BUSINESS

ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 – Sanchez Roman | A.Y. 2021 - 2022

1st Exam Coverage

CONTRIBUTORS

Transcribers:
ALCORAN, Dania LOQUIAS, Claro Matthew Bruce
BRAGA, Adrianne Beatrice MILANA, Samantha Joy
CAYBOT, Maria Luisa Rose PUERTO, Karlo Alexie
DEIPARINE, Sunshine Gianne SUYO, Alexandra Cates Erika
VILLA ABRILLE, Trisha Marie

Editors:
ALAG, Miguel Alleandro
JUNSAY, Roselle Angelica

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
BUSINESS ORGANIZATION II
CORPORATION LAW
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
“Corporations are not legal ‘persons’ with constitutional rights and
freedoms of their own, but legal fictions that we created and must
therefore control.”
Kalle Lasn, Culture Jam: How to Reverse America’s Suicidal
Consumer Binge – And Why we Must
SCOPE OF OUR LESSON
1. Revised Corporation Code (BP 68 revised by RA 11232,
February 2019)
2. Foreign Investment
3. Philippine Competition Act (RA 10667)
4. Securities and Regulation Code (RA 8799)
5. Intra-Corporate Remedies
6. Financial Rehabilitation Insolvency Act
HISTORY OF CORPORATION LAW
1) Colonial Companies – 17th century European colonial
expansion.
Basically, in our case, the Philippines have a concept of
corporation but not the same as the English and
American concept of corporation. We have sociedad de
anonimas on the Spanish period, these are controlled by
the Church, they are merely organized for non-profit.
HARDEN v. BENGUET CONSOLIDATED MINING COMPANY
G.R. No. L-37331 | March 18, 1933
Under the guidance of this and certain other provisions thus
enacted by Congress, the Philippine Commission entered
upon the enactment of a general law authorizing the creation
of corporations in the Philippine Islands. This rather
elaborate piece of legislation is embodied in what is called
our Corporation Law (Act No. 1459 of the Philippine
Commission). The evident purpose of the commission was to
introduce the American corporation into the Philippine
Islands as the standard commercial entity and to hasten the
day when the sociedad anonima of the Spanish law would be
obsolete. That statute is a sort of codification of American
corporate law.
For the purposes general description only, it may be stated
that the sociedad anonima is something very much like the
English joint stock company, with features resembling those
of both the partnership is shown in the fact that sociedad, the
generic component of its name in Spanish, is the same word
that is used in that language to designate other forms of
partnership, and in its organization it is constructed along the
same general lines as the ordinary partnership. It is therefore
not surprising that for purposes of loose translation the
expression sociedad anonima has not infrequently the other
hand, the affinity of this entity to the American corporation
has not escaped notice, and the expression sociedad
CONTRIBUTORS: ALCORAN | BRAGA | CAYBOT | DEIPARINE | LOQUIAS | MILANA | PUERTO | SUYO | VILLA-ABRILLE
1
anonima is now generally translated by the word
corporation. But when the word corporation is used in the
sense of sociedad anonima and close discrimination is
necessary, it should be associated with the Spanish
expression sociedad anonima either in a parenthesis or
connected by the word "or". This latter device was adopted
in sections 75 and 191 of the Corporation Law.
2) American Revolution – the pretense that corporations are
necessary to better government of the trade without foundation.
When we were colonized by the Americans, they tried to
put into some concepts of corporation – juridical entity.
In the Philippine setting, they introduced it, and the first
Corporation Code was the Old Corporation Code enacted
on April 1, 1906. From 1906 to 1980, Batas Pambansa Blg.
68 (Old Corporation Code) governed the legal
relationship of corporations but it lacks too much. It
doesn’t have the concepts of mergers, acquisitions, and
when that happens (mergers or acquisitions), they apply
different provisions of Commercial Law. That’s why the
74 year old history of the Old Corporation Code had
piece-meal amendments. It cried for codification of the
different sets of rules. From that until 2019, the
commercial landscape changed drastically. That’s why we
have the 2019 Revised Corporation Code of the
Philippines (RCCP).
3) Ending Colonial Monopoly – companies chartered to perform
public functions.
4) “Corporate Personhood” – Britain 1844 Act
CORPORATIONS as “Creatures of the Law”
Try to look at your Civil Code provisions:
Article 44. The following are juridical persons:
1. The State and its political subdivisions;
2. Other corporations, institutions and entities for public
interest or purpose, created by law; their personality
begins as soon as they have been constituted
according to law;
3. Corporations, partnerships and associations for
private interest or purpose to which the law grants a
juridical personality, separate and distinct from that
of each shareholder, partner or member. (35a)
DISCUSSION:
Corporations are among those given by law juridical personality, it
is not natural.
The consequence of having a juridical personality is that it can
acquire:
Article 46. Juridical persons may acquire and possess property
of all kinds, as well as incur obligations and bring civil or criminal
actions, in conformity with the laws and regulations of their
organization. (38a)
Article 47. Upon the dissolution of corporations, institutions
and other entities for public interest or purpose mentioned in
No. 2 of article 44, their property and other assets shall be
disposed of in pursuance of law or the charter creating them. If
nothing has been specified on this point, the property and other
EDITORS: ALAG | JUNSAY
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BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022

assets shall be applied to similar purposes for the benefit of the
region, province, city or municipality which during the existence
of the institution derived the principal benefits from the same.
(39a)
1. FRANCHISES OF CORPORATIONS
JRS vs. IMPERIAL
G.R. No. L-19891 July 31, 1964
• The primary franchise of a corporation that is, the
right to exist as such, is vested “in the individuals who
compose the corporation and not in the corporation
itself”
FACTS: JRS is an establishment duly franchised by the Congress
to conduct a messenger and delivery express service. Imperial
filed a complaint for sum of money against JRS but
subsequently, they entered into a Compromise Agreement
stating that JRS will pay on a certain date. When the date
arrived, they did not pay.
A Notice of Sale here was done by reason of the CFI’s judgment
and it included the personal properties, capital stocks, business
name, franchise, whole assets, total liberties and Net Worth,
books of accounts, etc. of JRS.
ISSUE: Whether or not the business name, franchise, and capital
stocks of JRS could be the subject of levy, execution, and sale?
HELD: YES. A franchise is a special privilege conferred by
governmental authority, and which does not belong to citizens
of the country generally as a matter of common right. xxx
effective only when the sale is confirmed by the Court after due
notice.
In this case, however, the Compromise Agreement and the
Judgment based thereon do not contain any special decree or
order making the franchise answerable for the judgment debt.
The same thing may be stated with respect to JRS's trade name
or business name and its capital stock. Like that of a franchise,
the law mandates, that property necessary for the enjoyment of
said franchise, can only be sold to satisfy a judgment debt if the
decision especially so provides. No such directive appears in the
decision. Moreover, a trade name or business name cannot be
sold separately from the franchise.
The inclusion of the franchise, the trade name and/or business
name and the capital stock of the petitioner corporation, in the
sale of the properties of the JRS Business Corporation, has no
justification.
DISCUSSION:
In this particular case, the Court discussed the primary and
secondary franchise. The act of giving a right to the corporation to
exist is primary franchise. There are certain businesses that require
secondary franchise. Just like this case, messenger services. Not all
corporations require secondary franchise, usually those
corporations that are engaged in giving public service – like
messenger, electricity, water, etc. The Supreme Court said in this
case that it is an asset subject to execution, which is different from
primary franchise.
INTERNATIONAL EXPRESS TRAVEL and TOUR SERVICES v. CA
343 SCRA 674

Franchises, so far as relating to corporations, are divisible into: FACTS: International Express Travel and Tour Services, Inc.
wrote a letter to the Philippine Football Federation wherein the
(1) corporate or general franchises – franchise to exist as former offered its services as a travel agency to the latter. The
a corporation; and offer was accepted.
(2) special or secondary franchises – certain rights and
privileges conferred upon existing corporations, such The total cost of the tickets amounted to P449, 654.83. The
as the right to use the streets of a municipality to lay Federation made two partial payments, in the total amount of
pipes or tracks, erect poles or string wires. P176,467.50. International Express wrote the Federation a
demand letter requesting for the amount of P265,894.33. The
General or Primary Special or Secondary Federation, paid the amount of P31,603.00. Henri Kahn, the
president of the Federation, issued a personal check in the
Franchise Franchise
amount of P50,000. Thereafter, no further payments were made
The right to exist as a Certain rights and privileges
despite repeated demands.
corporation conferred upon existing
corporations
International Express sued Henri Kahn in his personal capacity
Vested in the individuals Vested in the Corporation
and as President of the Federation and impleaded the
who compose the itself
Federation as an alternative defendant.
corporation
Cannot be conveyed in the May ordinarily by conveyed
ISSUE: Whether or not Henry Kahn is personally liable for the
absence of a legislative or mortgaged under a
Federation’s unpaid obligations
authority to do so general power granted to a
corporation to dispose of its
RULING: YES.
property. Unless such special
R.A. 3135 and P.D. No. 604 recognize the juridical existence of
or secondary franchises are
national sports associations. However, while national sports
charged with a public use.
associations may be accorded corporate status, such does not
automatically take place by the mere passage of these laws.
The right to operate a messenger and express delivery service, Before a corporation may acquire juridical personality, the State
by virtue of a legislative enactment, is admittedly a secondary must give its consent either in the form of a special law or a
franchise. Under our corporation law, a secondary franchise is
general enabling act.
subject to levy and sale on execution together and including all
the property necessary for the enjoyment thereof. Said Before an entity may be considered as a national sports
franchise can be sold under execution, when such sale is association, such entity must be recognized by the accrediting
especially decreed and ordered in the judgment and it becomes

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 3
BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022

organization. The Philippine Amateur Athletic Federation under
R.A. 3135, and the Department of Youth and Sports
Development under P.D. 604.
This fact of recognition, however, Henri Kahn failed to
substantiate. The copy of the constitution and by-laws of the
Philippine, Football Federation does not prove that said
Federation has indeed been recognized and accredited.
The Philippine Football Federation is not a national sports
association within the purview of the aforementioned laws and
does not have corporate existence of its own. It follows that
Henry Kahn should be held liable for the unpaid obligations of
the unincorporated Philippine Football Federation.
DISCUSSION:
Q: How may a corporation acquire legal personality?
- 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. There must be a law creating the
corporation. Otherwise, there is no corporation, the
corporation cannot exist.
2. CREATED BY OPERATION OF LAW
You have here the concept of “incorporated by operation of law.”
There has to be consent from the State.
When you try to establish a corporation, the State has to give
consent. Otherwise, there would be no corporation. If the State will
not give the consent, you cannot create a corporation. (Taken from
previous TSN)
is the concept of right to succession, there is continuity (Taken from
previous tsn)
DOCTRINE OF LIMITED POWER
Section 2. Corporation Defined. –
A corporation is an artificial being created by operation of law,
having the right of succession and the powers, attributes, and
properties expressly authorized by law or incidental to its
existence.
DISCUSSION:
The Corporation only has the powers, attributes and properties
expressly authorized by law or incidental to its existence.
Generally, this only means that the corporation is limited. What it
can do is limited.
For example, a real estate company, which has for its purpose the
sale, lease or whatever in terms of real estate, cannot do what
electric corporations do because the power is limited based on how
it was incorporated. That is the concept of limited power. If it does
something that’s outside its power, it is called an ultra vires act.
(Taken from previous tsn)
ADVANTAGES vs. DISADVANTAGES
OF THE CORPORATE MEDIUM
Q: Why choose to incorporate?

3. RIGHT OF SUCCESSION ADVANTAGES DISADVANTAGES

Strong Juridical Personality Administratively Tedious to
So regardless of the status of the stockholders or owners of the • As distinguished from maintain
corporation, there is business continuity. So that’s why, most Partnership, it has • There is greater
business would prefer to incorporate rather than to use strong legal degree of
partnerships or sole proprietorship as a business medium because personality having a government
there is right to succession. (Taken from previous tsn) separate and distinct control and
personality from the supervision than in
Prior to the revision, the life of a corporation is limited to 50 years members composing other forms of
and can be extended to another 50 years. But, one of the major it, unaffected by the business
revisions was to give it a perpetual existence, which means that death, incapacity, organizations
when you create a corporation now under the Revised Corporation withdrawal or
Code, it is deemed to exist perpetually. It has an indeterminate insolvency of any of Discussion
term or life. So, even if the incorporators or stockholders die, the its stockholders or You have the entire
corporation can still continue to exist. members. government agency (SCC)
which regulates and governs
Q: Now, what will happen if the incorporator or stockholder dies? Discussion you. You have a lot of
A: It is considered part of the asset and part of the estate. Thus, it
This particular situation or submissions yearly and a lot of
will be subject to the settlement by the heirs. The heirs will own the
circumstance affects a monitoring on the
shares of stock but the corporation will not be affected. It is for this
partnership. But it does not government’s part.
reason that corporations are favoured over partnerships. affect a corporation.
Centralized Management Lack of Personal Element
In partnerships, if there is death of one of the partners, it will cause
• Corporation’s and Abuse of Corporate
dissolution and of course, there is the need for liquidation. That is
management is Management (Villanueva)
not the case when it comes to corporations.
centralized in the • There is ordinarily
Board of Directors, to lack of personal
In a corporation, it will continue. There are rights to succession and
whom also are element in view of
there is perpetual existence.
granted all corporate the transferability
powers under of shares, and the
There is perpetual existence, unless you want to signify a specific
Section 23 of the vesting of
term. If there is no specific term, default – it exists perpetually. That
Corporation Code. management
powers in the BOD

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 4
BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022

• Shareholders are not who may be Free transferability of Units of Double Taxation
agents of the professional Investments • Corporations have
corporation, nor can managers. • The shares of stock been subjected to
they bind the can be transferred heavier taxation
corporations unlike • In large without the consent than other forms of
in the partnership corporations, of the other business
setting. management and stockholder. organizations; the
control are profits of the
Discussion separate from the Discussion corporation are
In partnerships, partners are powers and The shares of stock are assets so subject to corporate
agents of the partnership. prerogatives of they can be sold and acquired. income tax. It is
ownership with • This would assure subject to tax again
respect to the investors of a ready when declared and
corporate assets mechanism to distributed as
and the corporate dispose of their dividends.
enterprise, since investments when
control is vested in their personal or Discussion
the BOD. financial situation Presumably, there is double
may require it, and taxation because the
Discussion therefore places more corporation stocks(?) have
Because of the goal of liquidity bin [in] the already been taxed and then,
increasing shareholder value, corporate setting and the dividends (the distribution
the conscience aspect is would be better of income to the different
questionable. encourage investors stockholders) are also taxed
to channel their at the same rate. So,
investments through effectively, there is double
Limited liability of investors Limited liability feature corporate vehicles. taxation. But legally speaking,
abused it is not because they have
SAN JUAN STRUCTURAL AND STEEL different purposes. Thus, it
FABRICATORS, INC., • The limited liability will not fall within the purview
vs COURT OF APPEALS has often been of the requisites of double
(296 SCRA 631) taxation.
abused by business
in order to avoid
One of the advantages of a (Table taken from previous TSN)
having to provide
corporate form of business
adequate
organization is the limitation of
protection and
an investor’s liability to the
amount of the investment.
compensation for CORPORATION AS AN ARTIFICIAL BEING
victims of the
business ventures
This feature flows from the legal
they undertake. DUE PROCESS AND EQUAL PROTECTION CLAUSE
theory that a corporate entity is
separate and distinct from its The State grants the corporation the concept of a personality. So,
• Also, the limited
stockholders. However, the in the eyes of the State, it is a separate person. (Taken from
liability feature has
statutorily granted privilege of a previous TSN)
tended to increase
corporate veil may be used only
transaction costs
for legitimate purposes. The corporation is an artificial being. The law is the one giving
by the parties being
forced to enter into personhood to the corporations. Having said that, does it also enjoy
On equitable considerations, the same constitutional rights that we all enjoy as natural persons?
contractual
the veil can be disregarded Can the corporation invoke due process? Can it invoke the right
schemes skirting
when it is utilized as a shield to against self-incrimination? Can it invoke the right against unlawful
the limited liability
commit fraud, illegality or searches and seizures? Can it invoke freedom of expression?
features of the
inequity; defeat public
corporation when it
convenience; confuse Q: Does the Due Process Clause apply to Corporations?
is a party to a
legitimate issues; or serve as a
transaction.
mere alter ego or business SMITH, BELL & COMPANY v. NATIVIDAD
conduit of a person or an
Discussion (40 Phil 136)
instrumentality, agency or
adjunct of another corporation. But we do have the concept of
trust fund, which is a doctrine FACTS: Smith, Bell & Co., (Ltd.), is a corporation organized and
prevalent in corporation. existing under the laws of the Philippine Islands. A majority of its
Discussion
stockholders are British. It is the owner of a motor vessel known
If you are a shareholder, you as Bato built in the PH in 1916, which was the subject for the
can only be liable to the extent application for the issuance of a certificate of Philippine Registry.
of your shareholdings (just like a
limited partner). In relation to the issuance of a certificate, the Philippine
Legislature enacted Act No. 2761, where it reserved the
registration of vessels for coastwide shipping only to the

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BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
domestic corporations that are wholly-owned by Filipinos or by
Americans.
So, Natividad the Collector of Customs of the port of Cebu
refused to issue the certificate, citing that all stockholders of
Smith were not citizens of the USA or of the Philippines.
Subsequently, a writ of mandamus was prayed for by Smith, Bell
and Co. against Natividad to compel him to issue a certificate of
Philippine registry for its motor vessel named “BATO.”
Smith, Bell & Co. argues that in the bill of rights and in the Jones
law there is a provision that provides” That no law shall be
enacted which shall deprive any person of life, liberty, or
property without due process of law, or deny to any person
therein the equal protection of the laws.”
Smith, Bell & Co. argues that Act 2761 denies them the equal
protection of the laws because it in effect prohibits the
corporation from owning vessels and that it deprives the
corporation of its property without due process of law, because
by the passage of the law it left them with only naked title to a
boat it could not use.
ISSUE: W/N a corporation is entitled to the constitutional right
of due process and equal protection of the laws.
RULING: YES.
The guaranties of due process of law and equal protection of the
laws in the 14th amendment and the Philippine bill of rights are
universal in their application to all persons.
The word “person” here includes private corporations insofar as
their property is concerned.
The court here also said that the ultimate purpose of the
legislature is to encourage Philippine ship building. That the
limitation of domestic ownership for purposes of obtaining a
certificate of Philippine registry in the coastwise trade to citizens
of the Philippine Islands, and to citizens of the United States, is
considered as valid and constitutional.
So, even if Smith, Bell & Co as a corporation is entitled to the
guarantees of due process and equal protection of laws.
The Philippine legislature can validly deny corporations the right
to register vessels in the Philippines and it would not be
considered as a class legislation as it falls within the exemption
and is considered to be within the purview of police power
which does not offend the constitutional provision.
Thus, in this case even if a corporation is entitled to due process
and equal protection of laws, it cannot invoke it in this case
because this case involves the exercise of police power and the
court said that the 14th amendment and the Constitution was
not designed to interfere with the police power of the State.
DISCUSSION:
The Corporation is granted the right to invoke the due process
clause of our Constitution. It’s part of the rights of a Corporation,
being an artificial being. (Taken from previous TSN)
That is why ABS-CBN was heard before they were shut down. That
is the essence of due process - the right to be heard.
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For instance, there was a hearing for ABS-CBN before it was shut
down. That is the essence of due process – the right to be heard.
• The Bill of Rights are universal in their application to all
persons within the territorial jurisdiction without regard
to any differences of race, color, or nationality.
• The word “person” includes aliens.
UNREASONABLE SEARCH AND SEIZURES
Q: Can a corporation invoke this right? Can it say that you cannot
search the corporation's premises without a search warrant?
STONEHILL v. DIOKNO
EN BANC | G.R. No. L-19550 | June 19, 1967
DOCTRINE: Lawfulness of a seizure can be raised only by one
whose rights have been invaded.
FACTS:
The respondent-judges issued search warrants against Stonehill,
et al. and/or the corporations of which they were officers. The
warrants directed the search of their persons, offices, and
residences, and the seizure of several personal properties
subject of their violation of Central Bank Laws, Tariff and
Customs Laws, Internal Revenue Code and the Revised Penal
Code.
Stonehill, et al. alleged that the warrants are null and void for
being in the nature of general warrants, so they filed with the
Supreme Court this original action for certiorari, prohibition,
mandamus and injunction.
The documents, papers and things seized under the alleged
authority of the warrants were split into two groups, namely:
(a) those found and seized in the offices of the corporations,
and
(b) those found and seized in the residences of Stonehill, et al.
ISSUE:
W/N Stonehill, et al. have a cause of action to assail the legality
of the warrants as to the first group.
RULING: NO.
FIRST GROUP
As regards the first group, Stonehill, et al. have no cause of
action to assail the legality of the contested warrants and of the
seizures made under its authority.
The corporations have their respective personalities, separate
and distinct from the personality of Stonehill, et al., regardless
of the amount of shares of stock or of the interest of each of
them in said corporations, and whatever the offices they hold
therein may be.
Indeed, it is well settled that the legality of a seizure can be
contested only by the party whose rights have been impaired
thereby, and that the objection to an unlawful search and
seizure is purely personal and cannot be availed of by third
parties.
Consequently, Stonehill, et al. may not validly object to the use
in evidence against them of the documents, papers and things
seized from the offices and premises of the corporations
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
adverted to above, since the right to object to the admission of
said papers in evidence belongs exclusively to the corporations,
to whom the seized effects belong, and may not be invoked by
the corporate officers in proceedings against them in their
individual capacity.
If these papers were unlawfully seized and thereby the
constitutional rights of or any one were invaded, they were the
rights of the corporation and not the rights of the other
defendants. (A Guckenheimer & Bros. Co. vs. United States)
Note: The warrants are not valid as to the 2nd group for being
general warrants. The SC issued the writ of preliminary
injunction. However, the writ was partially lifted or dissolved,
insofar as the papers, documents and things seized from the
offices of the corporations are concerned; but the injunction
was maintained as regards the papers, documents and things
found and seized in the residences of petitioners herein.
Q: Since the corporation itself has no voice, who should invoke this
right?
A: The officers acting on behalf of the corporation, not in their
personal capacity.
DISCUSSION:
The officers can invoke the right against unreasonable search and
seizures, but that is the reason why work properties and documents
should not be brought home.
They might even issue a secretary certificate or a board resolution
giving the power to invoke it, by certain individuals.
RIGHT AGAINST SELF-INCRIMINATION
Q: Can the corporations say that “I invoke my right against self-
incrimination?”
BATAAN SHIPYARD vs PCGG
EN BANC | G.R. No. 75885 | May 27, 1987
DOCTRINE: It is elementary that the right against self-
incrimination has no application to juridical persons.
FACTS: BASESCO or Bataan Shipyard Engineering filed this
special civil action of certiorari and prohibition against EO
Numbers 1 and 2 promulgated by Pres Corazon Aquino on Feb
28, 1986 which stresses the urgent need to recover the ill-gotten
wealth by Former Pres Marcos, his relatives, and the leaders and
supporters of his regime.
BASECO is opposing the orders by PCGG to produce certain
documents in accordance with the said EO. Certain documents
such as the stock transfer book, legal documents, articles of
incorporation, financial statements.
BASECO argues that the April 18, 1986 order to produce
corporate records from 1973-1986 was issued without court
authority and infringed its constitutional right against self-
incrimination, and unreasonable search and seizure.
ISSUE: W/N there was violation of right against self-
incrimination.
RULING: NO.
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The right against self-incrimination has no application to
juridical persons.
While it is true an individual may lawfully refuse to answer
incriminating questions unless protected by an immunity
statute, it does not follow that a corporation, vested with special
privileges and franchises, may refuse to show its hand when
charged with an abuse of such privileges.
Jurisprudence provides that corporations are not entitled to all
of the constitutional protections which private individuals have.
The corporation is a creature of the state. It is presumed to be
incorporated for the benefit of the public. It received certain
special privileges and franchises, and holds them subject to the
laws of the state and the limitations of its charter. Its powers are
limited by law.
DISCUSSION: It has no right against self-incrimination.
RIGHT TO CLAIM MORAL DAMAGES
Q: Can a corporation (who has no central nervous system) ask for
moral damages because of wounded feelings, besmirched
reputation, sleepless nights, etc.? Can a corporation allege those?
The following cases are flip-flopping, so it seems that the Supreme
Court is also not sure.
MAMBULAO LUMBER v. PNB
22 SCRA 359 | 1968
DOCTRINE:
General Rule: Artificial person cannot experience physical
sufferings, mental anguish, fright, serious anxiety, xxx.
Exception:
A corporation may have a good reputation, which, if
besmirched, may also be a ground for the award of moral
damages.
FACTS: In connection with the loan applied by PET from RESPO,
the former mortgaged in favor of the latter of a parcel of land
including the buildings and improvements thereon.
On another loan that was released upon PET, the latter failed to
pay. Repeated demands were made upon PET but it failed or
refused to discharge its obligation.
Upon inspection made by the employees of the PNB, it found
out that PET had ceased its operations. Hence, PNB requested
the executive sheriff to take possession of the land and its
improvements thereon and sell it to public auction.
The sheriff sent notice to PET that PNB will foreclose
extrajudicially the chattel mortgage at the specified date and in
the compound of PET as indicated in the notice.
PET sent notices to PNB Naga branch and to the sheriff
protesting the foreclosure due to the absence of a court order
and that the foreclosure proceedings should be in the court of
Manila as stipulated in their agreement. PNB construed the
letter sent as a request of extension so the Foreclosure sale will
be conducted on another month.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
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3 - Sanchez Roman | A.Y. 2021 – 2022
The foreclosure sale was conducted and awarded to PNB.
Representatives of PNB went to the property and had succeeded
in obtaining two truckloads of equipment.
CFI sentenced PET to pay RESPO the amount of 3,582.52 with
interest. PET appealed and argued that the Foreclosure sale is
void as it did not comply with the provisions of Chattel Mortgage
Law and was not in accordance with the terms of their
agreement. PET asked for damages as the taking of possession
thereof were employed with force, intimidation and by
detaining its man in charge of said properties
ISSUE: W/N PET is entitled to moral damages.
RULING: NO.
Obviously, an artificial person like herein appellant corporation
cannot experience physical sufferings, mental anguish, fright,
serious anxiety, wounded feelings, moral shock or social
humiliation which are the basis of moral damages.
A corporation may have a good reputation which, if besmirched,
may also be a ground for the award of moral damages.
The same cannot be considered under the facts of this case,
however, not only because it is admitted that herein appellant
had already ceased in its business operation at the time of the
foreclosure sale of the chattels, but also for the reason that
whatever adverse effect the foreclosure sale of the chattels
could have upon its reputation or business standing would
undoubtedly be the same whether the sale was conducted at
Jose Panganiban, Camarines Norte, or in Manila which is the
place agreed upon by the parties in the mortgage contract.
DISCUSSION:
The Court is saying that corporations are not entitled to moral
damages because they cannot feel. However, if there is a
reputation that is besmirched, a corporation can ask for moral
damages.
However, let us take a look at ABS-CBN Broadcasting v. CA.
ABS-CBN BROADCASTING vs. COURT OF APPEALS
301 SCRA 589 (1999)
FACTS: In 1990, ABS-CBN and Viva executed a Film Exhibition
Agreement, whereby Viva gave ABS-CBN an exclusive right to
exhibit some Viva films.
Viva, offered ABS-CBN, a list of 36 title from which ABS-CBN may
exercise its right of first. ABS-CBN, however through Mrs.
Concio, said that they can only purchase 10 titles and therefore
did not accept said list. The titles ticked off are not the subject
of the case at bar except the film ''Maging Sino Ka Man."
On February 27, 1992, Del Rosario, proposing to sell to ABS-CBN
airing rights over this package of 104 films for P60,000,000.00 of
which P30,000,000.00 will be in cash and P30,000,000.00 worth
of television spots.
On April 2, 1992, defendant Del Rosario and ABS-CBN general
manager, Eugenio Lopez III, met at the Tamarind Grill Restaurant
in Quezon City to discuss the package proposal of Viva.
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ABS-CBN: Moral damages are, generally, not awarded to
juridical persons unless they enjoy a good reputation that was
debased by the defending party.
ISSUE: W/N RBS is entitled to moral damages.
RULING: NO.
As to moral damages the law is Section 1, Chapter 3, Title XVIII,
Book IV of the Civil Code. Article 2217 thereof defines what are
included in moral damages, while Article 2219 enumerates the
cases where they may be recovered, Article 2220 provides that
moral damages may be recovered in breaches of contract where
the defendant acted fraudulently or in bad faith. RBS's claim for
moral damages could possibly fall only under item (10) of Article
2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26, 27, 28,
29, 30, 32, 34, and 35.
Moral damages are in the category of an award designed to
compensate the claimant for actual injury suffered. and not to
impose a penalty on the wrongdoer. The award is not meant to
enrich the complainant at the expense of the defendant, but to
enable the injured party to obtain means, diversion, or
amusements that will serve to obviate the moral suffering he
has undergone. It is aimed at the restoration, within the limits
of the possible, of the spiritual status quo ante, and should be
proportionate to the suffering inflicted.
The award of moral damages cannot be granted in favor of a
corporation because, being an artificial person and having
existence only in legal contemplation, it has no feelings, no
emotions, no senses. It cannot, therefore, experience physical
suffering and mental anguish, which call be experienced only by
one having a nervous system.
The statement in People v. Manero and Mambulao Lumber Co.
v. PNB that a corporation may recover moral damages if it "has
a good reputation that is debased, resulting in social
humiliation" is an obiter dictum. On this score alone the award
for damages must be set aside, since RBS is a corporation.
Q: What is an obiter dictum?
A: This is a comment, suggestion or observation made by the
Justice, and they cannot be binding on other cases.
So the pronouncement in People v. Manero and Mambulao Lumber
v. PNB is only an obiter dictum.
But, let us look at MERALCO vs. TEAM, which was decided after
ABS-CBN vs. CA.
MERALCO v. TEAM ELECTRONICS
G.R. No. 131723
FACTS: TEAM, or formerly known as NS Electronics, is wholly
owned by Technology Assembly and Management Pacific
Corporation or TPC. Petitioner MERALCO is a utility company
supplying electricity in Metro Manila Area.
The issue started when MERALCO alleged that the two meters
installed in DCIM building, owned by TEC, were found to be
tampered with and did not register the actual power
consumption of the building.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
MERALCO informed TEC of the results of the inspection and
demanded from the latter the payment representing its
unregistered consumption, as a result of the alleged tampered
meters. TEC referred the letter to Ultra since the latter was in
possession of the said building during the covered period.
However, for failure of TEC to pay the differential billing,
MERALCO disconnected the electricity supply to the DCIM
Building.
Prior to the reconnection, MERALCO conducted a scheduled
inspection of the questioned meters and found them to have
been tampered anew. MERALCO sent TEC another letter
demanding in case of continued refusal to pay the differential
billing. To avert the impending disconnection of electrical
service, TEC paid the amount under protest.
TEC filed a complaint for damages against MERALCO before the
RTC Pasig. The court rendered a decision in favor of TEC and
ordered MERALCO to pay actual, exemplary and moral damages.
The trial court found that MERALCO’s act of disconnecting the
DCIM Building’s electric supply constituted bad faith and thus
makes it liable for damages.
ISSUE: W/N the award of moral damages is proper.
HELD: NO.
TEC’s claim was premised allegedly on the damage to its
goodwill and reputation. However, as a rule, a corporation is
not entitled to moral damages because, not being a natural
person, it cannot experience physical suffering or sentiments
like wounded feelings, serious anxiety, mental anguish and
moral shock.
The only exception to the rule is when the corporation has a
reputation that is debased, resulting in its humiliation in the
business realm. But in this exception, it is imperative for the
claimant to present proof to justify the award. It is essential to
prove the existence of the factual basis of the damage and its
causal relation to petitioner’s acts.
In this case, the records are bereft of any evidence that the
name of TEC has been debased as a result of the MERALCO’s
acts. The trial court simply awarded moral damages without
stating the basis thereof.
DISCUSSION: The court reverted back to the Mambulao ruling.
Q: A labor organization is also granted the same personality as a
corporation. Is it entitled to moral damages?
EMPLOYERS’ UNION OF BAYER PHILS vs. BAYER PHIL
636 SCRA 437 (2010)
FACTS: The two groups of EUBP had a dispute. It led to one
group forming another union (REUBP). Eventually, Bayer Phils.
Signed a CBA with REUBP.
This prompted EUBP to file a complaint for unfair labor practices
against Bayer. Included in the damages prayed for by EUBP was
moral damages.
ISSUE: W/N EUBP, a labor organization, may claim for moral
damages.
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RULING: NO.
On the matter of damages prayed for by EUBP, we have held
that as a general rule, a corporation cannot suffer nor be entitled
to moral damages.
A corporation, and by analogy a labor organization, being an
artificial person and having existence only in legal
contemplation, has no feelings, no emotions, no senses;
therefore, it cannot experience physical suffering and mental
anguish.
Mental suffering can be experienced only by one having a
nervous system and it flows from real ills, sorrows, and griefs of
life - all of which cannot be suffered by an artificial, juridical
person. A fortiori, the prayer for exemplary damages must also
be denied.
SAN FERNANDO REGALA TRADING INC. vs. CARGIL
PHILIPPINES
707 SCRA 187
FACTS: Cargill Philippines Inc. (Cargill) and San Fernando Regala
Trading, Inc. (San Fernando) were cane molasses traders that did
business with each other for some time.
The present controversy arose when San Fernando claimed that
Cargill reneged on its contractual obligations to deliver certain
quantities of molasses. That Cargill’s failure to make the
required deliveries resulted in San Fernando’s default on its
obligations to Ajinomoto, prompting the latter to cancel its
orders. That as a result, San Fernando lost expected profits of
P4,115,329.20.
Cargill denied this, insisting that San Fernando actually refused
to accept the delivery of the goods.
In its Answer with counterclaim, the San Fernando pointed out
that, except for the 951 mt of molasses that Cargill delivered in
March 1997, the latter made no further deliveries for Contract
5026.
On December 23, 2003, the RTC dismissed Cargill’s complaint for
lack of merit and granted San Fernando’s counterclaims. The
RTC awarded San Fernando its claims for unrealized profits,
P500,000 in moral damages, another P500,000 in exemplary
damages, attorney’s fees of P1,000,000, and P500,000 as cost of
litigation.
The case was then appealed to the Court of Appeals, to which
the Court of Appeals deleted the award of moral and exemplary
damages, attorney’s fees, and cost of litigation.
ISSUE: W/N San Fernando Regala is entitled to moral damages.
RULING: NO.
As a rule, moral damages are not awarded to a corporation
unless it enjoyed good reputation that the offender debased and
besmirched by his actuations.
In this case, San Fernando failed to prove by sufficient evidence
that it fell within this exception.
Besides, moral damages are, as a rule, also not recoverable in
culpa contractual except when bad faith had been proved. San
Fernando failed to show that Cargill was motivated by bad faith
or ill will when it failed to deliver the molasses as agreed.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
DISCUSSION:
So again, it went to back to the rule that as a general rule, no, it
cannot be awarded. BUT if there is the reputation is debased or
besmirched, it can be awarded moral damages.
It always goes back to the Mambulao ruling. When in fact the Court
already expressly stated that it’s just a mere obiter dictum. Just take
note of the cases. These will be asked, you will have jurisprudence
to back up your answers. Those are the ruling of the currently
applied.
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY
Now let’s go to a very important doctrine. Incorporation Doctrine.
In fact, this is one of the primary corporate principles that you have
to learn by heart – the doctrine of separate juridical personality.
Unlike in partnership, the juridical personality of a corporation is
stronger. There’s lot of requisites for it to be pierced. The general
rule is that there is a separate juridical personality. The Piercing
Doctrine is the exception.
STOCKHOLDERS OF F. GUENON AND SONS, INC. vs. REGISTER
OF DEEDS OF MANILA
6 SCRA 373
FACTS: The stockholders of F. Guenon adopted a resolution to
dissolve the corporation and the five stockholders of F. Guanzon
and Sons, Inc. executed a Certificate of Liquidation of its assets.
The said Certificate of Liquidation was subsequently presented
to the Register of Deeds of Manila, but it was denied
registration.
This was elevated it to the Commissioner of Land Registration,
but the Commissioner sustained the denial of registration
specifically on the ground that the purpose of the liquidation
was to transfer title from the corporation to the stockholders,
which requires a corresponding Deed of Conveyance to be
executed.
The stockholders alleged that the purpose of liquidation was
merely to distribute the assets of the corporation, which has
ceased to exist, and not to convey or transfer the assets of the
corporation.
ISSUE: W/N the certificate of liquidation was a conveyance from
the corporation to the stockholders.
RULING: YES.
A corporation is a juridical person distinct from the members
composing it.
Properties registered in the name of the corporation are owned
by it as an entity separate and distinct from its members.
While shares of stock constitute personal property they don’t
represent property of the corporation.
The corporation has property of its own which consists chiefly of
real estate.
A share of stock only typifies an aliquot part of the corporation’s
property, or the right to share in its proceeds to that extent
when distributed according to law and equity but its holder is
not the owner of any part of the capital of the corporation. Nor
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is he entitled to the possession of any definite portion of its
property or assets. The stockholder is not a co-owner or tenant
in common of the corporate property.
Therefore, it is clear that the act of liquidation made by the
stockholders of the F. Guanzon and Son, Inc. of the latter’s assets
is not and cannot be considered a partition of community
property, but rather a transfer or conveyance of the title of its
assets to the individual stockholders.
Indeed, since the purpose of the liquidation, as well as the
distribution of the assets of the corporation, is to transfer their
title from the corporation to the stockholders in proportion to
their shareholdings, that transfer cannot be effected without
the corresponding deed of conveyance from the corporation to
the stockholders.
DISCUSSION:
The assets of a corporation are not the assets of the stockholders.
They are two different beings under the law.
Q: When it comes to debts, are the debts of the corporation also
the debts of the stockholders?
TRADERS ROYAL BANK vs. CA
177 SCRA 789
FACTS: Philippine Blooming Mills Inc. (PBM) and one of its
stockholders, Alfredo Ching jointly submitted to the Securities
and Exchange Commission (SEC) a petition for suspension of
payments.
Traders Royal Bank was included among PBM’s creditors.
Traders Royal Bank then filed a civil case against PBM and
Alfredo Ching to collect charges representing PBM’s obligation
to the bank. Ching was impleaded as co-defendant for having
signed as a surety for PBM’s obligations.
The SEC then issued an Order placing PBM’s business, including
its assets and liabilities, under rehabilitation receivership, and
ordered that “all actions for claims pending before any court or
tribunal are hereby suspended in whatever stage the same may
be, until further orders from the Commission.”
PBM and Ching jointly filed a motion to dismiss the civil case filed
by Traders Royal Bank, invoking the pendency in the SEC of
PBM’s application for suspension of payments (which Ching co-
signed) and over which the SEC had already assumed
jurisdiction.
The trial court denied Ching’s motion to dismiss the complaint
against himself. The court pointed out that PD 1758 is only
concerned with the activities of corporation, partnership, and
associations. Never was it intended to regulate and/or control
activities of individuals.
ISSUE: W/N Traders Bank is barred to file an action against Ching
in his personal capacity.
RULING: NO. Although Ching was impleaded in the SEC case as
a co- petitioner of PBM, the SEC couldn’t assume jurisdiction
over his person and properties. The Securities and Exchange
Commission was empowered, as rehabilitation receiver, to take
custody and control of the assets and properties of PBM only,
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
for the SEC has jurisdiction over corporations only not over
private individuals, except stockholders in an intra- corporate
dispute (Sec. 5, PD 902-A and Sec 2, PD 1758).
Being a nominal party in the SEC Case No. 2250, Ching’s
properties were not included in the rehabilitation that the SEC
constituted to take custody of PBM’s assets.
Therefore, the petitioner bank was not barred from filing a suit
against Ching, as a surety of PBM.
It is elementary that a corporation has a personality distinct and
separate from its individual stockholders or members. Being an
officer of stockholder of a corporation doesn’t make one’s
property the property also of the corporation, for they are
separate entities.
DISCUSSION:
Q: What if that is not sufficient anymore? Is it the same in
partnership that the creditors can go after the individual assets of
the partners?
Ä NO. That is why a corporation has a stronger juridical
personality. It is really only up to the extent of the properties
of the corporation. You can no longer go to the individual
assets of the owners.
When you look at the Financial Rehabilitation and Insolvency Act
(FRIA), it is actually for the benefit of the debtor. Once the plan has
already been implemented, wala ka nang habol dun.
Contractually, the creditors cannot go after the individual
properties of the owners/shareholders.
The state policy on FRIA is to give some breather to the debtors for
them to recover from being insolvent.
GOOD EARTH EMPORIUM vs. COURT OF APPEALS
G.R. No. 82797 | 27 February 1991
FACTS: A lease contract was entered into between ROCES and
Good Earth Emporioum (GEE). A five-storey building was the
subject of the said contract, which upon failure of the latter to
pay its rentals, ROCES filed an ejectment case against the
petitioner. The MTC of Manila rendered a decision ordering GEE
and all persons under him to vacate the premises and surrender
the same to ROCES and pay the plaintiffs the rental.
GEE filed a motion to quash the writ of execution but the same
was denied by the MTC for lack of merit. In 1987 the RTC of
Manila reversed the decision of the MTC finding that the
amount of P1 million evidenced by Exhibit "I" and another P1
million evidenced by the pacto de retro sale instrument were in
full satisfaction of the judgment obligation.
On further appeal, the CA reversed the decision of the RTC and
reinstated the Resolution of the MTC of Manila. GEE’s motion
for reconsideration was denied, hence this petition.
ISSUE: Whether or not there was full satisfaction of the
judgment debt in favor of respondent corporation.
RULING: NO.
There is no indication in the receipt that it was in payment, full
or partial, of the judgment obligation. Likewise, there is no
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indication in the pacto de retro sale which was drawn in favor of
Jesus Marcos Roces and Marcos V. Roces and not the
respondent corporation that the obligation embodied therein
had something to do with petitioners' judgment obligation with
respondent corporation.
Article 1240 of the Civil Code of the Philippines provides that:
“Payment shall be made to the person in whose favor the
obligation has been constituted, or his successor in
interest, or any person authorized to receive it.”
In the case at bar, the supposed payments were not made to
Roces-Reyes Realty, Inc. or to its successor in interest nor is
there positive evidence that the payment was made to a person
authorized to receive it. No such proof was submitted but
merely inferred by the Regional Trial Court from Marcos Roces
having signed the Lease Contract as President which was
witnessed by Jesus Marcos Roces.
On the other hand, Jesus Marcos Roces testified that the
amount of P1 million evidenced by the receipt is the payment
for a loan extended by him and Marcos Roces in favor of Lim Ka
Ping. The assertion is home by the receipt itself whereby they
acknowledged payment of the loan in their names and in no
other capacity.
A corporation has a personality distinct and separate from its
individual stockholders or members. As a consequence of the
separate juridical personality of a corporation, the corporate
debt or credit is not the debt or credit of the stockholder, nor is
the stockholder’s debt or credit that of the corporation.
The fact that at the time payment was made to the two Roces
brothers, GEE was also indebted to respondent corporation for
a larger amount, is not supportive of the Regional Trial Court's
conclusions that the payment was in favor of the latter,
especially in the case at bar where the amount was not
receipted for by respondent corporation and there is
absolutely no indication in the receipt from which it can be
reasonably inferred, that said payment was in satisfaction of the
judgment debt.
Likewise, no such inference can be made from the execution of
the pacto de retro sale which was not made in favor of
respondent corporation but in favor of the two Roces brothers
in their individual capacities without any reference to the
judgment obligation in favor of respondent corporation.
DISCUSSION: Same concept, assets and debts are separate from
the incorporators, shareholders or even the officers.
Q: What about the case of DBP vs. NLRC? Does the ownership of
the majority shares in a corporation create an employer-employee
relationship?
DEVELOPMENT BANK OF THE PHILIPPINES vs. NATIONAL
LABOR RELATIONS COMMISSION
FACTS: Philippine Smelters Corporation (PSC), a corporation
registered under Philippine law, obtained a loan in 1983 from
the Development Bank of the Philippines (DBP), a government-
owned financial institution created and operated in accordance
with Executive Order No. 81, to finance its iron smelting and
steel manufacturing business.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
To secure said loan, PSC mortgaged to DBP real properties with
all the buildings and improvements thereon and chattels, with
its president, Jose T. Marcelo Jr. as co-obligor.
By virtue of the said loan agreement, DBP became the majority
stockholder of PSC, with stock holdings in the amount of
Php31,000,000 of the total Php80,226,000 subscribed and paid
up capital stock. Subsequently, it took over the management of
PSC.
When PSC failed to pay its obligations with DBP, which
amounted to Php75,752,445.83 as of March 31, 1986, DBP
foreclosed and acquired the mortgaged real properties and
chattels of PSC in the auction sale held on February 25, 1987 and
March 4, 1987. PSC’s employees filed a petition against herein
petitioner for the unpaid wages and other benefits to which the
labor arbiter ordered DBP to pay.
ISSUE: Whether or not there was an employer-employee
relationship between the PSC employees and DBP.
RULING: NO. It is to be noted that in their comment, private
respondents tried to prove the existence of employer-employee
relationship based on the fact that DBP is the majority
stockholder of PSC and that the majority of the members of the
board of directors of PSC are from DBP.
The Court said that such circumstances are not sufficient indicia
of the existence of an employer-employee relationship as would
confer jurisdiction over the case on the labor arbiter, especially
in the light of the express declaration of said labor arbiter and
the NLRC that DBP is being held liable as a foreclosing creditor.
At any rate, this jurisdictional defect was cured when DBP
appealed the labor arbiter's decision to the NLRC and thereby
submitted to its jurisdiction.
DISCUSSION:
Even if you own 99.99% or 100% of the corporation, there still is
separate juridical personality of the company from its
owners/shareholders.
In a one-person corporation (OPC), you are essentially the only
owner of the company. It can be prone to abuse since you may hide
behind a corporation solely owned by you. Since it is relatively new,
we are still yet to see cases on it. We would instead see the rules
and regulations on how the legislature foresees such potential for
abuse, what safeguards are in place in establishing the OPC.
If I am a businessman, I can use my OPC to loan from the bank and
not pay it back. I could use the defense that I have a separate
personality from the OPC.
Q: What about GOCCs? Are they granted by law the same degree
of juridical personality as that of private corporations?
POLYTECNIC UNIVERSITY OF THE PHILIPPINES vs. CA and
FIRESTONE CERAMICS
G.R. No. 143513 | 14 November 2001
FACTS: Petitioner NDC (National Development Corp.), a GOCC
owned & had in its disposal a 10-hectare property which is the
NDC Compound.
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A portion of which was leased to private respondent FIRESTONE
CORPORATION for ceramic manufacturing business. Both
parties entered into a contract of lease for a term of 10 years
renewable for another 10 years. Firestone built several
warehouses and facilities therein.
Prior to the expiration of the said lease contract, Firestone wrote
NDC requesting for an extension of their lease agreement. Since
business between NDC and FIRESTONE went smooth, the lease
was twice renewed, this time conferring upon Firestone an
express grant the first option to purchase the leased premise in
the event that NDC decided to dispose and sell the properties
including the lot. So Firestone now has the right of first refusal.
Eventually though, a Memorandum Order No. 214 was issued by
then President Corazon Aquino ordering the transfer of the
whole NDC compound to the National Government. The order
of conveyance would automatically result in the cancellation of
NDC's total obligation in favor of the National Government. The
memorandum order was in consideration of NDC’s P57M debt.
And so, pursuant thereto, NDC had no choice but to transfer the
property to Polytechnic University of the Philippines, another
GOCC, and in need of expansion.
Firestone therefore instituted an action for specific performance
to compel NDC to sell the leased property in its favor.
ISSUE: Whether or not NDC and PUP, being GOCCs, are one and
the same (as instrumentalities of the government).
RULING: NO.
Contrary to what petitioners PUP and NDC propose, there is not
just one party involved in the questioned transaction.
Petitioners NDC and PUP have their respective charters and
therefore each possesses a separate and distinct individual
personality.
The inherent weakness of NDC's proposition that there was no
sale as it was only the government which was involved in the
transaction thus reveals itself. Tersely put, it is not necessary to
write an extended dissertation on government owned and
controlled corporations and their legal personalities.
Beyond cavil, a government owned and controlled corporation
has a personality of its own, distinct and separate from that of
the government.
The intervention in the transaction of the Office of the President
through the Executive Secretary did not change the
independent existence of these entities. The involvement of the
Office of the President was limited to brokering the consequent
relationship between NDC and PUP. But the withdrawal of the
appeal by the Executive Secretary is considered significant as he
knew, after a review of the records, that the transaction was
subject to existing liens and encumbrances, particularly the
priority to purchase the leased premises in favor of FIRESTONE.
DISCUSSION:
GOCCs are treated the same way as a private corporation, just that
they are owned and controlled by the government. Is a stakeholder
liable for corporate liability? Of course not.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
Q: Does a subsidiary have a separate personality from that of its
parent corporation?
PHILIP SIGFRID FORTUN vs. PRIMA JESUSA QUINSAYAS
G.R. No. 194578 | 13 February 2013
FACTS: Petitioner alleged that on 23 November 2010, Channel
23 aired on national television a program entitled "ANC
Presents: Crying for Justice: the Maguindanao Massacre."
Drilon, the program’s host, asked questions and allowed Atty.
Quinsayas to discuss the disbarment case against petitioner,
including its principal points. Petitioner was allegedly singled out
and identified in the program as the lead counsel of the
Ampatuan family.
ABS-CBN alleged that ABS-CBN News Channel, commonly
known as ANC, is maintained and operated by Sarimanok
Network News (SNN) and not by ABS-CBN. SNN, which produced
the program "ANC Presents: Crying for Justice: the Maguindanao
Massacre," is a subsidiary of ABS-CBN but it has its own juridical
personality although SNN and ABS-CBN have interlocking
directors.
ISSUE: Whether or not an affiliate has a personality separate
from the parent corporation
RULING: YES. The Supreme Court ruled that a subsidiary has an
independent and separate juridical personality distinct from
that of its parent company and that any suit against the the
latter does not bind the former and vice-versa.
A corporation is an artificial being invested by law with a
personality separate and distinct from that of other
corporations to which it may be connected.
Hence, SNN, not ABS-CBN, should have been made respondent
in this case.
DISCUSSION: Again, even if they are related companies, they are
still separate and distinct.
DOCTRINE OF PIERCING OF CORPORATE VEIL
An exception to the concept of separate juridical personality is the
doctrine of piercing of corporate veil.
Imagine this is the veil of corporate fiction. You can actually pierce
that using the doctrine of piercing of corporate veil. But again, it is
just an exception to the general rule.
The burden is so hard for you to actually allege and prove the
doctrine of separate juridical personality and the doctrine of
piercing of corporate veil.
In the case of Heirs of Fe Ten Uy vs. International Exchange Bank,
the Court described the instances where the doctrine of piercing of
corporate veil will apply.
HEIRS OF FE TEN UY vs. INTERNATIONAL EXCHANGE BANK
G.R. No. 166282 | 13 February 2013
FACTS: International Exchange Bank (iBank), granted loans to
Hammer Garments Corporation (Hammer), covered by
promissory notes and deeds of assignment. The loans were
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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.
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: 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: Affirmed 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: Whether or not the doctrine of piercing the corporate
veil should apply in this case?
RULING: 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. A
director, officer or employee of a corporation is generally not
held personally liable for obligations incurred by the
corporation.
Nevertheless, this legal fiction may be disregarded if it is used as
a means to perpetrate fraud or an illegal act, or as a vehicle for
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 13
BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022

