Professional Documents
Culture Documents
Philippine Corporate Law Outline
Philippine Corporate Law Outline
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MODULE 1
STRUCTURE OF PHILIPPINE CORPORATE LAW
(1ST WEEK: FEBRUARY 8 AND 10)
d. Creature of Limited Powers: “A corporation has only such powers, attributes and properties as
are expressly authorized by law or incident to its existence.”
A corporation has no powers except for those expressly conferred on it by the Corporation
Code, and those found in its charter and those incidental to its existence. It exercises its powers
through its Board of Directors and/or its duly authorized officers and agents. Pascual and Santos,
Inc. v. Members of the Tramo Wakas Neighborhood Assn. Inc., 442 SCRA 438 (2004).4
A corporation as a creature of the State is presumed to exist for the common good; and the
special privileges and franchises it receives are subject to the laws of the State and the limitations of
its charter. The State reserves it right to inquire how these privileges had been employed, and
whether they have been abused. PAGCOR therefore has no power to grant franchise on internet
1
Unless indicated otherwise, all references to sections pertain to the Revised Corporation Code of the Philippines,
Republic Act No. 11232.
2
VILLANUEVA & TIANSAY, PHILIPPINE CORPORATE LAW , Rex Book Store, 2021 edition.
3
CDCP v. Cuenca, 466 SCRA 714 (2005); EDSA Shangri-La Hotel and Resorts, v. BF Corp., 556 SCRA 25 (2008).
4
De Liano v. Court of Appeals [“CA”], 370 SCRA 349 (2001); Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004); United
Paragon Mining Corp. v. CA, 497 SCRA 638 (2006); Cebu Bionic Builders Supply, v. DBP, 635 SCRA 13 (2010); Esguerra v. Holcim Phils., 704 SCRA 490
(2013).
gambling, which power finds no basis in its charter. Jaworski v. PAGCOR, 419 SCRA 317 (2004).
c. “JURIDICAL ENTITY” LEVEL: “The corporation’s juridical personality is primarily a medium through
which to pursue a business enterprise.”
c. “EXTRA-CORPORATE” RELATIONSHIPS: Deals with legal consequences arising from the relationships
of the corporation with the public it deals with or those affected by its business enterprise:
(1) Between the corporation and those it contracts with, governed by various Laws on Contracts;
(2) Between the corporation and its employees, governed by Labor Laws;
(3) Between the corporation and those affected by its enterprise, governed by Law on Torts
Underpinned by the emerging “Stakeholder Theory”
6. Power to Create a Corporation Is Legislative in Character (Sec. 16, Art. XII, 1987
Constitution)
Since Congress cannot, under the Constitution, enact a special law creating a private corporation,
except when it is a GOCC, it follows then that Congress can create corporations with special charters
only if such are GOCCs. Thus, all water districts which are pursuant to P.D. 198, and not under the
Corporation Code, are GOCCs within COA’s jurisdiction. Feliciano v. COA, 419 SCRA 363 (2004).6
P.D. 1717 creating New Agrix, Inc. violated the constitutional prohibition on the formation of a
private corporation by special legislative act, as it is not a GOCC, since NDC was merely required to
extend a loan to the new corporation, and the new stocks of the corporation were to be issued to the old
investors and shareholders upon proof of their claims against the abolished corporation. National
Development Corporation v. Philippine Veterans Bank, 192 SCRA 257 (1990).
5
Footnote 35: Recent cases have enlarged the concept of good will over the behavioristic resort of old customers to the old place of business. It is now
recognized that “It may include in addition to those factors all that goes with a business in excess of its mere capital and physical value; such as reputation
for promptness, fidelity, integrity, politeness, business sagacity and commercial skill in the conduct of its affairs, solicitude for the welfare of customers and
other tangible elements which contribute to successful commercial venture.”
6
Veterans Federation of the Phils. v. Reyes, 483 SCRA 526 (2006).
2
may deem necessary to impose.cf Ang Pue & Co. v. Sec. of Commerce & Industry, 5 SCRA 645
(1962).
“There is thus a rejection of Gierke’s genossenchaft theory, the basic theme of which … ‘is the
reality of the group as a social and legal entity, independent of state recognition and concession.’ A
corporation as known to Philippine jurisprudence is a creature without any existence until it has
received the imprimatur of the state acting according to law. It is logically inconceivable therefore that
it will have rights and privileges of a higher priority than that of its creator. More than that, it cannot
legitimately refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary,
whenever called upon to do so.” Tayag v. Benguet Consolidated, 26 SCRA 242 (1968).
All corporations, big or small, must abide by the provisions of the [Revised] Corporation Code;
even a simple family corporation cannot claim an exemption, nor can it have rules and practices
other than those established by law. Torres v. Court of Appeals, 278 SCRA 793 (1997).
“It is a basic postulate that before a corporation may acquire juridical personality, the State must
give its consent either in the form of a special law or a general enabling act,” and the procedure and
conditions provided under the law for the acquisition of such juridical personality must be complied
with. Although the statutory grant to an association of the powers to purchase, sell, lease and
encumber property can only be construed the grant of a juridical personality to such an association,”
nevertheless, the failure to comply with the statutory procedure and conditions does not warrant a
finding that such association acquired a juridical personality, even when it adopts a constitution and
a set of bylaws. Int’l Express Travel & Tour Services v. Court of Appeals, 343 SCRA 674 (2000).
7
Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003).
8
Ever Electrical Manufacturing, Inc. (EEMI) v. Samahang Manggagawa ng Ever Electrical/NAMAWU Local 224 , 672 SCRA 562 (2012); Gotesco
Properties v. Fajardo, 692 SCRA 319 (2013).
3
Obligations incurred by the corporation through its directors and officers are its sole
liabilities. Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, 357 SCRA 77
(2001).
Where the creditor sues not only the company but also all shareholders to reach their
unpaid subscription which appear to be the only visible assets of the company, the controlling
doctrine is that “a stockholder is personally liable for the financial obligations of the corporation
to the extent of his unpaid subscription.” Halley v. Printwell, Inc. 649 SCRA 116 (2011).
By virtue of the principle separate juridical personality, the corporate debts or credits are
not the those of the shareholders. This protection from corporate liability for shareholders is the
principle of limited liability. PNB v. Hydro Resources Contractors Corp., 693 SCRA 294 (2013).9
Under the general doctrine of separate juridical personality, stockholders of a corporation
enjoy the principle of limited liability: the corporate debt is not the debt of the stockholder. Here,
it was the corporation who has been impleaded in the labor case, and any judgment on
employees’ claim must be pursued against the corporation even when it has been dissolved and
undergoing liquidation proceedings. Atienza v. Saluta, 904 SCRA 320 (2019).
It is basic in Corporation Law that a corporation is an artificial being invested by law with a
personality separate and distinct from its stockholders and from other corporations to which it
may be connected. Inferred from a corporation's separate personality is that “consent by a
corporation through its representatives is not consent of the representative, personally.” The
corporate obligations, incurred through official acts of its representatives, are its own. Corollarily,
a stockholder, director, or representative does not become a party to a contract just because a
corporation executed a contract through that stockholder, director, or
representative. Spouses Fernandez v. Smart Communications, Inc., 909 SCRA 293 (2019).
9
Aboitiz Equity Venture v. Chiongbian, 729 SCRA 580 (2014).
10
PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).
11
;
4
Joint venture is an association of persons or companies jointly undertaking some commercial
enterprise; generally, all contribute assets and share risks. It requires a community of interest in the
performance of the subject matter, a right to direct and govern the policy in connection therewith, and
agreement to share both in profits and losses. Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110
(1994).
1
Davao City Water District v. Civil Service Commission, 201 SCRA 593 (1991).
5
(GCE) under Section 3(n) of the GOCC Governance Act (R.A. 10149). Republic v. Heirs of Bernabe,
G.R. No. 237663, 6 October 2020.
b. As to Legal Status:
(1) De Jure Corporation
(2) De Facto Corporation (Sec. 19)
(3) Corporation by Estoppel (Sec. 20)
d. As to Existence of Shares:
(1) Stock Corporation (Sec. 3)
(2) Nonstock Corporation (Secs. 3, 86 and 87)
e. As to Purpose of Incorporation:
(1) Business (For-Profit) Corporations
(2) Nonstock and Nonprofit Corporations: Charitable, Scientific or Vocational
Corporations
(3) Educational Corporations (Secs. 105; Sec. 25, B.P. Blg. 232)
(4) Religious Corporation (Sec. 107)
Decisions on purely ecclesiastical matters by proper church tribunals are conclusive upon
civil courts—a church member who is expelled or a priest or minister who is deprived of his
office by church authorities, is without remedy in the civil courts. Long v. Basa, 366 SCRA 113
(2001).
(5) Other Special Corporations (Sec. 4)
f. As to Number of Corporators:
(1) Aggregate Corporation—no limit of shareholders or members
(2) Close Corporation—not more than 20 shareholders of records (Sec. 95)
(3) One Person Corporation—available only for stock corporations (Secs. 10 and 116)
(4) Corporation Sole—religious corporation (Secs. 108)
A corporation sole has no nationality being an institution that existed prior to the Republic; but if
any nationality is to be accorded to it, it is to be judged from the nationality of the majority of the
faithfuls thereof. Roman Catholic Apostolic Administrator of Davao, Inc. v. LRC and the Register of
Deeds of Davao City, 102 Phil. 596 (1957).
The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982), and Republic v. Iglesia ni Cristo,
127 SCRA 687 (1984), that a corporation sole is disqualified to acquire/hold alienable lands of the
public domain because of the constitutional prohibition qualifying only individuals to acquire land and
the provision under the Public Land Act which applied only to Filipino citizens or natural persons, has
been expressly overturned in Director of Land v. IAC, 146 SCRA 509 (1986); Republic v. Iglesia ni
Cristo, 127 SCRA 687 (1984); Republic v. IAC, 168 SCRA 165 (1988).
g. As to Place of Incorporation:
(1) Domestic Corporation
MODULE 2
7
II. CORPORATION AS A CIVIL PERSON
1. CORPORATION AS A “PERSON BEFORE THE LAW ” (Arts. 44[3], 45 and 46, Civil Code)
a. Entitled to Invoke the Due Process and Equal Protection Clauses
The due process clause has universal application and covers private corporations insofar as
their properties are concerned. Smith Bell & Co. v. Natividad, 40 Phil. 136 (1920).2
The failure to formally implied a corporation in a suit for recovery of ill-gotten wealth against its
shareholders cannot bind the corporation itself; otherwise, the corporation’s fundamental right to due
process will be violated. COCOFED v. Republic, 805 SCRA 1 (2016).3
2. Corporation Can Engage in Practice of Profession When Authorized by Law (Sec. 10)
Corporations cannot engage in the practice of a profession since they lack the moral and technical
competence required by the PRC. ULEP v. The Legal Clinic, 223 SCRA 378 (1993).
A corporation engaged in the selling of eyeglasses and which hires optometrists is not engaged in
the practice of optometry. Samahan ng Optometrists v. Acebedo Int’l Corp., 270 SCRA 298 (1997).5
SEE: Section 37 of the ARCHITECTURE ACT OF 2004 (R.A. 9266), allows the registration with the SEC of
“Architectural professional corporations”.
2
White Light Corp. v. City of Manila, 576 SCRA 416 (2009).
3
Citing earlier rulings in PCGG v. Sandiganbayan, 290 SCRA 639 (1998); Palm Holding Co. v. Sandiganbayan, 732 SCRA 156 (2014.
4
Wilson v. United States, 221 U.S. 361 (1911); United States v. White, 322 U.S. 694 (1944).
5
Alfafara v. Acebedo Optical Co., 381 SCRA 293 (2002).
6
Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993); LBC Express, Inc. v. CA, 236 SCRA 602 (1994); Acme Shoe, Rubber & Plastic Corp. v.
8
4. Corporations Can Be Held Liable for Torts/Quasi-Delicts
A corporation is civilly liable for torts in the same manner as natural persons because the rules
governing the liability of a principal for a tort committed by an agent are the same whether the principal
be a natural person or a corporation, and whether the agent be a natural or artificial person. Philippine
National Bank v. Court of Appeals, 83 SCRA 237 (1978).
“Corporate tort” consists in the violation of a right given or the omission of a duty imposed by law; a
breach of a legal duty. The failure of the corporate employer to comply with the duty under the Labor
Code to grant separation pay to employees in case of cessation of operations constitutes tort and its
shareholder who was actively engaged in the management or operation of the business should be held
personally liable. Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).
(1) Prior to the RCC: Philippine courts have no common law jurisdiction. Consequently,
corporations cannot be held criminally liable under Philippine jurisdiction since at this time there
is no law relating to the practice and procedure in criminal actions whereby a corporation may
be brought to court to be proceeded against criminally. West Coast Life Ins. Co. v. Hurd, 27
Phil. 401 (1914).
Prior to the Trust Receipts Law, a corporate officer who signs the trust receipt could not be
held criminally liable for estafa punished under the Revised Penal Code, for his criminal liability
could not be proven beyond reasonable doubt under the doctrine that “the corporation was [not]
directly required by law to do an act in a given manner, and the same law makes the person
who fails to perform the act in the prescribed manner expressly liable criminally.” Sia v. CA, 121
SCRA 655 (1983).
Now, the Trust Receipts Law recognizes the impossibility of imposing the penalty of
imprisonment on a corporation, hence, the law makes the officers or employees responsible for
the offense liable to suffer the penalty of imprisonment. Ong v. Court of Appeals, 401 SCRA 647
(2003).7
The Trust Receipts Law specifically makes the officers, employees or other officers or
persons responsible for the offense, without prejudice to the civil liabilities of such corporation
and/or board of directors, officers, or other officials or employees responsible for the offense.
The rationale is that such officers or employees are vested with the authority and responsibility
to devise means necessary to ensure compliance with the law and, if they fail to do so, are held
criminally accountable. A corporation cannot be arrested and imprisoned; hence, cannot be
penalized for a crime punishable by imprisonment; however, it may be charged and prosecuted
for a crime if the imposable penalty is fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined.
Ching v. Secretary of Justice, 481 SCRA 602 (2006).
(2) SEC. 166: A corporation used for committing or concealing fraudulent, graft
and corrupt practices.
(3) SEC. 167: A corporation appoints an intermediary who engages in graft and
corrupt practices.
(4) SEC. 170: A corporation that violates any provision of the RCC not specifically
penalized.
b. Shareholders Per Se Cannot Be Held Liable for a Corporate Criminal Act: Shareholders,
being “owners” of the corporation or being basically investors in the corporation, and with the
management of its business generally vested in the Board of Directors, cannot be held liable for the
criminal offense committed on behalf of the corporation, unless they personally took part in the
same. Espiritu v. Petron Corp., 605 SCRA 245 (2009).
c. Directors/Trustees Per Se Not Personally Liable for a Corporate Criminal Act (Sec. 171):
A criminal statute that forbids the corporation from doing an act extends to the Board, and to each
director individually, through which the corporation acts, and upon whom shall befall the criminal
penalty for violation thereof. People v. Concepcion, 43 Phil. 653; 44 Phil. 129 (1922).
OUTLIER: Veritably, Board members, being in direct control and supervision in the management and
conduct of the corporate affairs, must have known or were aware that the corporation is engaged in
trademark infringement and unfair competition. The existence of the corporate entity does not shield
CA, 260 SCRA 714 (1996); Solid Homes v. CA 275 SCRA 267 (1997); NPC v. Philipp Brothers Oceanic, Inc., 369 SCRA 629 (2001); Flight Attendants and
Stewards Assn. of the Phils. v. PAL, 559 SCRA 252 (2008); Employees Union of Bayer Phils. v. Bayer Philippines, Inc., 636 SCRA 473 (2010).
7
Crisologo v. People, 686 SCRA 782 (2012).
9
from prosecution the corporate agent who knowingly and intentionally caused the corporation to
commit a crime. Republic Gas Corp. v. Petron Corp., 698 SCRA 666 (2013).
GENERAL RULE: The Board being generally a policy-making body, directors as such cannot be held
liable under a criminal statute making those in charge of the management of the corporation liable for
the criminal acts done in pursuit of corporate operations. Even if the corporate powers of a
corporation are reposed in the Board under what is now Sec. 22 of RCC, it is of common knowledge
and practice that the Board is not directly engaged or charged with the running of the recurring
business affairs of the corporation. The members of the Board generally do not concern themselves
with the day-to-day affairs of the corporation, except those corporate officers who are charged with
the running of the business of the corporation and are concomitantly members of the Board, like the
President. Federated Dealers Assn. v. Del Rosario, 808 SCRA 272 (2016).8
A corporation’s personality is separate from its officers, directors, and shareholders. To be held
criminally liable for the acts of a corporation, there must be a showing that its officers, directors, and
shareholders actively participated in or had the power to prevent the wrongful act. Here, there was
no allegation of the specific acts of the corporate officers for which they could be indicted for
violations of the SRC and the Revised Penal Code. SEC v. Price Richardson Corp., 832 SCRA
560 (2017).
e. Civil Liability Emanating from the Criminal for the Account of the Corporation:
Although a criminal case can only be filed against the officers and not against the corporation
itself, it does not follow that the corporation cannot be a real-party-in-interest for the purpose of
bringing a civil action for malicious prosecution for the damages incurred by the corporation for the
criminal proceedings brought against its officer. Cometa v. Court of Appeals, 301 SCRA 459 (1999).
It is hornbook law that corporate personality is a shield against personal liability of its officers—a
corporate officer and his spouse cannot be made personally (civilly) liable under a trust receipt where
he entered and signed the contract clearly in his official capacity. Consolidated Bank and Trust Corp.
v. Court of Appeals, 356 SCRA 671 (2001).
Corporate officers who signed a trust receipt in behalf of the corporation cannot be held
personally liable therefore when there is no indication therein that they guaranteed personally the
payment of the corporation’s debt: “Debts incurred by directors, officers and employees acting as
such corporate agents are not theirs but the direct liability of the corporation they represent. As an
exception, directors or officers are personally liable for the corporation’s debt if they so contractually
agree or stipulate.” Tupaz IV v. Court of Appeals, 475 SCRA 398 (2005).
