stock
were made by him and paid with his own money.
the selling price of the car if it did not exceed P5000, and 15%
of the price if more than P5000 but not more than P7000, etc.
This progressive rate of the sales tax naturally would tempt the
taxpayer to employ a way of reducing the price of the first sale.
And Liddell Motors, Inc. was the medium created by Liddell &
Co. to reduce the price and the tax liability.

to allow a taxpayer to deny tax liability on the ground that the

It is of course accepted that the mere fact that one or more
corporations are owned and controlled by a single stockholder is
not of itself sufficient ground for disregarding separate corporate
entities. Authorities10 support the rule that it is lawful to obtain a
corporation charter, even with a single substantial stockholder,
to engage in a specific activity, and such activity may co-exist
with other private activities of the stockholder. If the corporation
is a substantial one, conducted lawfully and without fraud on
another, its separate identity is to be respected.
sales were made through an other and distinct corporation when
it is proved that the latter is virtually owned by the former or that
they are practically one and the same is to sanction a
circumvention of our tax laws.
CASE: Yutivo Sons Hardware Company v. CTA, G.R. No. L-
13203, January 28, 1961

FACTS:
Accordingly, the mere fact that Liddell & Co. and Liddell Motors,
Inc. are corporations owned and controlled by Frank Liddell
directly or indirectly is not by itself sufficient to justify the
disregard of the separate corporate identity of one from the CASE: Commissioner of Customs v. Oilink International
other. There is, however, in this instant case, a peculiar
consequence of the organization and activities of Liddell Motors, Corporation, G.R. No. 161759, July 2, 2014
Inc.

COMMISSIONER OF CUSTOMS, Petitioner, vs. OILINK

Under the law in force at the time of its incorporation the sales INTERNATIONAL CORPORATION, Respondent.
tax on original sales of cars (sections 184, 185 and 186 of the
National Internal Revenue Code), was progressive, i.e. 10% of
FACTS
1. URC and Oilink, both selling and dealing oil, had
interlocking directors when Oilink started its business.
2. In applying for and in expediting the transfer of the
operator’s name for the Customs Bonded Warehouse
then operated by URC, Magleo, the Vice-President and
General Manager of URC, sent a letter to manifest that
URC and Oilink had the same Board of Directors and
that Oilink was 100% owned by URC.
3. Customs Commissioner formally directed that URC pay
URC’s special duties, VAT, and Excise Taxes that it had
failed to pay, to pay deficiency taxes.
4. Manuel Co, URC’s President, conveyed to Custom
Commissioner URC’s willingness to pay of which the
initial amount would be taken from the collectibles of
Oilink.
5. Commissioner made a final demand for the total liability
upon URC and Oilink.
6. Oilink formally protested the assessment on the ground
that it was not the party liable for the assessed
deficiency taxes.
7. After receiving the letter from Co, Commissioner
communicated in writing the detailed computation of the
tax liability, stressing that the Bureau of Customs would
not issue any clearance to Oilink unless the amount
demanded as Oilink’s tax liability be first paid, and a
performance bond be posted by URC/Oilink to secure
the payment of any adjustments that would result from
the BIR’s review of the liabilities for VAT, excise tax,
special duties, penalties, etc.
8. Thus, Oilink appealed to the CTA, seeking the
nullification of the assessment for having been issued
without authority and with grave abuse of discretion
tantamount to lack of jurisdiction because the
Government was thereby shifting the imposition from
URC to Oilink.
The CTA rendered its decision declaring as null and void the
assessment of the Commissioner of Customs.
ISSUE: the CTA gravely erred in holding that the Commissioner
of Customs could not pierce the veil of corporate fiction.
HELD:
There was no ground to pierce the veil of corporate existence
A corporation, upon coming into existence, is invested by law
with a personality separate and distinct from those of the
persons composing it as well as from any other legal entity to
which it may be related. For this reason, a stockholder is
generally not made to answer for the acts or liabilities of the
corporation, and viceversa. The separate and distinct
personality of the corporation is, however, a mere fiction
established by law for convenience and to promote the ends of
justice. It may not be used or invoked for ends that subvert the
policy and purpose behind its establishment, or intended by law
to which the corporation owes its being. This is true particularly
when the fiction is used to defeat public convenience, to justify
wrong, to protect fraud, to defend crime, to confuse legitimate
legal or judicial issues, to perpetrate deception or otherwise to
circumvent the law. This is likewise true where the corporate
entity is being used as an alter ego, adjunct, or business conduit
for the sole benefit of the stockholders or of another corporate
entity. In such instances, the veil of corporate entity will be
pierced or disregarded with reference to the particular
transaction involved.9
In Philippine National Bank v. Ritratto Group, Inc., 10 the Court
has outlined the following circumstances that are useful in
the determination of whether a subsidiary is a mere
instrumentality of the parent-corporation, viz:
1. Control, not mere majority or complete control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so
that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to
commit fraud or wrong, to perpetrate the violation of a
statutory or other positive legal duty, or dishonest and,
unjust act in contravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of.
In applying the "instrumentality" or"alter ego" doctrine, the
courts are concerned with reality, not form, and with how the
corporation operated and the individual defendant's relationship
to the operation.11 Consequently, the absence of any one of the
foregoing elements disauthorizes the piercing of the corporate
veil.
Indeed, the doctrine of piercing the corporate veil has no
application here because the Commissioner of Customs did not
establish that Oilink had been set up to avoid the payment of
taxes or duties, or for purposes that would defeat public
convenience, justify wrong, protect fraud, defend crime, confuse
legitimate legal or judicial issues, perpetrate deception or
otherwise circumvent the law.
CASE: Marvel Building Corporation v. David, G.R. No. L-
5081, February 24, 1954
FACTS:
- Plaintiffs are stockholders of the Marvel Building Corporation.
- They (plaintiff) filed an action to enjoin the defendant (Collector
of Internal Revenue) from selling at public auction three parcels
of land (including buildings thereon) all registered under the
name of the plaintiff.
- Said properties were seized and distrained by defendant to
collect war profits taxes assessed against plaintiff Maria B.
Castro.
-Maria Castro is the President of the Corporation with 250
shares
Plaintiffs’ contention: That the properties were owned by the
Corporation and not by Castro
Defendant’s contention: That Castro is the true and exclusive
owner of the properties
Trial Court held that the evidence failed to show that Castro is
the true owner of all the stock certificates of the corporation;
ordered the release of the properties mentioned and enjoined
the defendant from selling the same.
ISSUE: WON Castro is the owner of all the shares of stocks of knowledge or concurrence, were they owners of the stocks in
Marvel Building Corporation and the other stockholders mere their own rights.
dummies of hers

HELD: YES. The Court held that Castro is the sole and
exclusive owner of the shares and that they were only her
dummies.

SC: Evidence that prove the defendant’s contention; these facts

are of patent and potent significance: BENEFITS OF FORMING A CORPORATION
-The existence of endorsed certificates, discovered by the
internal revenue agents between 1948 and 1949 in the
possession of the Secretary-Treasurer;
-the fact that twenty-five certificates were signed by the
president of the corporation, for no justifiable reason The advantages are the following:
- the fact that two sets of certificates were issued, the
undisputed fact that Maria B. Castro had made enormous profits (1) The corporation has a legal capacity to act and contract as
and, therefore, had a motive to hide them to evade the payment
of taxes; a distinct unit in its own name;
-the fact that the other subscribers had no incomes of sufficient
magnitude to justify their big subscriptions’ (2) It has continuity of existence because of its non-depen
-the fact that the subscriptions were not receipted for and
deposited by the treasurer in the name of the corporation but dence on the lives of those who compose it;
were kept by Maria B. Castro herself;
-the fact that the stockholders or the directors never appeared to (3) Its credit is strengthened by such continuity of existence;
have ever met to discuss the business of the corporation
-the fact that Maria B. Castro advanced big sums of money to (4) Its management is centralized in the board of directors;
the corporation without any previous arrangement or
accounting, and the fact that the books of accounts were kept (5) Its creation, organization, management, and dissolution
as if they belonged to Maria B. Castro alone —
SC: Maria B. Castro would not have asked them to endorse
are standardized as they are governed under one general incor
their stock certificates, or be keeping these in her possession, if
they were really the owners. They never would have consented
that Maria B. Castro keep the funds without receipts or poration law;
accounting, nor that she manages the business without their
(6) It makes feasible gigantic financial undertakings since it
enables many individuals to invest their separate funds in the en pervision than in any other forms of business organization;

terprise in order to furnish large amounts of capital upon which (6) In large corporations, management and control are sepa

big business depends; rated from ownership;

(7) The shareholders have limited liability; (7) The stockholders' voting rights have become theoretical

(8) They are not general agents of the business; and particularly in large corporations because of the use of proxies

(9) The shares of stocks can be transferred without the con and widespread ownership; and

sent of the other stockholders. (8) The stockholders have little voice in the conduct of the

business.

Disadvantages of a business corporation.

They are as follows:

(1) The corporation is relatively complicated in formation DIFFERENCES AND SIMILARITIES WITH OTHER LEGAL
ENTITIES (SOLE PROP, PARNTERSHIP, BUSINESS
and management; TRUSTS, JOINT VENTURES, COOPERATIVES)

(2) It entails relatively high cost of formation and operations;

(3) Its credit is weakened by the limited liability of the stock Partnership Corporation

holders; Manner of by mere agreement of Created by law or

creation the parties by operation of law
(4) There is ordinarily lack of personal element in view of the
Commencement from the moment of the From the date of
transferability of shares; of Juridical execution of the issuance of the
personality contract certificate of
(5) There is a greater degree of governmental control and su incorporation by
 the SEC

Powers May exercise any Can exercise only Corporation as a partner

power authorized by the powers
the powers provided it expressly granted GR: cannot enter into partnership with other corporations or
is not contrary to law, by law or implied individuals because a corporation can only act through its duly
morals, public order, from those granted authorized officers and agents and is not bound by the acts of
good customs, or or incident to its anyone else.
public policy existence
EXPN: Joint ventures, where the nature of such is in line with
Management When the management Vested in the board the business authorized by their charters.
is not agreed upon, of directors or
every partner is an trustees Joint venture- an association of two or more persons to
agent of the carry out a single business enterprise for profit. It relates
partnership to a single transaction rather than to a continuous
business.
Effect of A partner can sue a co- May sue but must
mismanagement partner be in the name of
the corporation
2. CLASSES OF CORPORATION
Right of No right of succession With right of
succession succession

Extent of liability Partners are liable To the extent of Stock Non-Stock

to third persons personally and their investment
subsidiarily for      
partnership debts to
third persons***
Definition Corporations All other private
which have corporations (§3)
Transferability of Cannot without the capital stock
interest consent of the partners divided into  
(principle of delectus shares and
personarum)
One where no part of
are authorized to its income is
distribute to the distributable as
 holders of shares dividends to its the distribution of its
dividends or members, trustees or assets among its
allotments of the officers. (§87) members upon its
surplus profits on dissolution.  Before
the basis of the then, no profit may be
shares (§3) made by members.