the evasion of an existing obligation, the circumvention of Q: May the personal property of stockholders be attached to
statutes, or to confuse legitimate issues. satisfy corporate liabilities?

In this case, petitioners are correct to argue that it was not DELIMA vs. GOIS
alleged, much less proven, that Uy committed an act as an 544 SCRA 731 | 2008
officer of Hammer that would permit the piercing of the
corporate veil.
FACTS: Delima filed an illegal dismissal case against Golden
Corporation and Susan Gois.
A reading of the complaint reveals that with regard to Uy, iBank
did not demand that she be held liable for the obligations of
The Labor Arbiter ruled that Delima was illegally dismissed.
Hammer because she was a corporate officer who committed
Hence, Golden Corporation was ordered to pay backwages,
bad faith or gross negligence in the performance of her duties
separation pay, etc. The decision became final and executory. A
such that the lifting of the corporate mask would be merited.
writ of execution was then issued and a certain Isuzu Jeep was
What the complaint simply stated is that she, together with her
attached.
errant husband Chua, acted as surety of Hammer, as evidenced
by her signature on the Surety Agreement which was later found
Gois (the president of Golden Corporation) contends that the
by the RTC to have been forged.
attachment was irregular since:
a. the vehicle was registered in her name, not Golden
The Court emphasized that the application of the doctrine of
Corporation;
piercing the corporate veil should be done with caution. A court
b. her personality is distinct from that of the
should be mindful of the milieu where it is to be applied. It must
Corporation;
be certain that the corporate fiction was misused to such an
c. the attachment had an effect of making her liable for
extent that injustice, fraud, or crime was committed against
a judgement debt of the Corporation; and
another, in disregard of its rights. The wrongdoing must be
d. the judgement debt could not be satisfied using her
clearly and convincingly established; it cannot be presumed.
own personal assets.
Otherwise, an injustice that was never unintended may result
from an erroneous application.
However, Delima argues that the vehicle was principally used in
the business operations but was just registered in the name of
However, the Court finds Goldkey liable for it is a mere alter ego
Susan Gois.
of Hammer.
ISSUE: W/N the personal property of the stockholders may be
Goldkey contends, among others, that iBank is estopped from
attached to satisfy corporate liabilities.
expanding Goldkey’s liability beyond the real estate mortgage.
It adds that it did not authorize the execution of the said
RULING: NO.
mortgage. Finally, it passes the blame on to iBank for failing to
A corporation has a personality distinct and separate from its
exercise the requisite due diligence in properly evaluating
individual stockholders or members and from that of its officers
Hammer’s creditworthiness before it was extended an omnibus
who manage and run its affairs.
line.
Obligations incurred by the Corporation, acting through its
The Court disagrees.
directors, officers and employees, are its sole liabilities. Thus,
property belonging to a corporation cannot be attached to
Goldkey’s argument, that iBank is barred from pursuing Goldkey
satisfy the debt of a stockholder and vice versa, the latter
for the satisfaction of the unpaid obligation of Hammer because
having only an indirect interest in the assets and business of the
it had already limited its liability to the real estate mortgage, is
former.
completely absurd. Goldkey needs to be reminded that it is
being sued not as a consequence of the real estate mortgage,
In the case at bar, the LA directed only Golden Corporation to
but rather, because it acted as an alter ego of Hammer.
pay Delima and the same was not joint and solidary obligation
Accordingly, they must be treated as one and the same entity,
with Gois. Hence, Gois cannot be personally liable since Golden
making Goldkey accountable for the debts of Hammer.
has a separate and distinct personality of its own.
Similarly, Goldkey is undoubtedly mistaken in claiming that
Further, it was found that the vehicle was owned by Gois. Hence,
iBank is seeking to enforce an obligation of Chua. The records
the vehicle cannot be attached to answer for the liabilities of
clearly show that it was Hammer, of which Chua was the
Golden Corporation.
president and a stockholder, which contracted a loan from
iBank. What iBank sought was redress from Goldkey by
Unless they have exceeded their authority, corporate officers
demanding that the veil of corporate fiction be lifted so that it
are, as a general rule, not personally liable for their official acts,
could not raise the defense of having a separate juridical
because a corporation, by legal fiction, has personality separate
personality to evade liability for the obligations of Hammer.
and distinct from its officers. No evidence was shown that the
termination of Delima was done with bad faith for it to hold the
Under a variation of the doctrine of piercing the veil of corporate
corporate officers, like Gois, solidarily liable with the
fiction, when two business enterprises are owned, conducted
corporation
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.

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 14
BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022

Q: Do sister companies have separate personalities? Have you
ever thought why they are called ‘sister’ companies?
PADILLA AND PHOENIX-OMEGA vs. CA AND SUSANA REALTY
G.R. No. 123893 | November 22, 2001
FACTS: Susana Realty, Inc. (SRI), by a deed of absolute sale, sold
to the Light Rail Transit Authority (LRTA) its several parcels of
land. In the deed of sale, SRI reserved the right of first refusal to
develop the property sold should the LRTA decide to
lease/assign to any person the right to develop the property.
Thereafter, a tripartite contract was entered into between
Phoenix Omega and SRI with LRTA whereby:
§ Phoenix Omega undertook to develop a portion of the
subject property subject to the approval of the same
by SRI.
In addition, SRI agreed to a concession contract and to lease to
Phoenix Omega the SRI’s remaining property adjacent to that 90
sq m. property.
Phoenix Omega, by a deed of assignment, then assigned its right
and interests over the remaining property unto its sister
company, PKA Development and Management Corporation
(PKA). As a result of such assignment, PKA entered into a
contract of lease with SRI.
PKA's building permit was later revoked due to certain violations
but it was allowed by the DPWH to resume construction on the
leased premises subject to PKA's correction of the defects. PKA
transmitted its amended plans to SRI for its approval. However,
their repeated requests for plans were not heeded by SRI.
Action Filed by PKA:
PKA filed before the RTC an action for rescission of contract of
lease against SRI, alleging that SRI's refusal to approve the plans
without any justifiable reason deprived it of the use of the
commercial stalls, thereby incurring losses.
Arguments of SRI
SRI claimed that it was PKA which violated the terms of their
contract, and that PKA undertook the construction without first
having its plans approved.
Ruling of the RTC/Writ of Execution
• The RTC granted the action for rescission.
• It issued a writ of execution against PKA (the only party
in the case), Phoenix Omega and Padilla.
ISSUE: W/N the issuance of the writ against PKA, Phoenix-
Omega and Padilla was proper.
RULING: NO.
As a rule, the participation by the general manager of a
corporation - which manager was also the chairman of the board
of another corporation—in an action involving the first
corporation, cannot equate to participation by the second
corporation in the same proceedings.
Here, the fact that at the same time Padilla was the chairman of
PKA and at the same time chairman of the board of Phoenix
Omega cannot equate to participation by Phoenix-Omega in the
same proceedings.
Phoenix-Omega was not a party to the case and so could not
have taken part therein. The court applied the general rule of
the separate juridical personality of a corporation. The general
rule is that a corporation is clothed with a personality separate
and distinct from the persons composing it. It may not be held
liable for the obligations of the persons composing it, and
neither can its stockholders be held liable for its obligations.
As an exception, a veil of corporate fiction may only be
disregarded in cases where the corporate vehicle is being used
to defeat public convenience, justify wrong, protect fraud, or
defend crime.
PKA and Phoenix-Omega are admittedly sister companies, and
may be sharing personnel and resources, but in this case there
is no allegation, much less positive proof, that their separate
corporate personalities are being used to defeat public
convenience, justify wrong, protect fraud, or defend crime.
For the separate juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly and convincingly
established. It cannot be presumed. Thus, there is reason to
justify piercing the corporate veil in this case.
Q: Do sister companies have separate personalities?
A: NO. Sister companies have different personalities regardless of
the amount of ownership of the parent company.
They are called the sister companies because they are under one
parent/holding company. Further, they are using the term sisters
as it is only a woman who can give birth. However, subsidiary is the
most proper.
Q: What are the exceptions to the doctrine of separate personality
of corporations?
A: As an exception, a veil of corporate fiction may only be
disregarded in cases where the corporate vehicle is being used to
defeat public convenience, justify wrong, protect fraud, or defend
crime
I would like to remind that these are strong exceptions. This
means that you have to present and establish clear and
convincing evidence for these exceptions to apply. However, if
you survey the cases I have assigned, the SC most likely applies
the exceptions in labor cases. Recall that our laws are biased
in favor of the workers.
3 JUSTIFICATIONS OF CORPORATE VEIL
1. The corporate veil is used as a tool of statutory
interpretation in the sense that piercing the corporate
veil is done in order to bring corporate actor behavior into
conformity with a particular statutory scheme
2. In order to remedy what appears to be fraudulent
conduct that does have the strict elements common
fraud.
3. The promotion of what we term accepted bankruptcy
values.
DISCUSSION:
The reason why a corporation is attractive as a business
organization is because of its separate personality. If you are an
investor, you would want to enter into a corporation rather than a
partnership because your liability and risk will only cover up to the
extent of your investment. It will never affect your personal assets.