Under SSS Law, even a corporate employer can be held liable for the non-remittance of SSS
contributions; but it is the head, directors or officers responsible for the non-remittance who shall
suffer the personal criminal liability. Although a corporation is invested with a personality separate
from that of the persons composing it, the corporate veil is pierced when a director, trustee or officer
is made personally liable by specific provision of law. Thus, a corporation cannot invoke its separate
8
Singian, Jr. v. Sandiganbayan, 478 SCRA 348 (2005); Ty v NBI Supervising Agent de Jemil, 638 SCRA 671 (2010)
10
judicial entity to escape its liability for non-payment of SSS contributions. Ambassador Hotel, Inc.
v. Social Security System, 827 SCRA 641 (2017).
As a general rule, when an officer issues a worthless check in the corporation’s name, he or she
may be held criminally liable for violating the Bouncing Checks Law (B.P. 22); however, such
officer can only be held civilly liable when he or she is convicted, and that conversely, once acquitted
of the offense of violating B.P. 22, an officer is discharged of any civil liability arising from the
issuance of the worthless check in the name of the corporation he or she represents. In the case
however, the officer was made civilly liable on the bounced checks in spite of his acquittal because
he had voluntarily bound himself to the personally liable for the amounts covered by the checks.
Ongkingco v. Sugiyama, 920 SCRA 110 (2019).
6. CORPORATE NATIONALITY
a. Primary “Place of Incorporation Test” (Sec. 140): The corporation is a national of the country
under whose laws it is organized or incorporated.
b. Ancillary “Control Test: ” In cases involving properties, business or industries reserved for
Filipinos, in addition to the place of incorporation test, the nationality of a corporation is determined
by the nationality of the “controlling shareholders”.
e. NEDA May Set Stock Ownership Limitations in Corporations Vested with Public
Interests (Sec. 176)
Philippine Bank of Commerce v. Court of Appeals [“CA”], 269 SCRA 695 (1997); Bank of P.I. v. CA, 326 SCRA 641 (2000); Bank of P.I. v. Casa
Montessori Internationale, 430 SCRA 261 (2004); Bank of P.I. v. Lifetime Marketing Corp., 555 SCRA 373 (2008); Philippine Savings Bank v. Chowking
Food Corp., 557 SCRA 318 (2008); Bank of America v. Philippine Racing Club, 594 SCRA 301 (20019); Metropolitan Bank v. Mariñas, 625 SCRA 511
(2011).
13
Associated Bank v. Tan, 446 SCRA 282 (2004); Sandejar v. Ignacio, 541 SCRA 61 (2007); Bank of P.I. v. Lifetime Marketing Corp., 555 SCRA 373
(2008); PNB v. Velasco, 564 SCRA 512 (2008); Security Bank v. RCBC, 577 SCRA 407 (2009); Equitable PCI Bank v. Tan, 628 SCRA 346 (2010);
Citibank v. Dinopol, 635 SCRA 649 (2010); PCI Bank v. Balmaceda, 658 SCRA 33 (2011); Metropolitan Bank v. Tobias III, 664 SCRA 165 (2012);
Metropolitan Bank v. Centro Dev. Corp., 672 SCRA 325 (2012); Comsaving Bank v. Capistrano, 704 SCRA 72 (2013).
13
interest. For in the final analysis, the bottom line is that those who do not exercise such
prudence in the discharge of their duties shall be made to bear the consequences of such
oversight” citing Ridjo Tape & Chemical Corp. v. Court of Appeals, 350 Phil. 184 (1998).
Manila Electric Co. v. Nordec Philippines, 861 SCRA 515 (2018).
MODULE 3
Such legal fiction is only for purposes of convenience and to subserve the ends of justice—it
cannot be extended to a point beyond its reason and policy. Where, as in this case, the corporate fiction
was used as a means to perpetrate a social injustice or as a vehicle to evade obligations or confuse the
legitimate issues, it would be discarded and the two corporations would be merged as one, the first
being merely considered as the instrumentality, agency, conduit or adjunct of the other. Azcor
Manufacturing Inc. v. NLRC, 303 SCRA 26 (1999).15
(1) Doctrine of Limited Liability: Shareholders/Members Cannot Be Held Liable for the
Liabilities of the Corporation, Except to the Extent of
Their Investments or Promised Investments.
(2) Agency Law Principle: Directors/Trustees, Officers and Other Corporate Agents Do
Not Become Personally Liable for Corporate Contracts That
They Enter in Behalf of the Corporation.
Corporate debt or credit is not the debt or credit of the shareholder nor is the shareholder’s debt
or credit that of the corporation. Traders Royal Bank v. Court of Appeals, 177 SCRA 789 (1989).
Debts incurred by directors, officers, and employees acting as corporate agents are not their
direct liability but of the corporation they represent. Crisologo v. People, 686 SCRA 782 (2012).16
The obligations of a shareholder in one corporation cannot be offset from the obligation of the
shareholder in a second corporation since the corporation has a separate juridical personality. CKH
Industrial and Dev. Corp v. Court of Appeals, 272 SCRA 333 (1997).
A consequence of a corporation’s separate personality is that its consent made through its
representatives is not consent of the representative, personally. Its obligations, incurred through
official acts of its representatives, are its own. A director or officer does not become a party to a
contract just because a corporation executed a contract through such individual. Hence, a
corporation’s representatives are generally not personally bound by the terms of the contract
executed in behalf of the corporation. Lanuza, Jr. v. BF Corp., 737 SCRA 275 (2014).17
14
McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007); Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA
598 (2009); Shrimp Specialists, Inc. v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009); Saverio v. Puyat, 710 SCRA 747 (2013).
15
Martinez v. CA 438 SCRA 139 (2004); Prudential Bank v. Alviar, 464 SCRA 353 (2005); EDSA Shangri-La Hotel and Resorts v. BF Corp., 556 SCRA
25 (2008); Siain Enterprises v. Cupertino Realty Corp., 590 SCRA 435 (2009).
16
Heirs of Fe Tan Uy v. International Exchange Bank, 690 SCRA 519 (2013); Land Bank of the Philippines v. Belle Corp., 769 SCRA 46 (2015); Ferro
Chemicals, Inc. v. Garcia, 804 SCRA 528 (2016).
17
Land Bank of the Philippines v. Belle Corp., 769 SCRA 46 (2015).
14
b. APPLICATION OF THE RULES EMANATING FROM THE PRIMARY DOCTRINE:
18
Sunio v. NLRC, 127 SCRA 390 (1984); Asionics Phils., Inc. v. NLRC, 290 SCRA 164 (1998); Francisco v. Mejia, 362 SCRA 738 (2001); Matutina
Integrated Wood Products v. CA, 263 SCRA 490 (1996); Manila Hotel Corp. v. NLRC, 343 SCRA 1 (2000); Secosa v. Heirs of Erwin Suarez Fancisco, 433
SCRA 273 (2004); EDSA Shangri-La Hotel v. BF Corp., 556 SCRA 25 (2008); Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598
(2009); Situs Dev. Corp. v. Asiatrust Bank, 677 SCRA 495 (2012); Saverio v. Puyat, 710 SCRA 747 (2013); Ferro Chemicals, Inc. v. Garcia, 804 SCRA 528
(2016); Mayor v. Tiu, 810 SCRA 256 (2016); Maricalum Mining Corp. v. Florentino, 872 SCRA 572 (2018).
19
Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006); Union Bank of the Phils. v. Ong, 491 SCRA 581 (2006); Shrimp Specialists, Inc.
v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009); Hacienda Luisita, Inc. v. Presidential Agrarian Reform Council, 660 SCRA 525 (2011).
20
Sesbreno v. CA, 222 SCRA 466 (1993); “G” Holdings, Inc. v. National Mines and Allied Workers Union Local, 604 SCRA 73 (2010); Malixi v. Mexicali
Phils., Inc., 792 SCRA 586 (2016); Malixi v. Mexicali Philippines, Inc., 792 SCRA 586 (2016); Zaragoza v. Tan, 847 SCRA 437 (2017).
21
Bautista v. Auto Plus Traders, Inc. 561 SCRA 223 (2008); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Saverio v.
Puyat, 710 SCRA 747 (2013).
15
2. COMMON LAW DOCTRINE OF “PIERCING THE VEIL OF CORPORATE FICTION”
a. Source of Incantation: U.S. v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 (1905).
The notion of corporate entity will be pierced or disregarded and the individuals composing it will
be treated as identical, if the corporate entity is being used as a cloak or cover for fraud or illegality;
as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit
of the shareholders. Gochan v. Young, 354 SCRA 207 (2001).22
This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of
corporate assets as part of the estate of the decedent, to escape liability arising for a debt, or to
perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives to
cover up an otherwise blatant violation of the prohibition against forum shopping. Only is these and
similar instances may the veil be pierced and disregarded. PNB v. Andrada Electric &
Engineering Co., 381 SCRA 244 (2002).
The legal fiction of separate corporate existence is not at all times invincible; it may be pierced
when employed as a means to perpetrate a fraud, confuse legitimate issues, used as a means to
promote unfair objectives, or to shield an otherwise blatant violation of the prohibition against forum-
shopping. While piercing of the corporate veil has to be done with caution, the corporate fiction may
be disregarded when necessary for the interest of justice. Rovels Enterprises, Inc. v. Ocampo, 391
SCRA 176 (2002).
When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud,
or defend crime, the law will regard the corporation as an association of persons. The corporate
entity may also be disregarded in the interest of justice in such cases as fraud that may work
inequities among members internally, involving no rights of the public or third persons. In both
instances, for the separate juridical personality of a corporation to be disregarded, the wrongdoing
must be clearly and convincingly established; it cannot be presumed. Suldao v. Cimech System
Construction, Inc., 506 SCRA 256 (2006).
ALTER-EGO PIERCING: When the corporate entity merely a farce since the corporation is
merely the alter ego, business conduit, or instrumentality of a person or another entity.
DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING): When the application of the separate
corporate personality would be inconsistent with the business purpose of the legal fiction or
would merely confuse legitimate issues, or when piercing the corporate fiction is necessary
to achieve justice or equity for those who deal in good faith with the corporation.
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: (1) defeat of public convenience, as when the corporation is used as vehicle for the
evasion of existing obligation; (2) fraud cases or when the corporate entity is used to justify wrong,
protect fraud, or defend a crime; or (3) alter ego cases, where the 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. General Credit Corp. v. Alsons Dev. and
Investment Corp., 513 SCRA 225 (2007),23 citing VILLANUEVA, COMMERCIAL LAW REVIEW (2004 ed.), at p. 576.
22
DBP v. CA, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001); Velarde v. Lopez, 419 SCRA 422 (2004); R&E Transport v. Latag, 422 SCRA
698 (2004); Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004); Martinez v. CA, 438 SCRA 139 (2004); McLeod v. NLRC, 512 SCRA 222
(2007); Siain Enterprises v. Cupertino Realty Corp., 590 SCRA 435 (2009).
23
Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590
(2010); Sarona v. NLRC, 663 SCRA 394 (2012); PNB v. Hydro Resources Contractors Corp., 693 SCRA 294 (2013); Lanuza, Jr. v. BF Corp., 77 SCRA
275 (2014); De Castro v. CA, 805 SCRA 265 (2016); Maricalum Mining Corp. v. Florentino, 872 SCRA 572 (2018); Montealegre v. Spouses De Vera, 908
SCRA 269 (2019); ABS-CBN Broadcasting Corp. v. Hilario, 908 SCRA 203 (2019).
24
Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997); Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009);
Lanuza, Jr. v. BF Corp., 737 SCRA 275 (2014).
16
that two corporations are distinct entitled and treat them as identical or one and the same. General
Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007).25
(1) Recent Attempts to Narrow the Objectives for Availing of Piercing: Piercing is not
allowed unless the remedy sought is to make the officer or another corporation pecuniarily liable
for corporate debts, unlike here were it is resorted to determine proper jurisdiction of the court.
(?) Indophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697 (1992).
The rationale for piercing in a given case is to remove the barrier between the corporation
and the persons comprising it to thwart the fraudulent schemes of those who use the corporate
personality as a shield for undertaking proscribed activities. In the case at bar, however, instead
of holding certain individuals or person responsible for an alleged corporate act, the situation
has been reversed: it is the corporation that is being ordered to answer for the personal liability
of certain directors and officers. Hence, it appears that the doctrine has been turned upside
down because of its erroneous invocation. Francisco Motors Corp. v CA, 309 SCRA 72
(1999).
BUT SEE: Reverse Piecing of the Corporate Veil: Int’l Academy of Management and
Economics v. Litton and Co., Inc., 848 SCRA 437 (2017).
(2) Applicable to “Third-Parties”: That respondents are not shareholders of record does not
make them non-parties, since it is alleged that the corporations are mere alter egos of the
directors-petitioners, and that the sister corporations acquired the properties sought to be
reconveyed to FGSRC in violation of directors-petitioners’ fiduciary duty to FGSRC. The notion
of corporate entity will be pierced and the individuals composing it will be treated as identical if
the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a
wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the
shareholders. Gochan v. Young, 354 SCRA 207 (2001).
(3) Piercing Has Only Res Judicata Effect : Application of the doctrine to a particular case does
not deny the corporation of legal personality for any and all purposes, but only for the particular
transaction or instance, or the particular obligation for which the doctrine was applied. Koppel
(Phil.) Inc. v. Yatco, 77 Phil. 496 (1946).26
(1) It Is a Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not
available when other remedies are still available. Umali v. CA, 189 SCRA 529 (1990).
(2) Available Only to Prevent Fraud or to Achieve an Equitable End: Piercing doctrine is
meant to prevent fraud and cannot be employed when the net result would be to perpetrate
fraud or a wrong. Gregorio Araneta, Inc. v. Tuason de Paterno, 91 Phil. 786 (1952).
The theory of corporate entity was not meant to promote unfair objectives or otherwise, nor
to shield them. Villanueva v. Adre, 172 SCRA 876 (1989).
The creation by DBP as the mother company of the three mining corporations to manage
and operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and
lose their value, does not indicate fraud or wrongdoing, and will not constitute application of the
piercing doctrine. DBP v. Court of Appeals, 363 SCRA 307 (2001).
(3) Party Invoking Piercing Doctrine Must Have a “Victim Standing”: The bank cannot
successfully invoke the piercing doctrine when it was proven that the assignment of the
securities by the subsidiary company was contrary to existing rules of the Central Bank of the
Philippines, which were well-known to the officers of the lending bank. Being merely an
equitable remedy, employment of the piercing doctrine can only be for the “protection of the
interests of innocent third persons dealing with the corporate entity which the law aims to protect
by this doctrine.” Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997).
25
Marques v. Far East Bank, 639 SCRA 312 (2011); Sarona v. NLRC, 663 SCRA 394 (2012); De Castro v. CA, 805 SCRA 265 (2016); Lee v.
Samahang Manggagawa ng Super Lamination, 809 SCRA 313 (2016).
26
Tantoco v. Kaisahan ng Mga Manggagawa sa La Campana, 106 Phil. 198 (1959); Francisco v. Mejia, 362 SCRA 738 (2001).
27
Commissioner of Customs v. Oilink Int’l Corp., 728 SCRA 469 (2014).
17
applies when such corporate fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime.” Union Bank v. Court of Appeals, 290 SCRA 198 (1998).
Application of the piercing of the subsidiary company to merge it with the holding company
cannot be allowed to support a theory of set-off or compensation, there being no allegation
much less any proof of fraud. Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007).
An employee who retires and avails of her retirement benefits, but continued as a
consultant with affiliate companies, cannot employ piercing to treat her stint with the affiliate
companies as part of her employment with the main company she retired from—there is no
fraud or employment of unfair shielding. Rivera v. United Laboratories, Inc., 586 SCRA 269
(2009).
BUT SEE: Where clear evidence supports the fact that a corporation’s affiliates have received
large amounts which became the consideration for the company’s execution of a real estate
mortgage over its properties, then the piercing doctrine shall be applied to support the fact that
the real estate mortgage was valid and supported by proper consideration. Siain Enterprises
v. Cupertino Realty Corp., 590 SCRA 435 (2009).
Piercing of the veil of corporate fiction cannot be used to justify service of summons on the
subsidiary to be binding on the parent company. A wholly owned subsidiary is a distinct and
separate entity from its mother company and the fact that the latter exercises control over the
firm does not justify disregarding their separate personality. The complaint, taken as a whole,
should be able to convey that the subsidiary is but a business conduit of the principal or that by
reason of fraud, their separate and distinct and separate personalities should be disregarded.
Luzon Iron Dev. Group Corp. v. Bridgestone Mining and Dev. Corp., 813 SCRA 583 (2016).
(5) Piercing Must Therefore Be Based on Clear Evidence : To disregard the separate juridical
personality, it is elementary that the wrongdoing cannot be presumed and must be clearly and
convincingly established. Application of the doctrine of piercing should be done with caution.
Otherwise, an injustice that was never intended may result from an erroneous application.
PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).28 CONSEQUENTLY:
Organizing the corporation when relationship between landowner and developer were still
cordial cannot be used as a basis to hold the corporation liable later on for landowner’s
obligations to the developer under the mere allegation that the corporation is being used to
evade the performance of obligation by its major shareholders. Luxuria Homes, Inc. v. Court
of Appeals, 302 SCRA 315 (1999).
The Court finds that the Remington failed to discharge its burden of proving bad faith on the
part of Marinduque Mining and its transferees in the mortgage and foreclosure of the subject
properties to justify the piercing of the corporate veil. DBP v. CA, 363 SCRA 307 (2001).29
Neither has it been alleged or proven that Merryland is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency conduit or adjunct of
Cardale. Even assuming that the businesses of Cardale and Merryland are interrelated, this
alone is not justification for disregarding their separate personalities, absent any showing that
Merryland was purposely used as a shield to defraud creditors and third persons. Francisco
v. Mejia, 362 SCRA 738 (2001).30
The mere assertion by a Filipino litigant against the existence of a “tandem” between two
Japanese corporations cannot be the basis for piercing, which can only be applied by showing
wrongdoing by clear and convincing evidence. Marubeni Corp. v. Lirag, 362 SCRA 620
(2001).