     

Purpose Primarily to make May be formed or

profits for its organized for NON-STOCK CORPORATIONS
shareholders charitable, religious,
educational,  All other corporations which are not organized for profit
professional, cultural, to be distributed to their members or do not have the two
fraternal, literary, requisites for stock corporations are non-stock corporations.
scientific, social, civic
service, or similar  For the purposes of this Code, a NON-STOCK
purposes like trade, CORPORATION is one where no part of its income is
industry, agricultural distributable as dividends to its members, trustees or
and like chambers, or officers, subject to the provisions of this Code on
any combination dissolution;
thereof. (§88)

 
 Any profit which a non-stock corporation may obtain as
      an incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or
Distribution of Profit is Whatever incidental purposes for which the corporation was organized, subject
Profits distributed to profit made is not to the provisions of this Title.
shareholders distributed among its
members but is used  The provisions governing stock corporations, when
for furtherance of its pertinent, shall be applicable to non-stock corporations, except
purpose.  AOI or by- as may be covered by specific provisions of this Title.
laws may provide for
 Non-stock corporations may be formed or organized for  Persons who composes a stock corporation are
charitable, religious, educational, professional, cultural, STOCKHOLDERS
fraternal, literary, scientific, social, civic service, or similar
purposes, like trade, industry, agricultural and like chambers, or STOCK CORPORATIONS
any combination thereof, subject to the special provisions of this
Title governing particular classes of non-stock corporations.  Stock corporations shall have the following
requisites/elements:
 Implicit from the latter is the main purpose of such
corporation: to make profits for its shareholders. 1. they must have capital stock divided into shares; and

 A non-stock corporation exists for purposes other than profit,
like civic, religious and charitable organizations.
Corporations organized for charitable purposes are
sometimes called eleemosynary corporations.
 It does not follow however that a non-stock corporation can
make no profits.
2. they must be authorized to distribute dividends or
allotments of surplus profits on the basis of the
shares held.
 The section specifically mentions profits, giving
out the principal motive of stock corporations to
make profits to be distributed to its stockholders.

 Many such corporations do obtain profits as an incident  These two requisites must concur in order that
from their operations, but unlike in stock corporations, the corporation will be classified as a stock
such profits are not distributed among its members but corporation.
are used for the furtherance of its purposes.
Section 4, RCCP
 The articles of incorporation or by-laws of a non-stock
corporation may however provide for the distribution of
its assets among its members upon its dissolution,
EXCEPT as to those which have been received by it SPECIAL CORPORATION
subject to restrictions as to their use or return, and
subject to the provisions of the Code.

 Until such dissolution, the members cannot reap for

themselves any incidental income or profit made by the non-
stock corporation.
 Persons who compose a non-stock corporation are referred
to as MEMBERS
SEC. 4. Corporations Created by Special Laws or Charters. –
Corporations created by special laws or charters shall be
governed primarily by the provisions of the special law or
charter creating them or applicable to them, supplemented by
the provisions of this Code, insofar as they are applicable.
 Generally, a business corporation should organize as a  All other corporations must be corporations aggregate, i.e.,
stock corporation. they must be formed by at least five persons.

 Some kinds of corporations, like banks, cannot organize

except in the form of stock corporations.

 With the enactment of the Corporation Code, a non-stock

corporation is now legally recognized as a special kind of Section 5, RCCP
corporation with needs different from those of stock
corporations.

 However, in matters not covered by the special provisions,
those governing stock corporations would still be applicable
to non-stock corporations.
 The Code also contains special provisions on educational
corporations, which may either be stock or non-stock.
 Title XIII of the Code covers religious corporations, which
may be either corporations sole or corporations aggregate,
but always non-stock.
 Close corporations, which are always stock corporations,
are given special treatment
SEC. 5. Corporators and Incorporators, Stockholders and
Members. – Corporators are those who compose a corporation,
whether as stockholders or shareholders in a stock corporation
or as members in a nonstock corporation. Incorporators are
those stockholders or members mentioned in the articles of
incorporation as originally forming and composing the
corporation and who are signatories thereof.
3. CORPORATORS, INCORPORATORS, STOCKHOLDERS,
MEMBERS

CORPORATION SOLE
Components of a corporation
 CORPORATION SOLE is an incorporated office held by
only one person.

 The idea of such a corporation grew out of the convenience 1. Corporators

it affords to religious sects in the administration of church
properties and funds. -those who compose the corporation, whether
stockholders or members.
 Only a religious corporation can be a corporation sole.

2. Incorporators
-those mentioned in the articles of incorporation as
originally forming and composing the corporation and
who executed and signed the articles of incorporation
and acknowledged the same before any notary public.
3. STOCKHOLDERS
- Persons who composes a stock corporation
4. MEMBERS
- Persons who compose a non-stock corporation
 Is stock which entitles the owners of it to an equal pro rata
division of profits, if there be any, but without any preference
or advantage in that respect over any other stockholder or
class of stockholders.
 The common stock is the most commonly issued by
corporations.
 It is one which entitles the owner of such stocks to an equal
pro rata division of profits, if there be any, one stockholder
having no advantage, priority or preference over any other
stockholder in the same class.
 In the presence of preferred stocks, the common stocks are
usually vested with the exclusive right to vote and have the
residuary rights to the profits and the net assets upon
liquidation, after the preferences have been complied with.
 They are usually granted the exclusive right to vote.

PREFERRED STOCKS

 Preferred stock is stock that entitles the holder to some

priority as to dividends or principal or both over some other
4. CLASSIFICATION OF SHARES class or classes of shareholders

The most common classes of shares of stock are:  A preferred stock entitles the holder thereof to some
preference either in the dividends or in the distribution of
1) common shares; assets upon liquidation of the corporation, or in both, or to
such other preferences not inconsistent with the Code.
2) preferred shares;
 Two limitations are imposed by section 6 on the issuance of
3) par value shares; and preferred stocks:

4) no par value shares.

COMMON STOCKS 1. They can be issued only with a stated par value;
 2. The preferences must be stated both in the articles of PAR VALUE AND NO-PAR VALUE SHARES
incorporation and in the certificate of stock, otherwise
each share shall be in all respects equal to every other
share.
 PAR VALUE SHARE is one in the certificate of which
The Code allows the articles of incorporation to authorize the appears an amount in pesos, as the nominal value of the
board of directors to fix the terms and conditions of preferred share.
stocks, provided that these shall become effective only upon the
filing of a certificate thereof with the SEC.

This provision qualifies the requirement that the preferences  The par value of a share is fixed in the articles of
must appear in the articles of incorporation. incorporation and is the minimum issue price of such share.

The authority given to the board of directors by the articles of

incorporation to fix the terms, combined with the filing of the
certificate containing the preferences with the SEC, has the  This value must be stated in the certificate of stock, which
same legal effect as providing for such terms in the articles of cannot be issued until the subscriber has paid his
incorporation. subscription in full.

 These preferred shares may be given preferences:

1. in the distribution of the assets of the corporation in case  The stocks cannot be issued or sold by the corporation at
of liquidation; less than par, otherwise they would be "watered stock" and
the stockholder would still be liable for the difference
2. in the distribution of dividends; or between what he paid and the par value thereof.

3. such other preferences as may be stated in the articles

of incorporation.
 They may however be issued or sold at higher than par.
 Preferred shares are generally denied the right to vote.
However, even if so denied under the articles of
incorporation, these preferred shares and other non-voting
shares, are entitled to vote on the eight matters mentioned  NO-PAR VALUE SHARE is a stock without any nominal
in section 6. value stated in terms of peso or peso's worth.
 All other matters, except the eight mentioned, shall be voted
on only by stocks with voting rights.