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BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
DOCTRINE OF PIERCING THE VEIL OF
CORPORATE FICTION
Q: May the corporate veil be lifted?
PNB V. ANDRADA
G.R. No. 142936 | April 17, 2002
FACTS: On October 1971, Pampanga Sugar Mills / PASUMIL
engaged the services of Andrada Electric for electrical
rewinding, repair, installation of transformers, among others.
Most of the services were partially paid by PASUMIL, leaving
several unpaid accounts.
On August 1975, PNB acquired Pampanga Sugar Mills/
PASUMILS’s assets that DBP had foreclosed, which were
embodied in the Redemption Agreement. PNB, as successor-in-
interest, stepped into the shoes of DBP as PASUMIL's creditor.
By way of a Deed of Assignment, PNB then transferred to
National Sugar Development Corporation / NASUDECO, its
subsidiary corporation, all its rights under the Redemption
Agreement.
Since cost of the services of Andrada Electric were partially paid
by PASUMIL, leaving several unpaid accounts, Andrada Electric
alleged that PNB and NASUDECO should be liable for PASUMIL’s
unpaid obligation having owned and possessed the assets of
PASUMIL.
However, PNB and NASUDECO allege that they should not be
held liable for the corporate debts of PASUMIL, because their
takeover of the latter's foreclosed assets did not make them
assignees or to assume the corporate obligations of PASUMIL.
On the other hand, Andrada Electric asserts that PNB and
NASUDECO and PASUMIL should be treated as one entity and,
as such, jointly and severally held liable for PASUMIL's unpaid
obligation.
ISSUE: Whether the Doctrine of Piercing Corporate Fiction
applies in this case? – NO.
HELD: The rule is that, a corporation has a legal personality
distinct and separate from the persons and entities owning it.
The corporate veil may be lifted only if it has been used to
shield fraud, defend crime, justify a wrong, defeat public
convenience, insulate bad faith or perpetuate injustice.
The Supreme court in this case provided the elements wherein
the piercing the veil of corporate fiction may be allowed:
(1) control - not mere stock control, but complete
domination - not only of finances, but of policy and
business practice in respect to the transaction
attacked, must have been such that the corporate
entity as to this transaction had at the time no
separate mind, will or existence of its own;
(2) such control must have been used by the defendant to
commit a fraud or a wrong to perpetuate the violation
of a statutory or other positive legal duty, or a
dishonest and an unjust act in contravention of
plaintiff's legal right; and
(3) the said control and breach of duty must have
proximately caused the injury or unjust loss
complained of.
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First, other than the fact that PNB and NASUDECO acquired the
assets of PASUMIL, there is no showing that their control over it,
warrants the disregard of corporate personalities.
Second, there is no evidence that their juridical personality was
used to commit a fraud or to do a wrong; or that the separate
corporate entity was absurdly used as a mere alter ego, business
conduit or instrumentality of another entity or person.
Third, Andrada Electric was not defrauded or injured when PNB
and NASUDECO acquired the assets of PASUMIL. Hence,
although the assets of NASUDECO can be easily traced to
PASUMIL, the transfer of the PASUMIL’s assets to PNB and
NASUDECO was not fraudulently entered into in order to escape
liability for its debt to AEEC.
Therefore, Doctrine of Piercing Corporate Fiction does not apply
in this case thus It will not make PNB and NASUDECO liable for
the PASUMIL's contractual debts to Andrada Electric &
Engineering Company (AEEC).
DISCUSSION:
The Court did not allow the Piercing of the Corporate Veil. Here, the
Supreme Court reiterated 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.
REQUISITES FOR ALTER EGO TO APPLY
When the piercing of the corporate veil is based on the alter ego
theory it requires the concurrence of three elements, namely:
1. Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy
and business practice in respect to the transaction
attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or
existence of its own;
2. Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal right; and
3. The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss complained
of.
The absence of any of these three elements prevents piercing the
corporate veil.
HALLEY v. PRINTWELL
649 SCRA 116 | May 30, 2011
FACTS: Halley is an incorporator and original director of BMPI
Business Media Philippines (BMPI).
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.
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BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
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For a certain period of time BMPI placed with Printwell several
orders on credit, amounting to more or less ₱316,342.76.
BUT BMPI was only able to pay ₱25,000.00. This prompted
Printwell to sue BMPI on January 26, 1990 for the collection of
the unpaid balance of ₱291,342.76 with the RTC.
And then later on, Printwell amended its complaint in order to
implead as defendants all the original stockholders and
incorporators to recover on their unpaid subscriptions
(THE PETITIONER IN THIS CASE, DONNINA HALLEY, SUBSCRIBED
T 35,000 SHARE WORTH 350,000 BUT WAS ONLY ABLE TO PAY
87, 500)
Halley argued that BMPI had a personality separate from its
stockholders which personality should not be disregarded.
However, both the RTC and the CA ruled that the defendant
stockholders are liable (piercing the veil of corporate fiction),
and 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.
The case went all the up to the SC wherein Halley maintained
that the CA and the RTC erroneously pierced the veil of
corporate fiction despite the absence of cogent proof showing
that she, as a stockholder of BMPI, had any hand in transacting
with Printwell.
ISSUE: Whether or not it was erroneous for the RTC and the CA
to pierce the veil of corporate fiction so as to make the
defendant stockholders personally liable. – NO.
HELD: Although a corporation has a personality separate and
distinct from those of its stockholders, directors, or officers,
such separate and distinct personality is merely a fiction created
by law for the sake of convenience and to promote the ends of
justice.
The corporate personality may be disregarded, and the
individuals composing the corporation will be treated as
individuals, if the corporate entity is being USED:
1. as a cloak or cover for fraud or illegality;
2. as a justification for a wrong;
3. as an alter ego, an adjunct, or a business conduit for
the sole benefit of the stockholders.
As a general rule, a corporation is looked upon as a legal entity,
unless and until sufficient reason to the contrary appears. Thus,
the courts always presume good faith, and for that reason
accord prime importance to the separate personality of the
corporation, disregarding the corporate personality only after
the wrongdoing is first clearly and convincingly established.
IN THE CASE AT BAR
Although nowhere in Printwell’s amended complaint or in the
testimonies offered by Printwell can it be read or inferred that
the (halley) petitioner was instrumental in persuading BMPI to
renege on its obligation to pay; or that she induced Printwell to
extend the credit accommodation by misrepresenting the
solvency of BMPI to Printwell, her personal liability, together
with that of her co-defendants, remained because the CA found
her and the other defendant stockholders to be in charge of the
operations of BMPI at the time the unpaid obligation was
transacted and incurred. And despite the fact that they were not
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able to pay their unpaid subscriptions to BMPI yet they greatly
benefited from the said transactions.
It follows, therefore, that whether or not the petitioner
persuaded BMPI to renege on its obligations to pay, and
whether or not she induced Printwell to transact with BMPI
were not good defenses in the suit.
DISCUSSION:
The corporate personality may be disregarded, and the individuals
composing the corporation will be treated as individuals, if the
corporate entity is being used as a cloak or cover for fraud or
illegality; as a justification for a wrong; as an alter ego, an adjunct,
or a business conduit for the sole benefit of the stockholders.
Because we have a rule that we cannot collaterally attack the
personality of the corporation, if you want to question the
existence of a corporation it must be through a direct attack.
Q: Does the piercing doctrine violate the doctrine that the
personality of the Corporation may not be attacked collaterally?
KOPPEL (PHIL.) INC. V. YATCO
G.R. No. L-47673 | October 10, 1946
HELD: When the piercing doctrine is applied against a
corporation, the court does “not deny legal personality x x x for
any and all purposes.
DISCUSSION:
It means that you do not disregard the existence of a corporation.
You just disregard the separate juridical personality. That’s
different.
Q: Is res judicata available in piercing cases?
TANTONGCO V. KAISAHAN NG MGA MANGAGAWA
G.R. No. L-13119 | September 22, 1959
HELD: The application of the piercing doctrine is therefore
within the ambit of the principle of res judicata that binds only
the parties to the case only to the matters actually resolved
therein.
Even when a corporation’s legal personality had been pierced, a
corporation still possessed such separate juridical personality in
any other case.
DISCUSSION:
In other words, for that particular transaction or issue where there
is fraud or allegation of injustice.
CONCEPT BUILDERS INC v. NLRC
G.R. No. 108734 | May 29, 1996
FACTS: There was a case filed against Concept Builders before
the Labor Arbiter. The Labor Arbiter ruled to reinstate the
respondents and to be paid of back wages. There was an
issuance of writ of execution but the same was not enforced
because as the sheriff enforced the writ by levying the
properties in the premises of Concept Builders, several security
guards with high powered guns prevented the sheriff from
removing the properties allegedly because the properties
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BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
sought to be removed or levied upon by were owned by Hydro
Pipes Philippine Incorporated (HPPI).
The private respondents filed a motion for the issuance of a
break open order alleging that HPPI and Concept Builders were
owned by the same incorporators and stockholders. They also
alleged that petitioner temporarily suspended its business
operations in order to evade its obligations to them.
ISSUE: Whether or not the doctrine of piercing of corporate veil
is applicable in this case? – YES.
HELD: The Court discussed that while it is a fundamental
principle of corporation law that a corporation is an entity
separate and distinct from its stockholders and from other
corporations to which it may be connected, this will only hold if
it is not used as a device to defeat the labor laws. Otherwise, this
separate personality of the corporation may be disregarded or
the veil of corporate fiction pierced. This is true likewise when
the corporation is merely an adjunct, a business conduit or an
alter ego of another corporation, which is what happened in this
case.
Now, the conditions in determining whether the juridical entity
may be disregarded will vary according to the peculiar facts and
circumstances of each case. However, there are some common
factors that we may look out for, such as:
1. Stock ownership by one or common ownership of
both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business.
The court also discussed the "INSTRUMENTALITY RULE," which
provides that where one corporation is so organized and
controlled and its affairs are conducted so that it is, in fact, a
mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the ‘instrumentality’ may be disregarded.
The test in determining the applicability of the doctrine of
piercing the veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control,
but complete domination, not only of finances but of
policy and business practice in respect to the
transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will
or existence of its own;
2. Such control must have been used by the defendant
to commit fraud or wrong, to perpetuate the violation
of a statutory or other positive legal duty or dishonest
and unjust act in contravention of plaintiff's legal
rights; and
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained
of.
The absence of any one of these elements prevents "piercing the
corporate veil." In applying the "instrumentality" or "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.
The Court went on to discuss the factors in the test in
determining the applicability of the doctrine of piercing the veil
of corporate fiction, which we have discussed earlier. The
absence of any one of these elements prevents the ‘piercing the
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corporate veil’. In applying the ‘instrumentality’ or ‘alter ego’
doctrine, the courts are concerned with how the corporation
operated and the individual defendant’s relationship to that
operation." Thus, the question of whether a corporation is a
mere alter ego, a mere sheet or paper corporation, a sham or a
subterfuge is purely one of fact.
IN THIS CASE: The NLRC noted that, while petitioner claimed
that it ceased its business operations on 1986, in the next year
in 1987, both Concept Builders and HPPI filed Information
Sheets with the Securities and Exchange Commission providing
the same office address for both corporations. Furthermore,
both information sheets were filed by the same Virgilio O.
Casiño as the corporate secretary of both corporations. Both
corporations also had the same president, the same board of
directors, the same corporate officers, and substantially the
same subscribers. Therefore, it appears that Concept Builders
and HPPI shared the same address and/or premises. Under this
circumstances, it cannot be said that the property levied upon
by the sheriff were not those of Concept Builders’.
Clearly, Concept Builders ceased its business operations in order
to evade the payment to private respondents of back wages and
to bar their reinstatement to their former positions. HPPI is
obviously a business conduit of Concept Builders and its
emergence was orchestrated to avoid Concept Builders’
financial liability.
DISCUSSION:
We have the general rule that if you are going to pierce the
corporation, you are going after the owners. In this particular case,
it was a different corporation. This is a labor case where they
dissolved the corporation, then they put up a new corporation.
This is quite different as it did not pierce through the owners. The
SC said that it is a mere adjunct or continuation of the business.
CLASSIFICATION OF PIERCING CASES
GENERAL CREDIT CORP v. ALSONS DEV AND INVESTMENT
CORP.
513 SCRA 225
FACTS: GCC is a finance and investment company and during its
business operation it was able to establish different franchise
companies. It was also allowed to engage in quasi banking
activities. GCC organized EQUITY to take over the operations
and the management the different franchise companies.
Alsons Development Company is a shareholder of this franchise
companies and later on it sold its shareholding to Equity where
in Equity issued a promissory note in favor of Alsons. However
Equity was not able to pay the interest payment so Alsons filed
a case for collection of sum of money against Equity and also
impleaded GCC contending that Equity was merely organized as
a tool or a mere conduit of GCC.
ISSUE: Whether or not the doctrine of piercing of corporate veil
is applicable in this case. – YES.
HELD:
A corporation is an artificial being vested by law with a
personality distinct and separate from those of the persons
composing it as well as from that of any other entity to which it
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
may be related. The first consequence of the doctrine of legal
entity of the separate personality of the corporation is that a
corporation may not be made to answer for acts and liabilities
of its stockholders or those of legal entities to which it may be
connected or vice versa.
The notion of separate personality, however, may be
disregarded under the doctrine - "piercing the veil of corporate
fiction" - as in fact the court will often look at the corporation as
a mere collection of individuals or an aggregation of persons
undertaking business as a group, disregarding the separate
juridical personality of the corporation unifying the group.
Another formulation of this doctrine is that when two (2)
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.
Whether the separate personality of the corporation should be
pierced hinges on obtaining facts, appropriately pleaded or
proved. However, any piercing of the corporate veil has to be
done with caution, albeit the Court will not hesitate to disregard
the corporate veil when it is misused or when necessary in the
interest of justice. After all, the concept of corporate entity was
not meant to promote unfair objectives.
Authorities are agreed on at least three (3) basic areas where
piercing the veil, with which the law covers and isolates the
corporation from any other legal entity to which it may be
related, is allowed. These are:
1) defeat of public convenience, as when the corporate
fiction is used as 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.
The Court agrees with the disposition of the appellate court on
the application of the piercing doctrine to the transaction
subject of this case. Per the Court's count, the trial court
enumerated no less than 20 documented circumstances and
transactions, which, taken as a package, indeed strongly
supported the conclusion that respondent EQUITY was but an
adjunct, an instrumentality or business conduit of petitioner
GCC. This relation, in turn, provides a justifying ground to pierce
petitioner's corporate existence as to ALSONS' claim in question.
Foremost of what the trial court referred to as "certain
circumstances" are the commonality of directors, officers and
stockholders and even sharing of office between petitioner GCC
and respondent EQUITY; certain financing and management
arrangements between the two, allowing the petitioner to
handle the funds of the latter; the virtual domination if not
control wielded by the petitioner over the finances, business
policies and practices of respondent EQUITY; and the
establishment of respondent EQUITY by the petitioner to
circumvent CB rules. For a perspective, the following are some
relevant excerpts from the trial court's decision setting forth in
some detail the tipping circumstances adverted to therein:
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It must be noted that as characterized by their business
relationship, [respondent] EQUITY and [petitioner] GCC had
common directors and/or officers as well as stockholders. This
is revealed by the proceedings recorded in SEC Case No. 25-81
entitled "Avelina Ramoso, et al., v. GCC, et al., where it was
established, thru the testimony of EQUITY's own President - that
more than 90% of the stockholders of - EQUITY were also
stockholders of - GCC '.. Disclosed likewise is the fact that when
[EQUITY's President] Labayen sold the shareholdings of EQUITY
in said franchise companies, practically the entire proceeds
thereof were surrendered to GCC, and not received by EQUITY
(EXHIBIT "RR")
It was likewise shown by a preponderance of evidence that not
only had 'GCC financed - EQUITY and that the latter was heavily
indebted to the former but EQUITY was, in fact, a wholly owned
subsidiary of 'GCC. Thus, as affirmed by EQUITY's President, - the
funds invested by EQUITY in the CCC franchise companies
actually came from CCC Phils. or GCC (Exhibit "Y-5")'. that, as
disclosed by the Auditor's report for 1982, past due receivables
alone of GCC exceeded P101,000,000.00 mostly to GCC affiliates
especially CCC EQUITY. '; that [CB's] Report of Examination
dated July 14, 1977 shows that - EQUITY which has a paid-up
capital of only P500,000.00 was the biggest borrower of GCC
with a total loan of P6.70 Million '.
Given the foregoing considerations, it behooves the petitioner,
as a matter of law and equity, to assume the legitimate financial
obligation of a cash-strapped subsidiary corporation which it
virtually controlled to such a degree that the latter became its
instrument or agent. The facts, as found by the courts a quo, and
the applicable law call for this kind of disposition. Or else, the
Court would be allowing the wrong use of the fiction of
corporate veil.
Q: When piercing is allowed?
(1) Defeat of public convenience, as when the corporate
fiction is used as vehicle for the evasion of an existing
obligation (“Equity Cases”);
(2) Fraud cases or when the corporate entity is used to justify
a wrong, protect fraud, or defend a crime (“Fraud
Cases”); 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.
NOTE: Complete the domination, not merely stockholdings. There
must be complete domination, not merely the fact of interlocking
directors,. When complete domination is enough, there must be
fraud. There must be a wrong doing and the complete domination
must be the conduit for that wrong doing to materialize. Piercing
cases are exceptions. (3SR TSN, 20’-21’)
Q: May corporate representatives who did not personally bind
themselves to an arbitration agreement be forced to participate
in arbitration proceedings?
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
LANUZA VS. BF CORPORATION
737 SCRA 275
FACTS: BF Corporation filed a collection complaint with the
Regional Trial Court against Shangri-La and the members of its
board of directors: Alfredo C. Ramos, Rufo B. Colayco, Antonio
O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III, and
Benjamin C. Ramos.
BF Corporation alleged in its complaint that it entered into
agreements with Shangri-La wherein it undertook to construct
for Shangri-La a mall and a multilevel parking structure along
EDSA.
Shangri-La had been consistent in paying BF Corporation in
accordance with its progress billing statements. However, by
October 1991, Shangri-La started defaulting in payment.
BF Corporation eventually completed the construction of the
buildings.
Shangri-La allegedly took possession of the buildings while still
owing BF Corporation an outstanding balance. BF Corporation
alleged that despite repeated demands, Shangri-La refused to
pay the balance owed to it.
Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III, and
Benjamin C. Ramos filed a motion to suspend the proceedings in
view of BF Corporation’s failure to submit its dispute to
arbitration, in accordance with the arbitration clause provided…
in its contract BF Corporation opposed the motion to suspend
proceedings
In the November 18, 1993 order, the Regional Trial Court denied
the motion to suspend proceedings.
On December 8, 1993, petitioners filed an answer to BF
Corporation’s complaint, with compulsory counterclaim against
BF Corporation and cross-claim against Shangri- La. They alleged
that they had resigned as members of Shangri-La’s board of
directors as of July 15, 1991.
Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III, and
Benjamin Ramos filed a petition for certiorari with the Court of
Appeals. On April 28, 1995, the Court of Appeals granted the
petition for certiorari and ordered the submission of the dispute
to arbitration.
Shangri-La filed an omnibus motion and BF Corporation an
urgent motion for clarification, both seeking to clarify the term,
“parties,” and whether Shangri-La’s directors should be included
in the arbitration proceedings and served with separate
demands for… arbitration.
Petitioners filed their comment on Shangri-La’s and BF
Corporation’s motions, praying that they be excluded from the
arbitration proceedings for being non-parties to Shangri-La’s
and BF Corporation’s agreement.
ISSUE: W/N petitioners (Board of Directors) should be made
parties to the arbitration proceedings, pursuant to the
arbitration clause provided in the contract between BF
Corporation and Shangri-La, thereby piercing the veil of
corporate fiction? – YES.
HELD: The petitioners may be compelled to submit to the
arbitration proceedings. The Supreme Court held that the
directors and officers should be included in the arbitration
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proceedings in order to determine whether or not the
distinction between the directors and officers from Shangri-la
must be disregarded. In other words, the issue is to determine
the application of the Doctrine of Piercing the Corporate Veil.
Piercing the veil of corporate fiction - when the distinction
between personalities of directors, officers, and
representatives, and of the corporation, are disregarded.
Piercing the corporate veil is warranted when "[the separate
personality of a corporation] 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."
It is also warranted in alter ego cases "where a corporation is
merely a farce since it is a mere alter ego or business conduit of
a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it... merely
an instrumentality, agency, conduit or adjunct of another
corporation."
When corporate veil is pierced, the corporation and persons
who are normally treated as distinct from the corporation are
treated as one person, such that when the corporation is
adjudged liable, these persons, too, become liable as if they
were the corporation.
In addition, the Supreme Court held that when there are
allegations of malice or bad faith against corporate directors, it
becomes the duty of the Court to determine if this person and
the corporation should be treated as one.
Hence, when the directors, as in this case, are impleaded in a
case against a corporation, alleging malice or bad faith on their
part in directing the affairs of the corporation, complainants are
effectively alleging that the directors and the corporation are
not acting as separate entities. Here, petitioners may be
compelled to submit to the arbitration proceedings.
The directors and officers should be included in the arbitration
proceedings in order to determine whether or not the
distinction between the directors and officers from Shangri-la
must be disregarded. In other words, the issue is to determine
the application of the Doctrine of Piercing the Corporate Veil.
DISCUSSION:
Corporation’s representative who did not personally bind himself
or herself to an arbitration agreement cannot be forced to
participate in arbitration proceedings made pursuant to an
agreement entered into by the corporation.
FRAUD CASES
If you try to survey the cases, if the allegation is about fraud and it
is proven, they are more lenient in piercing. They are trying to avoid
using the separate juridical personality of a corporation to
perpetrate fraud.
CIR v. MENGUITO
545 SCRA 461 | G.R. No. 167560 | September 17, 2008
DOCTRINE: The fiction of their separate and distinct corporate
identities shall be disregarded, and both entities treated as one
taxable person.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
FACTS: Dominador Menguito is married to Jeanne Menguito and
is engaged in the restaurant and/or cafeteria business.
For the years 1991, 1992 and 1993, its principal place of business
was later transferred to Kalayaan Bar (Copper Kettle Cafeteria
Specialist or CKCS), Departure Area, NAIA, Pasay City. During the
same years, he also operated a branch at Club John Hay, Baguio
City carrying the business name of Copper Kettle Cafeteria
Specialist.
BIR BAGUIO received information that DOMINADOR has
undeclared income from Texas Instruments and Club John Hay,
prompting the BIR to conduct another investigation.
In an effort to clear an alleged confusion regarding CKCS being a
sole proprietorship owned by the Spouses, and Copper Kettle
Catering Services, Inc. (CKCS, Inc.) being a corporation with
whom Texas Instruments and Club John Hay entered into a
contract, DOMINADOR submitted to BIR BAGUIO a photocopy
of the SEC Registration of CKCS, Inc.
CTA’S DECISION: The CTA rendered a Decision, ordering
DOMINADOR to PAY the amount of P11,333,233.94 and
P2,573,655.82 as deficiency income and percentage tax
liabilities.
DOMINADOR questioned the CTA Decision and Resolution
mainly on the ground that:
• CKCS, Inc. was a separate and distinct entity from CKCS;
• the sales and revenues of CKCS, Inc. could not be ascribed
to CKCS;
• neither may the taxes due from one, charged to the other;
nor the notices to be served on the former, coursed
through the latter.
• DOMINADOR’S business was called Copper Kettle Cafeteria
Specialist, not Copper Kettle Catering Services, Inc.
ISSUE: W/N CKCS and CKCS, Inc. should be treated as one
taxable person – YES.
HELD: In a number of cases, the Court has shredded the veil of
corporate identity and ruled that where a corporation is merely
an adjunct, business conduit or alter ego of another corporation
or when they practice fraud on our internal revenue laws, the
fiction of their separate and distinct corporate identities shall be
disregarded, and both entities treated as one taxable person,
subject to assessment for the same taxable transaction.
The Court considers the presence of the following
circumstances, to wit:
• when the owner of one directs and controls the operations
of the other, and the payments effected or received by one
are for the accounts due from or payable to the other; or
• when the properties or products of one are all sold to the
other, which in turn immediately sells them to the public,
as substantial evidence in support of the finding that the
two are actually one juridical taxable personality.
In the present case, overwhelming evidence supports the CTA in
disregarding the separate identity of CKCS, Inc. from CKCS and
in treating them as one taxable entity.
1. In DOMINADOR expressly admitted that he “is engaged in
restaurant and/or cafeteria business” and that “[i]n 1991,
1992 and 1993, he also operated a branch at Club John Hay,
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20
Baguio City with a business name of Copper Kettle Cafeteria
Specialist.”
2. Texas Instruments identified the concessionaire operating
its canteen as “Copper Kettle Catering Services, Inc.” and/or
“COPPER KETTLE CAFETERIA SPECIALIST SVCS.” It being
settled that “Copper Kettle Cafeteria Specialist” is also
known as “Copper Kettle Catering Services,” and that
respondent and Jeanne Menguito both own, manage and
act as proprietors of the business, these further establish
that, through said business, respondent also had taxable
transactions with Texas Instruments.
The Articles of Incorporation of CKCS, Inc. cannot insulate it
from scrutiny of its real identity in relation to CKCS. It is noted
that said Articles of Incorporation of CKCS, Inc. was issued in
1989, but documentary evidence indicate that after said date,
CKCS, Inc. has also assumed the name CKCS, and vice-versa.
The most concrete indication of this practice is the 1991
Quarterly Percentage Tax Returns covering the business
name/trade “19th Tee Camp John Hay.” In said returns, the
taxpayer is identified as “Copper Kettle Cafeteria Specialist” or
CKCS, not CKCS, Inc. Yet, in several documents already cited, the
purported owner of 19th Tee Bar at Club John Hay is CKCS, Inc.
All these pieces of evidence buttress the finding that Spouses
Menguito owned and operated outlets in Club John Hay and
Texas Instruments under the names Copper Kettle Cafeteria
Specialist or CKCS and Copper Kettle Catering Services or Copper
Kettle Catering Services, Inc.
DISCUSSION:
The fiction of their separate and distinct corporate identities shall
be disregarded, and both entities treated as one taxable person.
MENDOZA AND YOTOKO v. BANCO REAL DEVELOPMENT
BANK
G.R. No. 140923| September 16, 2005
MENDOZA and YOKOTO – officer of Technical Video Inc (TVI)
Banco Real Dev. Inc – Mortgagee Bank
DOCTRINE: Veil is lifted if it is used by any of them as a cloak or
cover for fraud or illegality or injustice.
FACTS: By virtue of a Board Resolution, Mendoza and Yokoto
secured a loan for Banco Real (now LBC Dev. Bank) secured by a
chattel mortgage over units of video machines and their
equipment and accessories belonging to TVI in favor of the Bank.
Later, TVI and 2 other video firms organized a new corporation
named FGT Video Network Inc (FGT) in which Mendoza was
appointed as the president of FGT. For easier monitoring of the
business the office of TVI was transferred to the building of FGT.
TVI failed to pay its loan upon maturity, thus the Bank filed a
petition for extra judicial foreclosure and sale of the mortgage.
In the Sheriff’s Report/Return it shoes that TVI is no longer doing
business at the given address and when asked about the
whereabouts of the video machines, Mendoza denied any
knowledge thereof.
Meanwhile, in a case entitled “Republic vs. FGT Video Network,
et al,” the RTC issued a search warrant, and the NBI agents were
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
able to confiscate machines from the office of FGT including
those video machines mortgage with the bank. The Bank then
filed a complaint for collection of a sum of money against TVI,
FGT, and its officers. Mendoza raised the defense that the loan
is purely a corporate indebtedness of TVI.
ISSUE: W/N the doctrine of piercing the corporate veil is
applicable – NO.
HELD: The general rule is that obligations incurred by a
corporation, acting through its directors, officers or employees,
are its sole liabilities. However, the veil with which the law
covers and isolates the corporation from its directors, officers or
employees will be lifted when the corporation is used by any of
them as a cloak or cover for fraud or illegality or injustice.
Here, the fraud was committed by the officers to the prejudice
of the bank. As reported by the sheriff, TVI is no longer doing
business at its given address and Mendoza, when asked of its
whereabouts have denied any knowledge thereof.
Both the trial court and the Court of Appeals thus concluded that
the officers succeeded to hide the chattels, preventing the
sheriff to foreclose the mortgage. Obviously, they acted in bad
faith to defraud respondent bank.
Thus, the Supreme Court ruled that with the presence of fraud,
the doctrine of piercing on the corporate veil is not applicable in
this case. The officers shall be held personally liable to the bank.
MENDOZA AND YOTOKO v. BANCO REAL DEVELOPMENT
BANK
G.R. No. 140923 | September 16, 2005
Mendoza and Yotoko – officer of Technical Video Inc (TVI)
Banco Real Dev. Inc – Mortgagee Bank
FACTS: By virtue of a Board Resolution, Mendoza and Yotoko
secure a loan for Banco Real (now LBC Dev. Bank) secured by a
chattel mortgage over units of video machines and their
equipment and accessories belonging to TVI in favor of the Bank.
Later, TVI and 2 other video firms organized a new corporation
named FGT Video Network Inc (FGT) in which Mendoza was
appointed as the president of FGT. For easier monitoring of the
business the office of TVI was transferred to the building of FGT.
TVI failed to pay its loan upon maturity, thus the Bank filed a
petition for extra judicial foreclosure and sale of the mortgage.
In the Sheriff’s Report/Return it shows that TVI is no longer
doing business at the given address and when asked about the
whereabouts of the video machines, Mendoza denied any
knowledge thereof.
Meanwhile, in a case entitled “Republic vs. FGT Video Network,
et al,” the RTC issued a search warrant, and the NBI agents were
able to confiscate machines from the office of FGT including
those video machines mortgage with the bank.
The Bank then filed a complaint for collection of a sum of money
against TVI, FGT, and its officers.
Mendoza raised the defense that the loan is purely a corporate
indebtedness of TVI.
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ISSUE: Whether Mendoza and Yotoko can be personally liable
for the indebtedness of the Corporation? – YES.
RULING: The general rule is that obligations incurred by a
corporation, acting through its directors, officers or employees,
are its sole liabilities. However, the veil with which the law
covers and isolates the corporation from its directors, officers or
employees will be lifted when the corporation is used by any of
them as a cloak or cover for fraud or illegality or injustice.
Here, the fraud was committed by the officers to the prejudice
of the bank. As reported by the sheriff, TVI is no longer doing
business at its given address and Mendoza, when asked of its
whereabouts have denied any knowledge thereof.
Also, in a separate case filed by the Republic against FGT Inc.,
the NBI here seized video machines from FGT and these video
machines show that Yotoko and Mendoza transferred the same
from TVI. A comparison of the list of the video machines in the
chattel mortgage executed between TVI and the Bank, and the
list of the video machines seized by NBI from FGT shows that
they have the same serial number, specifically they are one and
the same.
Lastly, it was also found out that TVI is petitioner's mere alter
ego or business conduit. They control the affairs of TVI and
among its stockholders and directors, they were the only ones
who became incorporators of FGT and they transferred the
assets of TVI to FGT.
With these instances, fraud was apparent and thus the
exception should apply they shall be held personally liable to the
obligation of TVI.
DISCUSSION:
The veil is lifted if it is used by any of them as a cloak or cover for
fraud or illegality or injustice.
LIVESEY v. BINSWANGER PHILIPPINES
719 SCRA 433
FACTS: This case stemmed from the nonpayment of financial
obligation in a compromise agreement.
An illegal dismissal case was filed by Livesey against CBB
Philippine Strategic Property Services Inc. (CBB). The Labor
Arbiter found that indeed Livesey was illegally dismissed.
Because of this, the parties entered into a compromise
agreement. Under the agreement, Livesey was to receive USD
31,000.00 in full satisfaction of the Labor Arbiter’s decision.
CBB paid Livesey the initial amount of USD 13,000.00, but not
the next two installments as the company ceased operations. In
reaction, Livesey moved for the issuance of a writ of execution.
The LA granted the writ but it was not enforced. Hence, Livesey
filed a motion for the issuance of an alias writ of execution,
alleging that he learned that the respondent had organized
another corporation, which was the Binswanger Philippines Inc.
He also claimed that there was evidence showing that CBB and
Binswanger Inc. are one and the same corporation.
Invoking the doctrine of piercing the veil of corporate fiction,
Livesey prayed that an alias writ of execution be issued against
respondents Binswanger and Keith Elliot, CBB’s former
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BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
President, and now Binswanger’s President and Chief Executive
Officer (CEO).
ISSUE: Should the doctrine of piercing the veil of corporate
fiction apply in this case? – Yes. The doctrine applies.
HELD: Piercing the veil of corporate fiction is an equitable
doctrine developed to address situation where the separate
corporate personality of a corporation is abused or used for
wrongful purposes. Under the 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 obligation,
or to justify a wrong, to shield or perpetrate fraud or to carry out
similar or inequitable considerations, other unjustifiable aims or
intentions, in which case, the fiction will be disregarded and the
individuals composing it and the two corporation will be treated
as identical.
In the present case, we see an indubitable link between CBB’s
closure and Binswanger’s incorporation. CBB ceased to exist
only in name; it re-emerged in the person of Binswanger for an
urgent purpose – to avoid payment by CBB of the last two
installments of its monetary obligation to Livesey, as well as its
other financial liabilities. Freed of CBB’s liabilities, especially
that owing to Livesey, Binswanger can continue, as it did
continue, CBB’s real estate brokerage business.
Livesey’s evidence, whose existence the respondents never
denied, converged to show this continuity of business operation
from CBB to Binswanger. It was not just coincidence that
Binswanger is engaged in the same line of business CBB
embarked on:
1. it even holds office in the very same building and on
the very same floor where CBB once stood;
2. CBB’s key officers, Elliot, no less, and Catral moved
over to Binswanger, performing the tasks they were
doing at CBB;
3. notwithstanding CBB’s closure, Binswanger’s Web
Editor (Young), in an e-mail correspondence, supplied
the information that Binswanger is “now known” as
either CBB (Chesterton Blumenauer Binswanger) or as
Chesterton Petty, Ltd., in the Philippines;
4. the use of Binswanger of CBB’s paraphernalia
(receiving stamp) in connection with a labor case
where Binswanger was summoned by the authorities,
although Elliot claimed that he boought the item with
his own money; and
5. Binswanger’s takeover of CBB’s project with the PNB.
Binswanger Philippine Inc. and Keith Elliot (CEO and President)
are jointly and severally liable to Eric Livesey.
DISCUSSION:
The entity is formed or used for non-legitimate purposes, such as
to evade a just and due obligation.
The corporate entity wanted to evade obligation, when there is
already the compromise agreement. That agreement stems from
an illegal dismissal case that Livesey filed. Again, in labor cases, the
court is more lenient in favor of laborers and the workers.
Francisco v. Mejia is another corporate case where the court
answers the question of whether or not mere ownership by a single
stockholder or by another corporation of all or nearly all of the
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capital stock of a corporation is sufficient ground for disregarding
the separate corporate personality.
FRANCISCO v. MEJIA
326 SCRA 738
FACTS: Andrea Gutierrez was the owner of a parcel of land
known as the Tala Estate located in Caloocan City. Such estate
was divided into five lots, four of which was purchased by
Cardale Financing and Realty Corporation (Cardale). They
executed a deed of sale with mortgage for the purchase.
Subsequently, Cardale failed to fulfill its mortgage obligation
with Gutierrez. Thus, he filed a case for rescission with the RTC
of Quezon City. Gutierrez died and was substituted by her
executrix, Rita C. Mejia (Mejia).
However, Cardale, which was represented by petitioner Adalia
B. Francisco (Francisco) in her capacity as Vice- President and
Treasurer of Cardale, lost interest in proceeding with the
presentation of its evidence and the case lapsed into inactive
status for a period of about fourteen years. In the meantime, the
mortgaged parcels of land became delinquent in the payment of
real estate taxes, which culminated in the levy and auction sale
in order to satisfy the tax arrears. The highest bidder was
Merryland Development Corporation (Merryland), whose
President and majority stockholder is Francisco.
Prior to the expiration of the redemption period, Francisco filed
a motion for postponement claiming that Cardale needed to hire
new counsel. However, Francisco did not mention the tax
delinquencies. After expiration of the redemption period,
Merryland through Francisco, filed petitions for consolidation of
title, which culminated in the issuance of new TCTs.
ISSUE: W/N Merryland, Cardale and Francisco should be held
solidarily liable. W/N the veil of corporate fiction of Merryland
in this case should be pierced. – NO.
HELD: The act of not paying or failing to pay taxes due the
government by the defendant Adalia B. Francisco, as treasurer
of Cardale Financing and Realty Corporation does not, per se,
constitute perpetration of fraud or an illegal act. It do [sic] not
also constitute an act of evasion of an existing obligation (to
plaintiff) if there is no clear showing that such an act of non-
payment of taxes was deliberately made despite its (Cardales)
solvency and capability to pay. There is no evidence showing
that Cardale Financing and Realty Corporation was financially
capable of paying said taxes at the time.
There are times when the corporate fiction will be disregarded:
1. where all the members or stockholders commit illegal
act;
2. where the corporation is used as dummy to commit
fraud or wrong;
3. where the corporation is an agency for a parent
corporation; and
4. where the stock of a corporation is owned by one
person. (I, Fletcher, 58, 59, 61 and 63).
None of the foregoing reasons can be applied to the incidents in
this case:
1. there appears no illegal act committed by the
stockholders of defendant Merryland Development
Corporation and Cardale Financing and Realty
Corporation;
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
2. the incidents proven by evidence of the plaintiff as
well as that of the defendants do not show that either
or both corporations were used as dummies by
defendant Adalia B. Francisco to commit fraud or
wrong.
To be used as [a] dummy, there has to be a showing
that the dummy corporation is controlled by the
person using it.
The evidence of plaintiff failed to prove that
defendant Adalia B. Francisco has controlling interest
in either or both corporations. On the other hand, the
evidence of defendants clearly show that defendant
Francisco has no control over either of the two
corporations;
3. none of the two corporations appears to be an agency
for a parent (the other) corporation; and
4. the stock of either of the two corporation [sic] is not
owned by one person (defendant Adalia B. Francisco).
Except for defendant Adalia B. Francisco, the
incorporators and stockholders of one corporation are
different from the other.
Had the plaintiff not slept on her rights and had it not been for
her failure to perform her commensurate duty to pursue
vigorously her case against Cardale Financing and Realty
Corporation in said Civil Case No. 12366, she could have easily
known said non-payment of realty taxes on the said properties
by said Cardale Financing and Realty Corporation, or, at least the
auction sales that followed, and from which she could have
redeemed said properties within the one year period provided
by law, or, have availed of remedies at the time to protect the
interest of the testate estate of the late Andrea Cordova Vda. de
Gutierrez.
DISCUSSION:
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.
SUMMARY IN FRAUD CASES
(a) There must have been fraud or an evil motive in the
affected transaction, and the mere proof of control of the
corporation by itself would not authorize piercing;
(b) Corporate entity has been used in the perpetration of
fraud or in the justification of wrong, or to escape
personal liability;
(c) The main action should seek for the enforcement of
pecuniary claims pertaining to the corporation against
corporate officers or stockholders; or vice versa
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23
ALTER EGO CASES
Q: Whether a corporation is a mere instrumentality or alter-ego
of another is purely one of fact.
WPM INTERNATIONAL v. LABAYEN
G.R. 182770 | September 17, 2014
Parties:
§ Respondent - Fe Corazon Labayen is the owner of H.B.O.
Systems Consultants, a management and consultant firm.
§ Petitioner - WPM International Trading, Inc. is a domestic
corporation engaged in the restaurant business, while
Warlito P. Manlapaz is its president.
FACTS: In 1990, WPM entered into a management agreement
with Labayen, by virtue of which the respondent was authorized
to operate, manage and rehabilitate Quickbite, a restaurant
owned and operated by WPM.
As part of her tasks, Labayen looked for a contractorwho would
renovate the two existing Quickbite outlets. Pursuant to the
agreement, H.B.O. Systems Consultants engaged the services of
CLN Engineering Services (CLN) to renovate Quickbite-Divisoria.
When Quickbite-Divisoria’s renovation was finally completed,
only the amount of ₱320,000.00 was paid to CLN, leaving a
balance of ₱112,876.02.
Complaint for sum of money
CLN filed a complaint for sum of money and damages before the
RTC against the respondent. The RTC found Labayen liable to pay
CLN actual damages.
Complaint for damages
H.B.O. Systems Consultants instituted a complaint for damages
against WPM and Manlapaz. The RTC ruled that H.B.O. Systems
Consultants is entitled to indemnity from Manlapaz:
§ There is a clear indication that WPM is a mere
instrumentality or business conduit of Manlapaz.
§ WPM and Manlapaz are considered one and the same.
§ Manlapaz had complete control over WPM considering
that he is its chairman, president and treasurer at the
same time.
Arguments of Manlapaz and WPM International Trading
§ Fe Corazon Labayen and H.B.O. Systems Consultants failed
to establish that any of the circumstances that would
warrant the piercing of corporate veil
§ Hence, there is no justification in ruling that Manlapaz is
solidarily liable with WPM to answer for the alleged
damages
ISSUE: Whether or not, WPM is a mere instrumentality, alter-
ego, and business conduit of Manlapaz. – NO.
RULING: A corporation has a personality separate and distinct
from the persons acting for and, in its behalf, and, in general,
from the people comprising it.
Hence, the obligations incurred by the corporate officers, or
other persons acting as corporate agents, are the direct
accountabilities of the corporation they represent, and not
theirs.
Alter Ego Cases:
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
One of the three instances when the doctrine of piercing the
corporate veil shall apply is in alter ego cases:
1. where a corporation is essentially a farce, since it is a mere
alter ego or business conduit of a person, or
2. where the corporation is so organized and controlled and
its affairs so conducted as to make it merely an
instrumentality, agency, conduit, or adjunct of another
corporation.
Elements:
Piercing the corporate veil based on the alter ego theory
requires the concurrence of three elements, namely:
1. Control, not mere majority or complete stock control, but
complete domination, not only of finances, but of policy
and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction
had at the time no separate mind, will, or existence of its
own;
2. Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal right; and
3. The said control and breach of duty must have proximately
caused the injury or unjust loss complained of.
Further, it must be emphasized that the question of whether a
corporation is a mere instrumentality or alter-ego of another is
purely one of fact.
IN THE CASE AT BAR: The attendant circumstances do not
establish that WPM is a mere alter ego of Manlapaz. Aside from
the fact that Manlapaz was the principal stockholder of WPM,
records do not show that WPM was organized and controlled,
and its affairs conducted in a manner that made it merely an
instrumentality, agency, conduit, or adjunct of Manlapaz.
§ The mere ownership by a single stockholder of even all or
nearly all of the capital stocks of a corporation is not by
itself a sufficient ground to disregard the separate
corporate personality.That Manlapaz concurrently held
the positions of president, chairman, and treasurer, or
that the Manlapaz’s residence is the registered principal
office of WPM, are insufficient considerations to prove
that he had exercised absolute control over WPM.
§ It was not proven that Manlapaz, acting as president, had
absolute control over WPM. Even granting that he
exercised a certain degree of control over the finances,
policies and practices of WPM, in view of his position as
president, chairman and treasurer of the corporation,
such control does not necessarily warrant piercing the veil
of corporate fiction since there was not a single proof that
WPM was formed to defraud CLN or the respondent, or
that Manlapaz was guilty of bad faith or fraud.
On the contrary, the evidence establishes that CLN and the
Labayen knew and acted on the knowledge that they were
dealing with WPM for the renovation of the latter’s restaurant,
and not with Manlapaz.
That WPM later reneged on its monetary obligation to CLN,
resulting to the filing of a civil case for sum of money against
Labayen does not automatically indicate fraud, in the absence of
any proof to support it.
Since no harm could be said to have been proximately caused by
Manlapaz for which the latter could be held solidarily liable with
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24
WPM, and considering that there was no proof that WPM had
insufficient funds, only WPM is liable to indemnify the
respondent.
NOTA BENE:
v The piercing of the veil of corporate fiction is frowned
upon and thus, must be done with caution.
v It 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. The court 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 cannot be
presumed
CORPORATION AS A TOOL TO AVOID ESTATE TAXES
GALA v. ELLICE AGRO-INDUSTRIAL
418 SCRA 431
FACTS: In 1979, the spouses Manuel and Alicia Gala, their
children Guia Domingo, Ofelia Gala, Raul Gala, and Rita Benson,
and their encargados Virgilio Galeon and Julian Jader formed
and organized the Ellice Agro-Industrial Corporation.
Subsequently, the Margo Management and Development
Corporation was incorporated. The total subscribed capital
stock of Margo was 20,000 shares at P200, 000.00. Several
transfers of shares of Ellice to Margo were made by the
stockholders.
As payment for their subscriptions, the Gala spouses transferred
several parcels of land located in the provinces of Quezon and
Laguna to Ellice.
Contentions of Gala, et. al:
§ Thereafter, Gala, et. al filed several actions praying for the
court to disregard the separate juridical personalities of
Ellice and Margo for the purpose of treating all property
purportedly owned by said corporations as property solely
owned by the Gala spouses.
§ Ellice Agro-Industrial Corporation and Margo
Management and Development Corporation are mere
business conduits of the deceased Manuel Gala and thus
may be disregarded to prevent injustice, the distortion or
hiding of the truth or the letting in of a just defense.
§ They claimed that the Ellice Agro-Industrial Corporation
and Margo Management and Development Corporation
never pursued exemption from land reform coverage in
good faith and instead merely used the corporations as
tools to circumvent land reform laws and to avoid estate
taxes.
ISSUE #1: Whether or not, the purposes for which Ellice and
Margo were organized should be declared as illegal and contrary
to public policy. – NO.
RULING:
A perusal of the Articles of Incorporation of Ellice and Margo
shows no sign of the allegedly illegal purposes that petitioners
are complaining of. If a corporation ‘s purpose, as stated in the
Articles of Incorporation, is lawful, then the SEC has no authority
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
to inquire whether the corporation has purposes other than
those stated, and mandamus will lie to compel it to issue the
certificate of incorporation.
IN THE CASE AT BAR: With regard to their claim that Ellice and
Margo were meant to be used as mere tools for the avoidance
of estate taxes, suffice it say that the legal right of a taxpayer to
reduce the amount of what otherwise could be his taxes or
altogether avoid them, by means which the law permits, cannot
be doubted.
Thus, even if Ellice and Margo were organized for the purpose
of exempting the properties of the Gala spouses from the
coverage of land reform legislation and avoiding estate taxes,
the court cannot disregard their separate juridical personalities.
ISSUE #2: Whether or not, the piercing of the corporate veil may
be availed. – NO.
RULING:
To warrant resort to the extraordinary remedy of piercing the
veil of corporate fiction, there must be proof that the
corporation is being used as a cloak or cover for fraud or
illegality, or to work injustice. The petitioners have failed to
prove that Ellice and Margo were being used thus. They have not
presented any evidence to show how the separate juridical
entities of Ellice and Margo were used by the respondents to
commit fraudulent, illegal or unjust acts. Hence, this contention,
too, must fail.
On family corporations in the Philippines
It is always sad to see families torn apart by money matters and
property disputes. The concept of a close corporation organized
for the purpose of running a family business or managing family
property has formed the backbone of Philippine commerce and
industry. Through this device, Filipino families have been able to
turn their humble, hard-earned life savings into going concerns
capable of providing them and their families with a modicum of
material comfort and financial security as a reward for years of
hard work. A family corporation should serve as a rallying point
for family unity and prosperity, not as a flashpoint for familial
strife.
Q: When can a subsidiary be considered merely an instrumentality
of the parent corporation or another sister company?
PNB v. RITRATTO GROUP
362 SCRA 216
FACTS:
PNB International Finance Ltd. (PNB-IFL), a subsidiary company
of PNB, extended a letter of credit secured by real estate
mortgages, in favor of the respondents, Ritratto Group and
Dadasan General Merchandise. For failure to pay fully the loan,
and pursuant to the terms of the real estate mortgages, PNB-IFL,
through its attorney-in fact PNB, notified the respondents of the
foreclosure of all the real estate mortgages.
Complaint filed by respondents
Seeking to restrain PNB from foreclosing their properties (for the
reason that the entire credit facility is void as it contains
stipulations in violation of the principle of mutuality of
contracts), Ritratto Group and Dadasan General Merchandise
filed a complaint for injunction with prayer for the issuance of a
writ of preliminary injunction and/or temporary restraining
order.
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25
Action filed by PNB and its arguments
PNB filed a motion to dismiss on the grounds of failure to state
a cause of action and the absence of any privity between the
PNB and respondents.
Ruling - The motion was denied and the issuance of a writ of
preliminary injunction was ordered. The trial court held that
since PNB-IFL, is a wholly owned subsidiary of PNB, the suit
against the defendant PNB is a suit against PNB-IFL. In justifying
its ruling, it cited the case of Koppel Phil. Inc. vs. Yatco, and
reasoned that the corporate entity may be disregarded where a
corporation is the mere alter ego, or business conduit of a
person or where the corporation is so organized and controlled
and its affairs are so conducted, as to make it merely an
instrumentality of another corporation.
ISSUE: Whether or not, the piercing the veil of corporate identity
may be applied. – NO.
RULING:
As a general rule, a corporation has a personality distinct and
separate from its individual stockholders or members. The mere
fact that a corporation owns all of the stocks of another
corporation, taken alone is not sufficient to justify their being
treated as one entity. If used to perform legitimate functions, a
subsidiary's separate existence may be respected, and the
liability of the parent corporation as well as the subsidiary will
be confined to those arising in their respective business.
The ruling in Koppel finds no application in the case at bar.
In said case, the Court disregarded the separate existence of the
parent and the subsidiary on the ground that the latter was
formed merely for the purpose of evading the payment of higher
taxes.
IN THE CASE AT BAR: Respondents failed to show any reason
why the separate entities of the PNB and PNB-IFL should be
disregarded. While there exists no definite test of general
application in determining when a subsidiary may be treated as
a mere instrumentality of the parent corporation, some factors
have been identified that will justify the application of the
treatment of the doctrine of the piercing of the corporate veil.
Circumstances rendering the subsidiary an instrumentality
In the U.S. case of Garrett vs. Southern Railway Co, outlined the
circumstances which may be useful in the determination of
whether the subsidiary is but a mere instrumentality of the
parent-corporation:
a. The parent corporation owns all or most of the capital
stock of the subsidiary.
b. The parent and subsidiary corporations have common
directors or officers.
c. The parent corporation finances the subsidiary.
d. The parent corporation subscribes to all the capital
stock of the subsidiary or otherwise causes its
incorporation.
e. The subsidiary has grossly inadequate capital.
f. The parent corporation pays the salaries and other
expenses or losses of the subsidiary.
g. The subsidiary has substantially no business except
with the parent corporation or no assets except those
conveyed to or by the parent corporation.
h. In the papers of the parent corporation or in the
statements of its officers, the subsidiary is described
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
as a department or division of the parent corporation,
or its business or financial responsibility is referred to
as the parent corporation's own.
i. The parent corporation uses the property of the
subsidiary as its own.
j. The directors or executives of the subsidiary do not act
independently in the interest of the subsidiary but
take their orders from the parent corporation.
k. The formal legal requirements of the subsidiary are
not observed.
Elements:
The case of Concept Builders, Inc. v. NLRC laid the test in
determining the applicability of the doctrine of piercing the veil
of corporate fiction, to wit:
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 perpetuate the violation
of a statutory or other positive legal duty, or dishonest
and, unjust act in contravention of plaintiffs legal
rights; and
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained
of.
The absence of any one of these elements prevents piercing
the corporate veil.
Further, in applying the instrumentality" or alter ego doctrine,
the courts are concerned with reality and not form, with how
the corporation operated and the individual defendant's
relationship to the operation.
IN THE CASE AT BAR: Aside from the fact that PNB-IFL is a wholly
owned subsidiary of petitioner PNB, there is no showing of the
indicative factors that the subsidiary is a mere instrumentality of
the parent are present. Neither is there a demonstration that
any of the evils sought to be prevented by the doctrine of
piercing the corporate veil exists. Thus, the doctrine of piercing
the corporate veil based on the alter ego or instrumentality
doctrine finds no application in the case at bar.
NOTA BENE: Take note of the badges of control enumerated in this
case.
Q: Was there ground to pierce the corporate veil?
COMMISSIONER OF CUSTOMS V. OILINK
G.R. No. 161759 | July 2, 2014
FACTS: Union Refinery Corporation (URC) imported oil products
into the country. Oilink manufactures, imports, exports, buys,
sells or deals in oil and gas, and their refinements and by-
products at wholesale and retail of petroleum. URC and Oilink
had the same Board of Directors and Oilink is 100% owned by
URC.
Customs Commissioner Pedro C. Mendoza formally directed
that URC pay the amount of ₱119,223,541.71 representing
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26
URC’s special duties, VAT, and Excise Taxes. Upon his
assumption of office, Customs Commissioner Nelson Tan
transmitted another demand letter to URC the reduced
assessment of ₱99,216,580.10.
Manuel Co, URC’s President, conveyed willingness to pay only
₱94,216,580.10. Commissioner Tan made a final demand for the
total liability of ₱138,060,200.49 upon URC and Oilink. Oilink
formally protested the assessment on the ground that it was not
the party liable for the assessed deficiency taxes.
ISSUE: Whether or not it was proper to pierce the veil. – NO.
HELD: There was no ground to pierce the veil of corporate
existence.
The separate and distinct personality of the corporation is a
mere fiction established by law for convenience and to promote
the ends of justice.
In Philippine National Bank v. Ritratto Group, Inc., 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. Consequently, the absence of any
one of the foregoing elements disauthorizes the piercing of the
corporate veil.
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.
SUMMARY IN ALTER EGO CASES
Those whose acts and actuations directly violate this central
doctrines of Corporation Law makes themselves personally liable
for having themselves castaway the protective characteristic of
limited liability of the separate juridical personality.
Those who deal with the corporation are not also expected to be
bound by the separate juridical personality of the corporation, and
EDITORS: ALAG | JUNSAY
 27
BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022

may treat the interests of both the controlling stockholder or officer
and the corporation as the same.
Piercing in alter ego cases may prevail even when no monetary
claims are sought to be enforced against the stockholders or
officers of the corporation.
When the underlying business enterprise does not really change
and only the medium by which that business enterprise is changed,
then there would be occasion to pierce the veil of corporate fiction
to allow the business creditors to recover from whoever has actual
control of the business enterprise.
IAME filed a Motion to Lift or Remove the Annotations inscribed
in the TCT claiming that it has a separate and distinct personality
from Santos, hence its properties should not be made to answer
for the latter’s liabilities.
The MTC ordered for the cancellation of the annotation. The
same order was reversed by the RTC and on appeal to the CA, it
held that the RTC did not commit grave abuse of discretion when
it pierced the corporate veil of IAME.
The CA concluded that Santos merely used I/ AME as a shield to
protect his property from the coverage of the writ of execution;
therefore, piercing the veil of corporate fiction is proper.

PUBLIC CONVENIENCE OR EQUITY CASES ISSUE:

1. WON the piercing of the corporate veil may apply to
This is a catch-all. You have the case of A.D. Santos vs. Vasquez [22 Non-stock Corporations. – YES.
SCRA 1156] which is a claim for workmen compensation. This
piercing is more easily applicable in labor cases because Labor laws 2. WON piercing the corporate veil may apply to Natural
are tilted in favor of the laborers. Persons. – YES.

DISTINCTION OF FRAUD, ALTER EGO AND PUBLIC CONVENIENCE HELD:

1. I/AME argues that the doctrine of piercing the corporate veil
applies only to stock corporations, and not to non-stock,
PUBLIC
FRAUD ALTER EGO nonprofit corporations such as I/AME since there are no
CONVENIENCE
stockholders to hold liable in such a situation but instead only
As to APPLICABILITY
members. Hence, they do not have investments or shares of
Most restricted; Wider leeway in Most unwieldy;
stock or assets to answer for possible liabilities.
Must clearly be their applications
proven and even without Often are resorted
To this the Court agreed with the CA when it ruled that ruled
intending to do to as additional
that since the law does not make a distinction between a stock
malice or just be grounds
and non-stock corporation, neither should there be a distinction
being practical in (supportive roles)
in case the doctrine of piercing the veil of corporate fiction has
Note: Once proven, costing. in fraud and alter
to be applied. While I/AME is an educational institution, the CA
however, then ego cases
further ruled, it still is a registered corporation conducting its
there is no choice
affairs as such.
but to pierce the Note: Considered
corporate fiction. as a catch-all.
2. The petitioner also insists that the piercing of the corporate
veil cannot be applied to a natural person - in this case, Santos -
simply because as a human being, he has no corporate veil
EFFECT OF PIERCING IN ALL CASES shrouding or covering his person.