Whether a corporation is a mere alter ego is a purely a question of fact, and the party seeking
to pierce has the burden of presenting clear and convincing evidence to justify the setting
aside of the separate corporate personality rule. Concept Builder, Inc. v. NLRC, 257
SCRA 149 (1996).31
(6) Piercing Is a Power Belonging to the Courts and Cannot Be Assumed Improvidently
by a Sheriff. Cruz v. Dalisay, 152 SCRA 482 (1987).32
b. Shell or Fictitious Company: “Fictitious companies are by definition fraudulent and may also
serve as fronts for government officials. The typical scheme involves corrupt government officials
creating a fictitious company that will serve as a ‘vehicle’ to secure contract awards. Often, the
fictitious—or ghost—company will subcontract work to lower cost and sometimes unqualified firms.
The fictitious company may also utilize designated losers as subcontractors to deliver the work, thus
indicating collusion.” They have no significant assets, staff or operational capacity. They pose a
serious red flag as a bidder on public contracts, because they often hide the interests of project or
government officials, concealing a conflict of interest and opportunities for money laundering.
Republic v. Mega Pacific eSolutions, Inc., 794 SCRA 414 (2016), citing VILLANUEVA & TIANSAY,
PHILIPPINE CORPORATE LAW, p. 105 (2013 ed.)
c. Guiding Principles in Fraud Cases: Why is there inordinate showing of alter-ego elements?
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;
Corporate fiction is used as a means to commit the fraud or avoid the consequences thereof;
and
The main action should seek for the enforcement of pecuniary claims pertaining to the
corporation against corporate officers or shareholders.
Probative Factors for Fraud Piercing: The corporate fiction must be the very means by which
to commit fraud or avoid the consequences of ones unlawful or wrongful acts. Concept Builders,
Inc. v. NLRC, 257 SCRA 149 (1996).35 The absence of these elements prevents piercing the
corporate veil. Lim v. Court of Appeals, 323 SCRA 102 (2000).36
Two corporations may engage in the same business, share the same address, or have
interlocking incorporators, directors or officers, but in the absence of fraud or other public policy
consideration, does not warrant piercing the corporate veil. McLeod v. NLRC, 512 SCRA 222 (2007).37
Mere substantial identity of incorporators does not necessarily imply fraud, nor warrant the
piercing of the corporate veil. In the absence of clear and convincing evidence to show that the
33
Mendoza v. Banco Real Dev. Bank, 470 SCRA 86 (2005).
34
Dimson v. Chua, 811 SCRA 630 (2016).
35
PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001); Velarde v. Lopez, 419 SCRA 422 (2004); Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555
(2005); Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); Malarayat Rural Bank, 719 SCRA 565 (2014); Pacific Rehouse Corp.
v. Court of Appeals, 719 SCRA 665 (2014); Olongapo City v. Subic Water and Sewerage Co., 732 SCRA 133 (2014); Dutch Movers, Inc. v. Lequin, 824
SCRA 310 (2017); Veteran Federation of the Philippines v. Montenejo, 847 SCRA 1 (2017).
36
Child Learning Center, v. Tagorio, 475 SCRA 236 (2005); General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Nisce
v. Equitable PCI Bank, 516 SCRA 231 (2007); Maricalum Mining Corp. v. Florentino, 872 SCRA 572 (2018).
37
Indophil Textile Mill Workers Union v. Calica, 205 SCRA 697 (1992); Del Rosario v. NLRC, 187 SCRA 777 (1990); Park Hotel v. Soriano, 680 SCRA
328 (2012); Heirs of Fe Tan Uy v. Int’l Exchange Bank, 690 SCRA 519 (2013).
19
corporate personalities were used to perpetuate fraud, or circumvent the law, the corporations are to
be rightly treated as distinct and separate from each other. Laguio v. NLRC, 262 SCRA 715 (1996).38
That a corporation owns all of the stocks of another corporation does not amount to fraud per
se, and does not justify their being treated as one entity. If used to perform legitimate functions, a
subsidiary’s separate existence shall be respected, and the liability of the parent corporation, as well
as the subsidiary shall be confined to those arising in their respective business. Nisce v. Equitable
PCI Bank, 516 SCRA 231 (2007).39
42
Virata v. Ng Wee, 830 SCRA 271 (2017).
43
PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990); Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005); Mendoza and Yotoko v.
Banco Real Dev. Bank, 470 SCRA 86 (2005).
44
Pacific Rehouse Corp. v. Court of Appeals, 719 SCRA 665 (2014).
21
Where corporate fiction was used to perpetrate social injustice or as a vehicle to evade
obligations or confuse the legitimate issues (as in this case where the actions of management of the
two corporations created confusion as to the proper employer of claimants), the two corporations
would be merged as one. Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).
We have applied the piercing doctrine in cases where the employees are put in a
disadvantageous position as a result of the employers’ separate juridical personalities, pursuant to
the fundamental doctrine that corporate fiction should not be used as a subterfuge to commit
injustice and circumvent labor laws. While there is no prohibition on the mere act of engaging in a
work-pooling scheme as sister companies, that act will not be tolerated, and the sister companies’
separate juridical personalities will be disregarded, if they use that scheme to defeat the workers
right to collective bargaining. Lee v. Samahang Manggagawa ng Super Lamination, 809 SCRA 313
(2016).
a. Alter Ego Piercing: The judgment debt against the corporation can be pursued against the
controlling shareholder when it has been shown that the corporation had no existing assets of its
own and the operation of the corporation was so merged with those of the shareholders as to be
practically indistinguishable. Furthermore, they had the same office, the funds were held by the
shareholders, and the corporation had no visible assets. McConnel v. CA, 1 SCRA 722 (1961).
b. Fraud Piercing: The DOJ Resolution explicitly identified the false pretense, fraudulent act or
fraudulent means perpetrated upon the investing public who were made to believe that ASBHI had
the financial capacity to repay the loans it enticed petitioners to extend, despite the deficient
capitalization evidenced by its articles of incorporation, the treasurer’s affidavit, the audited
financial statements. “Moreover, respondent’s argument assumes that there is legal obligation on
the part of petitioners to undertake an investigation of ASBHI before agreeing to provide the loans.
There is no such obligation. It is unfair to expect a person to procure every available public record
concerning an applicant for credit to satisfy himself of the latter’s financial standing. At least, that is
not the way an average person takes care of his concerns.” Gabionza v. Court of Appeals, 565
SCRA 38 (2008).
c. Equity Piercing: Where the corporation was under the control of its shareholders who ran-up
quite a high obligation with the printing company knowing fully well that their corporation was not in
a position to pay for the accounts, and where in fact they personally benefited from the operations
of the company to which they never paid their subscription in full, would constitute piercing of the
veil to allow the creditor to be able to collect what otherwise were debts owed by the company
which has no visible assets and has ceased all operations. Halley v. Printwell, Inc. 649 SCRA
116 (2011).
45
Liddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961); CIR v. Norton and Harrison, 11 SCRA 704 (1964).
22
a. Suit Against Controlling Shareholder Is Not a Suit Against the Corporation That Would
Allow the Piercing Doctrine to Be Applied Against the Latter:
Failure to implead the corporations as defendants and merely annexing a list of such
corporations to the complaints is a violation of due process for it would in effect be disregarding their
distinct and separate personality without a hearing. PCGG v. Sandiganbayan, 365 SCRA 538 (2001).
Although both trial and appellate courts found sufficient basis for the conclusion that PKA and
Phoenix Omega were one and the same, and the former is merely a conduit of the other, We hold
void the application of a writ of execution on a judgment held only against PKA, since the RTC
obtained no jurisdiction over the person of Phoenix Omega which was never summoned as formal
party to the case. The general principle is that no person shall be affected by any proceedings to
which he is a stranger, and strangers to a case are not bound by the judgment rendered by the court.
Padilla v. Court of Appeals, 370 SCRA 208 (2001).
Piercing the veil of corporate fiction is applied only to determine established liability; it is not
available to confer on the court a jurisdiction it has not acquired, in the first place, over a party not
impleaded in the case. The doctrine comes into play only during the trial of the case after the court
has already acquired jurisdiction over the corporation. Hence, before this doctrine can be even
applied based on the evidence presented, it is imperative that the court must first have jurisdiction
over the corporation. Mayor v. Tiu, 810 SCRA 256 (2016).
BUT SEE: Piercing of the corporate veil is premised on the fact that the corporation concerned must
have been properly served with summons or properly subjected to the jurisdiction of the court a quo.
Corollary thereto, it cannot be subjected to a writ of execution meant for another in violation of its
right to due process. There exists, however, an exception to this rule: if it is shown "by clear and
convincing proof that the separate and distinct personality of the corporation was purposefully
employed to evade a legitimate and binding commitment and perpetuate a fraud or like
wrongdoings.” Int’l Academy of Management and Economics v. Litton and Co., Inc., 848 SCRA
437 (2017).
HOWEVER: A suit brought against the corporate officers sued in their official capacity would allow the
application of the piercing doctrine to make the corporation liable since the corporation, although not
made a formal party to the case, was not denied due process. Emilio Cano Enterprises v. CIR,
13 SCRA 291 (1965).
b. To Make Acting Officers Personally Liable under the Piercing Doctrine, Is There a Need
to Bring a New Case Against the Officer?
Application of the piercing doctrine may be made even during the enforcement of the judgment
debt of the corporation against the controlling shareholders. McConnel v. CA, 1 SCRA 723 (1961).
There is no denial of due process to hold officers liable under the piercing doctrine, provided
that evidential basis has been adduced during trial to apply the piercing doctrine. Jacinto v. Court
of Appeals, 198 SCRA 211 (1991).
We suggested as much in Arcilla v. Court of Appeals, 215 SCRA 120 (1992), where we found
lawful the Court of Appeal’s application of the piercing doctrine to hold the President liable for the
obligations incurred in the name of the corporation although it was not a party to the collection suit
before the trial court. Violago v. BA Finance Corp., 559 SCRA 69 (2008).
The elements of “control” laid down in Concept Builders to allow the application of the piercing
doctrine must be properly pleaded and proved during the hearing on the merits, and cannot be
merely raised for the first time in the motion for the issuance of an alias writ of execution. Pacific
Rehouse Corp. v. Court of Appeals, 719 SCRA 665 (2014).
MODULE 4
23
“Promoter” is a person who, acting alone or with others, takes initiative in founding and
organizing the business or enterprise of the issuer [i.e., corporate enterprise whose shares are
subscribed by investors] and receives consideration therefor. Sec. 3.10, Securities Regulation Code
(R.A. 8799)
b. Pre-incorporation Subscription Agreements (Secs. 59 and 60)
c. Liability Rules for Promoter’s Contracts:
A corporation, until organized, has no being, franchise or faculties, nor do those engaged in
bringing it into being have any power to bind it by contract—it is, as it were, a child in ventre sa
mere. The acts of promoters of a corporation may be ratified by the corporation if and when
subsequently organized, 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. Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223
(1937).
A franchise granted to a corporation still in the process of incorporation would nevertheless
constitute a valid contractual commitment, with the acceptance subsequent to the completion of
incorporation. Rizal Light & Ice Co. v. Public Service Commission, 25 SCRA 285 (1968).
Promoter’s contracts can be pursued against the investors who were the venture’s “moving
spirit”, but not against those who were merely convinced to invest in the corporate venture on the
basis of the feasibility study undertaken by the promoters. Caram, Jr. v. CA, 151 SCRA 372
(1987).
46
Citing Behn Meyer & Co. v. Rosatzin, 5 Phil. 660 (1906); Chamber of Commerce v. Pua Te Choing, 14 Phil. 222 (1909).
24
conflict, there is no corporation by estoppel. A failed consolidation therefore cannot result in a
consolidated corporation by estoppel. Lozano v. De Los Santos, 274 SCRA 452 (1997).
A party cannot challenge the personality of the plaintiff as a duly organized corporation after
having acknowledged same when entering to the contract with the plaintiff as such corporation for
the transportation of its merchandise. Ohta Dev. Co. v. Steamship Pompey, 49 Phil. 117 (1926).47
A person who accepts employment in an unincorporated charitable association is estopped from
alleging its lack of juridical personality. Christian Children’s Fund v. NLRC, 174 SCRA 681 (1989).
What is now Sec. 20 of RCC explicitly provides that one who assumes an obligation to an
ostensible corporation 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. Paz v. New Int’l Environmental Universality, Inc., 756 SCRA 284
(2015).
The corporation by estoppel doctrine rest on the idea that if the Court were to disregard the
existence of an entity which entered into a transaction with a third party, unjust enrichment would
result as some form of benefit that have already accrued on the part of one of the parties. Thus, in
that instance, the Court affords upon the unorganized entity corporate fiction and juridical personality
for the sole purpose of upholding the contract or transaction. Missionary Sisters of Our Lady of
Fatima v. Alzona, 876 SCRA 309 (2018).
Respondent allegation that it would be unjust for a third person to be allowed to circumvent
labor laws by claiming that a person or company who acted as an employer is a non-juridical entity
which cannot sue or be sued. To be sure, the Court, in the interest of preventing injustice and
unfairness, has previously prevented non-existent corporations from raising its lack of juridical
personality to avoid fulfillment of its contracts or obligations by applying the doctrine of corporation by
estoppel. This doctrine has been codified in what is now Section 19 of the Revised
Corporation Code, which provides that 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. TESDA v. Abragar, G.R. No. 201022, 17 March 2021.
c. Two Levels: (i) With “Fraud;” and (ii) Without “Fraud”
When the incorporators represent themselves to be officers of the corporation which was never
registered with SEC, and engaged in the name of the purported corporation in illegal recruitment,
they are estopped from claiming that they are not liable as corporate officers under what is now Sec.
20 of RCC which provides that all persons who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general partners for all the debts, liabilities and damages
incurred or arising as a result thereof. People v. Garcia, 271 SCRA 621 (1997).
Application of the doctrine applies to a third party only when he tries to escape liabilities on a
contract from which he has benefited on the irrelevant ground of defective incorporation. In the case
at bar, the petitioner is not trying to escape liability from the contract but rather is the one claiming
from the contract. However, one who deals with an unincorporated association is not estopped to
deny its corporate existence when his purpose is not to avoid liability, but precisely to enforce the
contract against the action for the purported corporation. Int’l Express Travel & Tour Services v.
Court of Appeals, 343 SCRA 674 (2000).
d. Can a Defective Attempt to Form a Corporation Result at Least into a Partnership?
While ordinarily persons who attempt, but fail, to form a corporation and who carry on business
under the corporate name occupy the position of partners inter se; such a relation, however, does
not necessarily exist, for ordinarily persons cannot be made to assume the relation of partners when
their purpose is that no partnership shall exist, and it should be implied only when necessary to do
justice between the parties. Thus, one who takes no part except to subscribe for stock in a proposed
corporation which is never legally formed does not become a partner with other subscribers who
engage in business under the name of the pretended corporation, so as to be liable as such in an
action for settlement of the alleged partnership and contribution. A partnership relation between
certain shareholders and other shareholders, who were also directors, will not be implied in the
absence of an agreement, so as to make the former liable to contribute for payment of debts illegally
contracted by the latter. Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989).
Under the law on estoppel including that under Sec. 21, those acting on behalf of an ostensible
corporation and those benefited by it, knowing it to be without valid existence, are held liable as
general partners. Lim Tong Lim v. Phils. Fishing Gear Industries, Inc., 317 SCRA 728 (1999).
V. ARTICLES OF INCORPORATION
1. Nature of Charter: The charter is in the nature of a contract between the corporation and the State.
Government of P.I. v. Manila Railroad Co., 52 Phil. 699 (1929).
Articles of incorporation defines the corporation’s charter and the contractual relationships between
the State and the corporation, the shareholders and the State, and between the corporation and its
shareholders. Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
47
The same principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil. 1 (1911), but that case pertained to a commercial partnership which
required registration in the registry under the terms of the Code of Commerce).
25
a. Commencement of Corporate Existence (Sec. 18)
2. Procedure and Documentary Requirements (Sec. 13 and 14)
a. SEC Guidelines on Authentication of Articles of Incorporation (SEC Memo Circular No. 16-
2020)
b. As to Who May Be and the Number of Incorporators (Sec. 10; SEC Guidelines on
Incorporators – SEC Memorandum Circular No. 16-2019)
It is possible for a corporation to be wholly owned by one individual, and the validity of its
incorporation is not affected when he gives nominal one share of stock to each of the other four
incorporators. This arrangement is not necessarily illegal, but it valid only between and among the
incorporators who are privy to the agreement. It does not bind the corporation that will consider all
shareholders of record as the lawful owners of their registered shares. As between the corporation
on the one hand, and its shareholders and third persons on the other, the corporation looks only to
its books to determine who its shareholders are. Nautica Canny Corp. v. Yumul, 473 SCRA 415
(2005).
(1) Guidelines on the Use of Corporate Names (SEC Memo Circular No. 13-2019)
Similarity in corporate names between two corporations would cause confusion to the
public especially when the purposes stated in their charter are also the same type of business.
Universal Mills Corp. v. Universal Textile Mills Inc., 78 SCRA 62 (1977).
To fall within the prohibition of the law Revised Guidelines in the Approval of Corporate and
Partnership Names, two requisites must be proven, to wit: (a) That the complainant corporation
acquired a prior right over the use of such corporate name; and (b) the proposed name is either:
(i) identical, or (ii) deceptively or confusingly similar to that of any existing corporation or to any
other name already protected by law; or (iii) patently deceptive, confusing or contrary to existing
laws. Philips Export B.V. v. Court of Appeals, 206 SCRA 457 (1992).