 Section 6 prescribes certain rules regarding no-par value
shares, namely:
1) said shares once issued are deemed fully paid and non-
assessable. In other words, its price cannot be increased
anymore by the board of directors and the shareholders
are not liable for additional payment;
2) said share may not be issued below five (P5.00) pesos
per share; and
3) its entire consideration is treated as capital and not avail-
able for distribution as dividends.
 No-par shares are those whose issued price is not stated in
the certificate, but which may be fixed in the articles of
incorporation, or by the board of directors when so
authorized by said articles or by the by-laws, or in the
absence thereof, by the shareholders themselves.
NOTES
 Whether the shares are with or without par value the
subscriber thereof must pay its full consideration.
 Although no-par shares are non-assessable, where the
stockholder has not actually paid the full consideration for
his no-par shares he may be held liable to pay the same to
the firm creditors.
 No-par shares are not considered issued nor can a
certificate of stock be obtained therefor until they are fully
paid.
 The following are the limitations on the issuance of no-par
stock:
1. once issued, they are deemed fully paid and therefore
non-assessable; i.e., the corporation can no longer
increase the price of issued no-par shares and demand
additional payment from the holders thereof;
2. consideration for their issuance cannot be less than five
pesos;
3. the entire consideration for their issuance constitutes
capital, hence no part of it is available for distribution as
dividends;
4. they cannot be issued as preferred stocks;
5. they cannot be issued by banks, trust companies,
insurance companies, public utilities, and building and
loan associations, and
6. the articled of incorporation must state the fact that the
corporation issues no-par shares as well as the number
of such shares.
 Although both par and no-par shares represent a
proportional interest in the corporate business, in the case of
par shares, a subscriber or buyer of the same may be
misled into believing that the actual value of his interest is
equal at least to the par value stated in the certificate.
 If the business has been suffering setbacks, the current
corporate assets may be much less than the par value of its
stocks. In the case of no-par shares, however, there is no
false appearance behind which the true value of the stock in
money is hidden.
 One advantage of having no-par shares is that their issued
price may be changed from time to time in accordance with
the market and other conditions.
To illustrate: A corporation has 10,000 unissued shares, 5,000
of which have a par value of Pl00 each, and the other 5,000 are
no-par shares.
Should the market value of the corporation's shares go down to
P80, it will be difficult for the corporation to market the par
shares because these cannot be sold at lower than par.
However, it can fix the price of, say, 3000 of the no-par shares
at the market value of P80 so they can be sold more easily to
raise whatever capital is needed by the corporation at that
particular time.
This of course assumes that the issued price has not been
previously fixed in the articles. Should the market go up to, say
P90 and again the corporation needs additional capital, it can
sell its remaining no-par shares by fixing the issued price at
P90.
 This cannot be done with par shares, without amending the
articles of incorporation to reduce the par value of the
shares.
 On the other hand, no-par shares cannot have an issued
price of less than five pesos, while the par value of a share
can be as low as one centavo.
 Where the market of par value shares goes lower than five
pesos, say three pesos, it is still possible to issue par value
shares for three pesos by amending the articles of
incorporation accordingly.
 Sometimes, what is done is to merely "split" the shares in,
say, two and lower the par value of each part by half.
To illustrate: if the par value of a share is P10 and the market
value is only P5, the articles of incorporation may be amended
by increasing the number of shares from 500 to 1000 and
reducing the par value of each of the latter from P10 to P5. After
canceling their certificates of stock, the present holders of
issued shares will be given new ones for double the number of
their present shares, but with a lower par value of P5 each. The
corporation can then issue whatever unissued shares it still has
for P5 each, the present market value.
 If shares are classified into common voting and preferred
non-voting shares, the management of corporate affairs will
be controlled by whoever owns the majority of the common
voting shares, which majority may in fact be only a minority
of the total number of shares, voting and non-voting.
 Control would thus depend not on the amount of investment
made but on the number of voting shares acquired.
 The preference of non-voting stocks over dividends and/or
in the distribution of assets upon liquidation compensate for
the lack of voting rights and may attract a particular group of
investors.
 If non-voting shares are redeemable, the compensating
factor is the fact that the investor may get back his
investment at some specified future time even before
dissolution of the corporation, at an agreed premium.
 The non-voting stocks may even be both preferred and
redeemable if both these features are necessary to attract
particular investors.
 To prevent abuses, however, the SEC usually requires that
where no dividends are declared for three consecutive years
inspite of available profits, the preferred stocks will be given
the right to vote for directors until dividends are declared.
 No other shares may be deprived of the right to vote aside
from preferred and redeemable shares.
 In a corporation with five stockholders owning varying
amounts of stock, if each of them is to have equal voting
rights, then the same number of common stocks with full
voting rights may be issued to each, and any additional
investment would be in the form of preferred non-voting
stocks.
 Of course, these are not completely disenfranchised and
may still vote in the instances specified by the Code
involving major corporate changes.
 Variations in the number of voting shares allocated to each
can be used to attain the desired proportional representation
in the board.
 Where a close corporation qualifies as such under the Code,
it is allowed to classify its directors into one or more classes,
each of whom may be voted for and elected solely by a
particular class of stock.
 Thus, equality of representation in a five-man board could
be achieved by dividing the stock into five classes, and
giving each class the right to elect one director, regardless
of the number of shares in such class.
 This would not be possible in corporations which are not
organized as close corporations, since the number of votes
of each stockholder in this case depends on the number of
shares he owns.
CLASSIFICATION OF SHARES
SEC. 6. Classification of Shares. – The classification of shares,
their corresponding rights, privileges, or restrictions, and their
stated par value, if any, must be indicated in the articles of
incorporation. Each share shall be equal in all respects to every
other share, except as otherwise provided in the articles of
incorporation and in the certificate of stock.
The shares in stock corporations may be divided into classes or
series of shares, or both. No share may be deprived of voting
rights except those classified and issued as “preferred” or
“redeemable” shares, unless otherwise provided in this Code:
Provided, That there shall always be a class or series of shares
with complete voting rights.
Holders of nonvoting shares shall nevertheless be entitled to
vote on the following matters:
(a) Amendment of the articles of incorporation;
(b) Adoption and amendment of bylaws;
(c) Sale, lease, exchange, mortgage, pledge, or other
disposition of all or substantially all of the corporate property;
(d) Incurring, creating, or increasing bonded indebtedness;
(e) Increase or decrease of authorized capital stock;
(f) Merger or consolidation of the corporation with another
corporation or other corporations;
(g) Investment of corporate funds in another corporation or
business in accordance with this Code; and
(h) Dissolution of the corporation.
Shares of capital stock issued without par value shall be
deemed fully paid and nonassessable and the holder of such
shares shall not be liable to the corporation or to its creditors in
respect thereto: Provided, That no-par value shares must be
issued for a consideration of at least

Except as provided in the immediately preceding paragraph, the
vote required under this Code to approve a particular corporate
act shall be deemed to refer only to stocks with voting rights.
Five pesos (P5.00) per share: Provided, further, That the entire
consideration received by the corporation for its no-par value
shares shall be treated as capital and shall not be available for
distribution as dividends.

A corporation may further classify its shares for the purpose of

The shares or series of shares may or may not have a par ensuring compliance with constitutional or legal requirements.
value: Provided, That banks, trust, insurance, and preneed
companies, public utilities, building and loan associations, and
other corporations authorized to obtain or access funds from the
public, whether publicly listed or not, shall not be permitted to a. Preferred shares
issue no-par value shares of stock.
b. Common shares