To make the active or intervening stockholder or officer liable for
corporate debts and obligations.
Q: Does piercing apply to non-stock corporations given that there
are no shares of stock, but rather just membership?
INTERNATIONAL ACADEMY AND ECONOMICS v. LITTON AND
COMPANY, INC.
G.R. No. 191525 | December 13, 2017 | Sereno, J.
FACTS: Atty. Santos is a lessee of two buildings owned by Litton
and he owed the latter rental arrears as well as his share of the
payment of realty taxes.
Litton filed a complaint for unlawful detainer against Santos
before the MeTC of Manila which ruled in favor of Litton and
ordered Santos to vacate the building and pay various sums of
money.
When the sheriff levied on a piece of real property registered in
the name of International Academy of Management and
Economics Incorporated (IAME) in order to execute the
judgment against Santos.
a) When the Corporation is the Alter Ego of a Natural Person
The doctrine of alter ego is based upon the misuse of a
corporation by an individual for wrongful or inequitable
purposes, and in such case the court merely disregards the
corporate entity and holds the individual responsible for acts
knowingly and intentionally done in the name of the
corporation.
This Court has held that the "corporate mask may be lifted and
the corporate veil may be pierced when a corporation is just but
the alter ego of a person or of another corporation. I/AME is the
alter ego of Santos and Santos - the natural person - is the alter
ego of I/AME. Santos falsely represented himself as President of
I/AME in the Deed of Absolute Sale when he bought the Makati
real property, at a time when I/AME had not yet existed.
There were also several uncontroverted facts showing IAME and
Santos as being one and the same person:
§ Santos is the conceptualizer and implementor of
IAME.
§ Santos is the majority contributor of IAME (1.2M out
of the 1.5M)
§ The building occupied by IAME is named after Santos

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BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
§ Santos made admissions in his pleadings that the
corporate entity is his alter ego
(b) Reverse Piercing of the Corporate Veil The Court discussed
that we borrow from American parlance what is called reverse
piercing or reverse corporate piercing or piercing the corporate
veil "in reverse.
The court cited a US Case:
In a traditional veil-piercing action, a court disregards the
existence of the corporate entity so a claimant can reach the
assets of a corporate insider. In a reverse piercing action,
however, the plaintiff seeks to reach the assets of a corporation
to satisfy claims against a corporate insider." "Reverse-piercing
flows in the opposite direction (of traditional corporate veil-
piercing and makes the corporation liable for the debt of the
shareholders.
It has two (2) types: outsider reverse piercing and insider reverse
piercing.
Outsider reverse piercing – occurs when a party with a claim
against an individual or corporation attempts to be repaid with
assets of a corporation owned or substantially controlled by the
defendant.
Insider reverse piercing – the controlling members will attempt
to ignore the corporate fiction in order to take advantage of a
benefit available to the corporation, such as an interest in a
lawsuit or protection of personal assets.
In this case, Outsider reverse piercing is applicable. Litton, as
judgment creditor, seeks the Court's intervention to pierce the
corporate veil of I/AME in order to make its Makati real property
answer for a judgment against Santos, who formerly owned and
still substantially controls I/AME.
The Court discussed that the equitable remedy of reverse
corporate piercing or reverse piercing is not meant to encourage
a creditor’s failure to undertake such remedies that could have
otherwise been available, to the detriment of other creditors.
Reverse corporate piercing is an equitable remedy which if
utilized cavalierly, may lead to disastrous consequences. The
Court discussed that it may have been possible for the Court to
recommend, pursuant to the Rules of Civil Procedure, that Litton
run after the other properties of Santos that could satisfy the
money judgment
However, if this were allowed, it would frustrate the decades old
yet valid MeTC judgment which levied on the real property now
titled under the name of the school. Moreover, this Court will
unwittingly condone the action of Santos in hiding all these
years behind the corporate form to evade paying his obligation
under the judgment in the court a quo. This we cannot
countenance without being a party to the injustice.
Thus, the reverse piercing of the corporate veil of I/AME to
enforce the levy on execution of the Makati real property where
the school now stands is applied.
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Q: What is “Reverse Piercing” of the Corporate Veil?
C.F. Trust, Inc., v. First Flight Limited Partnership (U.S. Case)
The plaintiff seeks to reach the assets of a corporation to satisfy
claims against a corporate insider.
Reverse Piercing flows in the opposite direction (of traditional
corporate veil-piercing) and makes the corporation liable for the
debt of the shareholders.
DISCUSSION:
The former Chief Justice actually applied a US concept of Reverse-
piercing. This is a novelty because in piercing, you are going to
pierce the corporate fiction of the corporation to go to the owner.
In Reverse-piercing, the owners are those that are indebted. You
are going to pierce that to get the assets of the corporation. That is
why it is called Reverse-piercing. This is a borrowed concept from
US Jurisprudence.
2 TYPES OF REVERSE PIERCING
1. Outsider Reverse Piercing – occurs when a party with a
claim against an individual or corporation attempts to be
repaid with assets of a corporation owned or
substantially controlled by the defendant.
Discussion: In other words, the shares of a shareholder,
owning a corporation, will be opened or scrutinized.
2. Insider Reverse Piercing – The controlling members will
attempt to ignore the corporate fiction in order to take
advantage of a benefit available to the corporation, such
as an interest in a lawsuit or protection of personal
assets.
ACREE v. MCMAHAN (U.S. Case)
Outsider reverse veil-piercing extends the traditional veil-
piercing doctrine to permit a third-party creditor to pierce the
veil to satisfy the debts of an individual out of the corporation’s
assets.
PALACIO v. FELY TRANSPORTATION CO.
The president and general manager of the private respondent
company formed the corporation to evade his subsidiary civil
liability resulting from the conviction of this driver who ran over
the child of the petitioner, causing injuries and medical
expenses.
The Court agreed with the plaintiffs that the president and
general manager, and Fely Transportation, may be regarded as
one and the same person.
REVERSE PIERCING
Reverse corporate piercing is an equitable remedy which if utilized
cavalierly, may lead to disastrous consequences for both stock and
non-stock corporations.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
Q: What are the 3 tests in alter ego in piercing?
A:
1. Instrumentality/Control Test
2. Fraud Test
3. Harm Test
MARICALUM MINING CORP. v. FLORENTINO
G.R. No. 221813, G.R. 222723| July 23, 2018
FACTS: Maricalum Mining was held to be a non-performing
asset thus it was sold by the National Government thru APT to G
Holdings (engaged in business of owning and holding shares of
stock of different companies). It then took possession of a
mining complex as well as its operations.
Sipalay Hospital was incorporated as well as 6 manpower
cooperatives to supply services to Maricalum. Maricalum then
wrote to these cooperatives that it would stop its mining and
milling operations in July 2001 to avert losses.
The employees of Maricalum Mining as well as the hospital filed
a labor case against G Holdings, its president, OIC, and the
cooperatives and officers for illegal dismissal among others.
There were claims that the manpower cooperatives were mere
alter egos of G Holdings organized to subvert the tenurial rights
of the complainants, and the G Holdings was their employer
because it had control and dismissal power.
G Holdings argued that piercing of Maricalum is not proper
because it did not acquire all assets, it is engaged in holding
shares not in participating, among others.
ISSUE: Is the piercing proper? – NO.
HELD:
Nature of a Holding Company
A parent or holding company is a corporation which owns or is
organized to own a substantial portion of another company's
voting shares of stock enough to control or influence the latter's
management, policies or affairs thru election of the latter's
board of directors or otherwise.
In other words, a "holding company" is organized and is basically
conducting its business by investing substantially in the equity
securities of another company for the purposes of controlling
their policies (as opposed to directly engaging in operating
activities) and "holding" them in a conglomerate or umbrella
structure along with other subsidiaries. Significantly, the holding
company itself-being a separate entity-does not own the assets
of and does not answer for the liabilities of the subsidiary or
affiliate.
The management of the subsidiary or affiliate still rests in the
hands of its own board of directors and corporate officers. It is
in keeping with the basic rule a corporation is a juridical entity
which is vested with a legal personality separate and distinct
from those acting for and in its behalf and, in general, from the
people comprising it. The corporate form was created to allow
shareholders to invest without incurring personal liability for the
acts of the corporation.
While the veil of corporate fiction may be pierced under certain
instances, mere ownership of a subsidiary does not justify the
imposition of liability on the parent company. It must further
appear that to recognize a parent and a subsidiary as separate
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29
entities would aid in the consummation of a wrong. Thus, a
holding corporation has a separate corporate existence and is to
be treated as a separate entity; unless the facts show that such
separate corporate existence is a mere sham, or has been used
as an instrument for concealing the truth.
Cited Doctrines
1. Elements of piercing the corporate veil (PNB v. Andrada
Electric)
2. Probative factors of identity (Concept Builders v. NLRC)
3. Probative factors that render subsidiary an instrumentality
(PNB v. Ritratto).
However, mere presence of control and full ownership of a
parent over a subsidiary is not enough to pierce the veil of
corporate fiction. It has been reiterated by this Court time and
again that mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the
separate corporate personality.
Totality of Circumstances Test for Fraud Test
G Holdings cannot be held liable for the satisfaction of
laborrelated claims against Maricalum Mining under the fraud
test because of the following:
[1] Transfer of asset was by virtue of a purchase and sale
agreement as part of the Governments measure to dispose non-
performing assets, thus it was not a fraudulent scheme;
GR: Settled is the rule that where one corporation sells or
otherwise transfers all its assets to another corporation for
value, the latter is not, by that fact alone, liable for the
debts and liabilities of the transferor.
XPN: Where the transaction is entered into fraudulently to
escape liability for such debts.
Besides, it is evident that the alleged continuing depletion of
Maricalum Mining's assets is due to its disgruntled employees'
own acts of pilferage, which was beyond the control of G
Holdings.
[2] It was not proven that all of Maricalum Mining’s assets were
transferred to G Holdings or were totally depleted.
[3] G Holdings purchased the Mining shares from APT not for the
purposes of continuing operations but for the purpose of
investing in the mining industry without having to directly
engage in the management and operation of mining.
[4] Lastly, no clear and convincing evidence was presented by
the complainants to conclusively prove the presence of fraud on
the part of G Holdings. Although the quantum of evidence
needed to establish a claim for illegal dismissal in labor cases is
substantial evidence, the quantum need to establish the
presence of fraud is clear and convincing evidence.
Here, the complainants did not satisfy the requisite
quantum of evidence to prove fraud on the part of G
Holdings. They merely offered allegations and suppositions
that, since Maricalum Mining's assets appear to be
continuously depleting and that the same corporation is a
subsidiary, G Holdings could have been guilty of fraud. As
emphasized earlier, bare allegations do not prove anything.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
Harm or Causal Connection Test
The control or breach of duty must proximately cause the injury
or unjust loss.
In the case at bench, complainants have not yet even suffered
any monetary injury. They have yet to enforce their claims
against Maricalum Mining. It is apparent that complainants are
merely anxious that their monetary awards will not be satisfied
because the assets of Maricalum Mining were allegedly
transferred surreptitiously to G Holdings.
However, as discussed earlier, since complainants failed to show
that G Holdings's mere exercise of control had a clear hand in
the depletion of Maricalum Mining's assets, no proximate cause
was successfully established. The transfer of assets was
pursuant to a valid and legal PSA between G Holdings and APT.
Conclusion
A holding company may be held liable for the acts of its
subsidiary only when it is adequately proven that:
a) there was control over the subsidiary;
b) such control was used to protect a fraud (or gross
negligence amounting to bad faith) or evade an
obligation; and
c) fraud was the proximate cause of another's existing
injury.
In this case, complainants have not successfully proven that G
Holdings fraudulently exercised its control over Maricalum
Mining to fraudulently evade any obligation. They also fell short
of proving that G Holdings had exercised operational control
over the employees of Sipalay Hospital.
Due to these findings, the Court sees no reversible error on the
part of the CA, which found no grave abuse of discretion and
affirmed in toto the factual findings and legal conclusions of the
NLRC.
“TOTALITY OF CIRCUMSTANCES TEST” (in aid of Fraud Test)
1. Comingling of funds and other assets of the corporation
with those of the individual shareholders;
2. Diversion of the corporation’s funds or assets to non-
corporate uses (to the personal uses of the corporation’s
shareholders);
3. Failure to maintain the corporate formalities necessary
for the issuance of or subscription to the corporation’s
stock, such as formal approval of the stock issue by the
board of directors;
4. An individual shareholder representing to persons
outside the corporation that he or she is personally liable
for the debts or other obligations of the corporation;
5. Failure to maintain corporate minutes or adequate
corporate records;
6. Identical equitable ownership in two entities;
7. Identity of the directors and officers of two entities who
are responsible for supervision and management (a
partnership or sole proprietorship and a corporation
owned and managed by the same parties);
8. Failure to adequately capitalize a corporation for the
reasonable risks of the corporate undertaking;
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30
9. Absence of separately held corporate assests;
10. Use of a corporation as a mere shell or conduit to operate
a single venture or some particular aspect of the business
of an individual or another corporation;
11. Sole ownership of all the stock by one individual or
members of a single family;
12. Use of the same office or business location by the
corporation and its individual shareholder(s);
13. Employment of the same employees or attorney by the
corporation and its shareholder(s);
14. Concealment or misrepresentation of the identity of the
ownership, management or financial interests in the
corporation, and concealment of personal business
activities of the shareholders (sole shareholders do not
reveal the association with a corporation, which makes
loans to them without adequate security);
15. Disregard of legal formalities and failure to maintain
proper arm’s length relationships among related entities;
16. Contracting by the corporation with another person with
the intent to avoid the risk of nonperformance by use of
the corporate entity; or the use of a corporation as a
subterfuge for illegal transactions; and
17. The formation and use of the corporation to assume the
existing liabilities of another person or entity.
“THE NELL DOCTRINE”
The granting to the corporate entity of a strong separate judicial
personality has been considered as the attribute or privilege most
characteristic of the corporation.
GR: Where one corporation sells or otherwise transfers all of its
assets to another corporation the latter is not liable for the debts
and liabilities of the transferor (Y-1 Leisure Phils., Inc., et al. v. Yu)
If it’s only the assets that are transferred, generally, the liabilities
are not included.
XPNS: Of course, we have exceptions:
1. Where the purchaser expressly or impliedly agrees to
assume such debts;
2. Where the transaction amounts to a consolidation or
merger of the corporations;
3. Where the purchasing corporation is merely a
continuation of the selling corporation; and (here, there
is piercing)
4. Where the transaction is entered into fraudulently in
order to escape liability for such debts.
If any of the above-cited exceptions are present, then the
transferee corporation shall assume the liabilities of the
transferor.
HARM OR CAUSAL CONNECTION TEST
The granting to the corporate entity a strong separate juridical
personality has been considered as the attribute or privilege most
characteristic of the corporation.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
NATIONALITY OF CORPORATIONS
We have several tests to know the personality of a corporation:
1. Incorporation Test – determined by the state of incorporation,
regardless of the nationality of the stockholders.
2. Domiciliary Test – determined by the principal place of
business of the corporation.
3. Control Test – determined by the nationality of the controlling
stockholders or members. This test is applied in times of war.
4. Grandfather Rule – nationality is attributed to the percentage
of equity in the corporation used in nationalized or partly
nationalized area.
TAKE NOTE:
GR: We adhere to the Incorporation Test that a corporation is a
creature of the State whose laws it has been created.
If it is incorporated in the Philippines, it is a domestic corporation.
If you are a corporation, it is always written there “duly established
and existing under the laws of the Republic of the Philippines” that
is tantamount to saying that that corporation is Filipino.
PURPOSE OF OTHER TESTS
Other tests such as the control test must be used for purposes of
compliance with the provisions of the Constitution and of other
laws on nationality requirements.
For example, the control test is used to determine the eligibility of
a corporation, which has foreign equity participation in its
ownership structure, to engage in nationalized or partly
nationalized activities.
DISCUSSION:
In other words, you use first the Incorporation Test. If incorporated
in the Philippines = domestic corporation. When do you use the
control test? – When the industry to which that corporation is
incorporating is nationalized or partly nationalized.
If the corporation is operating in an industry which is reserved for
Filipino citizens in an industry which are partly reserved for Filipino
citizens, that’s the time you use the Control Test.
If you are operating in an industry where there is no restriction, you
don’t use Control Test, just use Incorporation Test.
Where do we see the industries which are nationalized or partly
nationalized? We have Foreign Investment Negative List (FIN-L),
this is because of the mandate of the Foreign Investments Act. If
there’s foreign equity, and the corporation is nationalized or partly
nationalized, you use the Foreign Investments Act.
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31
FOREIGN INVESTMENT ACT
The provisions of FIA on nationality restrictions apply only to
nationalized or partly nationalized corporations, where the
control test should be used to determine the nationality of such
corporations. If not, then you only use the Incorporation Test.
“Philippine National”
Compliance with the required Filipino ownership of a corporation
shall be determined on the basis of outstanding capital stock
whether fully paid or not, but only such stocks which are generally
entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the
required Filipino equity.
Full beneficial ownership of the stocks, coupled with appropriate
voting rights is essential.
Thus, stocks, the voting rights of which have been assigned or
transferred to aliens cannot be considered held by Philippine
citizens or Philippine nationals.
Individuals or juridical entities not meeting the aforementioned
qualifications are considered as non-Philippine nationals.
When does the Control Test apply?
Article XII, Section 2. – xxx The State may directly undertake
such activities, or it may enter into co-production, joint venture,
or production-sharing agreements with Filipino citizens, or
corporations or associations at least sixty per centum of whose
capital is owned by such citizens. xxx
Article XII, Section 7. –Save in cases of hereditary succession, no
private lands shall be transferred or conveyed except to
individuals, corporations, or associations qualified to acquire or
hold lands of the public domain.
Are religious corporations exempt from the Constitutional
limitation on foreign ownership?
ROD OF RIZAL v. UNG SIU SI TEMPLE
97 PHIL 58
FACTS: The Register of Deeds of Rizal refused to accept for
record a deed of donation executed in due form by Jesus Dy, a
Filipino citizen, conveying a parcel of residential land in favor of
the unregistered religious organization “Ung Siu Si Temple”,
operating through three trustees all of Chinese nationality. The
donation was duly accepted by Yu Juan, of Chinese nationality,
founder and deaconess of the Temple, acting in representation
and in behalf of the latter and its trustees.
CFI upheld the action of the ROD Rizal. Its bases were sections 1
and 5 of Article XIII of the Constitution limiting the acquisition of
land in the Philippines to its citizens, or to corporations or
associations at least sixty per centum of the capital stock of
which is owned by such citizens adopted after the enactment of
Act No. 271, and the decision of the Supreme Court in the case
of Krivenko vs. the Register of Deeds of Manila, that the deed of
donation in question should not be admitted for registration.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
Not satisfied with the ruling of the CFI, counsel for the donee
Temple appealed, claiming: that the acquisition of the land in
question, for religious purposes, is authorized and permitted by
Act No. 271
ISSUE: Whether UNG SIU SI TEMPLE, a religious organization,
may be allowed to own properties. – NO.
HELD: In view of the absolute terms of Section 5, Tile XIII of the
Constitution, the provisions of Act No. 271 of the old Philippine
Commission must be deemed repealed since the Constitution
was enacted, in so far as incompatible therewith.
In providing that, — Save in cases of hereditary succession, no
private agricultural land shall be transferred or assigned except
to individuals, corporations or associations qualified to acquire
or hold lands of the public domain in the Philippines, the
Constitution makes no exception in favor of religious
associations.
Neither is there any such saving found in sections 1 and 2 of
Article XIII, restricting the acquisition of public agricultural lands
and other natural resources to "corporations or associations at
least sixty per centum of the capital of which is owned by such
citizens
The fact that the Temple has no capital stock does not suffice to
escape the Constitutional inhibition, since it is admitted that its
members are of foreign nationality. The purpose of the sixty per
centum requirement is obviously to ensure that corporations or
associations allowed to acquire agricultural land or to exploit
natural resources shall be controlled by Filipinos; and the spirit
of the Constitution demands that in the absence of capital stock,
the controlling membership should be composed of Filipino
citizens.
Moreover, to permit religious associations controlled by non-
Filipinos to acquire agricultural lands would be to drive the
opening wedge to revive alien religious land holdings in this
country.
Q: Are religious corporations exempt from the Constitutional
limitation on foreign ownership?
ROD RIZAL vs. UNG SUI SI TEMPLE
97 Phil. 58 (1955)
FACTS: The Register of Deeds for the province of Rizal refused to
accept for record a deed of donation executed in due form on
January 22, 1953, by Jesus Dy, a Filipino citizen, conveying a parcel
of residential land, in Caloocan, Rizal, known as lot No. 2, block 48-
D, PSD-4212, G.L.R.O. Record No. 11267, in favor of the
unregistered religious organization "Ung Siu Si Temple", operating
through three trustees all of Chinese nationality.
The donation was duly accepted by Yu Juan, of Chinese nationality,
founder and deaconess of the Temple, acting in representation and
in behalf of the latter and its trustees. The refusal of the Registrar
was elevated en Consultato the IVth Branch of the Court of First
Instance of Manila where the court ruled that:
It appearing from the record of the Consulta that UNG SIU SI
TEMPLE is a religious organization whose deaconess, founder,
trustees and administrator are all Chinese citizens, this Court
is of the opinion and so hold that in view of the provisions of
the sections 1 and 5 of Article XIII of the Constitution of the
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32
Philippines limiting the acquisition of land in the Philippines to
its citizens, or to corporations or associations at least sixty per
centum of the capital stock of which is owned by such citizens
adopted after the enactment of said Act No. 271, and the
decision of the Supreme Court in the case of Krivenko vs. the
Register of Deeds of Manila, the deed of donation in question
should not be admitted for admitted for registration.
ISSUE: Whether UNG SIU SI TEMPLE, a religious organization,
maybe allowed to own properties.
HELD: NO. – We are of the opinion that the Court below has
correctly held that in view of the absolute terms of Section 5, Title
XIII, of the Constitution, the provisions of Act No. 271 of the old
Philippine Commission must be deemed repealed since the
Constitution was enacted, in so far as incompatible therewith. In
providing that, —
Save in cases of hereditary succession, no private agricultural
land shall be transferred or assigned except to individuals,
corporations or associations qualified to acquire or hold lands
of the public domain in the Philippines, the Constitution makes
no exception in favor of religious associations. Neither is there
any such saving found in sections 1 and 2 of Article XIII,
restricting the acquisition of public agricultural lands and
other natural resources to "corporations or associations at
least sixty per centum of the capital of which is owned by such
citizens"(of the Philippines).
The fact that the appellant religious organization has no capital
stock does not suffice to escape the Constitutional inhibition, since
it is admitted that its members are of foreign nationality. The
purpose of the sixty per centum requirement is obviously to ensure
that corporations or associations allowed to acquire agricultural
land or to exploit natural resources shall be controlled by Filipinos;
and the spirit of the Constitution demands that in the absence of
capital stock, the controlling membership should be composed of
Filipino citizens.
To permit religious associations controlled by non-Filipinos to
acquire agricultural lands would be to drive the opening wedge to
revive alien religious land holdings in this country. We cannot
ignore the historical fact that complaints against land holdings of
that kind were among the factors that sparked the revolution of
1896.
The fact that the religious organization has no capital stock does
not suffice to escape the Constitutional inhibition, since it is
admitted that its members are of foreign nationality.
DISCUSSION:
This is an example wherein the (real?) property has to have 60%
Filipino per corporation.
PUBLIC UTILITIES
FRANCHISES
Section 11, Article XII of the Constitution provides:
No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of
the Philippines or to corporations or associations organized under
the laws of the Philippines, at least sixty per centum of whose
capital is owned by such citizens; nor shall such franchise,
EDITORS: ALAG | JUNSAY
 33
BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022

certificate, or authorization be exclusive in character or for a longer Private respondent EDSA LRT Corporation, Ltd. to whom the
period than fifty years. contract to construct the EDSA LRT III was awarded by public
respondent, is admittedly a foreign corporation "duly incorporated
Unlike the provisions on the exploitation of natural resources, the and existing under the laws of Hongkong" (Rollo, pp. 50, 79).
provision cites the Incorporation Test (organized under the laws of
the Philippines). There is also no dispute that once the EDSA LRT III is constructed,
private respondent, as lessor, will turn it over to DOTC, as lessee,
This provision requires that only domestic corporations with at for the latter to operate the system and pay rentals for said use.
least 60% of the capital stock owned by Filipinos, may own and What EDSA LRT Corp. owns are the rail tracks, rolling stocks like the
operate public utilities in the Philippines. coaches, rail stations, terminals and the power plant, not a public
- (Taken from the previous TSN) utility. While a franchise is needed to operate these facilities to
serve the public, they do not by themselves constitute a public
Q: Does the fact that the assets are owned by a foreign owned utility.
corporation does that violate Section 11 Article XII of the
Constitution? What constitutes a public utility is not their ownership but their
use to serve the public.
OPERATION OF PUBLIC UTILITY vs. OWNERSHIP OF FRANCHISE
Section 11 Article XII of the Constitution, in no uncertain terms,
requires a franchise for the operation of a public utility. However,
TATAD vs. GARCIA, JR.
it does not require a franchise before one can own the facilities
243 SCRA 436 (1995)
needed to operate a public utility so long as it does not operate
them to serve the public.
FACTS: PETs Francisco S. Tatad, John H. Osmena, and Rodolfo G.
Biazon are members of the Philippine Senate and are suing in their
In law, there is a clear distinction between the "operation" of a
capacities as Senators and as taxpayers. RESPO Jesus B. Garcia, Jr.
public utility and the ownership of the facilities and equipment used
is the incumbent Secretary of the DOTC, while private RESPO EDSA
to serve the public.
LRT Corporation, Ltd. is a private corporation organized under the
laws of Hongkong.
Ownership is defined as a relation in law by virtue of which a thing
pertaining to one person is completely subjected to his will in
In 1989, DOTC planned to construct a light railway transit line along
everything not prohibited by law or the concurrence with the rights
EDSA, referred to as EDSA Light Rail Transit III (EDSA LRT III). DOTC
of another.
created a committee which issued guidelines for the
prequalification of contractors for the financing and
The right to operate a public utility may exist independently and
implementation of the LRT project. Five groups responded to the
separately from the ownership of the facilities thereof.
invitation among which was EDSA LRT Consortium, composed of
ten foreign and domestic corporations.
One can own said facilities without operating them as a public
utility, or conversely, one may operate a public utility without
The DOTC Sec Prado recommended the award of the EDSA LRT III
owning the facilities used to serve the public. The devotion of
project to the sole complying bidder, the EDSA LRT Consortium
property to serve the public may be done by the owner or by the
which was substituted by EDSA LRT Corporation, Ltd.
person in control thereof who may not necessarily be the owner
thereof.
THE AGREEMENT:
● EDSA LRT Corporation, Ltd. shall undertake and finance
This dichotomy between the operation of a public utility and the
the entire project required for a complete operational
ownership of the facilities used to serve the public can be very well
light rail transit system within 3 years
appreciated when we consider the transportation industry.
● Upon full or partial completion and viability thereof,
Enfranchised airline and shipping companies may lease their
EDSA LRT Corporation, Ltd shall deliver the use and
aircraft and vessels instead of owning them themselves.
possession of the completed portion to DOTC which shall
While private respondent is the owner of the facilities necessary to
operate the same
operate the EDSA. LRT III, it admits that it is not enfranchised to
● DOTC shall pay EDSA LRT Corporation, Ltd rentals on a
operate a public utility (Revised and Restated Agreement, Sec. 3.2;
monthly basis
Rollo, p. 57).
● After 25 years and DOTC shall have completed payment
of the rentals, ownership of the project shall be
In view of this incapacity, private respondent and DOTC agreed
transferred to the latter for a consideration of only U.S.
that on completion date, private respondent will immediately
$1.00
deliver possession of the LRT system by way of lease for 25 years,
during which period DOTC shall operate the same as a common
Sen. Tatad et al’s is opposing the agreement and contended that
carrier and private respondent shall provide technical maintenance
the EDSA LRT III is a public utility, and the ownership and operation
and repair services to DOTC.
thereof is limited by the Constitution to Filipino citizens and
domestic corporations, not foreign corporations like EDSA LRT
Indeed, a mere owner and lessor of the facilities used by a public
Corporation, Ltd.
utility is not a public utility.
ISSUE: Whether EDSA LRT Corp, a foreign owned corporation, can
Even the mere formation of a public utility corporation does not
own a public utility.
ipso facto characterize the corporation as one operating a public
utility. The moment for determining the requisite Filipino
RULING: NO.