Incorporators must choose a name at their peril; and the use of a name similar to the one
adopted by another corporation, whether a business or a nonprofit organization, if misleading or
likely to injure the exercise of its corporate functions, regardless of intent, may be prevented by
the corporation having a prior right. Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus v.
Iglesia ng Dios Kay Kristo Jesus, 372 SCRA 171 (2001).
The policy behind Sec. 18 which expressly prohibits the use of a corporate name which is
“identical or deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive, confusing or contrary to existing laws,”
is to avoid fraud upon the public that will occasion to deal with the entity concerned, the evasion
of legal obligations and duties, and the reduction of difficulties of administration and supervision
over corporations. Industrial Refractories Corp. v. Court of Appeals, 390 SCRA 252 (2002).48
Enforcement of protection accorded by Sec. 18 to corporate names is lodged exclusively in
the SEC which has absolute jurisdiction, supervision and control over all corporations. It is the
SEC’s duty to prevent confusion in the use of corporate names not only for the protection of the
corporations involved, but more so for the protection of the public. It has authority to de-register
at all times, and under all circumstances corporate names which in its estimation are likely to
generate confusion.” GSIS Family Bank v. BPI Family Bank, 771 SCRA 284 (2015).
(2) No Corporate Name Shall Be Allowed If: SEC Memo Circular No. 13-2019
“Not Distinguishable from that Already Reserved or Registered ”
48
Also Lyceum of the Phils. v. Court of Appeals, 219 SCRA 610 (1993).
26
“Name Already Protected by Law”
“When Use of Name is Contrary to Law”
(3) SEC Power to Adjudicate on the Use of Corporate Name (Sec. 17)
By express mandate of law, the SEC has absolute jurisdiction, supervision and control over
all corporations. It is the SEC’s duty to prevent confusion in the use of corporate names not
only for the protection of the corporation involved, but more so for the protection of the public. It
has the authority to de-register at all times, and under all circumstances, corporate names which
in its estimation are likely to generate confusion. Indian Chamber of Commerce Phils., Inc. v.
Filipino Indian Chamber of Commerce in the Philippines, Inc., 799 SCRA 27 (2016).
(4) Effect of Change of Corporate Name: A corporation may change its name by the
amendment of its articles of incorporation, but the same is not effective until approved by the
SEC. Phil. First Insurance Co. v. Hartigan, 34 SCRA 252 (1970).
A change in the corporate name does not make a new corporation and has no effect on the
identity of the corporation, or on its property, rights, or liabilities. Republic Planters Bank v.
Court of Appeals, 216 SCRA 738 (1992).49
49
P.C. Javier & Sons v. CA, 462 SCRA 36 (2005); Zuellig Freight and Cargo Systems v. NLRC, 701 SCRA 562 (2013).
27
Why Is Authorized Capital Stock Required to Be Stated under Sec. 13(h)?
h. No More Subscription and Paid-Up Requirements (Sec. 13 of old Corporation Code)
BUT SEE: 25% Subscription – 25% Paid-up Requirement under Section 37 for Increasing the
Authorized Capital Stock
VI. BYLAWS
1. Nature and Function and Contents of Bylaws (Sec. 46)
The power to adopt bylaws is an inherent power on the part of those forming a corporation or any
other form of association. Gokongwei, Jr. v. SEC, 89 SCRA 337 (1979).
As the “rules and regulations or private laws enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and its stockholders/members and directors and officers
with relation thereto and among themselves in their relation to it,” bylaws are indispensable to
corporations. These may not be essential to corporate birth but certainly, these are required for an
orderly governance and management of corporations. Loyola Grand Villas Homeowners v. CA, 276
SCRA 681 (1997).
Bylaws are traditionally defined as regulations, ordinances, rules or laws adopted by a corporation
for its internal governance, including rules for routine matters such as calling meetings and the like. If
those key bylaw provisions on matters such as quorum requirements, meetings, or on the internal
governance of the local/chapter are themselves already provided for in the constitution, then it would be
feasible to overlook the requirements for bylaws. In such an event, to insist on the submission of a
separate document denominated as “Bylaws” would be an undue technicality, as well as a redundancy.
San Miguel Corp. v. Mandaue Packing Products Plants Union-FFW, 467 SCRA 107 (2005).
Bylaws are the self-imposed rules resulting from the agreement between the country club and its
members to conduct the corporate business in a particular way. In that sense, the bylaws are the private
“statutes” by which the country club is regulated. Bylaws constitute a binding contract as between the
country club and its members, and as among the members themselves. They are self-imposed private
laws binding on all members, directors, and officers of the country club. The prevailing rule is that the
provisions of the articles of incorporation and the bylaws must be strictly complied with and applied to
the letter. Ching v. Quezon City Sports Club, Inc., 807 SCRA 46 (2016).50
b. Power to Purchase Own Shares (Secs. 8, 9, 40, 42 and 139, last paragraph)
Under common law, there were conflicting views on whether a corporation had the power to
purchase its own stocks. Only a few American jurisdictions adopted the strict English rule forbidding
a corporation from purchasing its own shares. In some American states where the English rule used
to be adopted, statutes granting authority to purchase out of surplus funds were enacted, while in
others, shares might be purchased even out of capital provided the rights of creditors were not
prejudiced. The reason underlying the limitation of share purchases sprang from the necessity of
imposing safeguards against the depletion by a corporation of its assets and against the impairment
of its capital needed for the protection of creditors. Turner v. Lorenzo Shipping Corp., 636 SCRA 13
(2010).
The Corporation Code clearly sets out the parameters when a corporation may reacquire its
shares and convert them into treasury shares. According to Section 9, “treasurer share are shares of
stock which have been issued and fully paid for, but subsequently reacquired through some lawful
means, but that reacquisition of shares requires that the corporation must have unrestricted retained
earnings in its books to cover the shared to be purchased or acquired. In addition, in cases where
the reason for reacquiring the shares is because of the unpaid subscription, the Corporation Code is
likewise explicit that the corporation must purchase the same during a delinquency sale. Salido, Jr.
v. Aramaywan Metals Dev. Corp., G.R. No. 233857, 18 March 2021.
c. Rescission of Subscription Agreement
Violation of terms embodied in a Subscription Agreement, with are personal commitments, do
not constitute legal ground to rescind the underlying subscription agreement: “In the instant case, the
rescission of the Pre-Subscription Agreement will effectively result in the unauthorized distribution of
the capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and the
Corporation Code, since the rescission of a subscription agreement is not one of the instances when
distribution of capital assets and property of the corporation is allowed.” Distribution of corporate
assets among the shareholders cannot even be resorted to achieve “corporate peace.” Ong Yong
v. Tiu, 401 SCRA 1 (2003).
51
CIR v. Court of Appeals, 301 SCRA 152 (1999).
30
VIII. ULTRA VIRES DOCTRINE
1. Ultra Vires of the First Type: Classic Ultra Vires Acts (Secs. 2 and 44)
An ultra vires act is one committed outside the object for which a corporation is created as defined
by the law of its organization and therefore beyond the power conferred upon it by law. The term “ultra
vires” is “distinguished from an illegal act for the former is merely voidable which may be enforced by
performance, ratification, or estoppel, while the latter is void and cannot be validated.” Atrium
Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).
A corporation has no power except those expressly conferred on it by the [Revised] Corporation
Code, its charter, and those that are implied or incidental to its existence. In turn, a corporation
exercises said powers through its Board of Directors and/or its duly authorized officers and agents.
Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004).
From a reading of what is now Sec. 44 of the RCC, it is clear that a corporation has: (1) express
powers, which are bestowed upon by law or its articles of incorporation; and (2) necessary or incidental
powers to the exercise of those expressly conferred. An act which cannot fall under a corporation's
express or necessary or incidental powers is an ultra vires act. Magallanes Watercraft Assn. v. Auguis,
791 SCRA 445 (2016).
a. General Judicial Attitude Towards the Ultra Vires Doctrine: The plea of “ultra vires” will not be
allowed to prevail, whether interposed for or against a corporation, when it will not advance justice
but, on the contrary, will accomplish a legal wrong to the prejudice of another who acted in good
faith. Zomer Dev. Corp. v. Int’l Exchange Bank, 581 SCRA 115 (2009).
b. Ratification of Ultra Vires Acts – Acts done by the Board of Directors which are ultra vires cannot
be set-aside if the acts have been ratified by the shareholders. Pirovano v. De la Rama
Steamship Co., 96 Phil. 335 (1954).
Even when a particular corporate act does not fall within the express or implied powers of the
corporation, it will not be set aside when, not being malum prohibitum, the corporation, through its
senior officers or its Board of Directors, are estopped from questioning the legality of such act,
contract or transaction. Carlos v. Mindoro Sugar Co., 57 Phil. 343 (1932).52
2. Ultra Vires of the Second Type: Doctrine of Centralized Management (Sec. 22)
Acts done in excess of the officers’ scope of authority cannot bind the corporation. However, when
subsequently a compromise agreement was on behalf of the corporation being represented by its
President acting pursuant to a Board of Directors’ resolution, such constituted as a confirmatory act
signifying ratification of all prior acts of its officers. NPC v. Alonzo-Legasto, 443 SCRA 342 (2004).
Contracts or acts of a corporation must be made either by the Board of Directors or by a corporate
agent duly authorized by the Board—absent such valid delegation/authorization, the rule is that the
declaration of an individual directors relating to the affairs of the corporation, but not in the course of, or
connected with, the performance of authorized duties of such director, are held not binding on the
corporation. Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).
Application of the First and Second Types of Ultra Vires – Third persons dealing with
corporations must determine the corporation’s competence as expressly defined by the law and their
articles of incorporation. Corporate acts that are outside those express definitions under the law or
articles of incorporation or those “committed outside the object for which a corporation is created” are
ultra vires. The only exception to this rule is when acts are necessary and incidental to carry out a
corporation's purposes, and to the exercise of powers conferred by the [Revised] Corporation Code and
under a corporation's articles of incorporation. This exception is specifically included in the general
powers of a corporation under what is now Sec. 35 of Revised Corporation Code. University of
Mindanao v. BSP, 778 SCRA 458 (2016).
3. Ultra Vires of the Third Type: Although arrangements between the two mining companies was
prohibited under the terms of the old Corporation Law, the Supreme Court did not declare the nullity of
the agreements on the ground that only private rights and interests, not public interests, were involved
in the case.Harden v. Benguet Consolidated Mining Co., 58 Phil. 140 (1933).
MODULE 5
52
Republic v. Acoje Mining Co., 3 SCRA 361 (1963); Crisologo Jose v. CA, 177 SCRA 594 (1989).
31
IX. CORPORATE POWERS AND CAPACITY
1. Corporate Power and Juridical Capacity to Act (Arts. 44(3) and 46, Civil Code; Secs. 35 and
44)
A corporation has no power except those expressly conferred by the [Revised] Corporation Code
and those that are implied or incidental to its existence. In turn, a corporation exercises said powers
through its Board of Directors and/or its duly authorized officers. In turn, physical acts of the corporation,
like the signing of documents, can be performed only by natural persons duly authorized for the purpose
by corporate bylaws or by a specific act of the Board. Shipside Inc. v. CA, 352 SCRA 334 (2001).53
A corporation has only such powers as are expressly granted by law and its articles of
incorporation (express powers), those which may be incidental to such conferred powers, those
reasonably necessary to accomplish its purposes (implied powers), and those which may be incident to
its existence as a juridical entity (incidental powers). Pilipinas Loan Co. v. SEC, 356 SCRA 193 (2001).54
b. Implied Powers: When the articles expressly provide that the purpose was to “engage in the
transportation of person by water,” such corporation cannot engage in the business of land
transportation, which is an entirely different line of business. Luneta Motor Co. v. A.D. Santos, Inc., 5
SCRA 809 (1962).
A corporation whose primary purpose is to generate electric power has no authority to
undertake stevedoring services to unload coal into its pier since it is not reasonably necessary for the
operation of its power plant. National Power Corp. v. Vera, 170 SCRA 721 (1989).
A corporation organized to engage as a lending investor cannot engage in pawnbroker.
Pilipinas Loan Co. v. SEC, 356 SCRA 193 (2001).
A mining company has not power to engage in real estate development. Heirs of Antonio Pael
v. Court of Appeals, 372 SCRA 587 (2001).
c. Incidental Powers: The act of issuing checks is within the ambit of a valid corporate act, for it as
for securing a loan to finance the activities of the corporation, hence, not an ultra vires act. Atrium
Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).
b. Borrow Funds
The power to borrow money is one of those cases where even a special power of attorney is
required under Art. 1878 of Civil Code. There is invariably a need of an enabling act of the
corporation to be approved by its Board of Directors. The argument that the obtaining of loan was in
accordance with the ordinary course of business usages and practices of the corporation is devoid of
merit because the prevailing practice is to the effect that the Board must explicitly authorize an officer
to contract loans on behalf of the corporation. China Banking Corp. v. Court of Appeals, 270 SCRA
503 (1997).
55
AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003);
Cosco Phils. Shipping v. Kemper Insurance Co., 670 SCRA 343 (2012).
56
Shipside Inc. v. CA, 352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002); United Paragon Mining Corp. v. CA, 497 SCRA 638 (2006);
Mediserv, Inc. v. CA, 617 SCRA 284 (2010); Cebu Bionic Builders Supply, Inc. v. DBP, 635 SCRA 13 (2010); Ellice Agro-Industrial Corp. v. Young, 686
SCRA 51 (2012); Swedish Match Phils v. Treasurer of Manila, 700 SCRA 428 (2013); Esguerra v. Holcim Phils., 704 SCRA 490 (2013); Philippine
Numismatic and Antiquarian Society v. Aquino, 816 SCRA 161 (2017).
57
DBP v. CA, 440 SCRA 200 (2004); Public Estates Authority v. Uy, 372 SCRA 180 (2001); PAL v. Flight Attendance and Stewards Assn. of the Phils.
(FASAP), 479 SCRA 605 (2006); Metro Drug Distribution v. Narcisco, 495 SCRA 286 (2006); Cagayan Valley Drug Corp. v. CIR, 545 SCRA 10 (2008)
Mediserv, Inc. v. CA, 617 SCRA 284 (2010); Cosco Phils. Shipping v. Kemper Insurance Co., 670 SCRA 343 (2012); Almeda v. Heirs of Ponciano Almeda,
839 SCRA 630 (2017); BSP v. BG Homes, Inc., G.R. No. 228239, 10 June 2019.
58
Mariveles Shipyard Corp. v. CA, 415 SCRA 573 (2003); Nissan Car Lease Phils. v. Lica Management Inc., 780 SCRA 400 (2016); Steamship Mutual
Underwirting Assn. (Bermuda) Ltd. v. Sulpicio Lines, Inc., 840 SCRA 203 (2017).
33
When a corporate officer has been granted express power by the Board of Directors to
institute a suit, the same is considered broad enough to include the power of said corporate
officer to execute the verification and certification against forum shopping required in initiatory
pleadings under the Rules of Court. Cunanan v. Jumping Jap Trading Corp., 586 SCRA 620
(2009).
A President can sign the verification and certification against non-forum shopping on behalf
of the corporation without the benefit of a board resolution. South Cotabato Communications
Corp. v. Sto. Tomas, 638 SCRA 566 (2011).
However, the following officials or employees of the company can sign a verification and
certification against forum-shopping without need of a board resolution: (1) the Chairperson of the
Board of Directors, (2) the President of a corporation, (3) the General Manager or Acting General
Manager, (4) Personnel Officer, and (5) an Employment Specialist in a labor case. While the
above cases do not provide a complete listing of authorized signatories to the verification and
certification required by the rules, the determination of the sufficiency of the authority was done
on a case-to-case basis. Pasos v. PNCC, 700 SCRA 608 (2013).
(2) xService of Summons on Corporations
Section 11, Rule 14 of the Rules of Civil Procedure uses the term “general manager” and
unlike the old provision in the Rules of Court, it does not include the term “agent”. Consequently,
the enumeration of persons to whom summons may be served is “restricted, limited and
exclusive” following the rule on statutory construction expressio unios est exclusio alterius.
Therefore, the earlier cases that uphold service of summons upon a construction project
manager;59 a corporation’s assistant manager;60 ordinary clerk of a corporation;61 private secretary
of corporate executives;62 retained counsel;63 officials who had charge or control of the operations
of the corporation, like the assistant general manager; 64 or the corporation’s Chief Finance and
Administrative Officer;65 no longer apply since they were decided under the old rule that allows
service of summons upon an “agent”66 of the corporation. E.B. Villarosa & Partners Co., Ltd. v.
Benito, 312 SCRA 65 (1999).67
MODULE 6
59
Kanlaon Construction Enterprises Co. v. NLRC, 279 SCRA 337 (1997).
60
Gesulgon v. NLRC, 219 SCRA 561 (1993).
61
Golden Country Farms, Inc. v. Sanvar Dev.t Corp., 214 SCRA 295 (1992); G&G Trading Corp. v. CA, 158 SCRA 466 (1988).
62
Summit Trading and Dev. Corp. v. Avendaño, 135 SCRA 397 (1985); Vlason Enterprises Corp. v. CA, 310 SCRA 26 (1999).
63
Republic v. Ker & Co., 18 SCRA 207 (1966).
64
Villa Rey Transit v. Far East Motor Corp., 81 SCRA 298 (1978).
65
Far Corp. v. Francisco, 146 SCRA 197 (1986).
66
Filoil Marketing Corp. v. Marine Dev. Corp. of the Phils., 177 SCRA 86 (1982).
67
Ellice Agro-Industrial Corp. v. Young, 686 SCRA 51 (2012).
34
X. BOARD OF DIRECTORS / TRUSTEES AND OFFICERS (Sec. 174)
Whatever may be the term used in the company charter, the “Board of Directors” is the body which (1)
exercises all powers provided for under the [Revised] Corporation Code; (2) conducts all business of the
corporation; and (3) controls and holds all properties of the corporation. Its members have been
characterized as clothed with a fiduciary character. Hence, the corporation’s general counsel cannot
represent the members of the Board who have been sued by the shareholders in a derivative suit, for clearly
the Board is separate and distinct from the corporate entity itself. Hornilla v. Salunat, 405 SCRA 220 (2003).