c. Par value; no par value shares

Preferred shares of stock issued by a corporation may be given
preference in the distribution of dividends and in the distribution
of corporate assets in case of liquidation, or such other
preferences: Provided, That preferred shares of stock may be 4. CLASSIFICATION OF SHARES; PAR VALUE, NO PAR
issued only with a stated par value. The board of directors, VALUE SHARES
where authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any series CASE: DELPHER TRADES CORPORATION VS IAC and
thereof: Provided, further, That such terms and conditions shall HYDRO PIPES PHILS, INC.
be effective upon filing of a certificate thereof with the Securities
and Exchange Commission, hereinafter referred to as the FACTS:
“Commission”.
-Delphin and his sister Pelagia Pacheco were the owners of a
real estate property located in Valenzuela. They leased the said
property to Construction Components International Inc.
-Construction Components then assigned its rights and
obligations under the lease contract in favor of Hydro Pipes
Phils, Inc. with the consent of the Pacheco’s.
-Then the Pacheco’s executed a deed of exchange with Delpher
Trades Corp whereby the former conveyed to the latter the
leased property together with a parcel of land located in Malinta
for 2,500 shares of stock of defendant corporation.
-Hydro filed an amended complaint for reconveyance of the
property assailing that it was not given the first option to buy the
subject property pursuant to their agreement.
CFI OF BULACAN: decided in favor of the plaintiff (Hydro)
IAC: Affirmed
Petitioner’s contention: That since Delpher Trades is a family
corporation organized by Pelagia Pacheco+ Benjamin
Hernandez (spouses), and Delfin Pacheco and Pilar Angeles
(spouses), there was actually no transfer since the Pachecos
remained in control of the property.
ISSUE: WON the Delpher Trades is a business conduit of
Pacheco
HELD: YES.
After incorporation, one becomes a stockholder of a
corporation by subscription or by purchasing stock directly
from the corporation or from individual owners thereof .
Here, in exchange for their properties, the Pachecos acquired
2,500 original unissued no par value shares of stocks of the
Delpher Trades Corporation. Consequently, the Pachecos
became stockholders of the corporation by subscription
"The essence of the stock subscription is an agreement to
take and pay for original unissued shares of a corporation,
formed or to be formed." It is significant that the Pachecos
took no par value shares in exchange for their properties.
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.
It is to be stressed that by their ownership of the 2,500 no par
shares of stock, the Pachecos have control of the corporation.
Their equity capital is 55% as against 45% of the other
stockholders, who also belong to the same family group.
What they really did was to invest their properties and
change the nature of their ownership from unincorporated
to incorporated form by organizing Delpher Trades
Corporation to take control of their properties and at the
same time save on inheritance taxes.
Q You also, testified during the last hearing that the
decision to have no par value share in the defendant
corporation was for the purpose of flexibility. Can you
explain flexibility in connection with the ownership of the
property in question?
A There is flexibility in using no par value shares as the
value is determined by the board of directors in
increasing capitalization. The board can fix the value of
the shares equivalent to the capital requirements of the
corporation.
Q Now also from the point of taxation, is there any
flexibility in the holding by the corporation of the property
in question?
A Yes, since a corporation does not die it can continue
to hold on to the property indefinitely for a period of at
least 50 years. On the other hand, if the property is held
by the spouse the property will be tied up in succession
proceedings and the consequential payments of estate
and inheritance taxes when an owner dies.
Q Now what advantage is this continuity in relation to
ownership by a particular person of certain properties in
respect to taxation?
A The property is not subjected to taxes on succession
as the corporation does not die.
The "Deed of Exchange" of property between the Pachecos
and Delpher Trades Corporation cannot be considered a
contract of sale. There was no transfer of actual ownership
interests by the Pachecos to a third party. The Pacheco family
merely changed their ownership from one form to another. The
ownership remained in the same hands. Hence, the private
respondent has no basis for its claim of a light of first refusal
under the lease contract.
d. Founders’ shares (Sec. 7)
e. Redeemable Shares (Sec. 8)
f. Treasury Shares (Sec. 9)
CASE: CIR v. Manning, 66 SCRA 14 (1975)
SYNOPSIS
Under a trust agreement, Julius Reese who owned 24,700
shares of the 25,000 common shares of MANTRASCO, and the
three private respondents who owned the rest, at 100 shares
each, deposited all their shares with the Trustees. The trust
agreement provided that upon Reese’s death MANTRASCO
shall purchase Reese’s shares. The trust agreement was
executed in view of Reese’s desire that upon his death the
Company would continue under the management of
respondents. Upon Reese’s death and partial payment by the
company of Reeses’s share, a new certificate was issued in the
name of MANTRASCO, and the certificate indorsed to the
Trustees. Subsequently, the stockholders reverted the 24,700
shares in the Treasury to the capital account of the company as
stock dividends to be distributed to the stockholders. When the
entire purchase price of Reese’s interest in the company was
paid in full by the latter, the trust agreement was terminated,
and the shares held in trust were delivered to the company.
The Bureau of Internal Revenue concluded that the distribution
of the 24,700 shares of Reese as stock dividends was in effect
a distribution of the "assets or property of the corporation." It
therefore assessed respondents for deficiency income taxes as
well as for fraud penalty and interest charges. The Court of Tax
Appeals absolved respondent from any liability for receiving the
questioned stock dividends on the ground that their respective
one-third interest in the Company remained the same before
and after the declaration of the stock dividends and only the
number of shares held by each of them had changed.
On a petition for review, the Supreme Court held that the newly
acquired shares were not treasury shares; their declaration as
treasury stock dividends was a complete nullity and that the
assessment by the Commissioner of fraud penalty and the
imposition of interest charges pursuant to the provision of the
Tax Code were made in accordance with law.
Judgment of the Court of Tax Appeals se aside.
DOCTRINE(S):
PRIVATE CORPORATIONS; SHARES OF STOCKS;
TREASURY; SHARES. — Treasury shares are stocks issued
and fully paid for and re-acquired by the corporation either by
purchase, donation, forfeiture or other means. They are
therefore issued shares, but being in the treasury they do not
have the status of outstanding shares. Consequently, although
a treasury share, not having been retired by the corporation re-
acquiring it, may be re-issued or sold again, such share, as long
as it is held by the corporation as a treasury share, participates
neither in dividends, because dividends cannot be declared by
the corporation to itself, nor in the meetings of the corporations
as voting stock, for otherwise equal distribution of voting powers
among stockholders will be effectively lost and the directors will
be able to perpetuate their control of the corporation though it
still represent a paid — for interest in the property of the
corporation.
2. ID.; ID.; ID.; DECLARATION OF QUESTIONED SHARES AS
TREASURY STOCK DIVIDENDS, A NULLITY. — Where the
manifest intention of the parties to the trust agreement was, in
sum and substance, to treat the shares of a deceased
stockholder as absolutely outstanding shares of said
stockholder’s estate until they were fully paid. the declaration
of said shares as treasury stock dividend was a complete
nullity and plainly violative of public policy.
3. ID.; ID.; STOCK DIVIDEND PAYABLE ONLY FROM
RETAINED EARNINGS. — A stock dividend, being one
payable in capital stock, cannot be declared out of
outstanding corporate stock, but only from retained
earnings.
4. ID.; ID.; PURCHASE OF HOLDING RESULTING IN
DISTRIBUTION OF EARNINGS TAXABLE. — Where by the
use of a trust instrument as a convenient technical device,
respondents bestowed unto themselves the full worth and value
of a deceased stockholder’s corporate holding acquired with the
very earnings of the companies, such package device which
obviously is not designed to carry out the usual stock dividend
purpose of corporate expansion reinvestment, e.g., the
acquisition of additional facilities and other capital budget items,
but exclusively for expanding the capital base of the surviving
stockholders in the company, cannot be allowed to deflect the
latter’s responsibilities toward our income tax laws. The
conclusion is ineluctable that whenever the company parted
with a portion of its earnings "to buy" the corporate holdings of
the deceased stockholders, it was in ultimate effect and result
making a distribution of such earnings to the surviving
stockholders. All these amounts are consequently subject to
income tax as being, in truth and in fact, a flow of cash benefits
to the surviving stockholders.
COMMISSION OF INTERNAL REVENUE VS. JOHN
MANNING
66 SCRA 14 (1975)
FACTS:
Under a trust agreement, Julius Reese who owned
24,700 shares of the 25,000 common shares of MANTRASCO,
and the three private respondents who owned the rest, at 100
shares each, deposited all their shares with the Trustees. The
trust agreement provided that upon Reese’s death
MANTRASCO shall purchase Reese’s shares. The trust
agreement was executed in view of Reese’s desire that upon
his death the Company would continue under the management
of respondents.
Upon Reese’s death and partial payment by the
company of Reeses’s share, a new certificate was issued in the
name of MANTRASCO, and the certificate indorsed to the
Trustees. Subsequently, the stockholders reverted the 24,700
shares in the Treasury to the capital account of the company as
stock dividends to be distributed to the stockholders. When the
entire purchase price of Reese’s interest in the company was
paid in full by the latter, the trust agreement was terminated,
and the shares held in trust were delivered to the company.
The Bureau of Internal Revenue concluded that the
distribution of the 24,700 shares of Reese as stock dividends
was in effect a distribution of the "assets or property of the
corporation." It therefore assessed respondents for deficiency
income taxes as well as for fraud penalty and interest charges.
The Court of Tax Appeals absolved respondent from any liability
for receiving the questioned stock dividends on the ground that
their respective one-third interest in the Company remained the
same before and after the declaration of the stock dividends and
only the number of shares held by each of them had changed.
On a petition for review, the Supreme Court held that the
newly acquired shares were not treasury shares; their
declaration as treasury stock dividends was a complete nullity
and that the assessment by the Commissioner of fraud penalty
and the imposition of interest charges pursuant to the provision
of the Tax Code were made in accordance with law.
Judgment of the Court of Tax Appeals was set aside.
ISSUE: Whether or not the newly acquired shares were not
treasury shares? And whether or not respondents is liable for
tax difffiencies?
RULING:
In submitting their respective contentions, it is the
assumption of both parties that the 24,700 shares declared as
stock dividends were treasury shares. The court is however
convinced, after a careful study of the trust agreement, that the
said shares were not, on December 22, 1958 or at anytime
before or after that date, treasury shares. The reasons are quite
plain.
Although authorities may differ on the exact legal and
accounting status of so-called "treasury shares," they are more
or less in agreement that treasury shares are stocks issued and
fully paid for and re-acquired by the corporation either by
purchase, donation, forfeiture or other means.
Treasury shares are therefore issued shares, but being