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nationality is when the entity applies for a franchise, certificate or
any other form of authorization for that purpose.
The right to operate a public utility may exist independently and
separately from the ownership of the facilities thereof.
Even the mere formation of a public utility corporation does not
ipso facto characterize the corporation as one operating a public
utility.
The moment for determining the requisite Filipino nationality is
when the entity applies for a franchise, certificate or any other form
of authorization for that purpose. (People vs Quasha, 93 Phil. 333)
DISCUSSION:
This is the difference between ownership and operation. What is
only proscribed under the Constitution is the operation of a public
utility.
Ownership of public utilities is possible. It is still allowed even if the
owner of the assets is not compliant with the sixty percent (60%)
rule. Just remember that the operation or the franchise should be
given to corporations – sixty percent (60%) of whose capital, is
owned by Filipino citizens.
(Taken from the previous tsn)
MASS MEDIA
Section 11 (1), Article XVI of the Constitution provides:
The ownership and management of mass media shall be limited to
citizens of the Philippines, or to corporations, cooperatives or
associations, wholly-owned and managed by such citizens.
The Congress shall regulate or prohibit monopolies in commercial
mass media when the public interest so requires. No combination
in restraint of trade or unfair competition therein shall be allowed.
(2) The advertising industry is impressed with public interest and
shall be regulated by law for the protection of consumers and the
promotion of general welfare.
For Mass Media, only Filipino citizens or corporations or
associations at least seventy per centum of the capital of which is
owned by such citizens shall be allowed to engage in the advertising
agency.
Note: The ancillary control test is more stringent since it requires
not only 100% Filipino Ownership but also 100% Filipino
Management of the entity. (Taken from the previous tsn)
Q: What do we mean by “Mass Media”?
IN RE: RAPPLER INC.
SEC Ruling January 11, 2018
FACTS: Rappler, Inc. is a domestic stock corporation with primary
purpose to design, develop, establish, market, sell, maintain,
support, distribute, customize, sell, resell and/or operate news,
information, and social network services. Rappler Holdings
Corporation is a domestic stock corporation registered which
presently owns 98.84% of Rappler, Inc.
On Dec 22, 2016, SEC En Banc received a letter from office of
Solicitor General requesting an investigation into Rappler, Inc. and
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Rappler Holdings Corp for any contravention of the strict
requirements of the 1987 Constitution.
RHC issued Philippine Depositary Receipts (PDR) to North Base
Media (NBM) and Omidyar Network (ON). The ON PDRs contain a
provision wherein Rappler is required to seek approval from ON
PDRs holders on corporate matters:
12.2.2. not to, without prior good faith discussion with on PDR
Holders and without the approval of PDR Holders
ISSUE/S:
1. Whether or not Rappler, Inc. is engaged in Mass media. – YES.
2. Whether or not Rappler Inc is controlled by foreigners. – YES
RULING #1: Rappler fits the description Mass Media.
The term mass media was not further defined in the Constitution
itself, evidently to adapt to changing times and to new technologies
that may arise after 1987. Precisely to adapt to changing times,
wide discretion has been given to the legislature and to
administrative agencies. Today’s legislature considers internet or
online media a type of Mass Media. The Commission, an
administrative agency, has followed the lead of the legislature and
considers internet or online media as Mass Media and subject to
the Foreign Equity Restrictions of the Constitution.
Mass Media refers to any medium of communication designed to
reach the masses and that tends to set the standards, ideals and
aims of the masses the distinctive features of which is the
dissemination of information and ideas to the public or a portion
thereof. The citizenship requirement is intended to prevent the use
of such facilities by aliens to influence public opinion to the
detriment of the best interest of the nation.
Mass media – refers to any medium of communication designed to
reach a mass of people. For this purpose, mass media includes print
media such as but not limited to, newspapers, magazines, and
publications; broadcast media such as but not limited to, radio,
television, cable television, and cinema; electronic media such as
but not limited to the internet [Tobacco Regulation Act of 2003]
What matters to the commission in determining what is mass
media is the transmission of information to the masses through any
medium of communication which includes technologies that were
not present at the time the Constitution was drafted but are
nonetheless embraced by the spirit and intent of the law which is
to prevent foreigners from wielding influence over the minds of the
Filipino people.
RULING #2: Reasonable person who read Paragraph 12.2.2 of the
ON PDR would agree that there is some control – definitely not zero
– granted to the foreign holder.
It clearly says that when a corporate action would affect the PDR
holders, the stockholders must consult the ON PDR holders and
obtain their approval. Thus, there is substantial evidence of a
violation of the Foreign Equity Restriction.
Article XVI, Section 11 (1) of the Constitution provides that:
“The ownership and management of mass media shall be
limited to citizens of the Philippines, or to corporations,
cooperatives, or associations, wholly-owned and managed by
such citizens. xxx”
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Section 2 of PD 1018, Limiting the Ownership and Management of
Mass Media to Citizens of the Philippines (in relation to the
sanctions under Section 6 (i) of PD 902-A, as amended and Section
5.1 (f) of the Securities Regulation Code, similarly provides that:
“The ownership and management of mass media shall be limited to
citizens of the Philippines, or to corporations or associations wholly
owned and management by such citizens.”
Thus, the ON PDR imposes obligations not just on the Issuer of the
derivative, RHC, but also on the Company which issued the
underlying shares, Rappler, Inc. The ON PDR instrument may be
categorized as an equity derivative, since its value is dependent on
the underlying equity. It follows that legal and economic rights
granted to the ON PDR Holders can be traced back to the legal and
economic rights originally reserved to the shareholders.
Rule 3.1.8.2 of the 2015 Implementing Rules and Regulations of
the Securities Regulation Code adds that Control exists whenever
one entity has the power “to govern the financial and operating
policies of another entity under a statute or agreement.”
This would be true even if the controlling entity does not own any
equity, such as through agreements (e.g. derivatives based on
underlying equity that grant influence in corporate matters.
As can be gleaned from the 2015 Implementing Rules and
Regulations of the Securities Regulation Doce, the Commission’s
definition of “control” is neither limited to stock ownership nor to
management in the board, but rather embraces a broad range of
schemes that grant influence over corporate policy.
DISCUSSION:
Again, if you try to look at it, the reason for this is that in the Revised
Corporation Code, the SEC had a very lenient approach in order to
help corporations comply. Revocation is the last resort. That is why
this has become an issue because in this case, they were strict.
Really, there were political colors in it; it is not strictly by the letters
of the law. There are things that were treated differently.
WARTIME TEST
We have this very old case which we are not going to discuss
anymore.
DAVIS WINSHIP v. PHILIPPINE TRUST CO.
90 Phil 744 | G.R. No. L-3869 | January 31, 1952
DOCTRINE: The nationality of a private corporation is
determined by the character or citizenship of its controlling
stockholders; and this pronouncement is of course decisive as to
the hostile character of the Eastern Isles, Inc., as far as the
Japanese Military Administration was concerned, it being
conceded that the controlling stockholders of said corporations
were American citizens.
FACTS: Prior to December, 1941, Eastern Isles Import
corporation (EIIC) and Eastern Isles, Inc.,(EII) organized under
the laws of the Philippines, all of the capital stock of which is
owned by American citizens, except one share with a par value
of P100 in the name of Antonia Sevilla and one share with a par
value of P100 in the name of Edmund A. Schwesinger, had a
current account deposit with the Philippine Trust Company
(PTC), and as of December 29, 1941, the balance was P51,410.91
and one share with a par value of P100 in the name of F.
Capistrano, had a current account deposit with the Philippine
Trust Company, and as of December 29, 1941, the balance was
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P34,827.74. The Eastern Isles, Incorporated made a withdrawal
of P204.37 which was debited to said account on June 10, 1942,
respectively.
October 4, 1943, the Japanese Military Administration in the
Philippines issued an order requiring all deposit accounts of the
hostile people (including corporations) to be transferred to the
Bank of Taiwan, as the depository of the Japanese Military
Administration, which order the PTC was specifically directed to
comply with.
September 29, 1944, PTC transferred and paid the credit
balances of the current account deposits of the Eastern Isles
Import Corporation and of the Eastern Isles, Inc. to the Bank of
Taiwan.
The Eastern Isles Import Corporation and of the Eastern Isles,
Inc. were subsequently transferred to S. Davis Winship who, on
August 12, 1947, presented to the PTC Checks Nos. A-79212 and
H-579401 covering the aforesaid deposits.
The PTC, however, refused to pay said checks.
September 6, 1947, S. Davis Winship instituted the present
action to recover the sum of P51,410.91 (first cause of action)
and the sum of P34,827.74 (second cause of action).
ISSUE: W/N the transfer made by PTC to the Bank of Taiwan was
valid. – YES.
HELD:
On Nationality
In Filipinas Compañia de Seguros vs. Christern Henefeld and Co.,
Inc., the nationality of a private corporation is determined by the
character or citizenship of its controlling stockholders; and this
pronouncement is of course decisive as to the hostile character
of the Eastern Isles, Inc., as far as the Japanese Military
Administration was concerned, it being conceded that the
controlling stockholders of said corporations were American
citizens.
As it has been stipulated by the parties that the defendant
transferred the deposits in question to the Bank of Taiwan in
compliance with the order of the Japanese Military
Administration, the defendant was released from any obligation
to the depositors or their transferee (S. Davis).
GRANDFATHER RULE
At this point, we already know about the incorporation test. For the
control test, we only apply it to an industry which is nationalized or
partly nationalized.
NARRA NICKEL MINING AND DEV’T CORP. v. REDMONT
CONSOLIDATED MINES CORP.
748 SCRA 455 | G.R. No. 195580 | January 28, 2015
DOCTRINE: It is only when the Control Test is first complied with
that the Grandfather Rule may be applied.
FACTS: Redmont Consolidated Mines Corp., a domestic
corporation organized and existing under Philippine laws, took
interest in mining and exploring certain areas of the province of
Palawan. After inquiring with the DENR, it learned that the areas
where it wanted to undertake exploration and mining activities
where already covered by Mineral Production Sharing
Agreement (MPSA) applications of Narra, Tesoro and McArthur.
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Redmont alleged that at least 60% of the capital stock of
McArthur, Tesoro and Narra are owned and controlled by MBMI
Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont
argued that given that petitioners’ capital stocks were mostly
owned by MBMI, they were likewise disqualified from engaging
in mining activities through MPSAs, which are reserved only for
Filipino citizens. To petitioners, the Court’s application of the
Grandfather Rule to determine their nationality is erroneous
and allegedly without basis in the Constitution, the Foreign
Investments Act of 1991 (FIA), the Philippine Mining Act of 1995,
and the Rules issued by the Securities and Exchange Commission
(SEC). These laws and rules supposedly espouse the application
of the Control Test in verifying the Philippine nationality of
corporate entities for purposes of determining compliance with
Sec. 2, Art. XII of the Constitution that only "corporations or
associations at least sixty per centum of whose capital is owned
by such [Filipino] citizens" may enjoy certain rights and
privileges, like the exploration and development of natural
resources.
ISSUE: W/N the grandfather rule was properly applied. – YES.
HELD: Defined by Dean Cesar Villanueva, the Grandfather Rule
is “the method by which the percentage of Filipino equity in a
corporation engaged in nationalized and/or partly nationalized
areas of activities, provided for under the Constitution and other
nationalization laws, is computed, in cases where corporate
shareholders are present, by attributing the nationality of the
second or even subsequent tier of ownership to determine the
nationality of the corporate shareholder."
Thus, to arrive at the actual Filipino ownership and control in a
corporation, both the direct and indirect shareholdings in the
corporation are determined.
BENEFICIAL OWNERSHIP
The method employed in the Grandfather Rule of attributing the
shareholdings of a given corporate shareholder to the second or
even the subsequent tier of ownership hews with the rule that
the “beneficial ownership” of corporations engaged in
nationalized activities must reside in the hands of Filipino
citizens.
That beneficial ownership of the right to dispose, exploit, utilize,
and develop natural resources shall pertain to Filipino citizens,
and that the nationality requirement is not satisfied unless
Filipinos are the principal beneficiaries in the exploitation of the
country’s natural resources.
The application of the Grandfather Rule in the present case
does not eschew the Control Test. The “control test” is still the
prevailing mode of determining whether or not a corporation is
a Filipino corporation, within the ambit of Sec. 2, Art. XII of the
1987 Constitution. When there is doubt, based on the attendant
facts and circumstances of the case, in the 60-40 Filipino equity
ownership in the corporation, then it may apply the
"grandfather rule."
Application of the Grandfather Rule with the Control Test
The Control Test can be applied jointly with the Grandfather
Rule to determine the observance of foreign ownership
restriction in nationalized economic activities. The Control Test
and the Grandfather Rule are not incompatible ownership-
determinant methods that can only be applied alternative to
each other. Rather, these methods can, if appropriate, be used
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cumulatively in the determination of the ownership and control
of corporations engaged in fully or partly nationalized activities,
as the mining operation involved in this case.
The Grandfather Rule, standing alone, should not be used to
determine the Filipino ownership and control in a corporation,
as it could result in an otherwise foreign corporation rendered
qualified to perform nationalized or partly nationalized
activities.
GUIDELINES
1. If the subject corporation’s Filipino equity falls below the
threshold 60%, the corporation is immediately considered
foreign-owned, in which case, the need to resort to the
Grandfather Rule disappears.
2. A corporation that complies with the 60-40 Filipino to
foreign equity requirement can be considered a Filipino
corporation if there is no doubt as to who has the
"beneficial ownership" and "control" of the corporation. In
that instance, there is no need for a dissection or further
inquiry on the ownership of the corporate shareholders.
3. Even if the 60-40 Filipino to foreign equity ratio is
apparently met by the subject or investee corporation, a
resort to the Grandfather Rule is necessary if doubt exists
as to the locus of the “beneficial ownership” and “control”.
MEANING OF “DOUBT”
“Doubt” refers to various indicia that the “beneficial ownership”
and “control” of the corporation do not in fact reside in Filipino
shareholders but in foreign stakeholders. The indicators are:
1. That the foreign investors provide practically all the funds
for the joint investment undertaken by these Filipino
businessmen and their foreign partner;
2. That the foreign investors undertake to provide practically
all the technological support for the joint venture;
3. That the foreign investors, while being minority
stockholders, manage the company and prepare all
economic viability studies.
IN THE CASE AT BAR
At first glance the petitioners complied with the 60-40 Filipino
to foreign equity ratio, but there is doubt as to the actual extent
of the participation of MBMI in the equity of the petitioners and
their investing corporations. The Court applied the Grandfather
rule.
Tesoro
Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara
Marie) holds 59.97% of the 10,000 common shares of petitioner
Tesoro while the Canadian-owned company, MBMI, holds
39.98% of its shares.
In turn, the Filipino corporation Olympic Mines & Development
Corp. (Olympic) holds 66.63% of Sara Marie’s shares while the
same Canadian company MBMI holds 33.31% of Sara Marie’s
shares. Nonetheless, it is admitted that Olympic did not pay a
single peso for its shares. On the contrary, MBMI paid for 99%
of the paid-up capital of Sara Marie.
The fact that MBMI had practically provided all the funds in Sara
Marie and Tesoro creates serious doubt as to the true extent of
its (MBMI) control and ownership over both Sara Marie and
Tesoro since, as observed by the SEC, “a reasonable investor
would expect to have greater control and economic rights than
other investors who invested less capital than him.” The
application of the Grandfather Rule is clearly called for, and as
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shown below, the Filipinos’ control and economic benefits in
petitioner Tesoro (through Sara Marie) fall below the threshold
60%.
Filipino participation in petitioner Tesoro: 40.01%
Foreign participation in petitioner Tesoro: 59.99%
With only 40.01% Filipino ownership in petitioner Tesoro, as
compared to 59.99% foreign ownership of its shares, it is clear
that petitioner Tesoro does not comply with the minimum
Filipino equity requirement imposed in Sec. 2, Art. XII of the
Constitution. Hence, the appellate court’s observation that
Tesoro is a foreign corporation not entitled to an MPSA is apt.
McArthur
As with petitioner Tesoro, with only 40.01% Filipino ownership
in petitioner McArthur, as compared to 59.99% foreign
ownership of its shares, it is clear that petitioner McArthur does
not comply with the minimum Filipino equity requirement
imposed in Sec. 2, Art. XII of the Constitution.
Narra
With 60.36% foreign ownership in petitioner Narra, as
compared to only 39.64% Filipino ownership of its shares, it is
clear that petitioner Narra does not comply with the minimum
Filipino equity requirement imposed in Section 2, Article XII of
the Constitution.
LIMIT AS TO THE NUMBER OF CORPORATE LAYERS MAY THE
GRANDFATHER RULE BE APPLIED
The SEC had already set up a limit. In a 1977 internal
memorandum, the SEC suggested applying the Grandfather Rule
on two (2) levels of corporate relations for publicly-held
corporations or where the shares are traded in the stock
exchanges, and to three (3) levels for closely held corporations
or the shares of which are not traded in the stock exchanges.
These limits comply with the requirement in Palting v. San Jose
Petroleum, Inc. that the application of the Grandfather Rule
cannot go beyond the level of what is reasonable.
DISCUSSION:
Again, let us go back to what we have learned:
1. Incorporation Test, passed.
2. If the industry is nationalized or partly nationalized. How
do you determine? You go to the Foreign Investments
Act. The government issues every six or three years a FINL
or negative list.
a. If not listed, then incorporation test is enough.
b. If listed, look at control test.
3. Control Test
4. Grandfather Rule, when there is doubt after using the
control test.
Example: When 40% is actually owned by another
corporation, it actually casts doubt. That is the time when you
use the rule. You go to the “grandfather”, after the “son” and
“father”.
The case of Narra Nickel is instructive. It says here:
If 100,000 shares are registered in the name of a corporation
or partnership at least 60% of the capital stock or capital,
respectively, of which belong to Filipino citizens, all of said
shares shall be recorded as owned by Filipinos.
But if less than 60%, or, say, only 50% of the capital stock or
capital belong to Filipino citizens, only 50,000 shares shall be
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counted as owned by Filipinos and the other 50,000 shares
shall be recorded belonging to aliens. (DOJ Opinion No. 025, s.
2008 [April 17, 2008])
DOMESTIC CORPORATIONS AS "DUMMIES" OF FOREIGN
CORPORATIONS
1. That the foreign investors provide practically all the funds for
the joint investment undertaken by these Filipino
businessmen and their foreign partner;
2. That the foreign investors undertake to provide practically all
the technological support for the joint venture;
3. That the foreign investors, while being minority stockholders,
manage the company and prepare all economic viability
studies.
Now, what is your basis in determining the 60% or 40%? What is
written in the law is only the “capital”. What consists of the word
“capital”? You already know that we have different types of capital
– authorized capital, subscribed capital, paid-up capital. The Court
has been flip-flopping in its decision in determining what the capital
is. Does it consist only of the voting shares, or does it also involve
the non-voting shares?
GAMBOA v. TEVES
652 SCRA 690| June 28, 2011
DOCTRINE: The legal and beneficial ownership of 60% of the
outstanding capital stock must rest in the hands of Filipino
nationals in accordance with the constitutional mandate.
Otherwise, the corporation is considered as non-Philippine
national[s].
FACTS: GTE sold 26% of its outstanding common shares in PLDT
to Phil. Telecommunications Investment Corp (PTIC).
Subsequently, Prime Holdings, Inc. (PHI) became the owner of
111,415 shares of PTIC (46.125% of the outstanding capital stock
of PTIC), which was later on sequestered by PCGG and declared
to be owned by the RP of PH.
First Pacific, a Bermuda-registered, Hong Kong-based
investment firm, acquired the remaining 54% of the outstanding
capital stock of PTIC.
The 111,415 shares held by the government was auctioned. First
Pacific acquired such shares.
Petitioner Wilson Gamboa, a stockholder of PLDT alleges that
since PTIC is a stockholder of PLDT, the sale of the 46.125%
shares of PTIC is actually an indirect sale of 12M shares or about
6.3% of the outstanding common shares of PLDT. With the sale,
First Pacific’s common shareholdings in PLDT increased from
30.7% to 37%, thereby increasing the common shareholdings of
foreigners in PLDT to about 81.47%. This violates the provision
on the Constitution which limits foreign ownership of the capital
of a public utility to not more than 40%.
Respondents on the other hand, do not offer any definition of
the term “capital” in Section 11, Article XII of the Constitution.
More importantly, private respondents Nazareno (Pres.) and
Pangilinan (Managing Director) of PLDT do not dispute that
more than 40% of the common shares of PLDT are held by
foreigners.
While Nazareno does not introduce any definition of the term
“capital,” he states that “among the factual assertions that need
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to be established to counter petitioner’s allegations is the
uniform interpretation by government agencies (such as the
SEC), institutions and corporations (such as the Philippine
National Oil Company-Energy Development Corporation or
PNOC-EDC) of including both preferred shares and common
shares in “controlling interest” in view of testing compliance
with the 40% constitutional limitation on foreign ownership in
public utilities.
ISSUE: Does the term “capital” in Section 11, Article XII of the
Constitution refer to the total common shares only, or to the
total outstanding capital stock (combined total of common and
non-voting preferred shares) of PLDT, a public utility? –
COMMON SHARES ONLY.
HELD: In the earlier case of Fernandez v. Cojuangco, it was
explained that:
The forty percent (40%) foreign equity limitation in public
utilities prescribed by the Constitution refers to ownership of
shares of stock entitled to vote, i.e., common shares,
considering that it is through voting that control is being
exercised. x x x
Obviously, the intent of the framers of the Constitution in
imposing limitations and restrictions on fully nationalized and
partially nationalized activities is for Filipino nationals to be
always in control of the corporation undertaking said activities.
Otherwise, if the Trial Court’s ruling upholding respondents’
arguments were to be u Following the Trial Court’s ruling
adopting respondents’ arguments, the common shares can be
owned entirely by foreigners thus creating an absurd situation
wherein foreigners, who are supposed to be minority
shareholders, control the public utility corporation.
xxxx
Thus, the 40% foreign ownership limitation should be
interpreted to apply to both the beneficial ownership and the
controlling interest. x x x x
Clearly, therefore, the forty percent (40%) foreign equity
limitation in public utilities prescribed by the Constitution refers
to ownership of shares of stock entitled to vote, i.e., common
shares.
Indisputably, one of the rights of a stockholder is the right to
participate in the control or management of the corporation.
This is exercised through his vote in the election of directors
because it is the board of directors that controls or manages the
corporation. In the absence of provisions in the articles of
incorporation denying voting rights to preferred shares,
preferred shares have the same voting rights as common shares.
However, preferred shareholders are often excluded from any
control, that is, deprived of the right to vote in the election of
directors and on other matters, on the theory that the preferred
shareholders are merely investors in the corporation for income
in the same manner as bondholders. In fact, under the
Corporation Code only preferred or redeemable shares can be
deprived of the right to vote. Common shares cannot be
deprived of the right to vote in any corporate meeting, and any
provision in the articles of incorporation restricting the right of
common shareholders to vote is invalid. Considering that
common shares have voting rights which translate to control, as
opposed to preferred shares which usually have no voting rights,
the term "capital" in Section 11, Article XII of the Constitution
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refers only to common shares. However, if the preferred shares
also have the right to vote in the election of directors, then the
term "capital" shall include such preferred shares because the
right to participate in the control or management of the
corporation is exercised through the right to vote in the election
of directors. In short, the term "capital" in Section 11, Article XII
of the Constitution refers only to shares of stock that can vote in
the election of directors.
Illustration of the glaring anomaly in giving a broad definition to
the term “capital”: Let us assume that a corporation has 100
common shares owned by foreigners and 1,000,000 non-voting
preferred shares owned by Filipinos, with both classes of share
having a par value of one peso (₱1.00) per share. Under the
broad definition of the term "capital," such corporation would
be considered compliant with the 40% constitutional limit on
foreign equity of public utilities since the overwhelming
majority, or more than 99.999 percent, of the total outstanding
capital stock is Filipino owned. This is obviously absurd.
In the example given, only the foreigners holding the common
shares have voting rights in the election of directors, even if they
hold only 100 shares. The foreigners, with a minuscule equity of
less than 0.001 percent, exercise control over the public utility.
On the other hand, the Filipinos, holding more than 99.999
percent of the equity, cannot vote in the election of directors
and hence, have no control over the public utility. This starkly
circumvents the clear language of the Constitution, to place the
control of public utilities in the hands of Filipinos. It also renders
illusory the State policy of an independent national economy
effectively controlled by Filipinos.
Q: How many classifications does PLDT have in terms of shares?
A: Two: common and preferred shares.
Q: Why is the issue only, ‘whether or not the term capital refers
only to common shares?’ Why are preferred shares not included in
this PLDT case?
A: It is because, by common shares, the common shareholders
exercise voting rights. Meanwhile, preferred shareholders cannot
vote.
Q: In this 2011 case, is it accurate to say that the term ‘capital’
only involves common shares?
A: No. The term ‘capital’ involves those shares of stock that allow
shareholders to vote in the election of directors. If the preferred
shareholders are given the right to vote, those shares can be
included in the term ‘capital.’
DISCUSSION:
In 2012, the Court changed its ruling saying that, it is not only
applicable to voting or shares of voting right but to each
classification of shares it must be 60-40. This is because even if you
are a preferred shareholder with no voting rights, there are certain
corporate action that requires also the concurrence of those
holders with preferred shares without voting rights.
In those particular actions, there is still a vote coming from
preferred shareholders without voting rights. For example,
amendments of Articles of Corporation. Those are things that are
major decisions that could also affect if a foreigner is seating or
having rights by using voting shares even if he does not really have
a voting share (he only has preferred shares). You go on that, what
are the particular actions of the corporations that requires the
concurrence of preferred shares even if without voting rights. That
is the case of Gamboa vs Teves.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
SEC. MEMORAMDUM CIRCULAR NO. 08-13
Guidelines on Compliance with the Filipino-Foreign Ownership
Requirements Prescribed in the Constitution and/or Laws (May 20,
2013).
DISCUSSION:
The SEC circularized the decision of the Supreme Court in Gamboa
vs Teves issuing the SEC Memorandum 08-13.
SEC. 1 of SEC MEMO 08-13: This Circular shall apply to all
corporations (“covered corporations”) engaged in identified
areas of activities or enterprises specifically reserved, wholly or
partly, to Philippine Nationals by the Constitution, the FIA and
other existing laws, amendments thereto and IRRs of said laws,
except as may otherwise be provided therein.
SEC. 2 of SEC MEMO 08-13: All covered corporations shall, at all
times, observe the constitutional or statutory ownership
requirement.
For purposes of determining compliance therewith, the
required percentage of Filipino ownership shall be applied to
BOTH:
(a) the total number of outstanding shares of stock
entitled to vote in the election of directors;
(b) the total number of outstanding shares of stock,
whether or not entitled to vote in the election of
directors.
Corporations covered by special laws 2 which provide specific
citizenship requirements shall comply with the provisions of said
law.
SEC. 3 of SEC MEMO 08-13: All Corporate Secretaries of covered
corporations are directed to monitor and observe compliance
with the provisions on ownership requirements provided in the
Constitution, the FIA, its IRR, other applicable laws, rules and
regulations and with the provisions of this Circular.
The Corporate Secretary cannot delegate the responsibility of
complying with the provisions of this Circular without the
express authority from the Board of Directors of Trustees, as
the case may be.
SEC. 4 of SEC MEMO 08-13: This Circular shall take effect
immediately after its publication in two (2) national newspapers
of general circulation, provided:
That all existing covered corporations which are non-compliant
with Section 2 hereof shall be given a period of one (1) year from
the effectivity of this Circular within which to comply with said
ownership requirement.
The Commission may extend the period of compliance but only
in meritorious and exceptional cases, and upon proper petition.
Sec. 14 of FIA: Administrative Sanctions. – A person who violates
any provision of this Act or of the terms and conditions of
registration or of the rules and regulations issued pursuant
thereto, or aids or abets in any manner any violation shall be
subject to a fine not exceeding one hundred thousand pesos
(P100,000).
If the offense is committed by a juridical entity, it shall be subject
to a fine in an amount not exceeding ½ of 1% of total paid-in
capital but not more than five million pesos (Php 5, 000, 000).
The president and/or officials responsible therefor shall also be
subject to a fine not exceeding two hundred pesos (P200, 000).
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39
DISCUSSION:
This was questioned in Roy III vs. Herbosa. The issue was whether
or not the SEC-MC violated the ruling of the court in Gamboa vs.
Finance Secretary?
ROY III V. HERBOSA
G.R. No. 207246
FACTS: The SEC issued SEC-MC No. 8 pertaining to the guidelines
to be followed in determining compliance with the Filipino
ownership requirement in public utilities under Section 11,
Article XII of the Constitution pursuant to the Court's directive in
the Gamboa Decision.
Section 2 of SEC-MC No. 8 provides:
Section 2. All covered corporations shall, at all times, observe
the constitutional or statutory ownership requirement. For
purposes of determining compliance therewith, the required
percentage of Filipino ownership shall be applied to BOTH (a)
the total number of outstanding shares of stock entitled to vote
in the election of directors; AND (b) the total number of
outstanding shares of stock, whether or not entitled to vote in
the election of directors.
Corporations covered by special laws which provide specific
citizenship requirements shall comply with the provisions of said
law.
Petitioner Roy, assailed the validity of SEC-MC No. 8 for not
conforming to the letter and spirit of the Gamboa Decision and
Resolution and for having been issued by the SEC with grave
abuse of discretion.
Petitioner Roy seeks to apply the 60-40 Filipino ownership
requirement separately to each class of shares of a public utility
corporation, whether common, preferred nonvoting, preferred
voting or any other class of shares.
ISSUE: Whether the SEC gravely abused its discretion in issuing
SEC-MC No. 8 in light of the Gamboa Decision and Gamboa
Resolution. – NO.
RULING: As observed in the Gamboa Decision, the capital as
required by the Constitution is full [and legal] beneficial
ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights xxx must rest in the
hands of Filipino nationals.
The Court also said that the same was not modified in the
Gamboa Resolution.
The Court held in the Gamboa resolution that:
The Constitution expressly declares as State policy the
development of an economy "effectively controlled" by
Filipinos.
Consistent with such State policy, the Constitution explicitly
reserves the ownership and operation of public utilities to
Philippine nationals, who are defined in the Foreign Investments
Act of 1991 as Filipino citizens, or corporations or associations
at least 60 percent of whose capital with voting rights belongs
to Filipinos. Xxx
The Court held in this case that Section 2 of SEC-MC No. 8 clearly
incorporates the Voting Control Test or the controlling interest
requirement. In fact, Section 2 goes beyond requiring a 60-40
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
ratio in favor of Filipino nationals in the voting stocks; it
moreover requires the 60-40 percentage ownership in the total
number of outstanding shares of stock, whether voting or not.
The SEC formulated SEC-MC No. 8 to adhere to the Court's
unambiguous pronouncement that "[f]ull beneficial ownership
of 60 percent of the outstanding capital stock, coupled with 60
percent of the voting rights is required." Clearly, SEC-MC No. 8
cannot be said to have been issued with grave abuse of
discretion.
Beneficial ownership test
Mere legal title is not enough to meet the required Filipino
equity, which means that it is not sufficient that a share is
registered in the name of a Filipino citizen or national, i.e., he
should also have full beneficial ownership of the share.
FOREIGN INVESTMENT ACT (RA 7042 as amended by RA 8179)
– Defines what doing business in the Philippines.
Guidelines for foreign corporation
What are the regulations when doing business in the Philippines
and what are the actions that can be considered as doing business
in the Philippines? Is that important? YES. Because if you are doing
business in the Philippines, you have to be registered.
Registration of doing business in the Philippines is different from
incorporation.
If you are going to incorporate, this means that you want to be a
domestic corporation. You want to be bound in the laws and
restriction of the Republic of the Philippines. But if you are just
getting a license, you are already an incorporated entity abroad or
you are a foreign corporation and just want to do business in the
Philippines and get the license to do business in the Philippines. You
are not going to be bound wholly by the Revised Corporation Code
but you are only going to be bound by the transaction per se. This
is what you call the License to do business in the Philippines.
We have to define what constitutes doing business in the
Philippines.
Q: What is doing business?
A: Doing business is not defined strictly in the Foreign Investment
Act for the reason that it avoids being contained and that business
should be creative how to avoid doing business in the Philippines.
But it only describes what is included as doing business in the
Philippines
Example: It includes soliciting orders, service contracts and opening
of offices, appointing representative in the Philippines or in any
country you are staying for a period of 180 days or more.
Participating in the provincial control.
CATCH-ALL PROVISION
Any other act or acts that imply a continuity of commercial dealings
or arrangements, and contemplate to that extent the performance
of acts or works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial gain or
of the purpose and object of the business organization.
Doing business does NOT include:
1. Meer investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business,
and/or the exercise of rights such investor;
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40
2. Having a nominee director or officer to represent its
interests in such corporation;
3. Appointing a representative or distributor domiciled in
the Philippines which transacts business in its own name
and for its own account.
SEC-OGC Opinion No. 18-09 (24 July 2009)
EUROPEAN RESOURCES AND TECHNOLOGIES INC vs.
INGENIEUBURO BIRKHAHN
GR No. 159586, 26 July 2004
FACTS: European Resources and Technologies Inc. (hereinafter
“ERTI”), a corporation organized and existing under the laws of
the Republic of the Philippines, is joined by Delfin J. Wenceslao
as petitioner in this case. Ingenieuburo Birkhan + Nolte
Ingiurgesellschaft mbh and Heers & Brockstedt Gmbh & Co. are
German corporations who are respondents in this case and shall
be collectively referred to as the “German Consortium.”
The German Consortium tendered and submitted its bid to the
Clark Development Corporation (“CDC”) to construct, operate
and manage the Integrated Waste Management Center at the
Clark Special Economic Zone (“CSEZ”). CDC accepted the
German Consortium’s bid and awarded the contract to it.
On October 6, 1999, CDC and the German Consortium executed
the Contract for Services which embodies the terms and
conditions of their agreement.
The Contract for Services provides that the German Consortium
shall be empowered to enter into a contract or agreement for
the use of the integrated waste management center by
corporations, local government units, entities, and persons not
only within the CSEZ but also outside. Article VIII, Section 7 of
the Contract for Services provides that the German Consortium
shall undertake to organize a local corporation as its
representative for this project.
On April 18, 2000, the German Consortium entered into a Joint
Venture with D.M. Wenceslao and Associates, Inc. (“DMWAI”)
and Ma. Elena B. Villarama (doing business as LBV and
Associates), embodied in a Memorandum of Understanding7
(“MOU”) signed by the parties.
Under the MOU, the parties agreed to jointly form a local
corporation to which the German Consortium shall assign its
rights under the Contract for Services. Pursuant to this
agreement, petitioner European Resources and Technologies,
Inc. was incorporated.
On December 11, 2000, ERTI received a letter from BN
Consultants Philippines, Inc., signed by Mr. Holger Holst for and
on behalf of the German Consortium,12 stating that the German
Consortium’s contract with DMWAI, LBV&A and ERTI has been
terminated or extinguished.
On February 20, 2001, petitioner ERTI, through counsel, sent a
letter to CDC requesting for the reconsideration of its
disapproval of the agreement between ERTI and the German
Consortium. Before CDC could act upon petitioner ERTI’s letter,
the German Consortium filed a complaint for injunction against
herein petitioners before the Regional Trial Court of Angeles
City, Branch 61.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
ISSUE: Whether or not the German Consortium has the capacity
to institute the petition for injunction.
RULING: NO. A corporation has legal status only within the state
or territory in which it was organized. For this reason, a
corporation organized in another country has no personality to
file suits in the Philippines. In order to subject a foreign
corporation doing business in the country to the jurisdiction of
our courts, it must acquire a license from the Securities and
Exchange Commission (SEC) and appoint an agent for service of
process. Without such license, it cannot institute a suit in the
Philippines.
However, there are exceptions to this rule. In a number of cases,
we have declared a party estopped from challenging or
questioning the capacity of an unlicensed foreign corporation
from initiating a suit in our courts. In the case of Communication
Materials and Design, Inc. v. Court of Appeals,a foreign
corporation instituted an action before our courts seeking to
enjoin a local corporation, with whom it had a “Representative
Agreement”, from using its corporate name, letter heads,
envelopes, sign boards and business dealings as well as the
foreign corporation’s trademark. The case arose when the
foreign corporation discovered that the local corporation has
violated certain contractual commitments as stipulated in their
agreement. In said case, we held that a foreign corporation
doing business in the Philippines without license may sue in
Philippine Courts a Philippine citizen or entity that had
contracted with and benefited from it.
In the case at bar, petitioners have clearly not received any
benefit from its transactions with the German Consortium. In
fact, there is no question that petitioners were the ones who
have expended a considerable amount of money and effort
preparatory to the implementation of the MOA. Neither do
petitioners seek to back out from their obligations under both
the MOU and the MOA by challenging respondents’ capacity to
sue. The reverse could not be any more accurate. Petitioners are
insisting on the full validity and implementation of their
agreements with the German Consortium.
To rule that the German Consortium has the capacity to institute
an action against petitioners even when the latter have not
committed any breach of its obligation would be tantamount to
an unlicensed foreign corporation gaining access to our courts
for protection and redress. We cannot allow this without
violating the very rationale for the law prohibiting a foreign
corporation not licensed to do business in the Philippines from
suing or maintaining an action in Philippine courts. The object of
requiring a license is not to prevent the foreign corporation from
performing single acts, but to prevent it from acquiring domicile
for the purpose of business without taking the steps necessary
to render it amenable to suits in the local courts. In other words,
the foreign corporation is merely prevented from being in a
position where it takes the good without accepting the bad.
DISCUSSION:
If you are deemed to be [considering yourself to be] doing business
in the Philippines and you did not secure a license from the SEC, you
cannot use the machineries of the Philippines to your advantage.
That’s the repercussion if you are not registered in the Philippines.
You can be sued, but you cannot sue.
CONTRIBUTORS: ALCORAN | BRAGA | CAYBOT | DEIPARINE | LOQUIAS | MILANA | PUERTO | SUYO | VILLA-ABRILLE
41
HUTCHISON PORTS PHILIPPINES LIMITED vs. SUBIC BAY
METROPOLITAN AUTHORITY
G.R. No. 131367, 31 August 2000
FACTS: The Subic Bay Metropolitan Authority (or SBMA)
advertised in leading national daily newspapers and in one
international publication, an invitation offering to the private
sector the opportunity to develop and operate a modern marine
container terminal within the Subic Bay Freeport Zone.
Out of seven bidders who responded to the published invitation,
three were declared by the SBMA as qualified bidders after
passing the pre-qualification evaluation conducted by the
SBMA’s Technical Evaluation Committee (or SBMA-TEC). Among
these is the petitioner.
Thereafter, the services of three (3) international consultants
recommended by the World Bank for their expertise were hired
by SBMA to evaluate the business plans submitted by each of
the bidders, and to ensure that there would be a transparent
and comprehensive review of the submitted bids. The SBMA
also hired the firm of Davis, Langdon and Seah Philippines, Inc.
to assist in the evaluation of the bids and in the negotiation
process after the winning bidder is chosen. All the consultants,
after such review and evaluation unanimously concluded that
HPPL’s Business Plan was “far superior to that of the two other
bidders.”
However, even before the sealed envelopes containing the
bidders’ proposed royalty fees could be opened at the
appointed time and place, RPSI formally protested that ICTSI is
legally barred from operating a second port in the Philippines
based on Executive Order No. 212 and Department of
Transportation and Communication (DOTC) Order 95-863.
ISSUE: Whether or not petitioner HPPL has the legal capacity to
even seek redress from the Court.
RULING: YES. Admittedly, petitioner HPPL is a foreign
corporation, organized and existing under the laws of the British
Virgin Islands. While the actual bidder was a consortium
composed of petitioner, and two other corporations, namely,
Guoco Holdings (Phils.) Inc. and Unicol Management Services,
Inc., it is only petitioner HPPL that has brought the controversy
before the Court, arguing that it is suing only on an isolated
transaction to evade the legal requirement that foreign
corporations must be licensed to do business in the Philippines
to be able to file and prosecute an action before Philippines
courts.
There is no general rule or governing principle laid down as to
what constitutes “doing” or “engaging in” or “transacting”
business in the Philippines. Each case must be judged in the light
of its peculiar circumstances. Thus, it has often been held that a
single act or transaction may be considered as “doing business”
when a corporation performs acts for which it was created or
exercises some of the functions for which it was organized. The
amount or volume of the business is of no moment, for even a
singular act cannot be merely incidental or casual if it indicates
the foreign corporation’s intention to do business.
Participating in the bidding process constitutes “doing business”
because it shows the foreign corporation’s intention to engage
in business here. The bidding for the concession contract is but
an exercise of the corporation’s reason for creation or existence.
Thus, it has been held that “a foreign company invited to bid for
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
IBRD and ADB international projects in the Philippines will be
considered as doing business in the Philippines for which a
license is required.”
DISCUSSION:
In relation to that case, we have the case of Mentholatum vs.
Mangaliman (G.R. No. L-47701, 27 June 1941), which provides for
the test of determining whether or not a corporation is doing
business in the Philippines:
FIRST TEST: The true test, however, seems to be whether the
foreign corporation is continuing the body or substance of the
business or enterprise for which it was organized or whether it has
substantially retired from it and turned it over to another.
In this case that we just discussed; the foreign corporation was
established in the British Virgin Islands (BVI) for project
development. Now, if there is continuity of that purpose in the
Philippines, it is considered to be doing business in the Philippines.
SECOND TEST: The continuity of commercial dealings and
arrangements, contemplates to that extent, the performance of
acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of, the purpose and
object of its organization.
That is what happened in the earlier case [European]. There is an
intention to deal with the Philippines and the Philippine market.
That is why it is considered to be doing business in the Philippines.
STEELCASE, INC. v. DESIGN INTERNATIONAL
G.R. No. 171995 | April 18, 2012
• The appointment of a distributor is not sufficient to
constitute doing business unless it is under the full control
of the foreign corporation.
FACTS: Steelcase, Inc. (Steelcase) a foreign corporation existing
under the laws of Michigan, USA granted Design International
Selections, Inc. (DISI) a corporation existing under the Philippine
law, the right to market, sell, distribute, install, and service its
products to end-user customers within the Philippines.
Subsequently Steelcase filed a complaint for sum of money
against DISI. DISI alleged that the complaint should be dismissed
because Steelcase has no capacity to sue because of being a
foreign corporation doing business in the Philippines without
the requisite license to do so.
Steelcase argues that Section 3(d) of R.A. No. 7042 or the
Foreign Investments Act of 1991 (FIA) expressly states that the
phrase ‘doing business” excludes the appointment by a foreign
corporation of a local distributor domiciled in the Philippines
which transacts business in its own name and for its own
account.
Moreover, Steelcase claims that it was not doing business in the
Philippines when it entered into a dealership agreement with
DISI where the latter, acting as the former’s appointed local
distributor, transacted business in its own name and for its own
account.
Hence, DISI was an independent distributor of Steelcase
products, and not a mere agent or conduit of Steelcase. On the
other hand, DISI argues that it was appointed by Steelcase as the
CONTRIBUTORS: ALCORAN | BRAGA | CAYBOT | DEIPARINE | LOQUIAS | MILANA | PUERTO | SUYO | VILLA-ABRILLE
42
latter’s exclusive distributor of Steelcase products. The
dealership agreement between Steelcase and DISI had been
described by the owner himself as basically a buy and sell
arrangement
ISSUE: Whether Steelcase had been doing business in the
Philippines.
HELD: NO. The phrase "doing business" is clearly defined in
Section 3(d) of R.A. No. 7042 (Foreign Investments Act of 1991).
The definition is supplemented by its Implementing Rules and
Regulations, Rule I, Section 1(f) which elaborates on the
meaning of the same phrase:
f. "Doing business" shall include soliciting orders, service
contracts, opening offices, whether liaison offices or
branches; appointing representatives or distributors,
operating under full control of the foreign corporation,
domiciled in the Philippines or who in any calendar year
stay in the country for a period totalling one hundred eighty
[180] days or more; participating in the management,
supervision or control of any domestic business, firm, entity
or corporation in the Philippines; and any other act or acts
that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of
the functions normally incident to and in progressive
prosecution of commercial gain or of the purpose and
object of the business organization.
The following acts shall not be deemed "doing business" in the
Philippines:
1. Mere investment as a shareholder by a foreign entity
in domestic corporations duly registered to do
business, and/or the exercise of rights as such
investor;
2. Having a nominee director or officer to represent its
interest in such corporation;
3. Appointing a representative or distributor domiciled
in the Philippines which transacts business in the
representative's or distributor's own name and
account;
4. The publication of a general advertisement through
any print or broadcast media;
5. Maintaining a stock of goods in the Philippines solely
for the purpose of having the same processed by
another entity in the Philippines;
6. Consignment by a foreign entity of equipment with a
local company to be used in the processing of products
for export;
7. Collecting information in the Philippines; and
8. Performing services auxiliary to an existing isolated
contract of sale which are not on a continuing basis,
such as installing in the Philippines machinery it has
manufactured or exported to the Philippines, servicing
the same, training domestic workers to operate it, and
similar incidental services. (Emphases supplied)
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
The appointment of a distributor in the Philippines is not
sufficient to constitute doing business unless it is under the full
control of the foreign corporation. On the other hand, if the
distributor is an independent entity which buys and distributes
products, other than those of the foreign corporation, for its
own name and its own account, the latter cannot be considered
to be doing business in the Philippines.
In the case at bench, it is undisputed that DISI was founded in
1979 and is independently owned and managed by the spouses
Leandro and Josephine Bantug. In addition to Steelcase
products, DISI also distributed products of other companies
including carpet tiles, relocatable walls and theater settings. DISI
was an independent contractor which sold Steelcase products in
its own name and for its own account.
Thus, Steelcase cannot be considered to be doing business in the
Philippines by its act of appointing a distributor as it falls under
one of the exceptions under R.A. No. 7042.
In Philippine National Bank v. Ritratto Group, Inc., 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. Consequently, the absence of any
one of the foregoing elements disauthorizes the piercing of the
corporate veil.
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.
DISCUSSION: Take note that we are going to jump for a moment to
Section 142 of the Corporation Code because that is the latter part
discussing how a foreign corporation may apply for a license to do
business in the Philippines.
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APPLICATION FOR LICENSE
Q: What now if you want to apply for a license?
Article 142. Application for a License. – A foreign corporation
applying for a license to transact business in the Philippines shall
submit to the Commission a copy of its articles of incorporation
and bylaws, certified in accordance with law, and their
translation to an official language of the Philippines, if
necessary. The application shall be under oath and, unless
already stated in its articles of incorporation, shall specifically
set forth the following:
(a) The date and term of incorporation;
(b) The address, including the street number, of the principal
office of the corporation in the country or State of
incorporation;
(c) The name and address of its resident agent authorized to
accept summons and process in all legal proceedings and all
notices affecting the corporation, pending the establishment of
a local office;
(d) The place in the Philippines where the corporation intends
to operate;
(e) The specific purpose or purposes which the corporation
intends to pursue in the transaction of its business in the
Philippines: Provided, That said purpose or purposes are those
specifically stated in the certificate of authority issued by the
appropriate government agency;
(f) The names and addresses of the present directors and
officers of the corporation;
(g) A statement of its authorized capital stock and the aggregate
number of shares which the corporation has authority to issue,
itemized by class, par value of shares, shares without par value,
and series, if any;
(h) A statement of its outstanding capital stock and the
aggregate number of shares which the corporation has issued,
itemized by class, par value of shares, shares without par value,
and series, if any;
(i) A statement of the amount actually paid in; and
(j) Such additional information as may be necessary or
appropriate in order to enable the Commission to determine
whether such corporation is entitled to a license to transact
business in the Philippines, and to determine and assess the fees
payable.
Attached to the application for license shall be a certificate
under oath duly executed by the authorized official or officials
of the jurisdiction of its incorporation, attesting to the fact that
the laws of the country or State of the applicant allow Filipino
citizens and corporations to do business therein, and that the
applicant is an existing corporation in good standing. If the
certificate is in a foreign language, a translation thereof in
English under oath of the translator shall be attached to the
application.
The application for a license to transact business in the
Philippines shall likewise be accompanied by a statement under
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
oath of the president or any other person authorized by the
corporation, showing to the satisfaction of the Commission and
when appropriate, other governmental agencies that the
applicant is solvent and in sound financial condition, setting
forth the assets and liabilities of the corporation as of the date
not exceeding one (1) year immediately prior to the filing of the
application.
Foreign banking, financial, and insurance corporations shall, in
addition to the above requirements, comply with the provisions
of existing laws applicable to them. In the case of all other
foreign corporations, no application for license to transact
business in the Philippines shall be accepted by the Commission
without previous authority from the appropriate government
agency, whenever required by law.
APPLICATION FOR A LICENSE
A foreign corporation applying for a license to transact business in
the Philippines shall submit to the Commission a copy of its –
§ articles of incorporation and
§ bylaws, certified in accordance with law, and their
§ translation to an official language of the Philippines, if
necessary.
The application shall be under oath and, unless already stated in its
articles of incorporation, shall specifically set forth the following:
(a) The date and term of incorporation;
(b) The address, including the street number, of the principal
office of the corporation in the country or State of
incorporation;
(c) The name and address of its resident agent authorized to
accept summons and process in all legal proceedings and
all notices affecting the corporation, pending the
establishment of a local office;
(d) The place in the Philippines where the corporation
intends to operate;
(e) The specific purpose or purposes which the corporation
intends to pursue in the transaction of its business in the
Philippines: Provided, That said purpose or purposes are
those specifically stated in the certificate of authority
issued by the appropriate government agency;
(f) The names and addresses of the present directors and
officers of the corporation;
(g) A statement of its authorized capital stock and the
aggregate number of shares which the corporation has
authority to issue, itemized by class, par value of shares,
shares without par value, and series, if any;
(h) A statement of its outstanding capital stock and the
aggregate number of shares which the corporation has
issued, itemized by class, par value of shares, shares
without par value, and series, if any;
(i) A statement of the amount actually paid in; and
(j) Such additional information as may be necessary or
appropriate in order to enable the Commission to
determine whether such corporation is entitled to a
license to transact business in the Philippines, and to
determine and assess the fees payable.
Attached to the application for license shall be a certificate under
oath duly executed by the authorized official or officials of the
jurisdiction of its incorporation, attesting to the fact that the laws
of the country or State of the applicant allow Filipino citizens and
corporations to do business therein, and that the applicant is an
existing corporation in good standing.
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§ DISCUSSION: So, there is reciprocity. If you are allowed
to do business in the Philippines, then our nationals or
our corporations should also be allowed to do business
under your corporation law.
The application for a license to transact business in the Philippines
shall likewise be accompanied by a statement under oath of the
president or any other person authorized by the corporation,
showing to the satisfaction of the Commission and when
appropriate, other governmental agencies
§ that the applicant is solvent and in sound financial
condition,
Why does the applicant need to be solvent & in good
financial condition?
– If that foreign corporation is doing business in
the Philippines, it will incur debts & obligations.
Therefore, it should be willing & capable to pay
off those debts and obligations as the party is a
Filipino national or as they are in the Philippine
market. Thus, the Philippine market should not
be aggrieved in such a situation.
§ setting forth the assets and liabilities of the corporation
as of the date not exceeding one (1) year immediately
prior to the filing of the application.
Foreign banking, financial, and insurance corporations shall, in
addition to the above requirements, comply with the provisions of
existing laws applicable to them.
In the case of all other foreign corporations, no application for
license to transact business in the Philippines shall be accepted by
the Commission without previous authority from the appropriate
government agency, whenever required by law.
Article 143. Issuance of a License. – If the Commission is
satisfied that the applicant has complied with all the
requirements of this Code and other special laws, rules and
regulations, the Commission shall issue a license to transact
business in the Philippines to the applicant for the purpose or
purposes specified in such license.
Upon issuance of the license, such foreign corporation may
commence to transact business in the Philippines and continue
to do so for as long as it retains its authority to act as a
corporation under the laws of the country or State of its
incorporation, unless such license is sooner surrendered,
revoked, suspended, or annulled in accordance with this Code
or other special laws.
Within sixty (60) days after the issuance of the license to
transact business in the Philippines, the licensee, except foreign
banking or insurance corporations, shall deposit with the
Commission for the benefit of present and future creditors of
the licensee in the Philippines, securities satisfactory to the
Commission, consisting of bonds or other evidence of
indebtedness of the Government of the Philippines, its political
subdivisions and instrumentalities, or of government-owned or
-controlled corporations and entities, shares of stock or debt
securities that are registered under Republic Act No. 8799,
otherwise known as “The Securities Regulation Code”, shares of
stock in domestic corporations listed in the stock exchange,
shares of stock in domestic insurance companies and banks, any
financial instrument determined suitable by the Commission, or
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
any combination thereof with an actual market value of at least
Five hundred thousand pesos (P500,000.00) or such other
amount that may be set by the Commission:
Provided, however, That within six (6) months after each fiscal
year of the licensee, the Commission shall require the licensee
to deposit additional securities or financial instruments
equivalent in actual market value to two percent (2%) of the
amount by which the licensee’s gross income for that fiscal year
exceeds Ten million pesos (P10,000,000.00).
The Commission shall also require the deposit of additional
securities or financial instruments if the actual market value of
the deposited securities or financial instruments has decreased
by at least ten percent (10%) of their actual market value at the
time they were deposited.
The Commission may, at its discretion, release part of the
additional deposit if the gross income of the licensee has
decreased, or if the actual market value of the total deposit has
increased, by more than ten percent (10%) of their actual
market value at the time they were deposited.
The Commission may, from time to time, allow the licensee to
make substitute deposits for those already on deposit as long as
the licensee is solvent. Such licensee shall be entitled to collect
the interest or dividends on such deposits. In the event the
licensee ceases to do business in the Philippines, its deposits
shall be returned, upon the licensee’s application and upon
proof to the satisfaction of the Commission that the licensee has
no liability to Philippine residents, including the Government of
the Republic of the Philippines. For purposes of computing the
securities deposit, the composition of gross income and
allowable deductions therefrom shall be in accordance with the
rules of the Commission.
EFFECT OF ISSUANCE OF LICENCE
Such foreign corporation may commence to transact business in
the Philippines and continue to do so for as long as it retains its
authority to act as a corporation under the laws of the country or
State of its incorporation.
Ø UNLESS:
Such license is sooner –
§ surrendered,
§ revoked,
§ suspended, or
§ annulled in accordance with this Code or other special
laws.
Article 144. Who May be a Resident Agent. – A resident agent
may be either an individual residing in the Philippines or a
domestic corporation lawfully transacting business in the
Philippines: Provided, That an individual resident agent must be
of good moral character and of sound financial standing:
Provided, further, That in case of a domestic corporation who
will act as a resident agent, it must likewise be of sound financial
standing and must show proof that it is in good standing as
certified by the Commission.
It is also required for a foreign corporation applying for a license to
do business in the Philippines to appoint a resident agent for the
purpose of serving summons. As a foreign corporation, they
naturally have do not a presence in the Philippines, thus
necessitating the appointment of a resident agent.
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WHO MAY BE A RESIDENT AGENT?
A resident agent may be either an
1. individual residing in the Philippines or a
2. domestic corporation lawfully transacting business in the
Philippines:
Provided, That an individual resident agent must be of good moral
character and of sound financial standing:
Provided, further, That in case of a domestic corporation who will
act as a resident agent, it must likewise be of sound financial
standing and must show proof that it is in good standing as certified
by the Commission.
Article 145. Resident Agent; Service of Process. – As a condition
to the issuance of the license for a foreign corporation to
transact business in the Philippines, such corporation shall file
with the Commission a written power of attorney designating a
person who must be a resident of the Philippines, on whom
summons and other legal processes may be served in all actions
or other legal proceedings against such corporation, and
consenting that service upon such resident agent shall be
admitted and held as valid as if served upon the duly authorized
officers of the foreign corporation at its home office. Such
foreign corporation shall likewise execute and file with the
Commission an agreement or stipulation, executed by the
proper authorities of said corporation, in form and substance as
follows:
“The (name of foreign corporation) hereby stipulates and
agrees, in consideration of being granted a license to transact
business in the Philippines, that if the corporation shall cease to
transact business in the Philippines, or shall be without any
resident agent in the Philippines on whom any summons or
other legal processes may be served, then service of any
summons or other legal process may be made upon the
Commission in any action or proceeding arising out of any
business or transaction which occurred in the Philippines and
such service shall have the same force and effect as if made
upon the duly authorized officers of the corporation at its home
office.”
Whenever such service of summons or other process is made
upon the Commission, the Commission shall, within ten (10)
days thereafter, transmit by mail a copy of such summons or
other legal process to the corporation at its home or principal
office. The sending of such copy by the Commission shall be a
necessary part of and shall complete such service. All expenses
incurred by the Commission for such service shall be paid in
advance by the party at whose instance the service is made.
It shall be the duty of the resident agent to immediately notify
the Commission in writing of any change in the resident agent’s
address.
SERVICE OF PROCESS
The corporation shall file with the Commission a written power of
attorney designating a person who must be a resident of the
Philippines, on whom summons and other legal processes may be
served.
xxx and consenting that service upon such resident agent shall be
admitted and held as valid as if served upon the duly authorized
officers of the foreign corporation at its home office
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
Default if no Resident Agent: The SEC.
The SEC will serve as the default resident agent.
Article 146. Law Applicable. – A foreign corporation lawfully
doing business in the Philippines shall be bound by all laws, rules
and regulations applicable to domestic corporations of the same
class, except those which provide for the creation, formation,
organization or dissolution of corporations or those which fix
the relations, liabilities, responsibilities, or duties of
stockholders, members, or officers of corporations to each
other or to the corporation.
Article 146 should be highlighted as there will be conflicts of law, so
to speak, because remember that foreign corporations are
incorporated in the laws of their respective countries. So, what
about provisions of law that are indirect conflict with those of
Philippine law?
Example: In the foreign law under which the foreign corporation
was incorporated, the number of directors required is 5, but under
our laws it is only 3. In time when a board resolution needs to be
issued, what will govern?
In cases of conflict of law, Article 146 provides the rule:
GR: A foreign corporation lawfully doing business in the Philippines
shall be bound by all laws, rules and regulations applicable to
domestic corporations of the same class.
XPN: Except those which provide for the
§ creation,
§ formation,
§ organization or
§ dissolution of corporations or those
§ which fix the relations, liabilities, responsibilities, or
duties of stockholders, members, or officers of
corporations to each other or to the corporation.
Note: In the enumeration under the XPN above, what is
governing is their law on incorporation, which is not the
Philippines. In those matters enumerated, Philippine law has
no effect.
Article 149. Merger or Consolidation Involving a Foreign
Corporation Licensed in the Philippines. – One or more foreign
corporations authorized to transact business in the Philippines
may merge or consolidate with any domestic corporation or
corporations if permitted under Philippine laws and by the law
of its incorporation:
Provided, That the requirements on merger or consolidation as
provided in this Code are followed. Whenever a foreign
corporation authorized to transact business in the Philippines
shall be a party to a merger or consolidation in its home country
or State as permitted by the law authorizing its incorporation,
such foreign corporation shall, within sixty (60) days after the
effectivity of such merger or consolidation, file with the
Commission, and in proper cases, with the appropriate
government agency, a copy of the articles of merger or
consolidation duly authenticated by the proper official or
officials of the country or State under whose laws the merger or
consolidation was effected:
Provided, however, That if the absorbed corporation is the
foreign corporation doing business in the Philippines, the latter
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46
shall at the same time file a petition for withdrawal of its license
in accordance with this Title.
MERGER OR CONSOLIDATION OF FOREIGN CORPORATIONS
If a foreign corporation undergoes a merger or consolidation, they
have to advice the SEC:
Within sixty (60) days after the effectivity of such merger or
consolidation, file with the Commission, and in proper cases,
with the appropriate government agency, a copy of the
articles of merger or consolidation duly authenticated by the
proper official or officials of the country or State under whose
laws the merger or consolidation was effected
DOING BUSINESS WITHOUT LICENSE
Article 150. Doing Business Without a License. – No foreign
corporation transacting business in the Philippines without a
license, or its successors or assigns, shall be permitted to
maintain or intervene in any action, suit or proceeding in any
court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine
courts or administrative tribunals on any valid cause of action
recognized under Philippine laws.
DISCUSSION:
As to the consequences of a foreign corporation doing business in
the Philippines without a license, Article 150 is very explicit:
§ No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns,
shall be permitted to maintain or intervene in any action,
suit or proceeding in any court or administrative agency
of the Philippines.
§ But such corporation may be sued or proceeded against
before Philippine courts or administrative tribunals on
any valid cause of action recognized under Philippine
laws.
So, a foreign corporation doing business in the Philippines without
a license cannot sue but they can be sued.
REVOCATION OF LICENSES
Article 151. Revocation of License. – Without prejudice to other
grounds provided under special laws, the license of a foreign
corporation to transact business in the Philippines may be
revoked or suspended by the Commission upon any of the
following grounds:
(a) Failure to file its annual report or pay any fees as required by
this Code;
(b) Failure to appoint and maintain a resident agent in the
Philippines as required by this Title;
(c) Failure, after change of its resident agent or address, to
submit to the Commission a statement of such change as
required by this Title;
(d) Failure to submit to the Commission an authenticated copy
of any amendment to its articles of incorporation or bylaws or
EDITORS: ALAG | JUNSAY
 47
BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022