Nonstock and other special corporations may, through their articles of incorporation or their bylaws,
designate their Governing Board by any name other than as “Board of Trustees.” (Sec. 174)
c. Effects of Acts by a “Bogus” Board : The acts or contracts effected by a bogus Board would be
void pursuant to Art. 1318 of Civil Code because of the lack of “consent”. Islamic Directorate of the
Philippines v. Court of Appeals, 272 SCRA 454 (1997).
d. Executive and Other Board Committees (Sec. 34): It is within the power of the Board of
Directors to authorize any person or committee to undertake corporate acts. The board has power to
constitute even an executive committee, even when no such committee is provided for in the articles
and bylaws of the corporation. Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007).
a. BJR FIRST BRANCH: On the Transactions Entered Into: When resolutions are passed in good
faith by the Board of Directors, it is valid and binding, and whether it will cause losses or decrease
the corporation’s profits, the courts have no authority to review them. Questions of policy or
management are left solely to the honest decision of officers and directors of a corporation, and the
court is without authority to substitute its judgment for that of the Board. The Board is the
corporation’s business manager, and so long as it acts in good faith its orders are not reviewable by
the courts. Montelibano v. Bacolod-Murcia Milling Co., 5 SCRA 36 (1962).70
While SEC is the agency with the primary say as to whether securities, including shares of a
corporation, may be traded or not in the stock exchange, it does not mean that PSE’s management
prerogatives are under the absolute control of the SEC. The PSE is, after all, a corporation
authorized by its corporate franchise to engage in its proposed and duly approved business. One of
the PSE’s main concerns, as such, is still the generation of profit for its shareholders. Philippine
Stock Exchange v. Court of Appeals, 281 SCRA 232 (1997).
No court can, in resolving the issues between squabbling shareholders, order the corporation to
undertake certain corporate acts, since it would be in violation of the business judgment rule. Ong
Yong v. Tiu, 401 SCRA 1 (2003), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (1998 ed), p. 288.
b. BJR SECOND BRANCH: On the Personal Liability of the Acting Directors and/or Officers:
Directors and officers who purport to act for the corporation, keep within the lawful scope of their
authority and act in good faith, do not become liable, whether civilly or otherwise, for the
consequences of their acts, which are properly attributed to the corporation alone. Benguet Electric
Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).
If the cause of the losses is merely error in business judgment, not amounting to bad faith or
negligence, directors and/or officers are not liable. For them to be held accountable, the
mismanagement and the resulting losses must be proven to have resulted from bad faith and with
malice in doing the assailed acts. Bad faith does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of a
known duty through some motive or interest or ill-will partaking of the nature of fraud. Filipinas Port
Services, Inc. v. Go, 518 SCRA 453 (2007).
It is elementary in Corporation Law that the business judgment rule, which prohibits the courts
from interfering in the judgment made by the Board and its officers, admits of exceptions: bad faith
being one of them, gross negligence, another. Virata v. Ng Wee, 830 SCRA 271 (2017).
70
Estacio v. Electric Cooperative, Inc., 596 SCRA 542 (2009); Cua, Jr. v. Tan, 607 SCRA 645 (2009).
36
Ratification means that the principal voluntarily adopts, confirms and gives sanction to some
unauthorized act of its agent on its behalf. The substance of the doctrine is confirmation after
conduct, amounting to a substitute for a prior authority. Ratification can be made either expressly or
impliedly. Implied ratification may take various forms—like silence or acquiescence, acts showing
approval or adoption of the act, or acceptance and retention of benefits flowing therefrom. Lopez
Realty v. Spouses Tanjangco, 739 SCRA 644 (2014).
Cua, v. Tan held that by virtue of ratification, the acts of the Board of Directors become the acts
of the shareholders themselves, even if those acts were, at the outset, unauthorized. To declare the
Board resolution null and void will serve no practical use or value, or affect any of the rights of the
parties, because the subsequent shareholders’ resolution approving and ratifying said acquisition
and the manner in which PRCI shall constitute the JTH Board of Directors, will still remain valid and
binding. Lopez Realty, Inc. v. Spouses Tanjangco, 739 SCRA 644 (2014).
In order to ratify the unauthorized act of an agent to bind the corporation, it must be shown that
the Board or officer authorized to ratify had full and complete knowledge of all the material facts
connected with the transaction to which it relates. Ratification can never be made by the same
person who wrongfully assume the power to make the contract, but the ratification must be by the
officer or governing body having authority to make such contract. Vicente v. Geraldez, 52 SCRA 210
(1973).
The admission by counsel on behalf of the corporation of the latter’s culpability for personal
loans obtained by its corporate officers cannot be given legal effect when the admission was “without
any enabling act or attendant ratification of corporate act,” as would authorize or even ratify such
admission. In the absence of such ratification or authority, such admission does not bind the
corporation. Aguenza v. Metropolitan Bank and Trust Co., 271 SCRA 1 (1997).
Doctrine of Laches or Stale Demands: The failure or neglect, for an unreasonable and
unexplained length of time, to do that which by exercising due diligence could or should have been
done earlier, or the negligence or omission to assert a right within a reasonable time, warrants a
presumption that the party entitled to assert it either has abandoned it or declined to assert it. Rovels
Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002).71
When an officer in a bank arranges a credit line agreement and forwards the same to the legal
department at its head office, and the bank did not disaffirm the contract, then it is bound by it.
Premier Dev. Bank v. Court of Appeals, 427 SCRA 686 (2004).
Under Art. 1910 of Civil Code, acts done by such officers beyond the scope of their authority
cannot bind the corporation unless it has ratified such acts expressly or tacitly or is estopped from
denying them. Contracts entered by corporate officers beyond the scope of authority are
unenforceable against the corporation unless ratified by the Board. Woodchild Holdings, Inc. v.
Roxas Electric Constructions Co., 436 SCRA 235 (2004).
Acts done in excess of officers’ scope of authority cannot bind the corporation; however, when
subsequently a compromise agreement was on behalf of the corporation being represented by its
President acting pursuant to a Board resolution, such constituted as ratification of all prior acts of its
officers. National Power Corp. v. Alonzo-Legasto, 443 SCRA 342 (2004).
b. Doctrines of Apparent Authority (Art. 1883, Civil Code): If a corporation permits an officer to act
within the scope of an apparent authority, it holds him out to the public as possessing the power to
do those acts, the corporation will, as against anyone who has in good faith dealt with it through such
agent, be estopped from denying the agent’s authority. Francisco v. GSIS, 7 SCRA 577 (1963).72
A corporation cannot disown its President’s act of obtain a loan from the bank, on the ground
that it never authorized the President by the lack of any formal Board resolution. The following
placed the Board in estoppel in pais: (a) bylaws provides for the powers of the President, which
includes executing contracts and agreements, borrowing money, signing, endorsing and delivering
checks; (b) there were already previous transaction of discounting the checks involving the same
personalities wherein any enabling resolution from the Board was dispensed with and yet the bank
was able to collect from the corporation. Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637
(1991).
The authority of a corporate officer dealing with third persons may be actual or apparent . . . the
principal is liable for the obligations contracted by the agent. The agent’s apparent representation
yields to the principal’s true representation and the contract is considered as entered into between
the principal and the third person. First Philippine Int’l Bank v. Court of Appeals, 252 SCRA 259
(1996).
Persons who deal with corporate agents within circumstances showing that the agents are
acting in excess of corporate authority, may not hold the corporation liable. Traders Royal Bank v.
Court of Appeals, 269 SCRA 601 (1997).
Estoppel precludes a corporation’s Board from denying the validity of the transaction entered by
its officer with a third party who in good faith, relied on the authority of the former as manager to act
on behalf of the corporation. Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003).
71
Engineering Geoscience, Inc. v. Philippine Savings Bank, 890 SCRA 199 (2019).
72
Rural Bank of Milaor (Camarines Sur) v. Ocfemia, 325 SCRA 99 (2000); Soler v. CA, 358 SCRA 57 (2001); United Coconut Planters Bank v.
Planters Products, Inc., 672 SCRA 285 (2012).
37
Naturally, the third person has little or no information as to what occurs in corporate meeting,
since what transpires in the Board room is entirely an internal matter and must necessarily rely upon
the external manifestations of corporate consent. The integrity of commercial transactions can only
be maintained by holding the corporation strictly to the liability fixed upon it by its agents in
accordance with law. Hence, petitioner may not impute negligence on the part of the respondents in
failing to find out the scope of Atty. Soluta’s authority. Indeed, the public has the right to rely on the
trustworthiness of bank officers and their acts. Associated Bank v. Pronstroller, 558 SCRA 113
(2008).
The general rule remains that, in the absence of authority from the Board of Directors, no
person, not even its officers, can validly bind a corporation. If a corporation, however, consciously
lets one of its officers, or any other agent, to act within the scope of an apparent authority, it will be
estopped from denying such officer’s authority. … Unmistakably, the Court’s directive in Yao Ka Sin
Trading is that a corporation should first prove by clear evidence that its corporate officer is not in
fact authorized to act on its behalf before the burden of evidence shifts to the other party to prove,
by previous specific acts, that an officer was clothes by the corporation with apparent authority.
Westmont Bank v. Inland Construction and Dev. Corp., 582 SCRA 230 (2009).73
The doctrine of apparent authority provides that a corporation will be estopped from denying the
agent’s authority if it knowingly permits one of its officers or any other agent to act within the scope of
an apparent authority, and it holds him out to the public as possessing the power to do those acts.
The doctrine does not apply if the principal did not commit any acts or conduct which a third party
knew and relied upon in good faith as a result of the exercise of reasonable prudence. Moreover, the
agent’s acts or conduct must have produced a change of position to the third party’s
detriment. Advance Paper Corp. v. Arma Traders Corp., 712 SCRA 313 (2013).
The existence of apparent authority may be ascertained through (1) the general manner by
which the corporation holds out an officer or agent as having the power to act or, in other words, the
apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope
of his ordinary powers. Georg v. Holy Trinity College, Inc., 797 SCRA 550 (2016).74
A corporation exercises its corporate powers through its board of directors. This power may be
validly delegated to its officers, committees, or agencies. “The authority of such individuals to bind
the corporation is generally derived from law, corporate bylaws or authorization from the board,
either expressly or impliedly by habit, custom or acquiescence in the general course of business.”
Apparent or implied authority "can be measured by his or her prior acts which have been ratified by
the corporation or whose benefits have been accepted by the corporation.” Terp Construction Corp.
v. Banco Filipino Savings and Mortgage Bank, 920 SCRA 163 (2019).
Although the corporate officer was not duly authorized by the Board to enter into the
compromise agreement, nonetheless when the corporation itself availed of the provisions thereof
there is the proper application of the doctrine of apparent authority, plus the fact that the Board
questioned the authority of the corporate officer to sign the compromise agreement only after 12
years, laches had already set in. Engineering Geoscience, Inc. v. Philippine Savings Bank , 890
SCRA 199 (2019).
73
Calubad v. Ricarcen Dev. Corp., 838 SCRA 303 (2017); Ayala Land, Inc. v. ASB Realty Corp., 881 SCRA 56 (2018); Engineering Geoscience, Inc.
v. Phil. Savings Bank, 890 SCRA 199 (2019); Vive Eagle Land, Inc. v. NHMFC, 918 SCRA 87 (2019).
74
Inter-Asia Investment Industries v. Court of Appeals, 403 SCRA 452 (2003).
38
Doctrine of Implied Authority: An officer who is authorized to purchase the stock of another
corporation has implied power to perform all other obligations arising therefrom such as payment of
the shares. Inter-Asia Investments Industries v. Court of Appeals, 403 SCRA 452 (2003).
Even though a judgment or order is addressed to the corporation only, the officers as well as the
corporation itself, may be punished for contempt for disobedience to its terms, at least if they
knowingly disobey the court’s mandate, since a lawful judicial command to a corporation is in effect a
command to the officers. Heirs of Trinidad de Leon Vda. De Roxas v. CA, 422 SCRA 101 (2004).
While those who belong to the upper corporate echelons would have more privileges, it cannot
be presume the existence of such privileges or benefits—he who claims the same is burdened to
prove not only the existence of such benefits but also that he is entitled to the same. Kwok v.
Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005).
Corporate policies need not be in writing. Contracts entered into by a corporate officer or
obligations assumed by such officer on behalf of such corporation are binding on the said
corporation only if such officer acted within the scope of his authority or if such officer exceeded the
limits of his authority, the corporation has ratified such contracts or obligations. Hence, a verbal
promise given by the Chairman and President to the General Manager and COO to give the latter
unlimited sick and vacation leave benefits and cash conversion upon his retirement or resignation,
when not an integral part of the company’s rules and policies, is not binding on the company when it
is without the approval of the Board of Directors. Kwok v. Philippine Carpet Manufacturing Corp., 457
SCRA 465 (2005).
The acceptance of the offer to purchase by the clerk of the branch, and the representation that
the manager had already approved the sale (in fact not true), cannot bind the bank to the contract of
sale, it being obvious that such a clerk is not among the bank officers upon whom putative authority
may be reposed by a third party. There is, thus, no legal basis to bind the bank into any valid
contract of sale with the buyers, given the absolute absence of any approval or consent by any
responsible officer of the bank. DBP v. Ong, 460 SCRA 170 (2005).
The general principles of agency govern the relation between the corporation and its officers or
agents, subject to the articles of incorporation, bylaws, or relevant provisions of law—when
authorized, their acts bind the corporation; otherwise, their acts cannot bind it. Yasuma v. Heirs of
Cecilio S. De Villa, 499 SCRA 466 (2006); Litonjua v. Eternit Corp., 490 SCRA 204 (2006).
As a general rule, the acts of corporate officers within the scope of their authority are binding on
the corporation, but when these officers exceeded their authority, their actions cannot bind the
corporation, unless it has ratified such acts or is estopped from disclaiming them. Reyes v. RCPI
Employees Credit Union, Inc., 499 SCRA 319 (2006).
While it is a general rule that, in the absence of authority from the Board, no person, not even its
officers, can validly bind a corporation; however, just as a natural person may authorize another to
do certain acts for and on his behalf, the Board may validly delegate some of its functions and
powers to officers, committees or agents—the authority of such individuals to bind the corporation is
generally derived from law, corporate bylaws or authorization from the board, either expressly or
impliedly by habit, custom or acquiescence in the general course of business. Cebu Mactan
Members Center Inc. v. Tsukahara, 593 SCRA 172 (2009). 75
The general principles of agency govern the relationship between a corporation and its
representatives. Article 1317 of the Civil Code similarly provides that the principal must delegate the
necessary authority before anyone can act on his or her behalf. Nonetheless, law and jurisprudence
recognize actual authority and apparent authority as the two types of authorities conferred upon a
corporate officer or agent in dealing with third persons: Actual authority can either be express or
implied. Express actual authority refers to the power delegated to the agent by the corporation, while
an agent's implied authority can be measured by his or her prior acts which have been ratified by the
corporation or whose benefits have been accepted by the corporation. On the other hand, apparent
authority is based on the principle of estoppel, as provided under Articles 1431 and 1869 of the Civil
Code. Calubad v. Ricarcen Dev. Corp., 838 SCRA 303 (2017).
(1) President: In the absence of a charter or bylaw provision to the contrary, the President is
presumed to have the authority to act within the domain of the general objectives of the
corporation’s business and within the scope of his usual duties. The president of the corporation
possesses the power to enter into a contract for the corporation, when the “conduct on the part
of both the president and the corporation [shows] that he had been in the habit of acting in
similar matters on behalf of the company and that the company had authorized him so to act
and had recognized, approved and ratified his former and similar actions.” People’s Aircargo
v. Court of Appeals, 297 SCRA 170 (1998).76
Since what is now Section 24 of the RCC mandates that the President shall be a
director, it follows that a person who cannot qualify to be a director cannot validly be
appointed President. Lim v. Moldex Land, Inc., 815 SCRA 619 (2017).
It is the Board of Directors, not the President, that exercises corporate powers. It must be
emphasized that the basis for agency is representation and a person dealing with an agent is
75
Yu Chuck v. “Kong Li Po,” 46 Phil. 608 (1924); Vicente v. Geraldez, 52 SCRA 210 (1973); Boyer-Roxas v. CA, 211 SCRA 470 (1992); Associated
Bank v. Pronstroller, 558 SCRA 113 (2008); Pasos v. PNCC, 700 SCRA 608 (2013).
76
Advance Paper Corp. v. Arma Traders Corp., 712 SCRA 313 (2013).
39
put upon inquiry and must discover upon his peril the authority of the agent. Safic Alcan & Cie v.
Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001).
The President, as the corporation’s agent, his knowledge of the repeal of a resolution in
another juridical person in which his corporation has an interest, is ascribed to his principal
under the theory of imputed knowledge. Rovels Enterprises v. Ocampo, 392 SCRA 176 (2002).
The President of the corporation which becomes liable for the accident caused by its truck
driver cannot be held solidarily liable for the judgment obligation arising from quasi-delict, since
being President is not sufficient to hold him solidarily liable for the liabilities adjudged against the
corporation and its employee. Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004).
The President is a corporate officer under what is now Section 24 of the RCC, and issues
of dismissal relating to him would be considered an intra-corporate dispute, not a labor dispute.
Malcaba v. ProHealth Pharma Phils., Inc., 864 SCRA 518 (2018).
(2) Vice-President: The law does not require that a Vice-President be a shareholder. Baguio v.
Court of Appeals, 226 SCRA 366 (1993).
When bylaws provide that the Vice-President and Secretary must have the same
qualifications as those of the President (i.e., must be a member of the Board), then the
appointment of persons who are not members to such positions would also be unlawful.
Lim v. Moldex Land, Inc., 815 SCRA 619 (2017).