in the treasury they do not have the status of outstanding
shares.
Consequently, although a treasury share, not having
been retired by the corporation re-acquiring it, may be re-issued
or sold again, such share, as long as it is held by the
corporation as a treasury share, participates neither in
dividends, because dividends cannot be declared by the
corporation to itself, nor in the meetings of the corporation as
voting stock, for otherwise equal distribution of voting powers
among stockholders will be effectively lost and the directors will
be able to perpetuate their control of the corporation, though it
still represents a paid-for interest in the property of the
corporation.
 The foregoing essential features of a treasury stock are
lacking in the questioned shares.
The manifest intention of the parties to the trust
agreement was, in sum and substance, to treat the 24,700
shares of Reese as absolutely outstanding shares of Reese’s
estate until they were fully paid. Such being the true nature of
the 24,700 shares, their declaration as treasury stock dividend
in 1958 was a complete nullity and plainly violative of public
policy. A stock dividend, being one payable in capital stock,
cannot be declared out of outstanding corporate stock, but only
from retained earnings.
Dividends means any distribution made by a corporation
to its shareholders out of its earnings or profits. Stock dividends
which represent transfer of surplus to capital account is not
subject to income tax. But if a corporation redeems stock issued
so as to make a distribution, this is essentially equivalent to the
distribution of a taxable dividend the amount so distributed in
the redemption considered as taxable income.
The distinctions between a stock dividend which does
not and one which does constitute taxable income to the
shareholders is that a stock dividend constitutes income if its
gives the shareholder an interest different from that which his
former stockholdings represented. On the other hand, it does
constitute income if the new shares confer no different rights or
interests than did the old shares. Therefore, whenever the
companies involved parted with a portion of their earnings to
buy the corporate holdings of Reese, they were making a
distribution of such earnings to respondents. These amounts
are thus subject to income tax as a flow of cash benefits to
respondents. Hence, respondents are liable for deficiency
income taxes.
INCORPORATION AND ORGANIZATION OF PRIVATE
CORPORATIONS
Number and qualification of incorporators
CARE BEST INTERNATIONAL V SEC
FACTS
1. Petitioner (Care Best International) is a registered
corporation under SEC.
2. The Incorporators who appear in the Articles of
Incorporation are 7 who are all Filipinos.
3. Ultra Clean filed a complaint at Compliance and
Enforcement Division-SEC seeking the revocation or
cancellation of the Certificate of Registration of the
Petitioner on the ground of fraud of the procurement
thereof. It alleged that 3 of petitioner’s incorporators
uses alias instead of their real names.
4. CED resolved that the mere act of allowing its
incorporators to use alias in signing their Articles of
Incorporation, a public document, is fraudulent,
thereby warranting the revocation of their Certificate
of Registration, this fraudulent act left only 4 valid
incorporators, thereby failing to fulfill the mandatory
requirement under Section 14(6) of the Corporation
Code. Thus, CED filed a revocation at SEC. SEC
issued the assaild order. Hence, this petition.
ISSUE: Whether the use of alias constitutes fraud in the
procurement of petitioner’s certificate of registration
RULING:
Yes. A misrepresentation of one’s identity, with the unauthorized
use of aliases, is fraud which, in its general sense, is deemed to
comprise anything calculated to deceive, including acts,
omissions and concealment, involving a breach of legal or
equitable duty, trust or confidence justly reposed, resulting in
damage to another, or by which an undue or unconscientious
advantage is taken of another.
In the case at bar, there was no showing that the incorporators
who used alias are authorized to use as such. As part of the
requirements for petitioner’s incorporation and registration with
the SEC, the filing of its Articles of Incorporation is the
document prepared by persons establishing a corporation and
filed with the SEC containing the matters required by the Code.
It defines the charters of the corporation and the contractual
relationship between the State and the corporation, the
stockholders and the State, and between the Corporation and
its stockholders.
Section 14(5) of the Corporation Code specifically provides that
the Articles of Incorporation must states “the names,
nationalities and residencies of the incorporators.” The purpose
of the requirement is to inform the public about the personal
circumstances of the individuals organizing the corporation.
As SEC stated:
“Articles of incorporation is the basic corporate contract
which is accorded with reverence by the law and the
courts, as manifested by stringent rules for its
registration and the manner by which any part thereof
may be amended. One such registration requirement is
embodied in section 10 of the code, to wit:
Xxx Section 10. Number and qualifications of
incorporators. – Any number of natural persons not less
than five (5) but not more than fifteen (15), all of legal
age and a majority of whom are residents of the
Philippines, may form a private corporation for any lawful
purpose or purposes. Xxx
The incorporators must have the capacity to enter into a valid
contract, the act of forming a corporation as between the parties
being contractual. Furthermore, the Articles of Incorporation,
under section 15 of the Code, must be acknowledged by the
incorporators before a notary public. The purpose of which is to
secure the State and all concerned against the possibility of any
fictitious name being subscribed to the Articles and to furnish
proof of the genuineness of the signatures.
That fraud that was committed by the said
incorporators/directors of the corporation using unauthorized
aliases, evaded whatever personal liability directors/trustees
may incur under Section 31 of the Corporation Code; and made
it extremely difficult for the SEC to determine if there was
compliance with the requirement on the number and
qualifications of incorporation in Section 10 of the Corporation
Code that
Section 10. Number and qualifications of
incorporators. – Any number of natural persons not less
than five (5) but not more than fifteen (15), all of legal
age and a majority of whom are residents of the
Philippines, may form a private corporation for any lawful
purpose or purposes. Each of the incorporators of s
stock corporation must own or be a subscriber to at least
one (1) share of the capital stock of the corporation. (6a)
Since names provide identification, the person identified as
Jessica Evangelista and Ricardo Enriquez in the Articles of
Incorporation are, in the eyes of law, fictitious and non-existent;
hence the use of unauthorized alias by Ibita and Solivio
inevitably resorted in the Articles of Incorporation being a
falsified document considering that a) they cannot be viewed as
having validly and legally comported themselves as
incorporators in the formation of the Corporation; as fictitious
and legally non-existent individuals, they cannot be said to own
or hold a share in the capital stock of the Corporation; therefore,
the Corporation violated the requirement on the number of
incorporators and their qualifications in Section 10 of the
Corporation Code, b) the Articles of Incorporation are required
to be notarized; as a notarized document, the Articles of
Incorporation is executed to lend the truth; since the contents
are untruthful statements, and the signitures of Ibita and Solivio
are signing as Jessica Evangelista and Enriquez are counterfeit,
the authenticity of the Articles of Incorporation came under the
cloud of doubt.
Corporate Term
CASE: CLEMENTE VS. CA
Facts:
1. Luis Clemente et al., in a civil action entitled
“Declaration of Ownership with Receivership”, sought to be
declared the owners of a piece of a parcel of land situated in
Calamba, Laguna, bought by "Sociedad Popular Calambeña".
2. The “sociedad” was organized at the advent of the
early American occupation of the Philippines. It did business
and held itself out as a corporation from 1909 up to 1932. Its
principal business was cockfighting or the operation and
management of a cockpit. The "Sociedad" acquired the subject
parcel of land from the Friar Lands Estate of Calamba. Patent
was issued and the Real Property Tax Register of the Office of
the Treasurer of Calamba, Laguna showed that the lot was
declared and assessed for taxation purposes
3. Clemente et al., show that Mariano Elepaño and
Pablo Clemente, now both deceased, were the original
stockholders of the "sociedad." Pablo Clemente's shares of
stocks were later distributed and apportioned to his heirs.
4. The "sociedad" then issued stock certificates to the
heirs. On the basis of their respective stocks certificates, they,
along with the heirs of Mariano Elepaño jointly claimed
ownership over the subject parcel of land, asserting that their
fathers being the only known stockholders of the "sociedad"
they, to the exclusion of all others, are entitled to be declared
owners of the lot.
5. Private respondents, Elvira and Victor Castro, in their
answer; likewise claimed ownership of the property by virtue of
acquisitive prescription, they did not however presented any
evidence despite the several opportunities accorded to them by
the trial court.
6. The trial court dismissed the complaint not merely on
what it apparently perceived to be an insufficiency of the
evidence that firmly could establish plaintiffs' claim of ownership
over the property in dispute but also on its thesis that, absent a
corporate liquidation, it is the corporation, not the stockholders,
which can assert, if at all, any title to the corporate assets. The
court, even then, expressed some reservations on the
corporation's being able to still validly pursue such a claim.
ISSUE:
Whether or not petitioners can be held to have
succeeded in establishing for themselves a firm title to the
property in question.
Ruling:
NO. Basic is the rule that one asserting a right has the
burden of proving it and the fact is, no proof was introduced
demonstrating that the "sociedad" ever asserted its-right of
ownership over the property during the period of its existence.
The presumption is, "that a person takes ordinary care of his
concern."
We take, Sociedad is the legal owner of the land in
dispute.
Even assuming that their parents were the only
stockholders of Sociedad, and assuming further that Sociedad
has ceased to exist, these do not ipso facto vest ownership over
the property in the hands of plaintiffs-appellants.
Assuming that sociedad is a duly-organized entity, under
the laws of the Philippines, its corporate existence is separate
and distinct from its stockholders and from other corporations to
which it may be connected (Yutive Sons Hardware Co. vs. Court
of Tax Appeals, 1 SCRA 161, 165).
If it was not organized and registered under Philippine
laws as a private corporation, it is a de facto corporation, as
found by the court below, with the right to exercise corporate
powers, and thus it is imperative that any of the modes of
transferring ownership from said entity must be shown.
If, indeed, the sociedad has long become defunct, it
should behoove petitioners, or anyone else who may have any
interest in the corporation, to take appropriate measures before
a proper forum for a peremptory settlement of its affairs. We
might invite attention to the various modes provided by the
Corporation Code for dissolving, liquidating or winding up, and
terminating the life of the corporation.
Among the causes for such dissolution are when the
corporate term has expired or when, upon a verified complaint
and after notice and hearing, the SEC orders the dissolution of a
corporation for its continuous inactivity for at least 5 years. The
corporation continues to be a body corporate for 3 years after its
dissolution for purposes of prosecuting and defending suits by
and against it and for enabling it to settle and close its affairs,
culminating in the disposition and distribution of its remaining
assets. It may, during the 3-year term, appoint a trustee or a