of any articles of merger or consolidation within the time
prescribed by this Title;
(e) A misrepresentation of any material matter in any
application, report, affidavit or other document submitted by
such corporation pursuant to this Title;
h. Transacting business in the Philippines as agent of or
acting on behalf of any foreign corporation or entity not
duly licensed to do business in the Philippines; or
i. Any other ground as would render it unfit to transact
business in the Philippines.

(f) Failure to pay any and all taxes, imposts, assessments or

penalties, if any, lawfully due to the Philippine Government or WITHDRAWAL OF FOREIGN CORPORATIONS
any of its agencies or political subdivisions;
SEC. 153. Withdrawal of Foreign Corporations. – Subject to
(g) Transacting business in the Philippines outside of the existing laws and regulations, a foreign corporation licensed to
purpose or purposes for which such corporation is authorized transact business in the Philippines may be allowed to withdraw
under its license; from the Philippines by filing a petition for withdrawal of
license. No certificate of withdrawal shall be issued by the
(h) Transacting business in the Philippines as agent of or acting Commission unless all the following requirements are met:
on behalf of any foreign corporation or entity not duly licensed
to do business in the Philippines; or (a) All claims which have accrued in the Philippines have been
paid, compromised or settled;
(i) Any other ground as would render it unfit to transact business
in the Philippines. (b) All taxes, imposts, assessments, and penalties, if any,
lawfully due to the Philippine Government or any of its agencies
or political subdivisions, have been paid; and
GROUNDS FOR REVOCATION OF LICENSES:
(c) The petition for withdrawal of license has been published
a. Failure to once a week for three (3) consecutive weeks in a newspaper of
i. file its annual report or general circulation in the Philippines.
ii. pay any fees as required by this Code;
DISCUSSION: A foreign corporation who no longer wants to do
b. Failure to appoint and maintain a resident agent in the business in the Philippines may also withdraw their license.
Philippines as required by this Title;
Why is it based on your readings foreign corporations do not want
c. Failure, after change of its resident agent or address, to to apply for license? Remember, they will be subjected to tax
submit to the Commission a statement of such change as exposure and that’s what they are trying to avoid.
required by this Title;
In international taxation, if you have a PE (personal establishment),
d. Failure to submit to the Commission an authenticated then for all intent and purposes, you are a taxable entity; you
copy of cannot even invoke the international tax treaties.
i. any amendment to its articles of incorporation
or bylaws or Illustration: A Singaporean corporation has no presence here in the
ii. of any articles of merger or consolidation PH. However, such corporation is the only one which is competent
within the time prescribed by this Title; to construct a power plant. It joined the government bidding and
won. Whatever the PH government has paid will be declared as an
e. A misrepresentation of any material matter in any income of the corporation in Singapore (law on incorporation).
i. application,
ii. report, However, remember, such foreign corporation will be subjected to
iii. affidavit or a gross income tax here in the PH. It will be subjected to a 25%
iv. other document submitted by such corporation withholding tax. There is then seemingly a double taxation. That’s
pursuant to this Title; why countries have these treaties. However, one of the conditions
in these treaties is that the foreign corporation must have no
f. Failure to pay permanent establishment.
i. any and all taxes,
ii. imposts, If you have a license to do business here in the PH, such will be
iii. assessments or considered as a permanent establishment.
iv. penalties,
v. if any, lawfully due to Also, one of the conditions in these tax treaties is that the
i. the Philippine Government or corporations’ consultants here in the PH must not stay for more
ii. any of its agencies or political than 180 days.
subdivisions;
They will really come home. You can see it in the immigration
g. Transacting business in the Philippines outside of the because they can count. The BIR will count that how many days
purpose or purposes for which such corporation is they stayed here just to avoid having a Permanent Establishment
authorized under its license; which is similar to a license and will expose the foreign corporation
to different types of Philippine taxes.

Now let’s go to the Foreign Investment Negative List.

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 48
BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022

This recent case of PCAB v. MANILA WATER (G.R. No. 217590).

I told you earlier that the FINL is like the summary of the industries
which are restricted for an equity ownership.
FOREIGN INVESTMENT NEGATIVE LIST
It is a shortlist of investment areas or activities which may be
opened to foreign investors and/or reserved to Filipino nationals.
New 11th Regular Foreign Investment Negative List
Please take note of this case. Because the issue there is that, for
construction businesses or contractors, there is nothing in the
Foreign Investment Negative List that they are part of the
restricted. So, Foreign Entity can actually exist as a corporation
doing construction business. But of course, PCAB here says that
when they exist as a corporation, they will get their license then
they would say construction is an exercise of profession and should
therefore be reserved to 100% Filipino.

LIST A This has been an issue a long time ago. But if you ask SEC Opinion,
Consists of areas of activities reserved to Philippine nationals where the SEC would always say that “since they are not in the negative
foreign equity participation in any domestic or export enterprise list, they can be owned by foreigners but as a request of our co-
engaged in any activity listed therein shall be limited to a maximum equal agency, we will not decide as to the regulations of PCAB.” But
of forty percent (40%) as prescribed by the Constitution and other this particular case sets a tone. There’s a dissenting opinion there
specific laws. and it opens the practice of profession to foreign. It’s a very good
case. We will discuss that after we discuss the case of Jacobus.
NO FOREIGN EQUITY
1. Mass medica except recording and internet business;
2. Practice of profession;
RP ACQUIRED AS CONDOMINIUM UNIT
3. Retail trade enterprises with paid in capital of less than
$2,500,000;
For condominium, is it safe to say that foreigners can own a
4. Cooperatives;
condominium unit or is it accurate to say that for a condominium
5. Organization and operation of private detective,
corporation, it should be owned majority by a foreigner?
watchmen or security guard agencies;
6. Small-scale mining;
Q: Does the Constitutional Prohibition of Aliens Acquiring RP apply
7. Utilization of marine resources in archipelagic waters,
to Condominium Ownership?
territorial sea and exclusive economic zone as well as
small-scale utilization of natural resources in rivers, lakes,
JACOBUS BERNHARD HULST V. PR BUILDERS, INC.
bays, and lagoons;
G.R. No. 156364 | September 25, 2008
8. Ownership, operation and management of cockpits;
9. Manufacture, repair, stockpiling and/or distribution of
FACTS: The Contract to Sell between JACOBUS and PR
biological, chemical and radiological weapons and anti-
BUILDERS[PR] provides:
personnel mines; and
10. Manufacture of firecrackers and other pyrotechnic
Section 3. Title and Ownership of Unit.
devices.
a. Upon full payment by the BUYER [JACOBUS] ... the
SELLER[PR] shall deliver to the BUYER[JACOBUS] the
UP TO 30% FOREIGN EQUITY
Deed of Absolute Sale conveying its rights, interests
1. Advertising
and title to the UNIT and to the common areas
appurtenant to such UNIT, and the corresponding
UP TO 40% FOREIGN EQUITY
Condominium Certificate of Title in the SELLER's [PR‘S]
Subject to applicable regulatory framework, contracts for the
name;...
construction and repair of locally-funded public works except:
b. The Seller [PR] ... immediately comply with all
1. Infrastructure/development projects covered in RA 7718;
requirements of Republic Act No. 4726 (The
2. Projects which are foreign funded or assisted and
Condominium Act) and Presidential Decree No. 957
required to undergo international competitive biddings;
(Regulating the Sale of Subdivision Lots and
3. Exploration, development, and utilization of natural
Condominiums, Providing Penalties for Violations
resources; and
Thereof). It is hereby understood that all title, rights
4. Ownership of private lands.
and interest so conveyed shall be subject to the
provisions of the Condominium Act..., the Articles of
RP ACQUIRED AS CONDOMINUM UNIT
Incorporation and By-Laws and the Rules and
SEC Opinion:
Regulations of the Condominium Corporation... and
1. If the condominium is set up on leased land, the
such other restrictions on the use of the property as
condominium corporation may be wholly foreign-owned.
annotated on the title or may be imposed by any
2. Where the condominium corporation is a Filipino
government agency or instrumentality having
corporation which owns the land on which the
jurisdiction thereon.
condominium is located, no interest in the condominium
may be transferred to foreign individuals or to
On September 3, 2007, the Court rendered a Decision ordering
corporations more than 40% if the capital stock of which
JACOBUS BERNHARD HULST to return to PR BUILDERS the
is owned by foreign nationals.
amount, in excess of the proceeds of the auction sale delivered
3. When the common areas are held by a condominium
to JACOBUS BERNHARD HULST.
corporation, the transfer of condominium units to foreign
individuals may be made only up to the point where it
JACOBUS BERNHARD HULST filed the present Motion for Partial
would not cause the foreign interest in such corporation
Reconsideration insofar as he was ordered to return to PR
to exceed 40% of its entire capital stock.
BUILDERS the amount in excess of the proceeds of the auction

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BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
sale delivered to JACOBUS BERNHARD HULST. JACOBUS
BERNHARD HULST contends that:
JACOBUS BERNHARD HULST contends that:
a. the Contract to Sell between JACOBUS BERNHARD
HULST and PR BUILDERS involved a condominium unit
and did not violate the Constitutional proscription
against ownership of land by aliens.
b. that the contract to sell will not transfer to the buyer
ownership of the land on which the unit is situated;
thus, the buyer will not get a transfer certificate of
title but merely a Condominium Certificate of Title as
evidence of ownership; a perusal of the contract will
show that what the buyer acquires is the seller's title
and rights to and interests in the unit and the common
areas.
ISSUE: WON the Contract to Sell between JACOBUS and PR
violate proscription against ownership of land by aliens – NO.
HELD: Foreign nationals can own Philippine real estate through
the purchase of condominium units or townhouses constituted
under the Condominium principle with Condominium
Certificates of Title [Republic Act (R.A.) No. 4726, otherwise
known as the Condominium Act].
The law provides that no condominium UNIT can be sold without
at the same time selling the corresponding amount of rights,
SHARES or other interests in the condominium management
body, the Condominium Corporation; and no one can buy
SHARES in a Condominium Corporation without at the same
time buying a condominium UNIT.
It expressly allows foreigners to acquire condominium UNITS
and SHARES in condominium corporations up to not more than
40% of the total and outstanding capital stock of a Filipino-
owned or controlled corporation.
Under this set up, the ownership of the land is legally separated
from the unit itself. The land is owned by a Condominium
Corporation and the unit owner is simply a member in this
Condominium Corporation. As long as 60% of the members of
this Condominium Corporation are Filipino, the remaining
members can be foreigners.
Considering that the rights and liabilities of the parties under the
Contract to Sell is covered by the Condominium Act wherein
petitioner as unit owner was simply a member of the
Condominium Corporation and the land remained owned by
respondent, then the constitutional proscription against aliens
owning real property does not apply to the present case.
There being no circumvention of the constitutional prohibition,
the Court's pronouncements on the invalidity of the Contract of
Sale should be set aside.
DISCUSSION:
The SEC clarified in its Opinion, the nature of a condominium
corporation in relation to the proscription on aliens owning real
property.
SEC OPINION RULES:
1. If the Condominium is set up on a leased land, the
condominium corporation may be wholly foreign- owned.
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49
Discussion:
Because in that case, you are not owning the real
property. You are just leasing. Most condominium
corporation joint ventures are actually, the owner of the
property is different from the developer. In that case,
they just agree to use the land without having an interest
therein, the condo corporation can be fully owned by
foreigners.
2. Where the condominium corporation is a Filipino
corporation which owns the land on which the
condominium is located, no interest in the condominium
may be transferred to foreign individuals or to
corporation more than 40% of the capital stock of which
is owned by foreign nationals.
3. When the common areas are held by a condominium
corporation, the transfer to aliens of units in the project
may be made only up to the point where the concomitant
transfer of stockholdings in the condominium corporation
would not cause the alien interest in such corporation to
exceed 40% of its entire capital stock.
DISCUSSION: It’s not accurate to say that condo
corporations can be wholly owned by foreigners. It
depends on the set-up of condominium corporations.
25% FOREIGN EQUITY
• Private recruitment (i.e., recruitment firms), whether for
local or overseas employment
• Contracts for the defense-related structures
LIST B of the FOREIGN INVESTMENT NEGATIVE LIST
Consists of areas of activities where foreign ownership is limited
pursuant to law* such as defense or law enforcement- related
activities, which have negative implications on public health and
morals, and small and medium-scale enterprises.
DISCUSSION: *because there are certain statutes that
reserve certain equity to Filipinos
These are besides the limitations on the Constitution.
Some of the restrictions are placed in order to help SMEs
for public policy.
UP TO 40% EQUITY
• Manufacture, repair, storage, and/or distribution of
products and/or ingredients used in the manufacture
thereof requiring Philippine National Police [PNP]
clearance (i.e., firearms, ingredients used in making
explosives, etc.
• Manufacture, repair, storage and/or distribution of
products requiring Department of National Defense
[DND] clearance (i.e., guns and ammunition for warfare,
military ordinance, and parts thereof, etc.)
• Manufacture and distribution of dangerous drugs
[Republic Act No. 7042, as amended by R. A. No. 8179]
• Sauna and steam bath houses ,massage clinics and other
like activities regulated by law because of risks they may
impose to public health and morals [Republic Act No.
7042, as amended by R. A. No. 8179]
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BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
• All forms of gambling (R.A. No. 7042 as amended by R.A.
No. 8179) except those covered by investment
agreements with PAGCOR (P.D. No. 1869 as amended by
R.A. No. 9487)
• Domestic market enterprises with paid-in equity of less
than the equivalent of US$200,000.00
NOTE: I want to highlight this one. This is a very common
problem and misconception.
• Domestic market enterprises which involve advance
technology or they employ at least fifty [50] direct
employees, the minimum paid- in capital will be reduced
to US $ 100,000.00. [R. A. 7042, as amended by R.A. 8179]
DISCUSSION: For example, you are employing 50 direct
employees or you have an advanced technology used for
your business, it may be from $200,000 to $100,000.
If more than US $200,000, then there is no question. If it
is less than the US $200,000 and US $100,000 capital, it
has to be at least 60% Filipino-owned.
Q: How do you know when it is a domestic enterprise?
A: This pertains to your market. So, it is not accurate to say that
since the industry you are entering in the Philippines is not part of
those previously discussed (from List A or List B), it does not mean
that you could be 100% fully-owned if your market is domestic.
If your market is Filipino, you are still covered by the domestic
market restriction, which means that if the capital you are entering
in the Philippines is LESS than US $200,000 or US $100,000 if it
involves advanced technology or if you employ at least 50 direct
employees, then, you can only be owned up to 60% Filipino or 40%
Foreign Equity.
Q: What is the reason for that?
A: To safeguard the local investors. Without these safeguards, all
business owners, including small businesses, will be foreign-owned
because they have the capital to enter.
This restriction gives priority to local investors (100% Filipino-
owned), unless the foreign national would spend or invest in the
Philippines an amount equivalent to US $200,000 or US $100,000.
In that case, they are allowed to exceed 40%.
NOTE: If someone asks you about your opinion in entering a
business, remember the following:
(1) What is the industry? Is the industry part of the
restrictions?
(2) Who will be your market?
o If their market involves export, this can be 100%
foreign-owned.
o If their market is domestic (Filipino), proceed to the
next question.
(3) How much is the capital?
o If their capital is US $200,000, it is okay.
o If their capital is more than US $200,000, it is still
allowed.
o If their capital is less than US $200,000, proceed to the
next question.
(4) Will you employ at least 50 direct employees or do you
have advanced technology?
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o If yes, is your capital less than US $100,000? Then, you
can be fully owned by foreigners.
(Very important! Atty. Ong highlighted this part.)
If your market is domestic (within the Philippines), then you have
to comply with the US$200,000 paid-in capital for it to have a more
than 40% foreign equity. That's the negative list. (Taken from the
previous tsn)
DOMESTIC MARKET ENTERPRISE
SEC-OGC OPINION NO. 27-11
(April 20, 2011)
This refers to Active Alliance Incorporated’s ("AAI") letter
requesting SEC’s opinion on whether or not AAI is subject to any
foreign ownership restriction. AAI's primary purpose is
[1] to engage in the business of manufacturing, producing,
processing, assembling, importing, exporting, buying, selling or
otherwise dealing in all kinds of commerce, including but not
limited to consumer communication, electronic equipment and
other goods of similar nature, and any and all equipment,
materials and supplies used or employed in or related to the
manufacture of such finished products". [FOR EXPORT]
[2] AAI does not own any real property in the Philippines.
SEC’S OPINION:
THE ACTIVITIES BEING PERFORMED BY AAI DO NOT
FALL WITHIN THE 8TH FINL [old FINL]
The general rule is that non-Philippine nationals can own up to
one hundred percent (100%) of the equity in export as well as
domestic market enterprises.
However, the 8th FINL [Old FINL] restricts foreign ownership to
a maximum of forty percent (40%) of the equity in small and
medium-sized domestic market enterprises in cases where the
paid-in capital is less than the equivalent of Two Hundred
Thousand US dollars (US$200,000).
Nonetheless, a paid- in capital of at least the equivalent of One
Hundred Thousand US dollars (US$I00,000) is sufficient so long
as the enterprise either
(1) involves advanced technology as determined by the
Department of Science and Technology, or
(2) employs at least fifty (50) direct employees, and the foreign
equity restriction shall not apply.
Here,
(1) IF EXPORT ENTERPRISE—NOT SUBJECT TO RESTRICTION:
(2) AAI shall not be subject to any foreign equity ownership
restriction if it is an EXPORT ENTERPRISE, which is defined
by RA 7042 as one "wherein a manufacturer, processor or
service (including tourism) enterprise exports sixty percent
(60%) or more of its output, or wherein a trader purchases
products domestically and exports sixty percent (60%) or
more of such purchases".
(3) IF DOMESTIC MARKET ENTERPRISE—SUBJECT TO
RESTRICTION IF ACTIVITES COVERED; HERE, AAI’S
ACTIVITIES NOT COVERED:
On the other hand, if its activities make it a DOMESTIC MARKET
ENTERPRISE that "a. produces goods for sale, or b. renders
services to the domestic market entirely or c. if exporting a
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BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022

portion of its output fails to consistently export at least sixty

percent (60%) thereof", it is subject to the restrictions given DISCUSSION: The provisions on the RCC are merely suppletory.
above. Here, it appears the activities being performed by AAI do
not fall within the 8th FINL. STOCK CORPORATION VS. NON-STOCK CORPORATION

4. IF SMALL OR MEDIUM-SIZED ENTERPRISE— SUBJECT TO STOCK NON-STOCK

RESTRICTION; HERE, AAI’S CAPITALIZATION MORE THAN US
$200K—NOT COVERED BY RESTRICTION. Definition
Corporations which have All other private corporations
However, there is a need to determine if AAI is considered a capital stock divided into (Sec. 3, RCC)
small or medium-sized enterprise (SME) as defined by RA 7042 shares and are authorized to
to determine whether or not the statutory restrictions on said distribute to the holders of One where no part of its
kinds of enterprises apply to it. shares dividends or allotments income is distributable as
of the surplus profits on the dividends to its members,
Nonetheless, even assuming that AAI is classified as a SME under basis of the shares. trustees or officers. (Sec. 87)
the law, it appears that it is still not subject to any foreign
ownership restriction since its authorized capital stock is Eighty Provided, that any profit
Million Pesos which is more than the equivalent of Two Hundred which a non-stock corporation
Thousand US dollars (US$200,000.00). may obtain incidental to its
operations shall, whenever
The foregoing opinion rendered is based solely on the facts necessary or proper, be used
disclosed in the query and relevant solely to the particular issues for the furtherance of the
raised therein and shall not be used in the nature of a standing purpose or purposes for which
rule binding upon the Commission. the corporation was
organized, subject to the
provisions of this Title.
DISCUSSION:
Purpose
Under the SEC-OGC OPINION NO. 27-11, the SEC held that:
As a general rule, there are no restrictions on the extent of Primarily to make profits for Non-stock corporations may
acquired ownership of export enterprises. In domestic market its shareholders be formed or organized for
enterprises, foreigners can invest inasmuch as 100% equity, except charitable, religious,
in ---- of the Negative List. This is subject to small and medium educational, professional,
enterprises (SMEs) – the domestic market enterprises with capital cultural, fraternal, literary,
that is less than US$200,000 or reserved to Filipino nationals, scientific, social, civic service,
provided that if they involve advanced technology or employ at or similar purposes, like trade,
least fifty direct employees, then a minimum paid-in equity capital industry, agricultural and like
of US $100,000 shall be allowed to non-Filipino nationals. This is the chambers, or any combination
exception for domestic market enterprises. thereof, subject to the special
provisions of this Title
Export oriented enterprise: could be owned by foreigners. governing particular classes of
non-stock corporations.

CLASSIFICATION OF CORPORATIONS Distribution of Profits

Profit is distributed to Whatever incidental profit
STOCK AND NON-STOCK CORPORATIONS shareholders made is not distributed
among its members but is
used for furtherance of its
SECTION 3. Classes of Corporation. - Corporations formed or
purpose. AOI or by-laws may
organized under this Code may be stock or non-stock corporations.
provide for the distribution of
Stock corporations are those which have capital stock divided into
its assets among its members
shares and are authorized to distribute to the holders of such
upon its dissolution. Before
shares, dividends, or allotments of the surplus profits on the basis
then, no profit may be made
of the shares held. All other corporations are non-stock
by members.
corporations.
Composition
There are two general classifications of corporations: Stockholders Members
(1) Stock Corporations; and
Scope of the Right to Vote
(2) Non-stock Corporations.
Each stockholder votes Each member, regardless of
CORPORATIONS CREATED BY SPECIAL LAW according to the proportion of class, is entitled to one (1) vote
his shares in the corporation. UNLESS such right to vote has
No shares may be deprived of been limited, broadened or
SECTION 4. Corporations Created by Special Laws or Charter. -
voting rights except those denied in the AOI or by-laws.
Corporations created by special laws or charters shall be governed
classified and issued as (Sec. 89)
primarily by the provisions of the special law or charter creating
“preferred” or “redeemable”
them or applicable to them, supplemented by the provisions of
shares, and as otherwise
this Code, insofar as they are applicable.
provided by the Code. (Sec. 6)

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Who exercises corporate powers?
Board of Directors or Trustees
Governing Board
Board of Directors or Trustees
consisting of 2(5)-15
directors/trustees
Term of Directors
Directors/trustees shall hold
office for 1 year and until their
successors are elected and
qualified.
Election of Officers
Officers are elected by the
Board of Directors (Sec. 25),
except in close corporations
where the stockholders
themselves may elect the
officers (Sec. 97)
Place of Meetings
Any place within the
Philippines if provided for by
the by-laws (Sec. 93)
Distribution of Assets in Case of Liquidation
Distribute to the shareholders
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52
BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
provision shall be made
therefor;
Board of Trustees
(b) Assets held by the
corporation upon a condition
The number of trustees shall
requiring return, transfer or
be fixed in the AOI or by-laws conveyance, and which
which may or may not be condition occurs by reason of
more than fifteen (15).
the dissolution, shall be
returned, transferred or
They shall hold office for not conveyed in accordance with
such requirements;
more than three (3) years until
their successors are elected
(c) Assets received and held by
and qualified. Trustees elected
to fill vacancies occurring the corporation subject to
before the expiration of a limitations permitting their
use only for charitable,
particular term shall hold
religious, benevolent,
office only for the unexpired
educational or similar
period.
purposes, but not held upon a
condition requiring return,
Except with respect to
independent trustees of non- transfer or conveyance by
reason of the dissolution, shall
stock corporations vested
with public interest, only a be transferred or conveyed to
member of the corporation one (1) or more corporations,
societies or organizations
shall be elected as trustee.
engaged in activities in the
Unless otherwise provided in Philippines substantially
similar to those of the
the AOI or by-laws, the
dissolving corporation
members may directly elect
officers of a non-stock according to a plan of
distribution adopted pursuant
corporation.
to this Chapter;
Officers may be directly (d) Assets other than those
elected by the members mentioned in the preceding
UNLESS the AOI or by-laws paragraphs, if any, shall be
provide otherwise (Sec. 92) distributed in accordance with
the provisions of the AOI or
by-laws, to the extent that the
AOI or by-laws determine the
distributive rights of
Generally, the meetings must members, or any class or
be held at the principal office classes of members, or
of the corporation, if provide for distribution; and
practicable. If not, then any
place in the city or (e) In any other case, assets
municipality where the may be distributed to such
principal office of the persons, societies,
corporation is located. (Sec. organizations or corporations,
51) whether or not organized for
profit, as may be specified in a
plan of distribution adopted
Sec. 93. Rules of Distribution. pursuant to this Chapter.
– The assets of a non-stock
corporation undergoing the Sec. 94. Plan of Distribution of
process of dissolution for Assets. – A plan providing for
reasons other than those set the distribution of assets,
forth in Sec. 139 of this Code consistent with the provisions
shall be applied and of this Title, may be adopted
distributed as follows: by a non-stock corporation in
the process of dissolution in
(a) All liabilities and the ff. manner:
obligations of the corporation
shall be paid, satisfied and (a) The board of trustees shall,
discharged, or adequate by majority vote, adopt a
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BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022

resolution recommending a liabilities and damages incurred or arising as a result

plan of distribution and
directing the submission
thereof to a vote at a regular
or special meeting of
members having voting rights;
(b) Each member entitled to
vote shall be given a written
notice setting forth the
proposed plan of distribution
or a summary thereof and the
date, time and place of such
meeting within the time and in
the manner provided in this
Code for the giving of notice of
meetings; and
thereof (Sec. 21) (for purposes of protecting the
rights of third persons, it is considered as a
corporation)
Discussion: However, this is just a concept in order to
protect the interests of third persons. This is a case where
two or more persons hold themselves out as a
corporation when in fact they are not.
4. Corporation by Prescription
Discussion: There is only one – religious corporation.
IV. As to Relationship of Mgt & Control
1. A holding company has been defined by the
Commission in several opinions.