(3) Corporate Secretary: The Corporate Secretary is the custodian of corporate records—he
keeps the stock and transfer book and makes proper and necessary entries therein. It is his
duty and obligation to register valid transfers of stock in the corporate books; and in the event
he refuses to comply with such duty, the transferor-shareholder may rightfully bring suit to
compel performance. Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).
A sale that fails to comply with what is now Sec. 39 of RCC, cannot be invalidated when
the buyer relies upon a Secretary’s Certificate confirming authority. A Secretary’s Certificate
regular on its face can be relied upon by a third party who does not have to investigate the
truths of the facts contained in such certification; otherwise, corporate business transactions
would become tortuously slow and unnecessarily hampered. Esguerra v. Court of Appeals, 267
SCRA 380 (1997).
Although the Corporate Secretary’s duty to record transfers of stock is ministerial, he
cannot be compelled to do so when the transferee’s title to said shares has no prima facie
validity or is uncertain. More specifically, a pledgor, prior to foreclosure and sale, does not
acquire ownership rights over the pledged shares and thus cannot compel the corporate
secretary to record his alleged ownership of such shares on the basis merely of the contract of
pledge. Mandamus will not issue to establish a right, but only to enforce one that is already
established. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998).
Per its Secretary’s Certificate, the Foundation had given its President ostensible and
apparent authority to inter alia deal with the respondent bank, and therefore the Foundation is
estopped from questioning the President’s authority to obtain the subject loans from the
respondent bank. Lapulapu Foundation, Inc., v. Court of Appeals, 421SCRA 328 (2004).
The proper evidence of a Board resolution approving the sale of a piece of land can only
the Secretary’s Certificate embodying such resolution, since it serves as the corporation’s
official document showing the corporate actions approved by its Board of Directors, as well as
the extent and scope of authority necessarily conferred to its agents for the execution and
implementation of such actions. Lim v. People, 862 SCRA 405 (2018).
(4) Corporate Treasurer: A Corporate Treasurer’s functions have generally been described as “to
receive and keeps funds of the corporation, and to disburse them in accordance with the
authority given him by the board or the properly authorized officers.” Unless duly authorized, a
treasurer, whose power are limited, cannot bind the corporation in a sale of its assets, which
obviously is foreign to a corporate treasurer’s function. San Juan Structural v. CA, 296 SCRA
631 (1998).
A Corporate Treasurer whose negligence in signing a confirmation letter for rediscounting
of crossed checks, knowing fully well that the checks were strictly endorsed for deposit only to
the payee’s account and not to be further negotiated, may be personally liable for the damaged
caused the corporation. Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).
(5) Compliance Officer (Sec. 24): For corporations vested with public interests, the Board shall
appoint a compliance officer.
(6) Manager: Although a branch manager of a bank, within his field and as to third persons, is the
general agent and is in general charge of the corporation, with apparent authority
commensurate with the ordinary business entrusted him and the usual course and conduct
thereof, yet the power to modify contracts of the bank remains generally with the Board. Being a
branch manager alone is insufficient to support the conclusion that he has been clothed with
40
“apparent authority” to verbally alter terms of the bank’s written contract, such the mortgage
contract. Bañate v. Philippine Countryside Rural Bank (Liloan, Cebu), Inc., 625 SCRA 21 (2010).
(1) Who Is a “Corporate Officer” under the Power of the Board to Hire and Fire? (Sec. 25):
“Corporate officers” in the context of being the business judgment powers of the Board to hire
and fire are those officers who are given that character by the [Revised Corporation Code] or by
the bylaws. Gurrea v. Lezama, 103 Phil. 553 (1958).77
The position of Executive Secretary provided for in the bylaws is an “officer” position. Since
the appointment of the incumbent did not contain a fix term, the implication was that the
appointee held the appointment at the pleasure of the Board, such that when the Board opted to
replace the incumbent, technically there was no removal but only an expiration of the term.
Mita Pardo de Tavera v. Tuberculosis Society, 112 SCRA 243 (1982).78
One who is included in the bylaws in its roster of corporate officers is an officer and not a
mere employee. The removal of a corporate officer is an intra-corporate dispute cognizable by
the SEC and not by the NLRC. Ongkingco v. NLRC, 270 SCRA 613 (1997).79
To determine applicability of the “security of tenure” clause under Labor Laws, one who
holds a position, no matter how high in the organization, which is not provided for by law or
defined in the bylaws, is considered still to be an employee and not an officer, the latter being
within the business judgment power of the Board to hire and fire. Pamplona Plantation Co. v.
Acosta, 510 SCRA 249 (2006).80
Ordinary employees are generally employed not by action of the directors and
shareholders but by that of the Management who also determines the compensation to be paid
such employees. Corporate officers, on the other hand, are elected or appointed by the
directors or shareholders, and are those who are given that character either by the [Revised]
Corporation Code or by the bylaws. Gomez v. PNOC Dev. and Management Corp., 606 SCRA
187 (2009).81
Even if bylaws provide expressly that the Board of Directors “shall have full power to create
new offices and to appoint the officers thereto,” any office created, and any officer appointed
pursuant to such clause does not become a “corporate officer,” but is an employee and the
determination of the rights and liabilities relating to his removal are within NLRC’s jurisdiction—
they do not constitute intra-corporate controversies. “A different interpretation can easily leave
the way open for the Board of Directors to circumvent the constitutionally guaranteed security of
tenure of the employee by the expedient inclusion in the Bylaws of an enabling clause on the
creation of just any corporate officer position.” The rulings in Tabang v. NLRC, 266 SCRA 462
(1997), and Nacpil v. International Broadcasting Corp., 379 SCRA 653 (2002), “should no longer
be controlling.” Matling Industrial and Commercial Corp. v. Coros, 633 SCRA 12 (2010).82
Where the bylaws expressly provide for the positions of “one or more vice-president”, then
the appointment of the Executive Vice-President pursuant to said bylaw provision would make
the appointee a corporate officer within the contemplation of our ruling in Matling Industrial and
commercial Corp v. Coros. Cacho v. Balagtas, 855 SCRA 11 (2018).
Under what is now Sec. 24 of RCC, the President is considered a corporate officer;
whereas, “Assistant Vice President” is not among the officers stated therein, must less is it
provided for in the bylaws. The dismissal of the President is therefore an intra-corporate dispute
that is beyond the jurisdiction of the NLRC, while the dismissal of the Assistant Vice President
was well within NLRC’s jurisdiction to resolve. Malcaba v. ProHealth Pharma Phils., Inc., 864
SCRA 518 (2018).
(2) Nature of Exercise of Power to Terminate Officers: An officer’s removal is a corporate act,
its nature is not altered by the reason or wisdom, or lack thereof, with which the Board of
Directors might have in taking such action. Perforce, the matter would come within the area of
corporate affairs and management, and such a corporate controversy would call for SEC
adjudicative expertise [now RTC Special Commercial Courts], not that of NLRC. De Rossi v.
NLRC, 314 SCRA 245 (1999); Okol v. Slimmers World Int’l, 608 SCRA 97 (2009).
The President, Vice-President, Secretary and Treasurer are commonly regarded as the
principal or executive officers of a corporation, usually designated as the officers;
however, other officers are sometimes created by the charter or bylaws, or the Board may be
empowered under the bylaws of a corporation to create additional offices as may be necessary.
This Court expounded that an “office” is created by the charter and the officer is elected by the
directors or shareholders, while an “employee” usually occupies no office and generally is
77
Garcia v. Eastern Telecommunications Phils., 585 SCRA 450 (2009); WQPP Marketing Communications v. Galera, 616 SCRA 422 (2010).
78
PSBA v. Leaño, 127 SCRA 778 (1984); Dy v. NLRC, 145 SCRA 211 (1986); Visayan v. NLRC, 196 SCRA 410 (1991); Easycall Communications
Phils., v. King, 478 SCRA 102 (2005); Barba v. Liceo de Cagayan University, 686 SCRA 648 (2012); Cosare v. Broadcom Asia, 715 SCRA 534 (2014).
79
Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009).
80
WPP Marketing Communications, Inc. v. Galera, 616 SCRA 422 (2010); Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011); Loreche-Amit v.
Cagayan de Oro Medical Center, Inc., 902 SCRA 375 (2019).
81
Okol v. Slimmers World Int’l, 608 SCRA 97 (2009); FVR Skills and Services Exponents v. Seva, 739 SCRA 271 (2014).
82
Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011); Barba v. Liceo de Cagayan University, 686 SCRA 648 (2012); Cosare v. Broadcom Asia, Inc.,
715 SCRA 534 (2014); Ellao y Dela Vega v. Batanga I Electric Cooperative, 871 SCRA 227 (2018).
41
employed not by action of the directors or shareholders but by the managing officer who also
determines the compensation to be paid to such employee. The creation of the position is under
the charter or by-aws, and that the election of the officer is by the Board must concur in order for
an individual to be considered a corporate officer, as against an ordinary employee or officer. It
is only when the officer claiming to have been illegally dismissed is classified as such corporate
officer that the issue is deemed an intra-corporate dispute. Wesleyan University-Philippines
v. Maglaya, Sr., 815 SCRA 171 (2017).
MODULE 7
a. Implied Obligation of the Board to Remove Disqualified Director or Trustee (Sec. 27)
83
Detective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 (1969).
42
The proper remedy to question the legality and proper qualification of persons elected to the
board is a quo warranto proceeding. Ponce v. Encarnacion, 94 Phil. 81 (1953). – Now an election
contest under the Interim Rule of Procedure for Intra-Corporate Controversies
All election contests over directors and trustees fall within the original and exclusive jurisdiction
of the RTC Special Commercial Courts and no longer with the SEC. GSIS v. CA, 585 SCRA 679
(2009).
SEC retains its regulatory power over proxy issues on matters other than election of directors or
trustees, but not on matters relating to elections of directors or trustees. The test is whether the
controversy relates to such election. All matters affecting the manner and conduct of the election of
directors are properly cognizable by the regular courts. Otherwise, these matters may be brought
before the SEC for resolution based on the regulatory powers it exercises over corporations,
partnerships and associations. SEC v. Court of Appeals, 739 SCRA 99 (2014).
Under the Interim Rules, an election contest should be dismissed when filed beyond the 15-day
prescriptive period allowed. In substance, the main issues herein are on all fours with Yujuico v.
Quiambao, 513 SCRA 243 (2007), where we expressly ruled that where one of the reliefs sought in
the complaint is to nullify the election of the Board of Directors as the annual shareholders’ meeting,
the complaint involves an election contest. Ricafort v. Dicdican, 787 SCRA 163 (2016).
An action seeking to hold void the action of the Board of Directors suspending a member on the
ground that they did not have valid quorum at the time the action was taken since they invalidly
constituted themselves as the new members of the Board is actually an election contest, which
under the Interim Rules of Procedure would be available only within a period of 15 days from the
time the alleged election or constitution of the new Board took place. Eizmendi Jr., v. Valle Verde
Country Club, Inc., 879 SCRA 379 (2018).
c. Report of Election and Non-Holding of Election of Directors and Officers (Sec. 25)
3. INDEPENDENT DIRECTORS (Sec. 22): The Board of the following corporations “vested with public
interests” shall have independent directors constituting at least 20% of such Board:
(1) Securities Regulation Code Companies: publicly-held and publicly-listed companies,
and those whose securities are registered with the SEC;
(2) Financial Intermediaries: Banks and quasi-banks, NSSLAs, pawnshops, corporations
engaged in money service business, preneed, trust and insurance companies, and
other similar corporations;
(3) Other Corporations Engaged in Business Vested with Public Interests Similar to
Above, as may be determined by SEC based on given factors (see also Sec. 95)
84
Lim v. Moldex Land, Inc., 815 SCA 619 (2017).
85
Singson v. COA, 627 SCRA 36 (2010).
44
fiduciary relationship between the directors and the shareholders of the company is too obvious to
escape notice by the SEC which is called upon to protect the interests of investors. Palting v. San
Jose Petroleum, 18 SCRA 924 (1966).
In Philippine jurisdiction, members of the Board of Directors have a three-fold duty: duty of
obedience, duty of diligence, and the duty of loyalty. Accordingly, the Board members (1) shall direct
the affairs of the corporation only in accordance with the purpose for which it was organized; (2)
shall not willfully and knowingly vote for or assent to patently unlawful acts of the corporation or act
in bad faith or with gross negligence in directing the affairs of the corporation; and (3) shall not
acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees.
Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009), citing VILLANUEVA,
PHILIPPINE CORPORATE LAW, 2001, p. 318.
86
Dy-Dumalasa v. Fernandez, 593 SCRA 656 (2009); Montealegre v. Spouses De Vera, 908 SCRA 269 (2019).
45
The rule under what is now Sec. 32 of RCC allowing annulment of contracts between
corporations with interlocking directors resulting in the prejudice to one of the corporations, has no
application to cases where fraud is alleged to have been committed to third parties. DBP v. CA, 363
SCRA 307 (2001).
f. Duty to Maintain Records and Report on Salient Corporate Data (Sec. 161)
(1) To Adopt, Maintain and Allow Inspection of the Bylaws under Sec. 45
(2) To Keep, Maintain and Allow Inspection of Articles of Incorporation and Other
Corporate Books and Records under Sec. 73
See Reporting in the GIS of Beneficial Ownership (SEC Memo. Circular No. 15-
2019)
(3) To Keep and Update the List of Members and Proxies for Nonstock Corporations
under Sec. 92
(4) To Keep, Maintain and Update the Minutes Book for One Person Corporations (OPC)
under Section 128
(5) To Annually Submit to the SEC the General Information Sheet (GIS) and Audited
Financial Statements under Sec. 177;
For Corporations Vested with Public Interests: Also Submit Director
Compensation Report and Director Appraisal and Performance Report
This Court takes judicial notice of the fact that audited financial statements submitted by
corporations, as required by what is now Sec. 177 of RCC, are made available to the public.
Hence, the Court fails to see how Atty. Castillon violated any law when he attached a copy of
Ready Form’s audited financial statements in the Petition for Blacklisting he filed with the
National Publishing Office (NPO). Ready Form, Inc. v. Castillon, Jr., 859 SCRA 531 (2018).
The underlying prosecution is for the alleged violation of Section 74 of
the Corporation Code, in relation to Section 144 thereof. Collectively, these provisions create
the duty on the part of the corporation to keep and preserve a record of all business
transactions and minutes of all meetings of stockholders, members, or the board of directors or
trustees, along with the duty to make such record available to its stockholders or members upon
written request therefor; a violation of these duties invites criminal prosecution against the erring
officers to allow the eventual application of the prescribed penalties. Keh v. People, G.R. Nos.
217592-93, 13 July 2020.
46
the more true considering Meralco's dominant position in the market compared to its customers'
weak bargaining position. Manila Electric Co. v. Nordec Philippines, 861 SCRA 515 (2018).
87
Integrated Annual Corporate Governance Report under SEC Memo Circular No. 15-2017; Sustainability Reporting Guidelines for PLCs under SEC
Memo Circular No. 04-2019.
88
Polymer Rubber Corp. v. Salamuding, 702 SCRA 153 (2013).
89
Republic Planters Bank v. CA, 216 SCRA 738 (1992); Lowe, Inc. v. CA 596 SCRA 140 (2009); Marc II Marketing v. Joson, 662 SCRA 35 (2011); St.
Tomas v. Salac, 685 SCRA 245 (2012); Cosare v. Broadcom Asia, 715 SCRA 534 (2014).
90
Pabalan v. NLRC, 184 SCRA 495 (1990); Sulo ng Bayan, Inc. v. Araneta, Inc., 72 SCRA 347 (1976); Mindanao Motors Lines, v. CIR, 6 SCRA 710
(1962).
91
Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Urban Ban, Inc. v. Peña, 659 SCRA 418 (2011) ; Gotesco Properties, v.
Fajardo, 692 SCRA 319 (2013); Olivarez Realty Corp. v. Castillo, 729 SCRA 544 (2014).
92
MAM Realty v. NLRC, 244 SCRA 797 (1995); NFA v. CA, 311 SCRA 700 (1999); Atrium Management Corp. v. CA, 353 SCRA 23 (2001); Malayang
Samahan ng mga Manggawgawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001); Powton Conglomerate, Inc. v. Agcolicol, 400 SCRA 523 (2003); H.L.
Carlos Construction v. Marina Properties Corp., 421 SCRA 428 (2004); McLeod v. NLRC, 512 SCRA 222 (2007); Abott Laboratories Phils. V. Alcaraz, 701
SCRA 682 (2013); SPI Technologies v. Mapua, 720 SCRA743 (2014); Lanuza, Jr. v. BF Corp., 737 SCRA 275 (2014); Montallana v. La Consolacion
College Manila, 744 SCRA 163 (2014); Bank of Commerce v. Nite, 763 SCRA 520 (2015); PCGG v. Gutierrez, 871 SCRA 148 (2018).
47
The general rule is that a corporation is invested by law with a personality separate and
distinct from that of the persons composing it, or from any other legal entity that it may be
related to. Therefore, to hold a director or officer personally liable for corporate obligations, the
following requisites must concur: (1) complainant must allege in the complaint that the director
or officer assented to a patently unlawful acts of the corporation, or that the officer was guilty of
gross negligence or bad faith; and (2) complainant must clearly and convincingly prove such
unlawful acts, negligence or bad faith. Mactan Rock Industries v. Germo, 850 SCRA 532
(2018).93
Finding of solidary liability on officers and directors would be baseless when the decision
contains no allegation or finding regarding particular acts committed by said officers and director
that show them to have been individually guilty of unmistakable malice, bad faith, or ill-motive in
their personal dealings with third parties. When corporate officers and directors are sued merely
as nominal parties in their official capacities as such, they cannot be held liable personal for the
judgment rendered against the corporation. NPC. v. Court of Appeals, 273 SCRA 419 (1997).94
(4) Fraud
An office who signs a fraudulent contract on behalf of the corporation cannot claim the
benefit of separate juridical entity: “Thus, being a party to a simulated contract of management,
petitioner Uy cannot be permitted to escape liability under the said contract by using the
corporate entity theory. This is one instance when the veil of corporate entity has to be pierced
to avoid injustice and inequity.” Paradise Sauna Massage Corp. v. Ng, 181 SCRA 719 (1990).