receiver who may act beyond that period. If the 3-year extended
life has expired without a trustee or receiver having been
expressly designated by the corporation, the board of directors
(or trustees) itself may be permitted to so continue as "trustees"
by legal implication to complete the corporate liquidation. Still in
the absence of a board of directors or trustees, those having
any pecuniary interest in the assets, including not only the
shareholders but likewise the creditors of the corporation, acting
for and in its behalf, might make proper representations with the
SEC for working out a final settlement of the corporate
concerns.
TRUST FUND DOCTRINE
CASE: PHILIPPINE TRUST COMPANY, as assignee in
insolvency of "La Cooperativa Naval Filipina," plaintiff-
appellee,
vs.
MARCIANO RIVERA, defendant-appellant.
1. Philippine Trust Company, as assignee in
insolvency of La Cooperativa Naval Filipina,
instituted an action against Marciano Rivera, for the
purpose of recovering a balance alleged to be due
upon defendant's subscription to the capital stock of
said insolvent corporation. The trial judge having
given judgment in favor of the plaintiff for the amount
sued for, the defendant appealed.
2. Among the incorporators of the La Cooperativa Filipina
was defendant Mariano Rivera, who subscribed shares.
3. In the course of time the company became insolvent and
went into the hands of the Philippine Trust Company, as
assignee in bankruptcy; and by it this action was
instituted to recover one-half of the stock subscription of
the defendant, which admittedly has never been paid.
4. The reason given for the failure of the defendant to
pay the entire subscription is, that not long after
the Cooperativa Naval Filipina had been
incorporated, a meeting of its stockholders
occurred, at which a resolution was adopted to the
effect that the capital should be reduced by 50 per
centum and the subscribers released from the
obligation to pay any unpaid balance of their
subscription in excess of 50 per centum of the same.
As a result of this resolution it seems to have been
supposed that the subscription of the various
shareholders had been cancelled to the extent stated;
and fully paid certificate were issued to each
shareholders for one-half of his subscription. It does not
appear that the formalities prescribed in section 17 of the
Corporation Law (Act No. 1459), as amended, relative to
the reduction of capital stock in corporations were
observed, and in particular it does not appear that any
 certificate was at any time filed in the Bureau of
Commerce and Industry, showing such reduction.
RTC: The trial judge, held that the resolution relied upon the
defendant was without effect and that the defendant was still
liable for the unpaid balance of his subscription.
ISSUE: Whether the corporate creditor go after the unpaid stock
subscription of a stockholder to satisfy corporate debt
RULING:
Yes.
It is established doctrine that subscription to the capital of a
corporation constitute a fund to which creditors have a
right to look for satisfaction of their claims and that the
assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the
payment of its debts. (Velasco vs. Poizat, 37 Phil., 802.) A
corporation has no power to release an original subscriber to its
capital stock from the obligation of paying for his shares, without
a valuable consideration for such release; and as against
creditors a reduction of the capital stock can take place only in
the manner an under the conditions prescribed by the statute or
the charter or the articles of incorporation. Moreover, strict
compliance with the statutory regulations is necessary (14 C. J.,
498, 620).
In the case before us the resolution releasing the shareholders
from their obligation to pay 50 per centum of their respective
subscriptions was an attempted withdrawal of so much capital
from the fund upon which the company's creditors were entitled
ultimately to rely and, having been effected without compliance
with the statutory requirements, was wholly ineffectual.
STEINBERG, as receiver of the Sibuguey Trading Company,
Inc. vs. VELASCO
FACTS:
- Steinberg is the receiver of Sibuguey, a domestic corporation.
- It is alleged that the defendants, Gregorio Velasco, as
president, Felix del Castillo, as vice-president, Andres L.
Navallo, as secretary-treasurer, and Rufino Manuel, as director
of Trading Company, at a meeting of the board of directors
approved and authorized various lawful purchases already
made of a large portion of the capital stock of the company from
its various stockholders, thereby diverting its funds to the
injury, damage and in fraud of the creditors of the
corporation. 
- the total amount of the capital stock unlawfully purchased was
P3,300. That at the time of such purchase, the corporation had
accounts payable amounting to P13,807.50, most of which were
unpaid at the time petition for the dissolution of the corporation
was financial condition, in contemplation of an insolvency and
dissolution.
SECOND COA: the officers and directors of the corporation
approved a resolution for the payment of P3,000 as dividends to
its stockholders, which was wrongfully done and in bad faith,
and to the injury and fraud of its creditors. 
TRIAL COURT’S RULING: Dismissed the complaint
ISSUE: WON the trail court’s ruling is correct.
HELD: No. Decision of the lower court is reversed.
Creditors of a corporation have the right to assume that so
long as there are outstanding debts and liabilities, the
board of directors will not use the assets of the corporation
to purchase its own stock, and that it will not declare
dividends to stockholders when the corporation is
insolvent.
The corporation did not then have an actual bona
fide surplus from which the dividends could be paid, and
that the payment of them in full at the time would "affect the
financial condition of the corporation."
It is, indeed, peculiar that the action of the board in purchasing
the stock from the corporation and in declaring the dividends on
the stock was all done at the same meeting of the board of
directors, and it appears in those minutes that the both Ganzon
and Mendaros were formerly directors and resigned before the
board approved the purchase and declared the dividends, and
that out of the whole 330 shares purchased, Ganzon, sold 100
and Mendaros 200, or a total of 300 shares out of the 330,
which were purchased by the corporation, and for which it paid
P3,300. In other words, that the directors were permitted to
resign so that they could sell their stock to the corporation. In
this situation and upon this state of facts, it is very apparent that
the directors did not act in good faith or that they were grossly
ignorant of their duties.
General Duty to Exercise Reasonable Care. — The
directors of a corporation are bound to care for its
property and manage its affairs in good faith, and for a
violation of these duties resulting in waste of its assets or
injury to the property they are liable to account the same
as other trustees. Are there can be no doubt that if they
do acts clearly beyond their power, whereby loss ensues
to the corporation, or dispose of its property or pay away
its money without authority, they will be required to make
good the loss out of their private estates. This is the rule
where the disposition made of money or property of the
corporation is one either not within the lawful power of
the corporation, or, if within the authority of the particular
officer or officers.
And section 458 which says:
Want of Knowledge, Skill, or Competency. — It has
been said that directors are not liable for losses resulting
to the corporation from want of knowledge on their part;
or for mistake of judgment, provided they were honest,
and provided they are fairly within the scope of the
powers and discretion confided to the managing body.
But the acceptance of the office of a director of a
corporation implies a competent knowledge of the duties
assumed, and directors cannot excuse imprudence on
the ground of their ignorance or inexperience; and if they
commit an error of judgment through mere recklessness
or want of ordinary prudence or skill, they may be held
liable for the consequences. Like a mandatory, to whom
he has been likened, a director is bound not only to
exercise proper care and diligence, but ordinary skill and
judgment. As he is bound to exercise ordinary skill and
judgment, he cannot set up that he did not possess
them.
COMMISSIONER OF INTERNAL REVENUE VS. CA (1999)
FACTS:
-Don Soriano Andres (citizen and resident of the US), formed
the corporation A Soriano Y Cia (predecessor of ANSCOR),
with a P1M capitalization divided into 10,000 common shares at
a par value of P100/share. Don Andres then subscribed 4, 963
of the 5,000 shares.
-ANSCOR is wholly owned and controlled by the family of Don
Andres
-ANSCOR’s capital stock was increased to P2.5M divided into
25,000 common shares; 10,000 of which were subscribed by
Don Andres (Total na subscription nya: 14, 963 common
shares). Later on, 1, 250 shares each were transferred by Don
Andres to his two sons- Jose and Andres Jr.
- By 1947, ANSCOR declared stock dividends. Other stock
dividend declarations were made between 1949 and December
20, 1963. 11 On December 30, 1964 Don Andres died. As of
that date, the records revealed that he has a total shareholdings
of 185,154 shares 12 — 50,495 of which are original issues and
the balance of 134.659 shares as stock dividend declarations.  filed a petition for review with the CTA, the Tax Court reversed
Correspondingly, one-half of that shareholdings or 92,577
shares were transferred to his wife, Doña Carmen Soriano, as
her conjugal share. The offer half formed part of his estate.
A day after Don Andres died, ANSCOR increased its capital
stock to P20M and in 1966 further increased it to P30M. In the
same year (December 1966), stock dividends worth 46,290 and
46,287 shares were respectively received by the Don Andres
estate and Doña Carmen from ANSCOR. Hence, increasing
their accumulated shareholdings to 138,867 and 138,864
common shares each.
On December 28, 1967, Doña Carmen requested a ruling from
the United States Internal Revenue Service (IRS), inquiring if an
exchange of common with preferred shares may be considered
as a tax avoidance scheme. By January 2, 1968, ANSCOR
reclassified its existing 300,000 common shares into 150,000
common and 150,000 preferred shares.
In a letter-reply dated February 1968, the IRS opined that the
exchange is only a recapitalization scheme and not tax
avoidance. Consequently, on March 31, 1968 Doña Carmen
exchanged her whole 138,864 common shares for 138,860 of
the preferred shares. The estate of Don Andres in turn
exchanged 11,140 of its common shares for the remaining
11,140 preferred shares.
In 1973, after examining ANSCOR’s books of account and
record Revenue examiners issued a report proposing that
ANSCOR be assessed for deficiency withholding tax-at-source,
for the year 1968 and the 2nd quarter of 1969 based on the
transaction of exchange and redemption of stocks. BIR made
the corresponding assessments. ANSCOR’s subsequent protest
on the assessments was denied in 1983 by petitioner. ANSCOR
petitioners ruling. CA affirmed the ruling of the CTA. Hence this
position.
ISSUE: Whether ANSCOR's redemption of stocks from its
stockholders as well as the exchange of common shares
can be considered as equivalent to the distribution of
taxable dividend making the proceeds thereof taxable
under the provisions Section 83 (B) of the 1939 Revenue
Act.
HELD: Decision was modified. ANSCOR'S redemption of
82,752.5 stock dividends is herein considered as essentially
equivalent to a distribution of taxable dividends for which it is
liable for the withholding tax-at-source.
Tax on Stock Dividends
Proportionate test: wherein stock dividends once issued form
part of the capital and, thus, subject to income tax. Specifically:
“A stock dividend representing the transfer of surplus to capital
account shall not be subject to tax.”
Stock dividends, strictly speaking, represent capital and do not
constitute income to its recipient. So that the mere issuance
thereof is not yet subject to income tax as they are nothing but
an "enrichment through increase in value of capital investment."
As capital, the stock dividends postpone the realization of profits
because the "fund represented by the new stock has been
transferred from surplus to capital and no longer available for
actual distribution."