(c) Such plan of distribution A holding company has been aptly defined as a
shall be adopted upon “corporation organized to hold the stock of another
approval of at least two-thirds or other corporations.” Its essential feature is
(2/3) of the members having that it holds stock.
voting rights present or
represented by proxy at such The term “holding company” is equivalent to a
meeting. parent corporation, having such an interest in
another corporation, or power of control, that it may
DISCUSSION: elect its directors and influence its management.
Ø Definition. – Technically, you can distribute surplus profits to (Applicability of Foreign Ownership Restriction;
the members in non-stock corporations. Holding Companies, SEC-OGC Opinion No. 15-11,
Feb. 10, 2011)
Ø Purpose. – The reason for its existence is that stock is primarily
for profit, non-stock is other than for profit. Non-stock could 2. A subsidiary, subsidiary company or daughter
be religious, educational, professional, cultural, fraternal. company, is a company that is owned or controlled
Some frats or soros are registered as non-stock. by another company, which is called the parent
company, parent or holding company.
Ø Governing Board. – The limitations on the office of the
trustees are dependent on the particular type of non-stock. Discussion: It must be at more than 50% because it has
control. If it is less than 50%, it is an affiliate.
OTHER CLASSIFICATIONS OF CORPORATIONS
3. Affiliate means an entity at least 20% but not exceeding
I. In relation to the State
50% of the voting stock owned directly or indirectly. (IRR
1. Public Corporations are those created for political of AMLA)
purposes connected with the public good in the
administration of the civil government.
PRE-INCORPORATION STAGE
2. Private Corporations are divided into stock
corporations and non-stock corporations Section 5. Corporators and Incorporators, Stockholders and
Members. – Corporators are those who compose a corporation,
II. As to Place of Incorporation whether as stockholders or shareholders in a stock corporation
1. Domestic Corporations – one incorporated under or as a members in a nonstock corporations. Incorporators are
the laws of the Philippines those stockholders or members mentioned in the articles of
incorporation as originally forming and composing the
2. Foreign Corporation – other than the laws of the corporation and who are signatories thereof.
Philippines
Q: Are all corporators, incorporators?
III. As to Legal Status A: No. A corporator may be not one of those who started the
1. De Jure Corporations – organized in accordance corporation, but eventually got shares.
with the requirements of law
Q: Are all incorporators, corporators?
2. De Facto Corporation – a corporation with some A: Yes, at some point. Initially, if you were an incorporator, you
flaw in its incorporation were also a corporator. However, you also could have relinquished
or transferred your shares. So you are no longer a corporator, but
3. Corporation by Estoppel – It is a status acquired by you are still an incorporator.
persons who assume to act as a corporation
knowing it to be without authority. Such persons There are things in the Articles of Incorporation which you cannot
shall be liable as general partners for all debts, amend, and those are the historical facts. Among those you cannot

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BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
amend are the names of the incorporators. That is why when you
look at the Articles of Incorporation of some corporations, you will
realize that some of the incorporators are no longer shareholders.
Q: Who is a Promoter?
A: Promoter is a person who, acting alone or with others, takes
initiative in founding and organizing the business or enterprise of
the issuer and receives consideration therefor. (Sec 3.10, Security
and Exchange Commission Code [RA 8799])
Q: Why do we need to identify the promoters?
A: The promoter fills the gap between the intention to create a
corporation, and its actual birth.
Discussion: They (promoters) are much like the initial broker. They
are the bridge which materializes the intention and the creation.
PROMOTER’S CONTRACTS
Promoter’s contracts refer to contracts entered into with the
parties knowing fully well that a corporation does not yet legally
exist
Ex. Initial subscription
GR: Promoter's contracts are not necessarily binding on the
corporation once formed.
XPN: When the corporation received benefits from the contract at
the time of its constitution.
AGENCY PROVISIONS
The concept on agency is equally applicable on the concept of
promoter's contract.
Article 1897 | NCC. The agent who acts as such is not personally
liable to the party with whom he contracts, unless he expressly
binds himself or exceeds the limits of his authority without
giving such party sufficient notice of his powers. (1725)
Article 1898 | NCC. If the agent contracts in the name of the
principal, exceeding the scope of his authority, and the principal
does not ratify the contract, it shall be void if the party with
whom the agent contracted is aware of the limits of the powers
granted by the principal. In this case, however, the agent is liable
if he undertook to secure the principal's ratification.
Article 1901 | NCC. A third person cannot set up the fact that
the agent has exceeded his powers, if the principal has ratified,
or has signified his willingness to ratify the agent's acts.
DISCUSSION:
An example of a promoter's contract is what we called a Pre-
Incorporation Contract. This is a very specialized species of contract
because you have to understand that in pre-incorporation contract,
the subscriber (incorporator) is signing a contract with a
corporation yet to be formed. It still does not have a certificate of
incorporation. It is still not legal, a juridical entity in the eyes of the
law. Yet, you are contracting already with this particular
corporation to be formed.
So, that is an anomaly in the concept of contract because a contract
must have two existing parties at the time of its execution.
Technically, it's a void contract since the other party still has no
personality. What is the nature of the defect? What if the other
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54
party is non-existing or unauthorized? Recall what you’ve learned
in ObliCon.
That's why it's an anomaly but the Court has time and again ruled
its (of pre-incorporation contracts) validity because of the provision
on agency that once a corporation is formed - once it receives
benefits or it has been ratified - then it is considered as valid from
the time of its inception. That is an example of what we call as a
promoter's contract.
TYPES OF PRE-INCORPORATION CONTRACT
A pre-incorporation subscription contract is a special contract, and
a type of promoter's contract, and although these are contracts
between the subscriber and the corporation, they are at the same
time deemed to be contracts among the stockholders of the
corporation.
Contracts entered into in the name of the intended corporation by
the promoters or organizers of the corporation, i.e. feasibility
studies, lease, hiring of employees, etc.
Ex. Lease. You formed a corporation. Part of what you have to apply
for in SEC is the principal place of business. If you would rent, you
will already sign a lease contract with the lessor under the name of
the corporation, wherein that corporation is not yet existing. So
there is an anomaly that the lessee is non-existing, not yet a
juridical entity. That is the type of a promoter's contract [that is]
non-existing but then once it is existing and then ratified, that is
already considered as valid.
Q: What if the corporation does not subsist? Are the promoters or
the ones signing on behalf of the intended corporation liable?
A: Yes if they exceeded their authority or if they undertook to get
the ratification of the principal but the principal did not ratify it.
[Apply Concept of Agency] Since promoters are considered as
agents.
SUBSCRIPTION CONTRACT
Section 59 | RCC. Subscription Contract. - Any contract for the
acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription
within the meaning of this Title, notwithstanding the fact that
the parties refer to it as a purchase or some other contract.
DISCUSSION: Whatever contract you call it but if it pertains to the
issuance of an unissued shares of the corporation then that is
what you call a subscription contract.
PRE-INCORPORATION SUBSCRIPTION
Section 60 | RCC. Pre-incorporation subscription. – A
subscription of shares in a corporation still to be formed shall be
irrevocable for a period of at least six (6) months from the date
of subscription, unless all of the other subscribers consent to the
revocation, or the corporation fails to incorporate within the
same period or within a longer period stipulated in the contract
of subscription. No pre-incorporation subscription may be
revoked after the articles of incorporation is submitted to the
Commission.
DISCUSSION: This is actually an agreement between the initial
incorporators which is irrevocable.
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BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
No pre-incorporation subscription may be revoked after the
articles of incorporation is submitted to the Commission.
The reason for that is that it will be considered as fraudulent. You
are trying to defraud the government in saying that you've
subscribed but you just revoked after.
OFFER THEORY
This construes subscription agreement as only a continuing offer to
a proposed corporation, which offer does not ripen into a contract
until accepted by the corporation when organized.
CONTRACT THEORY
A subscription agreement among several persons to take shares in
a proposed corporation becomes binding contract and is
irrevocable from the time of subscription, unless cancelled by all
the parties before acceptance by the corporation.
SUBSCRIPTION AGREEMENTS
Subscriptions agreements are special contracts in the sense that
they go beyond the terms of the ordinary contracts. Although
subscription agreements are contract between the subscriber, and
the corporation, at the same time they are deemed to be contracts
among the stockholders of the corporation.
Such a special relationship among the subscriber can be sustained
only if we look beyond the corporate fiction and see that beneath
the corporate veil is an association of warm-bodied persons who
decided to band together through the corporation in pursuit of a
business enterprise.
DISCUSSION:
These are special contracts that go beyond the ordinary contract
because of the fact that you are contracting with a corporation yet
to be formed.
CAGAYAN FISHING DEV. CO., INC. v. TEODORO SANDIKO
G.R. No. 43350 ½ December 23, 1937
FACTS: Manuel Tabora Manuel Tabora is the registered owner
of four parcels of land in Linao, Aparri. These parcels of land
were subjected to several mortgages in favor of PNB and Buzon.
Tabora sold to Cagayan Shipping the 4 parcels of land. Cagayan
was then still under process of incorporation. The sale stated
that the outstanding mortgage loan on the properties would
have to be fully paid by the corporation.
Then, the corporation was incorporated. The board adopted a
resolution which authorized its president to sell the 4 parcels of
land to Teodoro Sandiko. Teodoro Sandiko then obligated
himself to shoulder the three mortgages But Sandiko failed to
pay the promissory note. So the corporation filed a recovery suit
ISSUE:
(1) Whether Cagayan Fishing Dev’t. has juridical capacity to
enter into the contract. NO.
(2) Can promoters of a corporation act as agents of a
corporation? NO.
HELD:
The transfer made by Tabora Effected May 31, 1930
to the Cagayan Fishing
Development Co., Inc
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Actual incorporation Oct 22, 1930
In other words, the transfer was made almost five months
before the incorporation of the company. Unquestionably, a
duly organized corporation has the power to purchase and hold
such real property as the purposes for which such corporation
was formed may permit and for this purpose may enter into
such contracts as may be necessary (sec. 13, pars. 5 and 9, and
sec. 14, Act No. 1459). But before a corporation may be said to
be lawfully organized, many things have to be done. Among
other things, the law requires the filing of articles of
incorporation (secs. 6 et seq., Act. No. 1459). Although there is
a presumption that all the requirements of law have been
complied with (sec. 334, par. 31 Code of Civil Procedure), in the
case before us it cannot be denied that the plaintiff was not yet
incorporated when it entered into a contract of sale, Exhibit A.
The contract itself referred to the plaintiff as “una ociedad en
vias de incorporacion.” It was not even a de facto corporation at
the time. Not being in legal existence then, it did not possess
juridical capacity to enter into the contract.
Corporations are creatures of the law, and can only come into
existence in the manner prescribed by law. As has already been
stated, general law authorizing the formation of corporations
are general offers to any persons who may bring themselves
within their provisions; and if conditions precedent are
prescribed in the statute, or certain acts are required to be done,
they are terms of the offer, and must be complied with
substantially before legal corporate existence can be acquired.
For reasons that are self-evident, these promoters could not
have acted as agent for a projected corporation since that which
no legal existence could have no agent. A corporation, until
organized, has no life and therefore no faculties. It is, as it were,
a child in ventre sa mere. This is not saying that under no
circumstances may the acts of promoters of a corporation be
ratified by the corporation if and when subsequently organized.
There are, of course, exceptions (Fletcher Cyc. Of Corps.,
permanent edition, 1931, vol. I, secs. 207 et seq.), but under the
peculiar facts and circumstances of the present case we decline
to extend the doctrine of ratification which would result in the
commission of injustice or fraud to the candid and unwary.
It should be observed that Manuel Tabora was the registered
owner of the four parcels of land, which he succeeded in
mortgaging to the Philippine National Bank so that he might
have the necessary funds with which to convert and develop
them into fishery. He appeared to have met with financial
reverses. He formed a corporation composed of himself, his
wife, and a few others. From the articles of incorporation,
Exhibit 2, it appears that out of the P48,700, amount of capital
stock subscribed, P45,000 was subscribed by Manuel Tabora
himself and P500 by his wife, Rufina Q. de Tabora; and out of the
P43,300, amount paid on subscription, P42,100 is made to
appear as paid by Tabora and P200 by his wife. Both Tabora and
His wife were directors and the latter was treasurer as well. In
fact, to this day, the lands remain inscribed in Tabora’s name.
The defendant always regarded Tabora as the owner of the
lands. He dealt with Tabora directly. Jose Ventura, president of
the plaintiff corporation, intervened only to sign the contract,
Exhibit B, in behalf of the plaintiff. Even the Philippine National
Bank, mortgagee of the four parcels of land, always treated
Tabora as the owner of the same.
The promisory note was made payable to the plaintiff company
so that it may not attached by Tabora’s creditors, two of whom
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BUSINESS ORGANIZATION II
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had obtained writs of attachment against the four parcels of
land.
DISCUSSION:
Here, the promoters were made liable. It would seem that in this
case, ratification is the key element in upholding the validity and
enforceability of promoter’s contracts.
Without ratification by a corporation after its due incorporation, a
contract entered into in behalf of a corporation yet to be organized
or still in the process of incorporation is void against the
corporation.
The transfer by Manuel Tabora to the Cagayan Fishing
Development Company, Inc. was null because at the time it was
effected, the corporation was non-existent (2020 TSN)
RIZAL LIGHT v. MUNICIPALITY OF MORONG
G.R. No. L-20993; 25 SCRA 285
FACTS:
On September 10, 1962, Morong Electric, having been granted
a municipal franchise on May 6, 1962 by respondent
municipality of Morong, Rizal to install, operate and maintain an
electric heat, light and power service in said municipality —
approved by the Provincial Board of Rizal on August 31, 1962 —
filed with the Public Service Commission an application for a
certificate of public convenience and necessity for said service.
Said application was entitled "Morong Electric Co., Inc.,
Applicant", and docketed as Case No. 62-5143.
Rizal Light opposed in writing the application of Morong Electric.
Rizal Light petitioner filed a motion, dated January 4, 1963,
asking for the dismissal of the application upon the ground that
applicant Morong Electric had no legal personality when it filed
its application on September 10, 1962, because its certificate of
incorporation was issued by the Securities and Exchange
Commission only on October 17, 1962.
The Commission approved the application of Morong Electric
and ordered the issuance in its favor of the corresponding
certificate of public convenience and necessity.
Rizal Light claims that Morong Electric should not have been
granted the certificate of public convenience and necessity
because it did not have a corporate personality at the time it was
granted a franchise and when it applied for said certificate.
The bulk of petitioner's arguments assailing the personality of
Morong Electric dwells on the proposition that since a franchise
is a contract, at least two competent parties are necessary to the
execution thereof, and parties are not competent except when
they are in being. Hence, it is contended that until a corporation
has come into being, in this jurisdiction, by the issuance of a
certificate of incorporation by the Securities and Exchange
Commission (SEC) it cannot enter into any contract as a
corporation.
The certificate of incorporation of the Morong Electric was
issued by the SEC on October 17, 1962, so only from that date,
not before, did it acquire juridical personality and legal
existence. Petitioner concludes that the franchise granted to
Morong Electric on May 6, 1962 when it was not yet in esse is
null and void and cannot be the subject of the Commission's
consideration.
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56
Morong Electric argues, and to which argument the Commission
agrees, that it was a de facto corporation at the time the
franchise was granted and, as such, it was not incapacitated to
enter into any contract or to apply for and accept a franchise.
Not having been incapacitated, Morong Electric maintains that
the franchise granted to it is valid and the approval or
disapproval thereof can be properly determined by the
Commission.
ISSUE: Whether the franchise granted to Morong Electric is
valid. – YES.
RULING:
Rizal Light's contention that Morong Electric did not yet have a
legal personality on May 6, 1962 when a municipal franchise was
granted to it is correct.
The juridical personality and legal existence of Morong Electric
began only on October 17, 1962 when its certificate of
incorporation was issued by the SEC. Before that date, or
pending the issuance of said certificate of incorporation, the
incorporators cannot be considered as de facto corporation. But
the fact that Morong Electric had no corporate existence on the
day the franchise was granted in its name does not render the
franchise invalid, because later Morong Electric obtained its
certificate of incorporation and then accepted the franchise in
accordance with the terms and conditions thereof. This view is
sustained by eminent American authorities.
Thus, McQuiuin says:
The fact that a company is not completely incorporated at
the time the grant is made to it by a municipality to use the
streets does not, in most jurisdictions, affect the validity of
the grant. But such grant cannot take effect until the
corporation is organized. And in Illinois it has been decided
that the ordinance granting the franchise may be presented
before the corporation grantee is fully organized, where
the organization is completed before the passage and
acceptance. (McQuillin, Municipal Corporations, 3rd Ed.,
Vol. 12, Chap. 34, Sec. 34.21)
Fletcher says: While a franchise cannot take effect until the
grantee corporation is organized, the franchise may,
nevertheless, be applied for before the company is fully
organized.
A grant of a street franchise is valid although the corporation
is not created until afterwards. (Fletcher, Cyclopedia Corp.
Permanent Edition, Rev. Vol. 6-A, Sec.2881)
And Thompson gives the reason for the rule: In the matter of the
secondary franchise, the authorities are numerous in support of
the proposition that an ordinance granting a privilege to a
corporation is not void because the beneficiary of the ordinance
is not fully organized at the time of the introduction of the
ordinance. It is enough that the organization is complete prior
to the passage and acceptance of the ordinance. The reason is
that a privilege of this character is a mere license to the
corporation until it accepts the grant and complies with its terms
and conditions. (Thompson on Corporations, Vol. 4, 3rd Ed., Sec.
2929)
The incorporation of Morong Electric on October 17, 1962 and
its acceptance of the franchise as shown by its action in
prosecuting the application filed with the Commission for the
approval of said franchise, not only perfected a contract
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
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between the respondent municipality and Morong Electric but
also cured the deficiency pointed out by the petitioner in the
application of Morong EIectric. Thus, the Commission did not err
in denying petitioner's motion to dismiss said application and in
proceeding to hear the same. The efficacy of the franchise,
however, arose only upon its approval by the Commission on
March 13, 1963. The reason is that —
Under Act No. 667, as amended by Act No. 1022, a
municipal council has the power to grant electric
franchises, subject to the approval of the provincial board
and the President. However, under Section 16(b) of
Commonwealth Act No 146, as amended, the Public Service
Commission is empowered “to approve, subject to
constitutional limitations any franchise or privilege granted
under the provisions of Act No. 667, as amended by Act No.
1022, by any political subdivision of the Philippines when,
in the judgement of the Commission, such franchise and
the Commission shall in so approving impose such
conditions as to construction, equipment, maintenance,
service, or operation as the public interests and
convenience may reasonably require, and to issue
certificated of public convenience and necessity when such
is required or provided by any law or franchise.” Thus, the
efficacy of a municipal electric franchise arises, therefore,
only after the approval of the Public Service Commissions.
(Almendras v. Ramos, 90 Phil. 231)
The conclusion herein reached regarding the validity of the
franchise granted to Morong Electric is not incompatible with
the holding of this Court in Cagayan Fishing Development Co.,
Inc. vs. Teodoro Sandiko upon which Rizal Light leans heavily in
support of its position. In said case this Court held that a
corporation should have a full and complete organization and
existence as an entity before it can enter into any kind of a
contract or transact any business. It should be pointed out,
however, that this Court did not say in that case that the rule is
absolute or that under no circumstances may the acts of
promoters of a corporation be ratified or accepted by the
corporation if and when subsequently organized. Of course,
there are exceptions. It will be noted that American courts
generally hold that a contract made by the promoters of a
corporation on its behalf may be adopted, accepted or ratified
by the corporation when organized.
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57
DE FACTO CORPORATION DOCTRINE
RCC | Section 19. De facto Corporations - The due
incorporation of any corporation claiming in good faith to be a
corporation under this Code, and its right to exercise corporate
powers, shall not be inquired into collaterally in any private suit
to which such corporation may be a party. Such inquiry may be
made by the Solicitor General in a quo warranto proceeding.
DISCUSSION: You cannot question the existence of corporations
collaterally. The attack must be in a direct proceeding called a Quo
Warranto proceeding.
For example, where the issue is whether or not you validly
contracted with the corporations, you cannot at the same time
attack the existence of the corporation. The attack must be in a Quo
Warranto proceeding made only by the Solicitor General.
DE FACTO DOCTRINE
De facto means there is some semblance of authority. It is as if a
corporation but is lacking something.
MAIN SEQUENCES IN A DE FACTO CORPORATION:
1. The enterprise enters into a contract with an outsider,
who later brings an action against the enterprise as
though it were a corporation, and the enterprise is held
liable in corporate form;
2. The enterprise enters into a contract with an outsider,
and subsequently brings actions in corporate form
against the outsider, the outsider is held liable to the
enterprise;
3. The enterprise enters into a contract with an outsider,
and the outsider brings an action against the component
individuals, they are absolved from liability and the
outsider is limited to his remedy against the enterprise
only;
4. The enterprise enters into a contract with an outsider,
and the component individuals seek to hold the outsider
liable on his contract, where logically the individuals are
not allowed to recover, recovery must be by the
enterprise.
REQUISITES FOR DE FACTO DOCTRINE
(1) The existence of a valid law under which the corporation
may be incorporated (Revised Corporation Code);
(2) An attempt in good faith to incorporate or existence of a
colorable compliance with provisions on incorporation;
and
(3) The assumption by the enterprise of corporate powers.
NOTE: The only thing that calls it de facto because it failed to
complete the incorporation process.
Q: What do we mean by “colorable compliance with the law”?
A: Under our statue it is to be noted (Corporation Law, Sec. 11) that
it is the issuance of a certificate of incorporation by the Director of
the Bureau of Commerce and Industry which calls a corporation
into being.
The issuance of the certificate of incorporation may therefore be
considered as essential for the existence of a de facto corporation,
(Hall vs Piccio).
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BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
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Therefore, to satisfy requirement #2 (for De Facto Doctrine), there
must be at least the issuance of the certificate of incorporation.
Q: How do we distinguish de jure from de facto?
A: Prior to the Revised Corporation Code was this – after the
issuance of the certificate of incorporation, you have the option
within 30 days to adopt the by-laws. By-laws are internal rules for
the stockholders, the officers, and the board of directors. It could
be that you applied as a corporation and you were given/issued a
certificate of incorporation but you did not comply after that – you
no longer submitted by-laws. So there was no full compliance but
yet you are given the certificate of incorporation. So technically you
could be a de facto.
Another thing, if you submitted the Articles of Incorporation for the
purpose of issuance of the certificate of incorporation, you have to
fill out or give some information – e.g. who is the incorporator, is he
a Filipino, of legal age, etc. It could be that you misstated some
fact/s. It could be that you said that this particular person is a
Filipino when in fact he is not. So, he was issued a certificate of
incorporation but it was later found out that there was
misrepresentation on the form submitted. So, it became illegal or it
was not fully compliant. This can also be a reason for de facto
corporation.
Those are the instances there could be a de facto corporation.
Again as earlier mentioned, the consequence of a de facto is that it
is still like a corporation. It still has authority/assumed corporate
powers.
Q: Is the failure of AIIBP to file its by-laws within the period
prescribed fatal? – No.
SAWADJAAN vs CA
G.R. 141735
FACTS: Philippine Amanah Bank (PAB) opened a 5 million credit
line to Compressed Air Machineries and Equipment Corporation
(CAMEC) but when the loan matured in 17 May 1989, CAMEC
failed to repay despite a 120 day extension.
In January 1990 Congress passed RA 6848 creating the Al-
Amanah Islamic Investment Bank of the Philippines (AIIBP),
repealing PD 264 which created PAB. All assets, liabilities and
capital accounts of the PAB were transferred to the AIIBP, and
the existing personnel of the PAB were to continue to discharge
their functions unless discharged. In the ensuing reorganization,
Sawadjaan was among the personnel retained by the AIIBP.
When CAMEC failed to pay its loan, the bank, now AIIBP
discovered that one of the titles to the land used as collateral
was spurious. The property described was non-existent and was
covered by an existing mortgage in favor of a Divina Pablico.
The Board of Directors of AIIBP formed a committee to look into
the CAMEC transaction which had cost the bank 6 Million in
losses.
AIIBP Board of Directors passed a resolution holding Sawadjaan
guilty of Dishonesty in performance of official duties and
conduct prejudicial to the best interest of the service and
imposing DISMISSAL.
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58
AIIBP was alleged to have committed GADALEJ when it initiated
and conducted an administrative investigation without a validly
promulgated rules of procedure in the adjudication of
administrative cases at the Islamic Bank. Despite petitioner’s
arguments, the petition was Dismissed and the assailed
resolutions of the CSC were affirmed.
Sawadjaan’s himself filed an MNT in the Court of Appeals based
on the following ground of newly discovered evidence. He
claimed that he had recently discovered that at the time his
employment was terminated, the AIIBP had not yet adopted its
corporate by-laws. He attached a Certification by the Securities
and Exchange Commission (SEC) that it was only on 27 May 1992
that the AIIBP submitted its draft by-laws to the SEC, and that its
registration was being held in abeyance pending certain
corrections being made thereon.
Sawadjaan argued that since the AIIBP failed to file its by- laws
within 60 days from the passage of Rep. Act No. 6848, as
required by Sec. 51 of the said law, the bank and its stockholders
had "already forfeited its franchise or charter, including its
license to exist and operate as a corporation," and thus no
longer have "the legal standing and personality to initiate an
administrative case."
ISSUE: W/N the failure of AIIBP to file its by-laws within the
period prescribed results in a nullity of all its actions. – NO.
HELD: The AIIBP was created by Rep. Act No. 6848. It has a main
office where it conducts business, has shareholders, corporate
officers, a board of directors, assets, and personnel. It is, in fact,
here represented by the Office of the Government Corporate
Counsel, "the principal law office of government- owned
corporations, one of which is respondent bank."
At the very least, by its failure to submit its by-laws on time,
the AIIBP may be considered a de facto corporation whose
right to exercise corporate powers may not be inquired into
collaterally in any private suit to which such corporations may
be a party.
Moreover, a corporation which has failed to file its by-laws
within the prescribed period does not ipso facto lose its powers
as such. The SEC Rules on Suspension/Revocation of the
Certificate of Registration of Corporations, details the
procedures and remedies that may be availed of before an order
of revocation can be issued. There is no showing that such a
procedure has been initiated in this case.
DISCUSSION: The de facto doctrine is meant to protect the
enforceability of corporate dealings and contracts, to allow the
public to take at reasonable face value the authority of the
corporation to enter into valid and binding contracts, thereby
providing a healthy system by which to encourage the public to deal
with corporate entities. If this is not the doctrine then, corporations
are prone to denial of existence.
It is therefore meant to apply the level of existence that pertains to
the relationship of the corporation with the dealing public and is
not meant to govern nor be applicable to other levels of existence.
Thus, it should not be used as a defense in a revocation proceedings
instituted by the Commission in the exercise of its jurisdiction and
powers. (In the Matter of Donggwang Clark Corporation, SEC
Administrative Case No. 10-13-168, SEC EPD Case No. 12-3010,
October 31, 2014)
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BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
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INSTANCES OF A DE FACTO CORPORATION
1. Defects in the Incorporation papers – Articles of Incorporation
(AOI) failed to state all the matters required by the
Corporation Code to be stated, or state some form of them
incorrectly
2. Corporate name – The name of the corporation closely
resembles that of a pre-existing corporation that will tend to
deceive the public.
Discussion: To date, we must have it checked with the SEC
whether the proposed corporate name is not confusingly
similar to an existing corporation. However, there are
instances that the system will not immediately capture the
similarity, and the SEC will ask you to change your corporate
name after some time. You will also be required to execute a
sworn statement that if ever the SEC finds out that your
corporate name is confusingly similar to another existing
corporation, you are willing to change your corporate name.
3. Ineligibility of incorporators
Discussion: Such as when you said “of legal age” but in fact is
still a minor.
4. Defects in the execution of the incorporation papers
CORPORATE EXISTENCE CANNOT BE COLLATERALLY ATTACKED
Remember that the corporate existence may not be collaterally
attacked.
(a) Individual right is not invaded; it is the State’s right and
authority which are invaded and usurped. If the state,
which alone grants the authority to incorporate, remains
silent, an individual would not be allowed and permitted
to raise the inquiry.
(b) It would produce endless confusion and hardship and
probably destroy the corporation if the legality of its
existence could be question in every suit to which it is a
party, for then no judgment could be rendered which
would finally settle the question.
(c) Likewise, the rule is in the interest of the public and is
essential to the validity of business transactions with
corporations.
CORPORATION BY ESTOPPEL DOCTRINE
RCC | Section 20. Corporation by Estoppel. - All persons who
assume to act as a corporation knowing it to be without the
authority to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result
thereof: Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not
be allowed to use on any its lack of corporate personality as a
defense. Anyone who assumes an obligation to an ostensible
corporation as such cannot resist performance thereof on the
ground that there was in fact no corporation.
DISCUSSION:
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59
Meaning, there is subsidiary liability – creditors can go after the
personal assets of those persons who assumed to act as a
corporation.
They may not raise that they do not have a certificate of
incorporation.
ASIA BANKING CORPORATION vs. STANDARD PRODUCTS, CO.,
INC.
G.R. No. 22106, September 11, 1924
FACTS: Standard Products, Co., Inc., was indebted to Asia
Banking Corporation for the amount of P37,757.22. To secure its
indebtedness, it executed a promissory note in favor of plaintiff-
appellee. Upon demand for the balance due, the respondent-
appellant failed to pay. Hence an action was brought by plaintiff-
appellee to recover the sum of P24,736.47. The court rendered
judgment in favor of the plaintiff-appellee for the sum
demanded in the complaint, with interest on the sum of
P24,147.34 from November 1, 1923, at the rate of 10 per cent
per annum, and the costs. Hence this appeal by the respondent-
appellant. At the trial of the case the plaintiff failed to prove
affirmatively the corporate existence of the parties and the
appellant insists that under these circumstances the court erred
in finding that the parties were corporations with juridical
personality and assigns same as reversible error.
ISSUE: Whether or not respondent is estopped from denying
the corporate existence of the plaintiff.
RULING: YES. The general rule is that in the absence of fraud a
person who has contracted or otherwise dealt with an
association in such a way as to recognize and in effect admit its
legal existence as a corporate body is thereby estopped to deny
its corporate existence in any action leading out of or involving
such contract or dealing, unless its existence is attacked for
cause which have arisen since making the contract or other
dealing relied on as an estoppel and this applies to foreign as
well as to domestic corporations.
The defendant having recognized the corporate existence of the
plaintiff by making a promissory note in its favor and making
partial payments on the same is therefore estopped to deny said
plaintiff's corporate existence. It is, of course, also estopped
from denying its own corporate existence.
Under these circumstances it was unnecessary for the plaintiff
to present other evidence of the corporate existence of either
of the parties. It may be noted that there is no evidence showing
circumstances taking the case out of the rules stated.
DISCUSSION:
In case of estoppel, they are liable as general partners, so there is
subsidiary liability.
PAZ v. NEW INTERNATIONAL ENVIRONMENTAL
UNIVERSALITY, INC.
G.R. No. 203993 | April 20, 2015
FACTS: Priscilo Paz, as the officer-in-charge of the Aircraft
Hangar at the Davao International Airport, entered into a
Memorandum of Agreement on March 1, 2000 with Captain
Clarke, who is the President of the International Environmental
University.
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BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
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Under the MOA, the International Environmental University
shall be allowed to use Davao International Airport’s aircraft
hangar space for a period of 4 years, unless pre-terminated by
both parties with 6 months advance notice. It is specified that
the space shall be used exclusively for company
aircraft/helicopter.
On August 19, 2000, Paz complained in a letter addressed to
Capt. Clarke that the hangar space was being used for trucks and
equipment, vehicles maintenance and fabrication, instead of for
company helicopter/aircraft only. Under the letter, Paz
threatened to cancel the MOA if the welding, grinding and
fabrication jobs were not stopped immediately. Paz sent two
other letters to Capt. Clarke, with the same import as the first
letter. The first and second letters were addressed to Capt.
Clarke, International Environmental Universality, Inc, while the
third and fourth letters were addressed to Capt. Clarke, CEO,
New International Environmental University, Inc.
For the fourth and final letter, Paz strongly demanded that Capt.
Clarke immediately vacate the hangar space. He further
informed Capt. Clarke that DIA will apply for immediate
electrical disconnection with the DLPC, to compel him to desist
from continuing the works thereon.
On Sept. 4, 2002, New International Environmental Universality
filed a complaint against Paz for breach of contract before the
RTC, alleging that Paz violated the terms of the MOA when he
took over the hangar space without giving NIEU the requisite 6-
month advance notice of termination.
In his defense, Paz alleged that respondent had no cause of
action against him as the MOA was executed between him and
Capt. Clarke, in his personal capacity, and that the 6- month
advance notice of termination was already given in the letters
he sent to Capt. Clarke.
The RTC ruled in favor of respondent, finding Paz liable for
breach of contract for illegally terminating the MOA even before
the expiration of the term. Moreover, the RTC declared that the
MOA was executed by the parties not only in their personal
capacities but also in representation of their respective
corporations or entities. (sept 3, 2001 – issuance of cert of
incorporation)
The CA similarly ruled in favor of respondent. While there was
no corporate entity at the time of the execution of the MOA, Paz
is nonetheless estopped from denying that he had contracted
with New International as a corporation, having recognized the
latter as the “Second Party” in the MOA that “will use the hangar
space exclusively for company aircraft/helicopter.” He was
likewise found to have issued checks to New International.
ISSUE: Whether or not Paz is bound by his obligation under the
MOA by estoppel.
HELD: YES. Paz is bound by his obligation under the MOA.
As correctly ruled by the CA, Paz cannot deny that he contracted
with NIEU, since it is evident from the very language itself of the
MOA, whereby he obligated himself to allow the use of the
hangar space for COMPANY aircraft/helicopter. Also, in his final
letter, Paz reiterated and strongly demanded the former to
immediately vacate the hangar space that the COMPANY is
occupying/utilizing.
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Section 20 of the Corporation Code explicitly provides that one
who assumes an obligation to an ostensible corporation, as
such, cannot resist performance thereof on the ground that
there was in fact no corporation. Clearly, petitioner is bound by
his obligation under the MOA not only on estoppel but by
express provision of law.
The lower courts, therefore, did not err in finding petitioner
liable for breach of contract for effectively evicting respondent
from the leased premises even before the expiration of the
term of the lease.
CAPITAL STRUCTURES
You have to look at a corporation as an entity. In capital structure,
you are talking about your sources of funds.
Example: If you put up a coffee shop, you would of course need a
coffee machine and whatever ingredients you would need. How
would you fund the acquisition of those assets? It would either be
based on the contribution of the owners, which is equity portion,
or you can borrow money, so the composition would then be debt
financing.
So, capital structures – in the broadest sense – is the mixture of
your debt and equity financing. It could be based on either
borrowed money in its entirety, or based on the contributions of
the owners, which is called the equity portion.
CAPITAL STRUCTURES
The composition of a company’s capital in terms of equity (common
and preferred stock), debt (including bonds and loans) and hybrid
securities (such as convertible debt and preferred shares).
§ The equity is the contribution and can be classified into
different shares, which will be discussed further later on.
§ Hybrid securities are a level up form of financial
instruments.
Equity financing is provided by the shareholders or the owners.
Debt financing is provided by the banks or shareholders who,
respectively, receive loan contracts and publicly traded bonds in
return for their money.
The capital structure shows the composition of a group’s liabilities
as it shows who has a claim on the group’s assets and whether it is
a debt or an equity claim. The leverage ratio is the proportion of the
group’s liabilities that is financed by debt claims.
THIN CAPITALIZATION RATIO
§ The World Bank’s annual The Doing Business article gives
a summary of the business climate of a particular country.
§ Some countries provide for thin capitalization ratio,
under which there a minimum percentage of the capital
that should be made up of equity.
§ If the thin capitalization rate is 10%, the amount of equity
should not go below the 10% mark. If the capital is 100,
then at least 10 should be financed by the owner. The
capitalization coming from debts should not exceed 90%.
In the Philippines, there is NO thin capitalization ratio. This matters
because of the claim of the owners or the financiers on the assets.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
If there is no thin capitalization, then it could be that all of the
finances for the business will come from loans or debts.
§ Disadvantage: The default risk is very high, because
you’re paying interest.
o It could be that the business owners would
need to pay interest while their business is not
doing well. That may be a red flag on the part
of the investor. Or, the investor may appreciate
that they will not have to contribute money to
the business and just take out loans.
§ Advantage: There may be an advantage for tax purposes.
o The higher the debt financing, the higher the
interest rates being paid are. The higher
interest expense, the higher the tax shield on
the tax component of the interest expense. This
could lower the tax liability.
When talking about capital structure, we are talking about the
sources of funding of a business to acquire an asset. Strictly
speaking, when we are talking about capital, we are only referring
to the equity.
§ Capitalization: refers to the entire structure;
o i.e. the combination of equity and debt.
§ Capital or Stock Capital: refers only to the definition of
equity financing in the strictest sense.
o It only refers to equity or those funds provided
by the owner or the stock holder.
THEORIES OF CAPITAL STRUCTURES
(1) TRADE-OFF THEORY
Companies optimally trade off the tax shield advantage of
debt against the expected bankruptcy costs.
The higher your debt financing, the higher is the default risk.
So, you have higher bankruptcy costs. The interest repayments
on debt are tax deductible. As mentioned earlier, this benefit
of debt has been traded off against the increase in expected
bankruptcy costs that result from taking higher debt levels.
Highly leveraged companies are more likely to go bankrupt,
and value gets destroyed in bankruptcy, especially if the assets
lose a large fraction of their value in bankruptcy.
(2) PECKING ORDER THEORY
Invoke the information asymmetry between inside
shareholders and outside shareholders. Given that insiders are
more likely to issue new shares when shares are overvalued, a
company’s announcement to issue more shares may lead to
drop in share price.
We will go the details of it when we discuss the Securities and
Regulations Code on how manipulations in share prices are
actually being done and the regulatory climate on the
manipulations of the share prices.
INVESTMENT
An investment is an expenditure to acquire property or other assets
in order to produce revenue.
PRESIDENT OF PDIC VS. REYES
460 SCRA 473 | June 21, 2005
CONTRIBUTORS: ALCORAN | BRAGA | CAYBOT | DEIPARINE | LOQUIAS | MILANA | PUERTO | SUYO | VILLA-ABRILLE
61
FACTS: Pacific Banking Corporation (PABC) was placed under
receivership on the ground of insolvency. Subsequently, it was
also placed under liquidation and the Central Bank of the
Philippines, through the Office of the Solicitor General, filed a
petition for the assistance in the liquidation of PABC.
So, here, private respondents (Singaporeans) filed their claim
before the liquidating court citing the Investment Incentive Act.
They claimed that they should be treated as preferred creditor
and prayed for the return of their equity investment with
interest until the closure of PABC.
Here, the liquidating court issued an order that the claimants are
Singaporeans who are foreign investors should be paid with
their investment and if there is any doubt as to whether or not
they shall be considered as preferred creditors, the doubt
should be resolved in favor of the claimants since it is of judicial
notice that the government adopted the policy to entice foreign
investors to help boost the economy. Also, that the claimant
here are foreign investors should be treated with liberality such
that they should be categorized among the preferred creditors.
Here, the liquidator of PDIC was ordered to pay the
SIngaporeans the total investment they have made and his order
was later on final and executory. The liquidating court, through
another judge, Judge Reyes, issued an order directing the Land
Bank of the Philippines to release the amount garnished and to
pay the accrued legal interest.
Now, the liquidator of PDIC was contending that the only fruits
that can arise from equity investments are dividends declared
from unrestricted retained earnings by the Board of Directors in
accordance with the Corporation Code. And, in the absence of
declaration in this case, the interest has no legal basis. Also, that
no actual damages can arise from the closure of the bank and
the interest rate provided in the case of Eastern Shipping Lines
vs. CA is not applicable because in that case, it clearly refers to
an award of interest in the concept of actual or compensatory
damages in case of breach of obligation.
In this case, the failure of PABC to return to the Singaporeans
their equity investments because of its closure is not a breach of
contract but is akin to a forced majeure.
ISSUE:
1) Whether or not the Singaporeans’ equity with the closed
PABC is entitled to the payment of interest? – NO.
2) Whether or the not Eastern Shipping Lines, Inc. v. CA
guidelines are applicable in fixing the rates of interest and/or
dividends that allegedly accrued on the equity investment of the
Singaporeans on PaBC. – NO.
HELD:
Original Remittance of the Singaporeans was not in a nature of
a loan or forbearance of money, goods, or credit. It is an
investment.
The Liquidation Court awarded interest not as a form of accrued
dividends or return of investment, but as actual and
compensatory damages. Categorically, the order states: The
December 16, 1993 CA ruled that the remittance of earnings of
this type of foreign investment is guaranteed. Legal interests are
earnings and they are provided for by law arising from the
withholding of funds due to a party. They are not computed on
the amount of earnings of a business.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
When the trial court, in its Order of 11 September 1992,
declared the Singaporeans to have the status of preferred
creditors, it did so only for the purpose of giving them priority in
the order of payment upon the liquidation of the PABC. Relying
only on the Investment Incentive Act, the trial court did not
decide whether the Singaporeans investment was a loan or
equity. Since the Singaporeans were declared preferred
creditors for a limited purpose, it does not allow that the court
likewise implied that the original remittance of the Singaporeans
was in the nature of a loan or forbearance of money, goods, or
credit.
Court of Appeals: The equity investment of US $2,531,632.18
was not a loan or forbearance of money; hence, Central Bank
Circular No. 416, prescribing 12% interest per annum on loans
or forbearance of money, goods, or credit is inapplicable. It
applied Article 2209 of the Civil Code, which provides for the
legal interest of 6% per annum in the absence of a stipulation to
the contrary. Thus, the CA modified the Order 12 May 1998 and
reduced the rate of interest on the investment of US
$2,531,632.18 from 12% to 6% to run from 15 October 1981
when the outward remittance and equity investment was
actually made up to the closure of PaBC.
Also, following Eastern Shipping Lines, Inc. v. Court of Appeals it
upheld the grant of 12% interest on the monetary award of US
$2,531,632.18 to run from the date of the finality of the 11
September 1992 Order until its satisfaction. It is undisputed that
the amount of US $2,531,632.18 remitted by the Singaporeans
represented the 154,462 PaBC common shares previously
issued to, and owned by, Mandarin Development Corporation
bought by the Singaporeans at the price of US $16.39 per share.
The investment was approved by the Central Bank under
Monetary Board Resolution No. 323 and constituted about 11%
of the total subscribed capital stock of PaBC. Clearly, the amount
remitted to PaBC by the Singaporeans was an investment.
An investment is an expenditure to acquire property or other
assets in order to produce revenue. It is the placing of capital
or laying out of money in a way intended to secure income or
profit from its employment. To invest is to purchase securities
of a more or less permanent nature, or to place money or
property in business ventures or real estate, or otherwise lay it
out, so that it may produce a revenue or income. Thus, unlike a
deposit of money or a loan that earns interest, the investment
of the Singaporeans cannot be assured of a dividend or an
interest on the amount invested.
For, interests or dividends are granted only after profits or gains
are generated.
CAPITAL STOCK
SEC. 173. Outstanding Capital Stock Defined. – The term
“outstanding capital stock”, as used in this Code, shall mean the
total shares of stock issued under binding subscription contracts
to subscribers or stockholders, whether fully or partially paid,
except treasury shares.
OUTSTANDING CAPITAL STOCK
This means how much the capital stock that’s held by the
stockholders and subscribers other than the corporation because
treasury shares are actually issued shares that are subsequently
bought back by the corporation.
CONTRIBUTORS: ALCORAN | BRAGA | CAYBOT | DEIPARINE | LOQUIAS | MILANA | PUERTO | SUYO | VILLA-ABRILLE
62
1. Paid Up Capital
2. Subscription Receivables
Capital Stock
Subscribed
Capital Stock
If the big circle is the capital stock, the smaller circle is the
subscribed capital stock. The subscribed capital stocks do not
required to be paid immediately, there’s a portion which is called
the paid-up capital and there’s a portion which we call unpaid
subscription.
Q: What do we mean by capital?
PLDT v. NTC
G.R. No. 152685 | December 4, 2007
HELD: The phrase "capital stock subscribed or paid" must be
determined at par value. We reiterated that the term "capital
stock subscribed or paid" is the amount that the corporation
receives, inclusive of the premiums, if any, in consideration of
the original issuance of the shares.
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.
DISCUSSION:
When we talk about capital in the general sense, in our discussion
in capital structure, this could either be debt or capital (owner’s
fund or equity). In a stricter sense, we only talk about capital in the
equity portion.
Q: What is Paid-up Capital?
MSCI-NACUSIP Local Chapter v. NWPC
G.R. No. 125198 | March 3, 1997
HELD: Paid-up capital is that portion of the authorized capital
stock which has been both subscribed and paid.
DISCUSSION:
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
Let’s say your authorized capital stock is 10, your subscription is 5,
it’s not required for you to pay when you execute the subscription
agreement, the entire 5. You can just pay 3, for example. In that
sense, the paid-up capital is the 3 (the one that you subscribed and
paid), and the 2 is still the unpaid, the receivable on the part of the
corporation.
CLASSIFICATION OF SHARES
Section 6. Classification of Shares. - The classification of shares,
their corresponding rights, privileges, restrictions, and their
stated par value, if any, must be indicated in the articles of
incorporations. Each share shall be equal in all respects to every
other share, except as otherwise provided 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 share 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 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;
(b) Sale, lease, echange, mortgage, pledge, or other
disposition of all or substantially all of the corporate
property;
(c) Incurring, creating, or increasing bonded
indebtedness;
(d) Increase or decrease of authorized capital stock;
(e) Merger or consolidation of the corporation with
another corporation or other corporations;
(f) Investment of corporate funds in another corporation
or business in accordance with this Code; and
(g) Dissolution of the corporation.
(h) 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.
xxx
Generally speaking, we have – preferred and common shares.
The classification of shares, their corresponding rights, privileges,
restrictions, and their stated par value, if any, must be indicated in
the articles of incorporations.
The classification of shares must be indicated in the
articles of incorporation. The Articles of Incorporation is
like the Constitution-and-By Laws document of the
corporation.
Each share shall be equal in all respects to every other share, except
as otherwise provided 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.
CONTRIBUTORS: ALCORAN | BRAGA | CAYBOT | DEIPARINE | LOQUIAS | MILANA | PUERTO | SUYO | VILLA-ABRILLE
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It is not enough that it is only provided in the articles of
incorporation, it must also be provided in the certificate
of stock.
Take note:
Q: Can you deprive certain shares of voting rights?
A: YES! But take note that, no share may be deprived of voting rights
except those classified and issued as "preferred" or "redeemable"
shares, unless otherwise provided in this Code: Provided, That there
shall be a class or series of shares with complete voting rights.
If it’s preferred and redeemable, you can remove the
voting rights. In other words, always have voting rights
attached to it.
Preferred means that this particular share is preferred as
to dividends, so they are preferred when it comes to
dividends distribution. It could be as to assets when
there’s liquidation, they are the first ones to be
distributed assets to. Redeemable means that the
corporation will issue but the corporation has the option
to buy it back during a limited period.
What are your rights if you are holding or not holding preferred
redeemable shares? Do you still have a right aside from voting? Of
course, you still have rights.
RIGHTS OF HOLDERS OF NON-VOTING SHARES
This is the reason why decisions talking about foreign equity
restrictions is considered “flip-flop”. You can still vote when it
comes to decisions on the following.
Section 6 of RCC:
xxx
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
(SLEMP) 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.
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.
xxx
DISCUSSION:
So, you can still vote even if you are a holder of non-voting shares.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
PAR VALUE OF SHARES
What is the meaning of par value? This is actually the amount
stated in your certificate.
Section 6 of RCC
xxx
The shares or series of shares may or may not have a par value:
Provided, That banks, trust, insurance, and preneed companies,
public utilities, building and loan associations, and other
corporations authorized to obtain or access funds from the
public whether publicly listed or not, shall not be permitted to
issue no-par value shares of stock.
xxx
PREFERRED SHARES
There are two types of preferences. It could either be preference
as to assets in case of liquidation, or could be preference as to
dividends
Section 6 of RCC
xxx
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 references:
Provided, That preferred shares of stock may be issued only
with a stated par value. The board of directors, where
authorized in the articles of incorporation, may fix the terms
and conditions of preferred shares of stock or any series
thereof:
xxx
Section 6 of RCC
xxx
Shares of capital stock issued without par value shall be deemed
fully paid and non-assessable and the holder of such shares shall
not be liable to the corporation or to its creditors in respect
thereto.
Provided, that no-par value shares must be issued for a
consideration of at least Five pesos (P5.00) per share.
Provided, further, that the entire consideration received by the
corporation for its no-par value shares shall be treated as capital
and shall not be available for distribution as dividends.
xxx
This means that the corporation has nothing left unpaid or any
more receivable. This means that if you are issued a no-par value,
necessarily what was subscribed (how much was subscribed) to be
a no-par value, the paid-up capital is then considered the same
because there is no unpaid portion.
“Provided, that no-par value shares must be issued for a
consideration of at least Five pesos (P5.00) per share.”
In other words, if it is par value, it could be lower than 5.
CONTRIBUTORS: ALCORAN | BRAGA | CAYBOT | DEIPARINE | LOQUIAS | MILANA | PUERTO | SUYO | VILLA-ABRILLE
64
Section 6 of RCC
A corporation may further classify its shares for the purpose of
ensuring compliance with constitutional or legal requirements.
COMMON SHARES
Common shares are very important.
CIR vs CA
301 SCRA 152 | (G.R. No. 108576 | January 20, 1999
FACTS: Don Andres Soriano, a citizen and resident of the USA
formed in the 1930's the corporation "A Soriano Y Cia,"
predecessor of ANSCOR. On December 30, 1964 Don Andres
died.
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, 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 June 30, 1968, pursuant to a Board Resolution, ANSCOR
redeemed 28,000 common shares from Don Andres' estate. By
November 1968, the Board further increased ANSCOR's capital
stock to P75M divided into 150,000 preferred shares and
600,000 common shares. About a year later ANSCOR again
redeemed 80,000 common shares from Don Andres' estate,
further reducing the latter's common shareholdings.
ANSCOR's business purpose for both redemptions of stock is to
partially retire said stocks as treasury shares in order to reduce
the company's foreign exchange remittances in case cash
dividends are declared. In 1973, after examining ANSCOR's
books of account and records Revenue Examiners issued a
report proposing that ANSCOR be assessed for deficiency
withholding tax-at-source, pursuant to Secs 53 and 54 of the
1939 Revenue Code for the year 1968 and the second quarter of
1969 based on the transactions of exchange and redemption of
stocks.
Subsequently, ANSCOR filed a petition for review with the CTA
assailing the tax assessments on the redemptions and exchange
of stocks. In its decision, the CTA reversed the BIR's ruling after
finding sufficient evidence to overcome the prima facie
correctness of the questioned assessments. In a petition for
review, the CA affirmed the ruling of the CTA.
ISSUE: WON ANSCOR's exchange of common shares with
preferred shares can be considered as taxable exchange?
RULING: NO. Exchange of common with preferred shares is not
a taxable exchange.
There was no change in their proportional interest after the
exchange. There was no cash flow. Both stocks had the same par
value. Under the facts herein, any difference in their market
value would be immaterial at the time of exchange because no
income is yet realized — it was a mere corporate paper
transaction. It would have been different, if the exchange
transaction resulted into a flow of wealth, in which case income
tax may be imposed.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
Reclassification of shares does not always bring any substantial
alteration in the subscriber's proportional interest. But the
exchange is different — there would be a shifting of the balance
of stock features, like priority in dividend declarations or
absence of voting rights. Yet neither the reclassification nor
exchange per se, yields realize income for tax purposes.
A common stock represents the residual ownership interest in
the corporation. It is a basic class of stock ordinarily and usually
issued without extraordinary rights or privileges and entitles the
shareholder to a pro rata division of profits. Preferred stocks are
those which entitle the shareholder to some priority on
dividends and asset distribution. Both shares are part of the
corporation's capital stock. Both stockholders are no different
from ordinary investors who take on the same investment risks.
Preferred and common shareholders participate in the same
venture, willing to share in the profits and losses of the
enterprise. Moreover, under the doctrine of equality of shares
— all stocks issued by the corporation are presumed equal with
the same privileges and liabilities, provided that the
Articles of Incorporation is silent on such differences. In this
case, the exchange of shares, without more, produces no
realized income to the subscriber. There is only a modification
of the subscriber's rights and privileges — which is not a flow of
wealth for tax purposes. The issue of taxable dividend may arise
only once a subscriber disposes of his entire interest and not
when there is still maintenance of proprietary interest. Thus, the
exchange of common shares with preferred shares
cannot be taxed.
DISCUSSION:
A common stock represents the residual ownership interest in the
corporation. It is a basic class of stock ordinarily and usually issued
without extraordinary rights or privileges and entitles the
shareholder to a pro rata division of profits.
Preferred stocks are those which entitle the shareholder to some
priority on dividends and asset distribution.
Q: Which is more profitable – preferred or common share?
It depends. If the corporation is earning so much, then the common
shares are in a good position because they are the residual. So after
the preferred shares are distributed, then it goes to common
shares. Therefore, if the profit is very big and it is operating very
well, then share of the common shares is considered big.
REPUBLIC PLANTERS BANK vs. AGANA
269 SCRA 1
FACTS: ROBES-FRANCISCO REALTY & DEVELOPMENT
CORPORATION secured a loan from Republic Planter’s Bank
(RPB). RPB lent partially in money and partially in the form of
two stock certificates: Each for 400 preferred shares of stock
with par value of P10 each, a total of P8,000.
The stock certificates indicated that the preferred stocks in the
hands of Robes-Francisco shall have the right to receive
quarterly dividends of 1%, cumulative and participating and that
such preferred shares may be redeemed by RPB at the option of
ROBES-FRANCISCO at any time after two (2) years from the date
of issue at the option of the Corporation.
ROBES-FRANCISCO filed a complaint against RPB anchored on its
alleged rights to collect dividends under the preferred shares in
CONTRIBUTORS: ALCORAN | BRAGA | CAYBOT | DEIPARINE | LOQUIAS | MILANA | PUERTO | SUYO | VILLA-ABRILLE
65
question and to have RPB redeem said shares under the terms
and conditions of the stock certificate.
ISSUE #1: Does ROBES-FRANCISCO have the right to collect
dividends pursuant to the stock certificate?
RULING #1: NO.
In spite of the specific preferences granted to preferred shares
there is no guaranty, however, that the share will receive any
dividends. There has to be unrestricted retained earnings.
A preferred share of stock, is one which entitles the holder
thereof to certain preferences over the holders of common
stock. The preferences are designed to induce persons to
subscribe for shares of a corporation. Preferred shares take a
multiplicity of forms.
The most common forms may be classified into two:
1. Preferred shares as to assets; and
2. Preferred shares as to dividends.
The former is a share which gives the holder thereof preference
in the distribution of the assets of the corporation in case of
liquidation; the latter is a share the holder of which is entitled to
receive dividends on said share to the extent agreed upon
before any dividends at all are paid to the holders of common
stock.
The Supreme Court first discussed the nature of preferred
shares and redeemable shares. There is no guaranty, however,
that the share will receive any dividends.
Under the old Corporation Law in force at the time the contract
between the petitioner and the private respondents was
entered into, it was provided that "no corporation shall make or
declare any dividend except from the surplus profits arising from
its business, or distribute its capital stock or property other than
actual profits among its members or stockholders until after the
payment of its debts and the termination of its existence by
limitation or lawful dissolution."
Similarly, the present Corporation Code provides that the board
of directors of a stock corporation may declare dividends only
out of unrestricted retained earnings.
The Code, in Section 43, adopting the change made in
accounting terminology, substituted the phrase "unrestricted
retained earnings," which may be a more precise term, in place
of "surplus profits arising from its business" in the former law.
Thus, the declaration of dividends is dependent upon the
availability of surplus profit or unrestricted retained earnings, as
the case may be.
Preferences granted to preferred stockholders, moreover, do
not give them a lien upon the property of the corporation nor
make them creditors of the corporation, the right of the former
being always subordinate to the latter. Dividends are thus
payable only when there are profits earned by the corporation
and as a general rule, even if there are existing profits, the board
of directors has the discretion to determine whether or not
dividends are to be declared.
Shareholders, both common and preferred, are considered risk
takers who invest capital in the business and who can look only
to what is left after corporate debts and liabilities are fully paid.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
ISSUE #2: Can RPB be compelled to redeem?
RULING #2: NO.
More so, the bank is declared by the CB to be suffering from
chronic reserve deficiency. Redeemable shares, on the other
hand, are shares usually preferred, which by their terms are
redeemable at a fixed date, or at the option of either issuing
corporation, or the stockholder, or both at a certain redemption
price. A redemption by the corporation of its stock is, in a sense,
a repurchase of it for cancellation. The present Code allows
redemption of shares even if there are no unrestricted retained
earnings on the books of the corporation.
This is a new provision which in effect qualifies the general rule
that the corporation cannot purchase its own shares except out
of current retained earnings. However, while redeemable shares
may be redeemed regardless of the existence of unrestricted
retained earnings, this is subject to the condition that the
corporation has, after such redemption, assets in its books to
cover debts and liabilities inclusive of capital stock. Redemption,
therefore, may not be made where the corporation is insolvent
or if such redemption will cause insolvency or inability of the
corporation to meet its debts as they mature.
The redemption of shares cannot be allowed. As pointed out by
the petitioner, the Central Bank made a finding that said
petitioner has been suffering from chronic reserve deficiency
and that such finding resulted in a directive, prohibiting the
latter from redeeming any preferred share, on the ground that
said redemption would reduce the assets of the Bank to the
prejudice of its depositors and creditors. Redemption of
preferred shares was prohibited for a just and valid reason.
Considering that the terms and conditions set forth in the stock
certificate clearly indicate that redemption of the preferred
shares may be made at any time after the lapse of two years
from the date of issue, private respondents should have taken it
upon themselves, after the lapse of the said period, to inquire
from the petitioner the reason why the said shares have not
been redeemed. As it is, not only two years had lapsed, as
agreed upon, but an additional sixteen years passed before the
private respondents saw it fit to demand their right.
DISCUSSION:
A preferred share of stock, on one hand, is one which entitles the
holder thereof to certain preferences over the holders of common
stock.
2 Forms of Preferred Shares
(1) Preferred shares as to assets; and
(2) Preferred shares as to dividends.
We also have another classification when it comes to dividends –
Cumulative and Non-Cumulative.
CUMULATIVE AND NON-CUMULATIVE
PREFERRED SHARES
Example:
This year, you do not declare a dividend. Next year, you declared a
dividend. When you say it is cumulative, this means that you can
receive dividends for the year when there was no declaration.
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On the other hand, non-cumulative means you can only receive
dividends for the year that there is a declaration.
Cumulative Shares entitle the holders to payment not only of the
current dividend but also of back dividends when and if dividends
are declared, to the extent agreed upon, before holders of common
shares are paid.
Non-cumulative Shares are entitled merely to the payment of
current dividends that are paid from unrestricted retained earnings
and lose whatever agreed rate of return in any year where there
are no available unrestricted retained earnings.
PARTICIPATING AND NON-PARTICIPATING
PREFERRED SHARES
Participating Preferred Shares entitle the holders to participate
with the holders of common shares in the RE after the amount
stipulated dividend has been paid to the preferred share.
DISCUSSION:
Imagine that there is preferred share and common share. You
declare a dividend. Prioritize preferred share first. Whatever is the
excess will be for the common share.
So, whatever is the excess would be for the holders of common
shares. However, because the other holder is "participating", the
participating preferred shares will still participate in whatever is
left.
In other words, participating preferred shares is really preferred
because aside from being given the preferred dividends, it also has
participation in the residual.
NON-PARTICIPATING PS
Non-participating only to the stipulated preferred dividends and no
more.
COMMENT: It is just the opposite. No participation.
NO PAR VALUE SHARES
From 20-21 Class TSN:
COMMENT: No value attached on that particular share of stock.
DELPHER TRADES CORP. v. IAC
157 SCRA 349
FACTS: Pacheco sisters and Construction Component
International Inc. (CCI), entered into a lease agreement. The
former grants to the latter a right of first refusal. Subsequently,
with the conformity of the sisters, CCI assigned its rights and
obligations under the contract in favor of Hydro Pipes
Philippines, Inc. (Hydro Pipes).
A deed of exchange was executed between the sisters and
Delpher Trades Corporation (Delpher). The sisters conveyed the
lease property to Delpher for 2500 original unissued no par
value shares of stocks.
With this, Hydro Pipes filed a complaint against both the sisters
and Delpher.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
Delpher countered that there was no transfer of ownership,
since the beneficial ownership and control over the land remains
in the hand of the original owners.
ISSUE: Whether or not there is transfer of ownership over the
subject leased property. – NO.
HELD: There was no sale and transfer of ownership. It must be
noted that what was exchanged here is no par value shares of
stocks of Delpher.
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.
Also, it is to be stressed that by the sisters ownership of the
2,500 no par shares of stock, they 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.
Thus, the "Deed of Exchange" of property between the sisters
and Delpher cannot be considered a contract of sale. There was
no transfer of actual ownership interests by the sisters 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 Hydro Pipes has no basis for its claim of a light
of first refusal under the lease contract.
Q: When does one become a stockholder of a corporation?
Q: I mentioned that in subscription of shares, it is okay not to pay
fully, but are you considered as a stockholder?
A: Delpher Trades Corp. vs. IAC (157 SCRA 349)
After incorporation, one becomes a stockholder of a
corporation by subscription or by purchasing stock directly
from the corporation or from the individual owners thereof.
Meaning, even only by subscription, you are already considered as
a stockholder.
Purchasing stock means you bought from the stockholders, not
directly from the corporation. You are also considered as a
stockholder.
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67
FOUNDERS' SHARES
It is issued to the founders of the corporation. It has specific rights
under Section 7, RCC.
Section 7. Founders' Shares. – Founders' shares may be given
certain rights and privileges not enjoyed by the owners of other
stock. Where the exclusive right to vote and be voted for in the
election of directors is granted, it must be for a limited period
not to exceed five (5) years from the date of
incorporation: Provided, That such exclusive right shall not be
allowed if its exercise will violate Commonwealth Act No. 108,
otherwise known as the "Anti-Dummy Law"; Republic Act No.
7042, otherwise known as the "Foreign Investments Act of
1991"; and otherwise known as "Foreign Investments Act of
1991"; and other pertinent laws.
DISCUSSION:
It can be given an exclusive right to vote and be voted for in the
election of directors. When such right is given it must be for a
limited period not to exceed five (5) years from the date of
incorporation: Provided, That such exclusive right shall not be
allowed if its exercise will violate the "Anti-Dummy Law". Of course,
there will be equity restrictions.
The Code does not, however, define the term "founders' shares,"
but as the name suggests these are shares issued to those who
founded the corporation.
Founders' shares are no different from management shares.
Founders' shares are, in English Company Law, shares issued to the
founders of (or vendors to) a public company as a part of the
consideration for the business or concession, etc., taken over, and
not forming a part of, the ordinary capital.
As a rule, such shares only participate in profits after the payment
of a fixed minimum dividend on paid-up capital.
As the original stockholders who initiated the business and
assumed greater risks thereon, the law vests them, through the
concept of founders' shares, with certain rights and privileges not
enjoyed by the owners of other stock.
REDEEMABLE SHARES
Section 8. Redeemable Shares. – Redeemable shares may be
issued by the corporation when expressly provided in the
articles of incorporation. They are shares which may be
purchased by the corporation from the holders of such shares
upon the expiration of a fixed period, regardless of the existence
of unrestricted retained earnings in the books of the
corporation, and upon such other terms and conditions stated
in the articles of incorporation and the certificate of stock
representing the shares, subject to rules and regulations issued
by the Commission.
DISCUSSION:
These may be issued by the corporation when expressly provided in
the articles of incorporation. These may be purchased by the
corporation (or bought back) from the holders of such shares upon
the expiration of a fixed period, regardless of the existence of
unrestricted retained earnings in the books of the corporation.
EDITORS: ALAG | JUNSAY

BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022
Technically, treasury shares and redeemable shares have the same
situation. Treasury shares are also bought back by the corporation,
same with redeemable shares. However, for treasury shares, you
have to have unrestricted retained earnings. For redeemable
shares, you may have none. Why? Once redeemable shares are
issued, that is already provided in the articles of incorporation. You
are required to have a sinking fund (see SEC Opinion below), so it is
okay if you do not have unrestricted retained earnings.
REPUBLIC PLANTERS BANK v. AGANA
269 SCRA 1| G.R. No. 51765| March 3, 1997
DOCTRINE: Redeemable shares are shares usually preferred,
which by their terms are redeemable at a fixed date, or at the
option of either issuing corporation, or the stockholder, or both
at a certain redemption price.
FACTS: Robes-Francisco Realty & Development Corporation
secured a loan from Republic Planter’s Bank (RPB). RPB lent
partially in money and partially in the form of stock certificates.
The stock certificates indicated that the preferred stocks in the
hands of Robes-Francisco shall have the right to receive
dividends and that such preferred shares may be redeemed by
RPB at the option of Robes-Francisco. Robes-Francisco filed a
complaint against RPB based on its rights to receive dividends
and to have RPB redeem said shares.
ISSUES:
a. Does Robes-Francisco Corporation have the right to collect
dividends? – NO. There has to be a dividend declaration.
b. Can RPB be compelled to redeem? – NO. The redemption
is merely optional.
HELD: The Supreme Court first discussed the nature of preferred
shares and redeemable shares.
A preferred share of stock is one which entitles the holder
thereof to certain preferences over the holders of common
stock. The preferences are designed to induce persons to
subscribe for shares of a corporation. Preferred shares take a
multiplicity of forms. The most common forms may be classified
into two:
1. Preferred shares as to assets; and
2. Preferred shares as to dividends.
The former is a share which gives the holder thereof preference
in the distribution of the assets of the corporation in case of
liquidation; the latter is a share the holder of which is entitled to
receive dividends on said share to the extent agreed upon
before any dividends at all are paid to the holders of common
stock. There is no guaranty, however, that the share will receive
any dividends. There has to be unrestricted retained earnings.
Redeemable shares, on the other hand, are shares usually
preferred, which by their terms are redeemable at a fixed date,
or at the option of either issuing corporation, or the stockholder,
or both at a certain redemption price. A redemption by the
corporation of its stock is, in a sense, a repurchase of it for
cancellation.
The present Code allows redemption of shares even if there are
no unrestricted retained earnings on the books of the
corporation. This is a new provision which in effect qualifies the
general rule that the corporation cannot purchase its own
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68
shares except out of current retained earnings. However, while
redeemable shares may be redeemed regardless of the
existence of unrestricted retained earnings, this is subject to the
condition that the corporation has, after such redemption,
assets in its books to cover debts and liabilities inclusive of
capital stock. Redemption, therefore, may not be made where
the corporation is insolvent or if such redemption will cause
insolvency or inability of the corporation to meet its debts as
they mature.
REDEMPTION
It is the act of buying back or repurchasing.
Where a corporation "redeems" or "make a redemption" of its
shares, it repurchases or buys them back.
But the term "redemption" as normally used in corporate finance is
more limited than the terms "repurchase".
As so used, it means the retirement or repurchase of shares or
securities pursuant to a provision in the share certificate or security
itself giving the corporation an option to repurchase at a specified
price.
REDEEMABLE SHARES
SEC Opinion
For the protection of the stockholders, the pertinent SEC rules
provide that a corporation that has issued redeemable shares,
shall set up and maintain a sinking fund to be deposited with a
trustee bank which shall not be invested in risky and speculative
ventures.
A sinking fund refers to a fund set up by a corporation where
cash is gradually set aside in order to accumulate the amount
necessary to meet the redemption price of redeemable shares
at specified dates in the future.
TREASURY SHARES
Section 9. Treasury shares. – Treasury shares are shares of stock
which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation through purchase,
redemption, donation, or some other lawful means. Such shares
may again be disposed of for a reasonable price fixed by the
board of directors.
DISCUSSION:
These are shares issued previously and fully paid but subsequently
reacquired by the issuing corporation.
Also, take note of another difference of treasury and redeemable
shares: Once a share is redeemed, that is already cancelled.
However, once you buy treasury shares, you would only put that in
your treasury; you can reissue that later on.
EDITORS: ALAG | JUNSAY
 69
BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022

TREASURY SHARES vs. REDEEMABLE SHARES SMC’s conversion or stock exchange offer is embodied in its
Information Statement and yields the following relevant
TREASURY SHARES REDEEMABLE SHARES features:
Both are bought back by the corporation.
Requires unrestricted Requires sinking fund Instrument – Peso denominated, perpetual, cumulative, non-
retained earnings voting preferred shares with a par value of Php 5.00 per share
Once a share is bought, it is Once a share is redeemed, and Issue Price of Php 75 per share.
put in the treasury and may that is already cancelled.
be reissued later on. Dividend Rate – The SMC Board of Directors shall have the sole
discretion to declare dividends on the Series 1 Preferred Shares
as redeemed by SMC, the dividend rate shall be at a fixed rate
of 8% per annum, payable quarterly and calculated by reference
TREASURY SHARES
to the issue price.
SEC-OGC Opinion No. 06-12
Dividend Rate Step Up – Unless the Series 1 Preferred Shares
Being the owner of treasury shares, the corporation may opt to
are redeemed by SMC, the Dividend Rate shall be adjusted at
retire, sell or distribute as property dividends said shares.
the end of the fifth year to the higher of (a) the Dividend Rate or
(b) the prevailing 10-year PDSTF rate plus a spread of 300 bps.
In case of retirement of treasury shares, the corporation shall
amend its Articles of Incorporation by decreasing the capital
Optional Redemption and Purchase – SMC has the option, but
stock of the corporation in accordance with Section 38 of the
not the obligation, to redeem all or part of the Series 1 Preferred
Corporation Code of the Philippines for the purpose of
Shares on the third anniversary from the Issue Date or on any
eliminating the treasury shares.
Dividend Date thereafter at a redemption price equal to the
Issue price of the Preferred Shares plus all cumulated and unpaid
Second Option
cash dividends.
The corporation may, like any of its other properties,
sell/dispose said shares for a reasonable price fixed by the board
Preference in the event of the liquidation of SMC – The Series
of directors. Once sold or reissued, the treasury shares again
1 Preferred Shares shall have preference over the common
become outstanding stock and regain voting rights.
shares.
Generally, a corporation can reacquire its own shares for
Selling costs – All selling costs pertaining to the Common Shares
legitimate corporate purpose/s provided it has sufficient
shall be borne by the common shareholders. x x x
amount of unrestricted retained earnings to support the cost of
said shares.
The shares in this case was sequestered by the PCGG. One of the
standards here is there must be prior approval of the court for
Consequently, the amount of such earnings equivalent to the
the conversion of the sequestered common shares to preferred
cost of the treasury shares being held cannot be declared and
shares. The SMC shares to be exchange.
distributed as dividends until said shares are reissued or retired.
COCOFED proposes to constitute a trust fund to be known as the
The reason for this is that such amount of earnings equivalent
"Coconut Industry Trust Fund (CITF) for the Benefit of the
to the cost of treasury shares is not considered part of earned or
Coconut Farmers," with respondent Republic, acting through
surplus profits that is distributable as dividends.
the Philippine Coconut Authority (PCA), as trustee. As proposed,
the constitution of the CITF shall be subject to terms and
On the other hand, if there are retained earnings arising from
conditions which, for the most part, reiterate the features of
the business of the corporation other than the amount
SMC’s conversion offer, albeit specific reference is made to the
equivalent to the cost of treasury shares, treasury shares, being
shares of the 14 CIIF companies.
property of the corporation, may be distributed among the
stockholders as property dividends.
Standard 1. There must be a prior approval by this Honorable
Court in this instant case G.R. No. 177857-58 entitled
Any declaration and issuance of treasury shares as property
"COCOFED, et. al. vs. Republic of the Philippines", of the
dividend shall be disclosed and properly designated as property
conversion of the sequestered SMC Common Shares, Both Class
dividend in the books of the corporation and in its financial
"A" and Class "B", registered in the respective names of the 14
statements.
CIIF Holding Companies, into SMC Series 1 Preferred Shares.
PHILIPPINE COCONUT PRODUCERS FEDERATION v. REPUBLIC
Standard 2. The SMC shares to be exchanged are all the shares
600 SCRA 102 | G.R. No. 177857-58| 2009
of stock of SMC that are presently sequestered and registered in
the respective names of the 14 CIIF Holding Companies in the
DOCTRINE: The common shares after conversion and release
total number of 753,848,312, both Class "A" and Class "B" shares
from sequestration become treasury stocks or shares.
x x x (hereinafter, collectively referred to as the "SMC Common
Shares").
FACTS: For consideration is the Urgent Motion to Approve the
Conversion of the SMC Common Shares into SMC Series 1
The issue arose because Salonga and others filed a comment
Preferred Shares dated interposed by Philippine Coconut
asserting that the government bears that the conversion is
Producers Federation, Inc., et al. (collectively, COCOFED).
indubitably advantageous to the public interest or will result in
clear and material benefit.

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 70
BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022

They further postulate that "even assuming that the proposal to TRUST FUND DOCTRINE
convert the SMC shares is beneficial to the government, it
cannot pursue the exchange offer because it is without power
It is a more-than-a-century-old corporate theory developed in the
to exercise acts of strict dominion over the sequestered shares."
United States which seeks to protect the interest of corporate
Lastly, they argue that "the proposed conversion x x x is not only creditors, and is deemed to have been implanted in our jurisdiction
not advantageous to the public interest but is in fact positively
with the adoption of the Corporation Law patterned after American
disadvantageous."
corporate statues, and carried over to the present Corporation
Code.
The more important consideration in the exercise at hand is the
preservation and conservation of the preferred shares and the
DISCUSSION:
innumerable benefits and substantial financial gains that will So, it’s the creditors of the corporation have the first claim with the
redound to the owner of these shares.
fund or equity that the owners/stockholders have placed with the
corporation. They held that in trust.
ISSUE: Whether or not the conversion will result in the loss of
voting rights of PCGG in SMC and enable Cojuangco, Jr. to
Q: When does the Trust Fund Doctrine apply?
acquire the sequestered shares, without encumbrances, using
SMC funds. NO
(a) Where the corporation has distributed its capital among
the stockholders without providing for the payment of
HELD: The common shares after conversion and release from
creditors;
sequestration become treasury stocks or shares. Treasury
shares under Sec. 9 of the Corporation Code (Batas Pambansa
DISCUSSION: Almost in all cases, when you declare
Blg. 68) are "shares of stock which have been issued and fully dividends, (dividends are where you give money to the
paid for, but subsequently reacquired by the issuing corporation
stockholder), there should be enough money left in the
by purchase, redemption, donation or through some other
corporation to pay for all the creditors. Because if there
lawful means. Such shares may again be disposed of for a
is none, that's very prone to abuse. It is possible that they
reasonable price fixed by the board of directors."
would give all the money to the stockholders and then
there's nothing left to pay for the creditors.
A treasury share or stock, which may be common or preferred,
may be used for a variety of corporate purposes, such as for a
(b) where it had released the subscribers to the capital stock
stock bonus plan for management and employees or for
from their subscriptions;
acquiring another company. It may be held indefinitely, resold
or retired.
DISCUSSION: Remember when you are a subscriber, you
are not required to pay in full. So you have a debt to the
While held in the company’s treasury, the stock earns no
corporation. If you release them from their debts, what
dividends and has no vote in company affairs. Thus, the CIIF
would happen to the money that's intended for the
common shares that would become treasury shares are not
corporation to pay for its creditors.
entitled to voting rights. And should conversion push through,
SMC, not Cojuangco, Jr., becomes the owner of the reacquired
(c) where it has transferred the corporate property in fraud
sequestered CIIF SMC common shares. Should SMC opt,
of its creditors;
however, to sell said shares in the future, prospective buyers,
including possibly Cojuangco, Jr., have to put up their own (d) where the corporation is insolvent.
money to acquire said common shares. Thus, it is erroneous for
intervenors to say that Cojuangco, Jr., with the use of SMC
The doctrine itself has to a great extent been marginalized in the
funds, will be acquiring the CIIF SMC common shares.
United States, mainly because of its misleading name.

Nevertheless, in Philippine jurisdiction, our own Supreme Court

ESCROW SHARES seems to accept the doctrine as a given.

They are deemed to be subjected to an agreement by virtue of
which the share is deposited by the grantor or his agent with a third
person to be held by the latter until the performance of a certain
condition or the happening of a certain event contained in the
agreement.
DISCUSSION: Actually, these are in covenants. An escrow deposit
makes the depository a trustee under an express trust.
TURNER v. LORENZO SHIPPING CORP.
G.R. No. 157479½November 24, 2010
The reason underlying the limitation of share purchases sprang
from the necessity of imposing safeguards against the depletion
by a corporation of its assets and against the impairment of its
capital needed for the protection of creditors.

This is actually for security, for purposes of issuing a collateral.
Title to the stock does not pass under such an agreement until the
performance of a certain condition, and does not relate back to the
time when the stock was deposited.
Effect: The subscriber is not yet the owner of said shares until the
condition has happened and consequently, he cannot be accorded
the rights belonging to a regular stockholder.
We have several theories to back this up:
FRAUD THEORY
The actionable wrong is the fraud or misrepresentation by
directors, officers or stockholders in falsely representing that the
capital stock has been fully paid or covered by binding subscription
contracts.

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 71
BUSINESS ORGANIZATION II
From the lectures of Atty. Raymund Christian Ong Abrantes, CPA
3 - Sanchez Roman | A.Y. 2021 – 2022

DISCUSSION:
This is also the reason why we have the principle of indivisibility of
subscription.

Example: I subscribed for 10 and then I paid for 5. Now, I do not

have any money to pay for the other 5. Can I just say to the
corporation that I would assign the debt or that my friend would
get it instead? No, because that is against the principle of
indivisibility of subscription. When you entered into a subscription,
you are fully aware that you are obliged to give the 10. Of course
there is an exception when it has become delinquent (?) but that's
a different procedure.

End of 1st Exam Coverage

“The strongest of all warriors are these two —

Time and Patience.”
- Leo Tolstoy, War and Peace.

CONTRIBUTORS: ALCORAN | BRAGA | CAYBOT | DEIPARINE | LOQUIAS | MILANA | PUERTO | SUYO | VILLA-ABRILLE EDITORS: ALAG | JUNSAY