(5) Section 30 Does Not Encompass All of “Breach of Duty of Diligence”
Officers of a corporation may become liable for its loans when they have breached their
duty of diligence under what is now Sec. 30 of RCC. Aratea v. Suico, 518 SCRA 501 (2007).96
Holding an officer personally liable for gross negligence or in bad faith in directing the
corporate affairs does not amount to an application of the doctrine of piercing the veil of
corporate fiction, for such personal liability is imposed directly under what is now Sec. 30 of
RCC to directors and officers who are guilty of violating their duty of diligence . Sanchez v.
Republic, 603 SCRA 229 (2009).
BUT SEE: Virata v. Ng Wee, 830 SCRA 271 (2017).
d. xJURISPRUDENCE IN LABOR LAW: Under Article 283 of the Labor Code, since a corporate employer
is an artificial person, it must have an officer who can be presumed to be the employer, “acting in
the interest of (the) employer” and therefore the highest officer becomes personally liable for labor
claims. A.C. Ransom Labor Union-CCLU v. NLRC, 142 SCRA 269 (1986).
(1) Overturning the A.C. Ransom Ruling: Only the responsible officer who had a hand in illegally
dismissing an employee should be held personally liable for the corporate obligations arising
from such act. Maglutac v. NLRC, 189 SCRA 767 (1990);97 for the separate juridical personality
of a corporation to be disregarded as to make the highest corporate officer personally liable on
labor claims, the wrongdoing must be clearly and convincingly established. Del Rosario v.
NLRC, 187 SCRA 777 (1990).
93
Heirs of Fe Tan Uy v. Int’l Exchange Bank, 690 SCRA 519 (2013); Abott Laboratories Phil. v. Alcaraz, 701 SCRA 682 (2013); Polymer Rubber Corp.
v. Salamuding, 702 SCRA 153 (2013); Ico v. Systems Technology Institute, 729 SCRA 439 (2014); FVR Skills and Services Exponents v. Seva, 739 SCRA
271 (2014); Bank of Commerce v. Nite, 763 SCRA 620 (2015); Dimson v. Chua, 811 SCRA 630 (2016); Zaragoza v. Tan, 847 SCRA 437 (2017);
Montealegre v. Spouses De Vera, 908 SCRA 269 (2019); Total Petroleum Philippines Corp. v. Lim, G.R. No. 203566, 23 June 2020.
94
Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965); Arcilla v. CA, 215 SCRA 120 (1992).
95
Banque Generale Belge v. Walter Bull and Co., 84 Phil. 164 (1949); EPG Constructions Co. v. CA, 210 SCRA 230 (1992); Rustan Pulp & Paper Mills
v. IAC, 214 SCRA 665 (1992); Western Agro-Industrial Corp. v. Court of Appeals, 188 SCRA 709 (1990); Laborte v. Pagsanjan Tourism Consumers’
Coop., 713 SCRA 536 (2014); Olivarez Realty Corp. v. Castillo, 729 SCRA 544 (2014); Pioneer Insurance & Surety Corp. v. Morning Star Travel & Tours,
762 SCRA 283 (2015).
96
Singian, Jr. v. Sandiganbayan, 478 SCRA 348 (2005); EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008).
97
Gudez v. NLRC, 183 SCRA 644 (1990); Chua v. NLRC, 182 SCRA 353 (1990); Reahs Corp. v. NLRC, 271 SCRA 247 (1997)
48
Corporate officers are not personally liable for money claims of discharged employees
unless they acted with evident malice and bad faith in terminating their employment.
AHS/Philippines v. Court of Appeals, 257 SCRA 319 (1996).98
In labor cases, directors and officers are solidarily liable for the termination of employment
of employees done with malice or in bad faith. In this case, it is undisputed that the officers have
a direct hand in the illegal dismissal of the employees. They were the one, who as high-ranking
officers and directors, signed the Board resolution retrenching the employees on the feigned
ground of serious business losses that had no basis apart from an unsigned and unaudited
Income Statement. Uichico v. NLRC, 273 SCRA 35 (1997).
A corporation, being a juridical entity, may act only through its directors, officers and
employees and obligations incurred by them, acting as corporate agents, are not theirs but the
direct accountabilities of the corporation. In labor cases, directors and officers are solidarily
liable with the corporation for the termination of employment of employees done with malice or
bad faith. Brent Hospital, Inc. v. NLRC, 292 SCRA 304 (1998).99
Officers cannot be held personally liable for damages on account of employees’ dismissal
because the employer corporation has a personality distinct from its officers who merely acted
as agents. Malayang Samahan… sa M. Greenfields v. Ramos, 357 SCRA 77 (2001).100
(2) Limiting the A.C. Ransom Ruling to Insolvent Corporation: A.C. Ransom is not in point
because there the corporation actually ceased operations after the decision of the court was
promulgated against it, making it necessary to enforce it against its former president. When the
corporation is still existing and able to satisfy the judgment in favor of the private respondent,
corporate officers cannot be held personally liable. Lim v. NLRC, 171 SCRA 328 (1989).
A.C. Ransom will apply only where the persons who are made personally liable for the
employees’ claims are shareholders-officers of employer corporation. Here, a mere general
manager while admittedly the highest-ranking corporate representative, is nevertheless not a
shareholder and much less a member of the Board nor an officer thereof. De Guzman v. NLRC,
211 SCRA 723 (1992).
(3) A.C. Ransom Reiterated in Restuarante Las Conchas v. Llego, 314 SCRA 24 (1999).101
(4) Definitive Overturning of A.C. Ransom Ruling: It is settled that in the absence of malice, bad
faith, or specific provisions of law, a shareholder or an officer of a corporation cannot be made
personally liable for corporate liabilities. McLeod v. NLRC, 512 SCRA 222 (2007).102
“Clearly, in A.C. Ransom, President organized ROSARIO to evade payment of backwages
to the 22 strikers. This situation, or anything similar showing malice or bad faith on the part of
Patricio, does not obtain in the present case. [What applies therefore is the ruling [i]n Santos v.
NLRC, [254 SCRA 673 (1996)].” McLeod v. NLRC, 512 SCRA 222 (2007).103
It was clarified in Carag v. NLRC, 520 SCRA 28 (2007), and McLeod v. NLRC, 512 SCRA
22 (2007), that Article 212(e) of Labor Code, by itself, does not make an officer personally liable
for corporate debts—the governing law on personal liability of directors or officers for debts of
the corporation is still what is now Sec. 30 of RCC. Pantranco Employees Assn. (PEA-PTGWO)
v. NLRC, 581 SCRA 598 (2009).104
As to the liability of the impleaded corporate officers, the Court equally finds error on the
part of the CA in holding them jointly and severally liable to respondent. Case law states that to
hold a director or officer personally liable for corporate obligations, two requisites must concur:
(1) it must be alleged in the complaint that the director or officer assented to patently unlawful
acts of the corporation or that the officer was guilty of gross negligence or bad faith; and (2)
there must be proof that the officer acted in bad faith. Here, the twin requirements of allegation
and proof of bad faith necessary to hold the impleaded corporate officers liable for the monetary
awards are clearly lacking.||Freyssinet Filipinas Corp. v. Lapuz, 897 SCRA 265 (2019).
(6) SEC Granted Fiscal Autonomy to Collect, Retain and Use Fees, Fines, and Other
Chargers pursuant to the RCC and its IRR (Sec. 175)
(7) SEC’s Visitorial Powers and Confidential Nature of Examination Results (Sec. 178)
i. Acting as Intermediaries for Graft and Corrupt Practices: Corporation Use for
Fraud, or For Committing or Concealing Graft and Corrupt Practices as Defined by
Pertinent Statutes (Sec. 166)
50
l. Retaliation Against Whistleblowers: Any Person Who knowingly and With Intent to
Retaliate, Commits Acts Detrimental to a Whistleblower such as Interfering with the
Lawful Employment or Livelihood of the Whistleblower (Sec. 169)
(1) Historical Background of Sec. 170 (Sec. 144 of old Corporation Code; Sec. 190 of
the old Corporation Law)
Sec. 190 was not intended to make every casual violation of one of the (old) Corporation
Law provisions ground for involuntary dissolution of the corporation and that the court was
entitled to exercise discretion in such matters. Government of P.I. v. El Hogar Filipino, 50 Phil.
399 (1927).
Penalties imposed in Sec. 190(A) of the old Corporation Law for the violation of the
prohibition in question are of such nature that they can be enforced only by a criminal
prosecution or by an action of quo warranto. These proceedings can be maintained only by
the Solicitor General in representation of the Government. Harden v. Benguet Consolidated
Mining Co., 58 Phil. 141 (1933).
(2) Doctrine on the Coverage of Section 144 of the Old Corporation Code
Section 133 of the (old) Corporation Code, unlike its counterpart Sec. 69 in the old
Corporation Law which specifically provided for penal sanctions for foreign corporations
engaging in business in the Philippines without obtaining the requisite license, should be
deemed to have a penal sanction by virtue of Sec. 144 of the (old) Corporation Code.
Home Insurance Co. v. Eastern Shipping Lines, 123 SCRA 424 (1983).
The lack of language imposing criminal liability in what are now Secs. 30 and 33 of RCC
shows the legislative intent to limit the consequences of their violation to the civil liabilities
mentioned therein. If the drafters of the law intended to define as criminal offenses what are
now Secs. 30 and 33 of, they could have easily included similar language as that found in
what is now Sec. 73 of RCC. The old Corporation Code was intended as a regulatory
measure, not primarily as a penal statute. Ient v. Tullett Prebon (Phils.), Inc., 814 SCRA
184 (2017).
o. Aiders and Abettors: “Anyone who shall aid, abet, counsel, command, induce, or
cause any violation of the [RCC, its IRR, or SEC orders] shall be punished with a
51
fine not exceeding that imposed on the principal offenders, at the discretion of the
court, after taking into account their participation in the offense.” (Sec. 172)
MODULE 8
105
TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001).
52
What is now Section 62 of RCC contemplates no restriction as to whom the stocks may be
transferred. It does not suggest that any discrimination may be created by the corporation in favor of,
or against a certain purchaser. The owner of shares, as owner of personal property, is at liberty
under said section to dispose of them in favor of whomever he pleases without limitation other than
the general provisions of law. Fleishcher v. Botica Nolasco, 47 Phil. 583 (1925).
The indication on the face of the stock certificate that it is “Nontranferable” alone does no
compel the corporation to buy back the shares from the shareholder and held that “in the absence of
a similar contractual obligation and of a legal provision applicable thereto, it is logical to conclude
that it would be unjust and unreasonable to compel the corporation to comply with a non-existent or
imaginary obligation.” Padgett v. Babcock & Templeton, Inc., 59 Phil. 232 (1933).
The “right of first refusal” is primarily an attribute of ownership; and a waiver thereof is an act of
ownership. To allow the PCGG to vote the sequestered shares for this purpose would be sanctioning
its exercise of an act of strict ownership. PCGG v. SEC, G.R. No. 82188, 30 June 1988 (unrep.)
Pursuant to what is now Section 62 of the Revised Corporation Code, shares of stock constitute
personal property which the shareholders may freely dispose. A corporation cannot by its board, or
the act of its officers, create restrictions in stock transfers since the only limitation imposed by [what
is now Section 62 of the Revised Corporation Code] is when the corporation holds any unpaid claim
against the shares intended to be transferred. Rural Bank of Salinas v. CA, 210 SCRA 510 (1992).
In a landholding corporation which by constitutional mandate is limited to 40% foreign equity,
where there is a right of first refusal between the co-shareholders, the fact that the corporation owns
land cannot deprive shareholders of their right of first refusal. No law disqualifies a person from
purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign
equity, what the law disqualifies is the corporation from owning land. J.G. Summit Holdings v. Court
of Appeals, 450 SCRA 169 (2005).
c. Remedy If Registration Refused:
Mandamus will not lie to compel the Corporate Secretary to register the transfer of shares in the
corporate books when the petitioner is not the registered shareholder, nor does he hold a power of
attorney from the latter. The general rule is that as between the corporation and its shareholders, the
corporation looks only to its books for the purpose of determining who its shareholders are, so that a
mere endorsee of a certificate of stock, claiming to be the owner, will not necessarily be recognized
as such in absence of express instructions of the registered owner to make such transfer to the
endorsee, or a power of attorney authorizing such transfer. Hager v. Bryan, 19 Phil. 138 (1911).106
BUT SEE: It is settled jurisprudence that the registration of a transfer of shares is a ministerial duty on
the part of the corporation. A bona fide transferee who is able to establish a clear legal right to the
registration of the transfer may then resort to the remedy of mandamus to compel corporations that
wrongfully or unjustifiably refuse to record the transfer or to issue new certificates of stock. Andaya
v. Rural Bank of Cabadbaran, 799 SCRA 325 (2016).
A stipulation on the stock certificate that any assignment would not be binding on the
corporation unless registered in the corporate books as required under the bylaws and without
providing when registration should be made, would mean that the cause of action and the
determination of prescription period would begin only when demand for registration is made and not
at the time of the assignment of the certificate. Won v. Wack Wack Golf & Country Club, 104 Phil.
466 (1958).
Since the law does not prescribe a period within which the registration of purchase of shares
should be effected, the action to enforce the right does not accrue until there has been a demand
and a refusal concerning the transfer.” Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).107
The claim for damages of what the shares could have sold had the demand for their registration
in the name of the buyer been complied with is deemed to be speculative damage and non-
recoverable. Batong Buhay Gold Mines v. Court of Appeals, 147 SCRA 4 (1987).
106
Rivera v. Florendo, 144 SCRA 643 (1986); Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).
107
Interport Resources Corp. v. Securities Specialists, Inc., 792 SCRA 155 (2016).
53
What is now Sec. 42 of RCC prohibits the issuance of any stock dividend without the approval of
shareholders, representing not less than two-thirds (2/3) of the outstanding capital stock, which
underscores the fact that payment of dividends to a shareholder is not a matter of right but a matter of
consensus. Furthermore, “interest bearing stocks”, on which the corporation agrees absolutely to pay
interest before dividends are paid to the common shareholders, is legal only when construed as
requiring payment of interest as dividends from net earnings or surplus only. Republic Planters Bank
v. Agana, 269 SCRA 1 (1997).
The power to declare dividends under what is now Sec. 42 of RCC is with the Board of Directors
and can be declared only out of its unrestricted retained earnings. Assuming arguendo that Socorro
as corporate director was authorized by the Board to fix the monthly dividends of Sugiyama, it
appears that she committed an ultra vires act because dividends can be declared only out of
unrestricted retained earnings of a corporation, which earnings cannot obviously be fixed and pre-
determined 5 years in advance.” Ongkingco v. Sugiyama, 920 SCRA 110 (2019).
d. Pre-Meeting Procedures
Closure of the Stock and Transfer Book: 20 days regular; 7 days special (Sec. 49)
Postponing of Meeting: 2 weeks unless Bylaws provides otherwise (Sec. 49)
d. When Right to Vote Exercisable Thru Remote Communication or In Absentia (Sec. 23)
e. Right to Vote of Secured Creditors and Administrators (Sec. 54)
When shares are pledged by means of endorsement in blank and delivery of the covering
certificates to lender, the pledgee does not become the owner thereof simply by the failure of the
registered shareholder to pay his loan. Consequently, without proper foreclosure, the lender cannot
demand that the shares be registered in his name. Lim Tay v. CA, 293 SCRA 634 (1998).
Although the Rules of Court, while permitting an executor or administrator to represent or to
bring suits on behalf of the deceased, do no prohibit the heirs from representing the deceased. When
no administrator has been appointed, there is all the more reason to recognize the heirs as the
proper representatives of the deceased. Gochan v. Young, 354 SCRA 207 (2001).
e. Voting in Case of Joint Ownership (Sec. 55)
f. Treasury Shares Have No Voting Rights (Sec. 56) Tan v. Sycip, 499 SCRA 216 (2006).
55
SEC’s power to pass upon the validity of proxies in election contests has effectively been
withdrawn, tied as it is to its abrogated jurisdictional powers. The fact that the jurisdiction of the regular
courts under Sec. 5(c) of P.D. 902-A is confined to the voting on election of officers, and not on all
matters which may be voted upon by shareholders, elucidates that the power of SEC to regulate
proxies remains extant and could very well be exercised when shareholders vote on matters other
than the election of directors. GSIS v. Court of Appeals, 585 SCRA 679 (2009).
b. VOTING TRUST AGREEMENTS (Sec. 58): A VTA separates the voting rights and other rights covered
of the stock from other attributes of ownership, intended to be irrevocable for a definite period of time
and the purpose of which is to give to the trustee to acquire voting control of the corporation. Lee
v. Court of Appeals, 205 SCRA 752 (1992).
The trustor has a right to terminate the voting trust agreement for breach thereof. Everett v. Asia
Banking Corporation, 49 Phil. 512 (1926).
Voting trust agreement as part of a loan arrangement. NIDC v. Aquino, 163 SCRA 153 (1988).
e. Criminal Sanction under Section 158 for Shareholder Who Abuse the Right of Inspection
or Reproduction (Sec. 73)
111
Spouses Hiteroza v. Cruzada, 794 SCRA 511 (2016).
112
Sy Tiong Shiou v. Sy Chim, 582 SCRA 517 (2009); Roque v. People, 826 SCRA 618 (2017).
57
Derivative suits are governed by the “Interim Rules of Procedure Governing Intra-Corporate
Controversies” (A.M. No. 01-2-04-SC, 01 April 2001). Section 1, Rule 1 thereof expressly lists
derivative suits among the cases covered by it. Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548
(2009).