Income in tax law is "an amount of money coming to a person
within a specified time, whether as payment for services,
interest, or profit from investment." It means cash or its
equivalent. It is gain derived and severed from capital, from
labor or from both combined— so that to tax a stock dividend
would be to tax a capital increase rather than the income.  exemption under Section 83(b). The use of the words "such
In a loose sense, stock dividends issued by the corporation,
are considered unrealized gain, and cannot be subjected to
income tax until that gain has been realized. Before the
realization, stock dividends are nothing but a representation of
an interest in the corporate properties. As capital, it is not yet
subject to income tax. It should be noted that capital and
income are different. Capital is wealth or fund; whereas
income is profit or gain or the flow of wealth. The determining
factor for the imposition of income tax is whether any gain or
profit was derived from a transaction.  of regular dividend,
EXPN: However, if a corporation cancels or redeems
stock issued as a dividend at such time and in such
manner as to make the distribution and cancellation or
redemption, in whole or in part, essentially equivalent to
the distribution of a taxable dividend, the amount so
distributed in redemption or cancellation of the
stock shall be considered as taxable income to the
extent it represents a distribution of earnings or profits
accumulated after March first, nineteen hundred and
thirteen.
The proceeds of redemption of stock dividends are essentially
distribution of cash dividends, which when paid becomes the
absolute property of the stockholder. Thereafter, the latter
becomes the exclusive owner thereof and can exercise the
freedom of choice.  Having realized gain from that redemption,
the income earner cannot escape income tax.  the treasury.
Whether the amount distributed in the redemption should be
treated as the equivalent of a "taxable dividend" is a question of
fact, 82 which is determinable on "the basis of the particular
facts of the transaction in question. 
No decisive test can be used to determine the application of the
manner" and "essentially equivalent" negative any idea that a
weighted formula can resolve a crucial issue — Should the
distribution be treated as taxable dividend.  On this aspect,
American courts developed certain recognized criteria, which
includes the following: 
1) the presence or absence of real business purpose,
2) the amount of earnings and profits available for the
declaration of a regular dividends and the corporation's past
record with respect to the declaration of dividends,
3) the effect of the distribution, as compared with the declaration
4) the lapse of time between issuance and redemption, 
5) the presence of a substantial surplus 87 and a generous
supply of cash which invites suspicion as does a meager policy
in relation both to current earnings and accumulated surplus.
REDEMPTION AND CANCELLATION
For the exempting clause of Section, 83(b) to apply, it is
indispensable that: (a) there is redemption or cancellation; (b)
the transaction involves stock dividends and (c) the "time and
manner" of the transaction makes it "essentially equivalent to a
distribution of taxable dividends." Of these, the most important is
the third.
Redemption is repurchase, a reacquisition of stock by a
corporation which issued the stock in exchange for property,
whether or not the acquired stock is cancelled, retired or held in
 
 Essentially, the corporation gets back some of its stock,
distributes cash or property to the shareholder in
payment for the stock, and continues in business as
before. The redemption of stock dividends previously
issued is used as a veil for the constructive distribution
of cash dividends.
In this case, there is no dispute that ANSCOR redeemed
shares of stocks from a stockholder (Don Andres) twice (28,000
and 80,000 common shares). If its source is the original capital
subscriptions upon establishment of the corporation or from
initial capital investment in an existing enterprise, its redemption
to the concurrent value of acquisition may not invite the
application of Sec. 83(b) under the 1939 Tax Code, as it is not
income but a mere return of capital. On the contrary, if the
redeemed shares are from stock dividend declarations other
than as initial capital investment, the proceeds of the
redemption is additional wealth, for it is not merely a return of
capital but a gain thereon.
It is not the stock dividends but the proceeds of its redemption
that may be deemed as taxable dividends. Here, it is undisputed
that at the time of the last redemption, the original common
shares owned by the estate were only 25,247.5 91 This means
that from the total of 108,000 shares redeemed from the estate,
the balance of 82,752.5 (108,000 less 25,247.5) must have
come from stock dividends. Besides, in the absence of evidence
to the contrary, the Tax Code presumes that every distribution
of corporate property, in whole or in part, is made out of
corporate profits such as stock dividends. The capital cannot be
distributed in the form of redemption of stock dividends without
violating the trust fund doctrine — wherein the capital stock,
property and other assets of the corporation are regarded as
equity in trust for the payment of the corporate creditors.  Once
capital, it is always capital.  That doctrine was intended for the
protection of corporate creditors.  FACTS
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 realized 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. 126 Preferred stocks
are those which entitle the shareholder to some priority on
dividends and asset distribution. 127
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. 128 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. 129chanroblesvirtuallawlibrary
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. 
G.R. No. 144476- April 8, 2003 ONG YONG vs.TIU
 1. First Landlink Asia Development Corporation (FLADC),
which was owned by the Tius, encountered financial
difficulties.
a. It was indebted to the Philippine National Bank
(PNB). To stave off foreclosure of the mortgage,
the Tius invited Ongs to invest in FLADC.
b. Under the Pre-Subscription Agreement they
entered into, the Ongs and the Tius agreed to
maintain equal shareholdings in FLADC.
2. The Ongs paid to FLADC and to the Tius over and
above their investment, the total sum of which was used
to settle the mortgage indebtedness of FLADC to PNB.
3. The business harmony between the Ongs and the Tius
in FLADC was shortlived because the Tius, rescinded
the Pre-Subscription Agreement.
4. The controversy finally came to a head when this case
was commenced4 by the Tius at the Securities and
Exchange Commission (SEC), seeking confirmation of
their rescission of the Pre-Subscription Agreement. After
hearing, the SEC, issued a decision confirming the
rescission sought by the Tius.
On motion of both parties, the above decision was partially
reconsidered but only insofar as the Ongs' was declared not as
a premium on capital stock but an advance (loan) by the Ongs
to FLADC and that the imposition of interest on it was correct.
Both parties appealed7 to the SEC en banc which rendered a
decision affirming the decision of the Hearing Officer. The
SEC en banc confirmed the rescission of the Pre-
Subscription Agreement but reverted to classifying the P70
million paid by the Ongs as premium on capital and not as a
loan or advance to FLADC, hence, not entitled to earn interest.8
ISSUE: whether the Tius could legally rescind the Pre-
Subscription Agreement.
RULING: We rule that they could not.
FLADC was originally incorporated with an authorized capital
stock of 500,000 shares with the Tius owning 450,200 shares
representing the paid-up capital. When the Tius invited the
Ongs to invest in FLADC as stockholders, an increase of the
authorized capital stock became necessary to give each group
equal (50-50) shareholdings as agreed upon in the Pre-
Subscription Agreement.
The authorized capital stock was thus increased from 500,000
shares to 2,000,000 shares with a par value of P100 each, with
the Ongs subscribing to 1,000,000 shares and the Tius to
549,800 more shares in addition to their 450,200 shares to
complete 1,000,000 shares. Thus, the subject matter of the
contract was the 1,000,000 unissued shares of FLADC stock
allocated to the Ongs. Since these were unissued shares, the
parties' Pre-Subscription Agreement was in fact a subscription
contract as defined under Section 60, Title VII of the
Corporation Code:
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 (Italics
supplied).
A subscription contract necessarily involves the corporation as
one of the contracting parties since the subject matter of the
transaction is property owned by the corporation – its shares of
stock. Thus, the subscription contract (denominated by the
parties as a Pre-Subscription Agreement) whereby the Ongs
invested P100 million for 1,000,000 shares of stock was, from
the viewpoint of the law, one between the Ongs and FLADC, not
between the Ongs and the Tius. Otherwise stated, the Tius did
not contract in their personal capacities with the Ongs since
they were not selling any of their own shares to them. It was
FLADC that did.
All this notwithstanding, granting but not conceding that the Tius
possess the legal standing to sue for rescission based on
breach of contract, said action will nevertheless still not
prosper since rescission will violate the Trust Fund
Doctrine and the procedures for the valid distribution of
assets and property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the
1923 case of Philippine Trust Co. vs. Rivera,22 provides that
subscriptions to the capital stock of a corporation constitute a
fund to which the creditors have a right to look for the
satisfaction of their claims.23 This doctrine is the underlying
principle in the procedure for the distribution of capital assets,
embodied in the Corporation Code, which allows the distribution
of corporate capital only in three instances: (1) amendment of
the Articles of Incorporation to reduce the authorized capital
stock,24 (2) purchase of redeemable shares by the corporation,
regardless of the existence of unrestricted retained
earnings,25 and (3) dissolution and eventual liquidation of the
corporation. Furthermore, the doctrine is articulated in Section
41 on the power of a corporation to acquire its own shares26 and
in Section 122 on the prohibition against the distribution of
corporate assets and property unless the stringent requirements
therefor are complied with.27
The distribution of corporate assets and property cannot be
made to depend on the whims and caprices of the stockholders,
officers or directors of the corporation, or even, for that matter,
on the earnest desire of the court a quo "to prevent further
squabbles and future litigations" unless the indispensable
conditions and procedures for the protection of corporate
creditors are followed. Otherwise, the "corporate peace"
laudably hoped for by the court will remain nothing but a dream
because this time, it will be the creditors' turn to engage in
"squabbles and litigations" should the court order an unlawful
distribution in blatant disregard of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription
Agreement will effectively result in the unauthorized distribution
of the capital assets and property of the corporation, thereby
violating the Trust Fund Doctrine and the Corporation Code,
since rescission of a subscription agreement is not one of the
instances when distribution of capital assets and property of the
corporation is allowed.
Contrary to the Tius' allegation, rescission will, in the final
analysis, result in the premature liquidation of the corporation
without the benefit of prior dissolution in accordance with
Sections 117, 118, 119 and 120 of the Corporation Code. 28 The
Tius maintain that rescinding the subscription contract is not
synonymous to corporate liquidation because all rescission will
entail would be the simple restoration of the status quo ante and
a return to the two groups of their cash and property
contributions. We wish it were that simple. Very noticeable is the
fact that the Tius do not explain why rescission in the instant
case will not effectively result in liquidation. The Tius merely
refer in cavalier fashion to the end-result of rescission (which
incidentally is 100% favorable to them) but turn a blind eye to its
unfair, inequitable and disastrous effect on the corporation, its
creditors and the Ongs.
Furthermore, it is an improper judicial intrusion into the internal
affairs of the corporation to compel FLADC to file at the SEC a
petition for the issuance of a certificate of decrease of stock.
Decreasing a corporation's authorized capital stock is an
amendment of the Articles of Incorporation. It is a decision that
only the stockholders and the directors can make, considering
that they are the contracting parties thereto. In this case, the
Tius are actually not just asking for a review of the legality and
fairness of a corporate decision. They want this Court to make a
corporate decision for FLADC. We decline to intervene and
order corporate structural changes not voluntarily agreed upon
by its stockholders and directors.
TRUST FUND DOCTRINE
G.R. No. 152685- December 4, 2007 PLDT v
NTC
1. This case pertains to Section 40 (e) of the Public Service
Act6 (PSA), pursuant to Batas Pambansa Blg. 325,
which authorized the NTC to collect from public
telecommunications companies Supervision and
Regulation Fees(SRF) or a fraction of the capital and
stock subscribed or paid for of a stock corporation,
partnership or single proprietorship of the capital
invested, or of the property and equipment, whichever is
higher.
2. Under Section 40 (e) of the PSA, the NTC sent SRF
assessments to petitioner PLDT. The SRF assessments
were based on the market value of the outstanding
capital stock, including stock dividends, of PLDT.
3. PLDT protested the assessments contending that the
SRF ought to be based on the par value of its
outstanding capital stock.
4. Its protest was denied by the NTC.
ISSUE: what should be the basis for the assessment of the
Supervision and Regulation Fee
RULING:
The SRF should be based neither on the par value nor the
market value of the outstanding capital stock but on the value of
the stocks subscribed or paid including the premiums paid
therefor, that is, the amount that the corporation receives,
inclusive of the premiums if any, in consideration of the original
issuance of the shares. We added that in the case of stock
dividends, it is the amount that the corporation transfers from its
surplus profit account to its capital account, that is, the amount
the stock dividends represent is equivalent to the value paid for
its original issuance.
The term "capital" and other terms used to describe the
capital structure of a corporation are of universal
acceptance and their usages have long been
established in jurisprudence. Briefly, capital refers to the
value of the property or assets of a corporation.
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.13 (Emphasis supplied.)
Two concepts can be gleaned from the above. First, what
constitutes capital stock that is subject to the SRF. Second,
such capital stock is equated to the "trust fund" of a corporation
held in trust as security for satisfaction to creditors in case of
corporate liquidation.
The first asks if stock dividends are part of the outstanding
capital stocks of a corporation insofar as it is subject to the SRF.
They are. The first issue we have to tackle is, are all the stock
dividends that are part of the outstanding capital stock of PLDT
subject to the SRF? Yes, they are.
Dividends, regardless of the form these are declared, that is,
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. Such distribution in whatever form is valued at the
declared amount or monetary equivalent.
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.
When stock dividends are distributed, the amount declared
ceases to belong to the corporation but is distributed among the
shareholders. Consequently, the unrestricted retained earnings
of the corporation are diminished by the amount of the declared
dividend while the stockholders’ equity is increased.
Furthermore, the actual payment is the cash value from the
unrestricted retained earnings that each shareholder foregoes
for additional stocks/shares which he would otherwise receive
as required by the Corporation Code to be given to the
stockholders subject to the availability and conditioned on a
certain level of retained earnings. 15 Elsewise put, where the
unrestricted retained earnings of a corporation are more than
100% of the paid-in capital stock, the corporate Board of
Directors is mandated to declare dividends which the
shareholders will receive in cash unless otherwise declared as
property or stock dividends, which in the latter case the
stockholders are forced to forego cash in lieu of property or
stocks.
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.
Moreover, the "Trust Fund" doctrine, bolsters the correctness of
the assessments made by the NTC. As a fund in trust for
creditors in case of liquidation, the actual value of the
subscriptions and the value of stock dividends distributed may
not be decreased or increased by the fluctuating market value of
the stocks. Thus, absent any showing by PLDT of the actual
payment it received for the original issuance of its capital stock,
the assessments made by the NTC, based on the schedule of
outstanding capital stock of PLDT recorded at historical value
payments made, is deemed correct.
YAMAMOTO VS. NISHINO LEATHER INDUSTRIES, INC.
FACTS:
-Yamamoto (Japanese National) organized under Phil laws
Wako Enterprises Manila, Inc., a corp engaged in leather
tanning, now known as Nishino Leather Industries.
- Yamamoto and Nishino (also a Japanese national) forged a
MOA where they agreed to enter into a joint venture wherein
Nishino would acquire number of shares of stock equivalent to
70% of the authorized capital of WAKO.
- Eventually, Nishino and his brother1 Yoshinobu Nishino
(Yoshinobu) acquired more than 70% of the authorized capital
stock of WAKO, reducing Yamamoto's investment therein to.
-Negotiations subsequently ensued in light of a planned
takeover of NLII by Nishino who would buy-out the shares of
stock of Yamamoto.
- In the course of the negotiations, Yoshinobu and Nishino's
counsel Atty. Emmanuel G. Doce (Atty. Doce) advised
Yamamoto by letter; pertinent portion of which : “Regarding the
above machines, you may take them out with you (for your own
use and sale) if you want, provided, the value of such machines
is deducted from your and Wako's capital contributions, which
will be paid to you.”
- Yamamoto filed a complaint against them for replevin
RTC decided in favor of Yamamoto
CA reversed the decision
ISSUE: WON the advice in the letter of Atty. Doce that
Yamamoto may retrieve the machineries and equipment, which
admittedly were part of his investment, bound the corporation
HELD: No.
Under the Corporation Law, unless otherwise provided,
corporate powers are exercised by the Board of Directors.
Indeed, without a Board Resolution authorizing respondent
Nishino to act for and in behalf of the corporation, he cannot
bind the latter.
It bears noting, however, that the aforementioned paragraph 12
of the letter is followed by a request for Yamamoto to give his
"comments on all the above, soonest." What was thus proffered
to Yamamoto was not a promise, but a mere offer, subject to his
acceptance. Without acceptance, a mere offer produces no
obligation. (ART 1181, NCC)
In the case at bar, there is no showing of compliance with the
condition for allowing Yamamoto to take the machineries and
equipment, namely, his agreement to the deduction of their
value from his capital contribution due him in the buy-out of his
interests in NLII. Yamamoto's allegation that he agreed to the
condition35 remained just that, no proof thereof having been
presented.
The machineries and equipment, which comprised Yamamoto's
investment in NLII,36 thus remained part of the capital property
of the corporation. It is settled that the property of a corporation
is not the property of its stockholders or members.
Under the trust fund doctrine, the capital stock, property, and
other assets of a corporation are regarded as equity in trust for
the payment of corporate creditors which are preferred over the
stockholders in the distribution of corporate assets. The
distribution of corporate assets and property cannot be made to
depend on the whims and caprices of the stockholders, officers,
or directors of the corporation unless the indispensable
conditions and procedures for the protection of corporate
creditors are followed.
he petitioner wasan incorporator and original director of
Business Media Philippines, Inc. (BMPI), which, at its
incorporation on November 12, 1987, had an authorized capital
stock divided into shares and were initially subscribed.
Printwell engaged in commercial and industrial printing.
BMPI commissioned Printwell for the printing of the magazine
Philippines, Inc. (together with wrappers and subscription cards)
that BMPI published and sold. For that purpose, Printwell
extended 30-day credit accommodations to BMPI.
BMPI placed with Printwell several orders on credit,
evidenced by invoices and delivery receipts.
Printwell sued BMPI for the collection of the unpaid
balance in the RTC.
Printwell amended the complaint in order to implead as
defendants all the original stockholders and incorporators to
recover on their unpaid subscriptions.
The defendants filed a consolidated answer,6averring
that they all had paid their subscriptions in full; that BMPI had a
separate personality from those of its stockholders;
Ruling of the RTC
On November 3, 1993, the RTC rendered a decision in
favor of Printwell, rejecting the allegation of payment in full of
the subscriptions in view of an irregularity in the issuance of the
ORs and observing that the defendants had used BMPI’s
corporate personality to evade payment and create injustice.
Applying the trust fund doctrine, the RTC declared the
defendant stockholders liable to Printwell pro rata, Defendant
Business Media, Inc. is a registered corporation and, as
appearing from the Articles of Incorporation, individual
defendants have unpaid subscriptions and it is an established
doctrine that subscriptions to the capital stock of a corporation
constitute a fund to which creditors have a right to look for
satisfaction of their claims.
Ruling of the CA
CA affirmed the RTC, holding that the defendants’ resort
to the corporate personality would create an injustice because
Printwell would thereby be at a loss against whom it would
assert the right to collect.
Settled is the rule that when the veil of corporate fiction
is used as a means of perpetrating fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievements or perfection of
monopoly or generally the perpetration of knavery or crime, the
veil with which the law covers and isolates the corporation from
the members or stockholders who compose it will be lifted to
allow for its consideration merely as an aggregation of
individuals (First Philippine International Bank vs. Court of
Appeals, 252 SCRA 259). Moreover, under this doctrine, the
corporate existence may be disregarded where the entity is
formed or used for non-legitimate purposes, such as to evade a
just and due obligations or to justify wrong (Claparols vs. CIR,
65 SCRA 613).
Further, the CA concurred with the RTC on the
applicability of the trust fund doctrine, under which corporate
debtors might look to the unpaid subscriptions for the
satisfaction of unpaid corporate debts, stating thus:
It is an established doctrine that subscription to the
capital stock of a corporation constitute a fund to which creditors
have a right to look up to for satisfaction of their claims, and that
the assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the
payment of its debts (PNB vs. Bitulok Sawmill, 23 SCRA 1366).
Premised on the above-doctrine, an inference could be
made that the funds, which consists of the payment of
subscriptions of the stockholders, is where the creditors can
claim monetary considerations for the satisfaction of their
claims. If these funds which ought to be fully subscribed by the
stockholders were not paid or remain an unpaid subscription of
the corporation then the creditors have no other recourse to
collect from the corporation of its liability. Such occurrence was
evident in the case at bar wherein the appellants as
stockholders failed to fully pay their unpaid subscriptions, which
left the creditors helpless in collecting their claim due to
insufficiency of funds of the corporation. Likewise, the claim of
appellants that they already paid the unpaid subscriptions could
not be given weight because said payment did not reflect in the
Articles of Incorporations of BMPI that the unpaid subscriptions
were fully paid by the appellants’ stockholders. For it is a rule
that a stockholder may be sued directly by creditors to the
extent of their unpaid subscriptions to the corporation (Keller vs.
COB Marketing, 141 SCRA 86).
Moreover, a corporation has no power to release a
subscription or its capital stock, without valuable consideration
for such releases, and as against creditors, a reduction of the
capital stock can take place only in the manner and under the
conditions prescribed by the statute or the charter or the Articles
of Incorporation. (PNB vs. Bitulok Sawmill, 23 SCRA 1366).18
The CA declared that the inconsistency in the issuance
of the ORs rendered the claim of full payment of the
subscriptions to the capital stock unworthy of consideration; and
held that the veil of corporate fiction could be pierced when it
was used as a shield to perpetrate a fraud or to confuse
legitimate issues.
Donnina Halley has come to the Court to seek a further
review, positing the following for our consideration and
resolution, to wit:
I.
THE COURT OF APPEALS ERRED IN AFFIRMING IN
TOTO THE DECISION THAT DID NOTSTATE THE FACTS
AND THE LAW UPON WHICH THE JUDGMENT WAS BASED
BUT MERELY COPIED THE CONTENTS OF RESPONDENT’S
MEMORANDUM ADOPTING THE SAME AS THE REASON
FOR THE DECISION
II.
THE COURT OF APPEALS ERRED IN AFFIRMING
THE DECISION OF THE REGIONAL TRIAL COURT WHICH
ESSENTIALLY ALLOWED THE PIERCING OF THE VEIL OF
CORPORATE FICTION
III.
THE HONORABLE COURT OF APPEALS ERRED IN
APPLYING THE TRUST FUND DOCTRINE WHEN THE
GROUNDS THEREFOR HAVE NOT BEEN SATISFIED.
Ruling
The petition for review fails.
I
The RTC did not violate the Constitution and the Rules
of Court
The contention of the petitioner, that the RTC merely
copied the memorandum of Printwell in writing its decision, and
did not analyze the records on its own, thereby manifesting a
bias in favor of Printwell, is unfounded.
Respondent fails to specify either the portions allegedly
lifted verbatim from the memorandum, or why she regards the
decision as copied. The omission renders the petition for review
insufficient to support her contention, considering that the mere
similarity in language or thought between Printwell’s
memorandum and the trial court’s decision did not necessarily
justify the conclusion that the RTC simply lifted verbatim or
copied from the memorandum.

It is to be observed in this connection that a trial or

appellate judge may occasionally view a party’s memorandum
or brief as worthy of due consideration either entirely or partly.
When he does so, the judge may adopt and incorporate in his
adjudication the memorandum or the parts of it he deems
suitable, and yet not be guilty of the accusation of lifting or
copying from the memorandum.24 This is because of the
avowed objective of the memorandum to contribute in the
proper illumination and correct determination of the controversy.
Nor is there anything untoward in the congruence of ideas and
views about the legal issues between himself and the party
drafting the memorandum. The frequency of similarities in
argumentation, phraseology, expression, and citation of
authorities between the decisions of the courts and the
memoranda of the parties, which may be great or small, can be
fairly attributable to the adherence by our courts of law and the
legal profession to widely know nor universally accepted
precedents set in earlier judicial actions with identical factual
milieus or posing related judicial dilemmas.