A “family corporation” is not exempt from complying with the clear requirements and formalities of
the rules for filing a derivative suit. There is nothing in the pertinent laws or rules which distinguishes
between family corporations and other types of corporations in the institution by a shareholder of a
derivative suit. Ang v. Spouses Ang, 699 SCRA 272 (2013).
b. Condition Precedent: When Board Cannot Properly Exercise Its Business Judgment
GENERAL RULE: In the absence of a special authority from the Board of Directors to institute a suit in
behalf of the corporation, the President or managing director is disqualified by law to sue in her own
name or for the corporation. The power to sue and be sued is lodged in the Board that exercises its
corporate powers and not in the President. Bitong v. Court of Appeals, 292 SCRA 503 (1998).
Under what are now Sec. 35 in relation to Sec. 22 of RCC, a corporation’s power to sue is
lodged with its Board. An individual shareholder is permitted to institute a derivative suit on behalf of
the corporation in order to protect or vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such
actions, the suing shareholder is regarded as a nominal party, with the corporation as the real party
in interest. Chua v. Court of Appeals, 443 SCRA 259 (2004).115
Minority shareholders do not have any statutory right to override the business judgments of the
officers and Boards of Directors. It is settled that a shareholder's right to institute a derivative suit is
not based on any express provision of the [Revised] Corporation Code, or even the Securities
Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers
liable for damages suffered by the corporation and its shareholders for violation of their fiduciary
duties. Ching v. Subic Bay Golf and Country Club, Inc., 734 SCRA 569 (2014).116
While questions of policy and management are left to the honest decision of the officers and
directors of a corporation, and the courts are without authority to substitute their judgment for the
judgment of the Board of Directors; yet where the corporate directors are guilty of breach of trust—
not of mere error of judgment or abuse of discretion—and intra-corporate remedy is futile or useless,
a shareholder may institute a suit in behalf of himself and other shareholders and for the benefit of
the corporation. However, the corporation is the real party in interest in a derivative suit and the
suing shareholder is only a nominal party. A derivative suit must be differentiated from a class suit.
Cua, Jr. v. Tan, 607 SCRA 645 (2009).117
Grounded on equity, the derivative suit has proven to be an effective tool for the protection of
minority shareholders. Such actions have for their object the vindication of a corporate injury, even
though they are not brought by the corporation, but by its stockholders. That said, derivative suits
remain an exception. As a general rule, corporate litigation must be commenced by the corporation
itself, with the imprimatur of the board of directors, which, pursuant to the law, wields the power to
sue. Therefore, since the derivative suit is a remedy of last resort, it must be shown that the board, to
the detriment of the corporation and without a valid business consideration, refuses to remedy a
corporate wrong. A derivative suit may only be instituted after such an omission. Simply put,
derivative suits take a back seat to board-sanctioned litigation whenever the corporation is willing
and able to sue in its own name. Ago Realty & Dev. Corp. v. Ago, G.R. Nos. 210906 & 211203,
16 October 2019. & Dev.|
113
Ang v. Ang, 699 SCRA 272 (2013).
114
Hi-Yield Realty v. CA, 590 SCRA 548, 556 (2009); Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).
115
Filipinas Port Services v. Go, 518 SCRA 453 (2007); Yu v. Yukayguan, 589 SCRA 588 (2009); Hi-Yield Realty v. CA, 590 SCRA 548 (2009).
116
Yu v. Yukayguan, 589 SCRA 588 (2009); BSP v. Campa,r., 671 SCRA 461 (2012); Florete, Jr. v. Florete, Sr., 781 SCRA 285 (2016).
117
Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
58
c. Requisites of Derivative Suit
The foregoing requisites before a shareholder can file a derivative suit: (a) the party bringing suit
should be a shareholder during the time of the act or transaction complained of, the number of
shares not being material; (b) the party has tried to exhaust intra-corporate remedies, relief, but the
latter has failed or refused to heed his plea; and (c) the cause of action actually devolves on the
corporation; the wrongdoing or harm having been or being caused to the corporation and not to the
particular shareholder bringing the suit. San Miguel Corp. v. Kahn, 176 SCRA 447 (1989).118
Section 1, Rule 8 of the Interim Rules lays down the requirements for the proper filing a
derivative suit: (1) Relator was a shareholder/member at the time the acts or transactions subject of
the action occurred and at the time the action was filed; (2) He exerted all reasonable efforts, and
alleges the same with particularity in the complaint, to exhaust all remedies available under the
articles of incorporation, bylaws, laws or rules governing the corporation or partnership to obtain the
relief he desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The
suit is not a nuisance or harassment suit. Yu v. Yukayguan, 589 SCRA 588 (2009).119
(1) Who May Bring a Derivative Suit? The relators must be shareholders both at time of
occurrence of the events constituting the cause of action and at the time of the filing of the
derivative suit. Pascual v. Orozco, 19 Phil. 83 (1911).120
A minority shareholder can file a derivative suit against the President for diverting corporate
income to his personal accounts. Commart (Phils.) Inc. v. SEC, 198 SCRA 73 (1991).
A lawyer engaged as counsel for a corporation cannot represent members of its Board of
Directors in a derivative suit brought against them. To do so would be tantamount to
representing conflicting interests, which is prohibited by the Code of Professional
Responsibility.” Hornilla v. Salunat, 405 SCRA 220 (2003).
Since a derivative action is a suit by a shareholder to enforce a corporate cause of action,
the corporation is a necessary party to the suit, and the relief which is granted is a judgment
against a third person in favor of the corporation. Similarly, if a corporation has a defense to an
action against it and is not asserting it, a shareholder may intervene and defend on behalf of the
corporation. Chua v. Court of Appeals, 443 SCRA 259 (2004).121
In a derivative suit, a shareholder may validly institute a derivative suit to vindicate the
alleged corporate injury; in which case such shareholder is only a nominal party while the
corporation is the real party-in-interest. Filipinas Port Services v. Go, 518 SCRA 453 (2007).
A minority shareholder-director has no power or authority to sue on the corporation’s
behalf. Nor can we uphold this as a derivative suit, since it is required that the minority
shareholder suing for and on behalf of the corporation must allege in his complaint that he is
suing on a derivative cause of action on behalf of the corporation and all other shareholders
similarly situated who may wish to join him in the suit. There is now showing that petitioner has
complied with the foregoing requisites. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001).122
The status of heirs as co-owners of shares prior to the partition of decedent’s estate does
not necessarily make them shareholders—unless and until there is compliance with what is now
Sec. 62 of RCC on the manner of transferring shares, the heirs do not become registered
shareholders of the corporation. Puno and Puno Enterprises, Inc., 599 SCRA 585 (2009).123
(2) Exhaustion of Intra-Corporate Remedies: A condition precedent to the filing of a derivative
suit is that the party has tried to exhaust intra-corporate remedies, i.e., has made a demand on
the Board of Directors for the appropriate relief, but the latter has failed or refused to heed his
plea. Everett v. Asia Banking Corp., 49 Phil. 512 (1927); Angeles v. Santos, 64 Phil. 697 (1937).
A derivative suit to question validity of foreclosure of the mortgage on corporate assets can
be filed without prior demand upon the Board of Directors where the legality of the constitution
of the Board lies at the center of the issues. DBP v. Pundogar, 218 SCRA 118 (1993).
The obvious intent behind the rule requiring the shareholder filing a derivative suit to first
exert all reasonable efforts to exhaust all remedies available under the articles of incorporation,
by laws, laws or rules governing the corporation to obtain relief he desires is to make the
derivative suit the final recourse of the shareholders, after all other remedies to obtain the relief
sought had failed. Yu v. Yukayguan, 589 SCRA 588 (2009).124
While it is true that the complaining shareholder must satisfactorily show that he has
exhausted all means to redress his grievances within the corporation, except when such remedy
is complete control of the person against whom the suit is being filed. The reason is obvious: a
demand upon the board to institute an action and prosecute the same effectively would have
been useless and an exercise in futility. Hi-Yield Realty, Inc. v. CA, 590 SCRA 548, 557 (2009).
118
Filipinas Port Services v. Go, 518 SCRA 453 (2007); Reyes v. RTC of Makati, 561 SCRA 593 (2008); Hi-Yield Realty v. CA, 590 SCRA 548 (2009).
119
Hi-Yield Realty v. CA, 590 SCRA 548, 556 (2009); Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009); Cua, Jr. v. Tan,
607 SCRA 645 (2009); Ang v. Ang, 699 SCRA 272 (2013).
120
Gochan v. Young, 354 SCRA 207 (2001).
121
Go v. Distinction Properties Dev. and Construction, Inc., 671 SCRA 461 (2012).
122
Hi-Yield Realty. v. CA, 590 SCRA 548 (2009).
123
Reyes v. RTC of Makati, Br. 142, 561 SCRA 593 (2008).
124
Ching v. Subic Bay Golf and Country Club, Inc., 734 SCRA 569 (2014).
59
(3) Relief/Remedies Must Be for the Benefit of the Corporation: The complaint cannot
demand for the defendants to pay the suing shareholders the value of their respective
participation in the assets that have been damaged, for a derivative suit must have cause of
action for the benefit of the corporation. Evangelista v. Santos, 86 Phil. 387 (1950).125
Appointment of receiver can be an ancillary remedy in a derivative suit. Chase v. CFI of
Manila, 18 SCRA 602 (1966).
A suit to enforce preemptive rights in a corporation is not a derivative suit, and therefore a
temporary restraining order enjoining a person from representing the corporation will not bar
such action, because it is instituted on behalf and for the benefit of the shareholder, not the
corporation. Lim v. Lim-Yu, 352 SCRA 216 (2001).
Allegations of injury to the relators can co-exist with those pertaining to the corporation—
such merely gives an additional cause of action against the erring directors. Gochan v. Young,
354 SCRA 207 (2001).
Where directors have committed a breach of trust either by their fraud, ultra vires acts, or
negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a
shareholder may sue on behalf of himself and other shareholders and for the benefit of the
corporation, to bring about a redress of the wrong done directly to the corporation and indirectly
to the shareholders. In such derivative suit, the corporation is the real party in interest while the
shareholder filing suit is only nominal party. Hornilla v. Salunat, 405 SCRA 220 (2003).
Since it is the corporation that is the real party-in-interest in a derivative suit, then the
reliefs prayed for must be for the benefit or interest of the corporation. When the relief prayed for
does not pertain to the corporation, then it is an improper derivative suit. Legaspi Towers 300,
Inc. v. Muer, 673 SCRA 453 (2012),126 citing VILLANUEVA, PHILIPPINE CORPORATE LAW, 1998 ed., p. 375.
A derivative suit presupposes that the corporation is the injured party and the individual
shareholder who files the suit seeks to protect or vindicate corporate rights whenever the
officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the
corporation. Here, the harm or injury that Aliño sought to be prevented pertains to properties
registered under Aliño and other third-party mortgagors. Furthermore, the prayer in the
complaint seeks for recovery of the properties belonging to Aliño and other third-party
mortgagors, some of whom are not shareholders of VR Holdings, who mortgaged their
properties to BSP. BSP v. Campa, Jr., 783 SCRA 476 (2016).
(4) Lack of Appraisal Right: An allegation that appraisal rights were not available for the acts
complained of is another requisite for filing derivative suits under Rule 8, Section 1(3) of the
Interim Rules. A distinction must also be made between an individual shareholder’s suit, a class
suit for shareholders from derivative suits. Villamor, Jr. v. Umale, 736 SCRA 325 (2014).127
(5) Must Not Be a Nuisance or Harassment Suit : Nuisance and harassment suits are
prohibited, and in determining whether a suit is a nuisance or harassment suit, the court shall
consider, among others, the follow: (a) The extent of the shareholding or interest of the initiating
shareholder or member; (b) subject matter of the suit; (c) legal and factual basis of the
complaint; (d) availability of appraisal rights for the act or acts complained of; and (e) prejudice
or damage to the corporation. In case of nuisance or harassments suits, the court may motu
proprio or upon motion dismiss the case. Ang v. Ang, 699 SCRA 272 (2013); BSP v. Campa,
Jr., 787 SCRA 476 (2016).
d. Venue for Derivative Suit – Under Section 5, Rule 1 of the Interim Rules, the proper venue for
derivative suit would be in the RTC which has jurisdiction over the principal office of the corporation.
Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009).
11. Shareholders’ Right over change of External Auditor (SEC Memo Circular No. 08-2018)
13. Right to Proportionate Share of Remaining Assets Upon Dissolution (Sec. 139)
In the liquidation of a corporation, after the payment of all corporate liabilities, the remaining assets,
if any, must be distributed to the shareholders in proportion to their interests in the corporation, which is
referred to as liquidating dividend. President of PDIC v. Reyes, 460 SCRA 473 (2005).
MODULE 9
125
Reyes v. Tan, 3 SCRA 198 (1961); Republic Bank v. Cuaderno, 19 SCRA 671 (1967).
126
R.N. Symaco Trading Corp. v. Santos, 467 SCRA 312 (2005); Ang v. Ang, 699 SCRA 272 (2013).
127
Florete, Jr. v. Florete, Sr., 781 SCRA 285 (2016).
60
The Corporation as the Medium by Which Shareholders’
Investments Are Promoted and Safeguarded
( 12TH AND 13TH WEEKS: APRIL 26, 28 AND 31, MAY 5 )
128
Central Textile Mills v. NWPC, 260 SCRA 368 (1996); CIR v. First Express Pawnshop Co., Inc., 589 SCRA 253 (2009).
61
c. Redeemable Shares
When the certificates of stock recognize redemption, but the option to do so is clearly vested in
the corporation, the redemption is clearly the type known as “optional” and rest entirely with the
corporation, and that the shareholder is without right to either compel or refuse the redemption of his
shares. Republic Planters Bank v. Agana, 269 SCRA 1 (1997).
“Redemption” is a repurchase or reacquisition of stock by the issuing corporation in exchange
for money or property, whether the acquired stock is cancelled, retired or held in the treasury.
Essentially, the corporation gets back some of its stock, distributes cash or property to the
shareholder in payment for the stock, and continues in business as before. The redemption of stock
dividends previously issued is used as a veil for the constructive distribution of cash dividends, and
therefore subject to tax. Comm. of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
d. Founders’ Shares (Sec. 7)129
Since Section 7 makes no distinction (and is found under General Provisions), then it must
mean that founders’ shares may be applied to both stock and nonstock corporations. Although what
is now Section 88 of the RCC allows in a nonstock corporation to limit, broaden or deny the right of
members of any class, the specific provision of Section 7 to founders’ share must prevail, and that
the nonstock corporation can lawfully suspend or define the voting rights of its members, but with
respect to founders’ share, the exclusive right to vote and be voted for of the founders’ share should
expire after five years from the approval of the SEC. Forest Hills and Country Club, Inc. v.
Kings Properties Corp., G.R. No. 212833, 07 August 2019.
e. Treasury Shares (Sec. 9): Treasury shares are stocks issued and fully paid for and re-acquired by
the corporation either by purchase, donation, forfeiture or other means, and do not have the status of
being outstanding shares and are not entitled to be voted upon nor participate in dividend
declarations. Comm. of Internal Revenue v. Manning, 66 SCRA 14 (1975).
A treasury share, either common or preferred, may be used for a variety of corporate purposes,
such as for a stock bonus plan for management and employees, or for acquiring another company. It
may be held indefinitely, resold or retired. While held in the company’s treasury, the stock earns no
dividends and has no vote in company affairs. COCOFED v. Republic, 600 SCRA 102 (2009).
f. Stock Warrants and Stock Options
g. Re-Classification and Exchange of Shares
“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 income for tax purposes. … 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 interests and not when
there is still maintenance of proprietary interest.” Comm. of Internal Revenue v. CA, 301 SCRA 152
(1999).
Conversion of common shares into preferred shares through amendment of articles of
incorporation, is a legitimate exercise of corporate powers. Conversion does not amount to SMC
using its funds to effect conversion but would amount merely to a reconfiguration of said (common)
shares into preferred shares. COCOFED v. Republic, 600 SCRA 102 (2009).
129
In Castillo v. Balinghasay, 440 SCRA 442 (2004), the position that when the articles of incorporation provide expressly a class of shares to have the
exclusive right to vote and be voted for into the Board of Directors, that such shares would essentially be founder’s share was raised but not resolved.
62
7. CONSIDERATION FOR SUBSCRIPTION (Sec. 61):
Actual cash paid to the corporation
Property, tangible or intangible, actually received by the corporation and necessary
or convenient for its use and lawful purposes at a fair valuation equal to the par
value or issued value of the stock issued
Labor performed for or services actually rendered to the corporation
Previously incurred indebtedness of the corporation
Amount transferred from unrestricted retained earnings to stated capital
Outstanding shares exchanged for stocks in the event of reclassification or
conversion
Shares in another corporation; and/or
Other generally accepted form of consideration
Stock dividends are in the nature of shares issued to the shareholders whereby the corresponding
amount of unrestricted retained earnings is converted into equity in the corporation’s books. Lincoln
Phil. Life v. Court of Appeals, 293 SCRA 92 (1998).130
131
C.N. Hodges v. Lezama, 14 SCRA 1030 (1965); Lincoln Phil. Life v. CA, 293 SCRA 92 (1998); Ponce v. Alsons Cement Corp., 393 SCRA 602
(2002); Nautica Canning Corp. v. Yumul, 473 SCRA 415 (2005); Makati Sports C;ib .
132
Rivera V. Florendo, 144 SCRA 643 (1986); Razon v. IAC, 207 SCRA 234 (1992); Rural Bank of Lipa City v. CA, 366 SCRA 188 (2001); Raquel-
Santos v. CA, 592 SCRA 169 (2009); Teng v. SEC, 784 SCRA 216 (2016); Tee Ling Kiat v. Ayala Corp., 857 SCRA 533 (2018).
64
shares upon the option of the buyer. Fil-Estate Golf v. Vertex Sales and Trading, 698 SCRA 272
(2013).
133
Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 362 SCRA 635 (2001).
134
Magsaysay-Labrador v. CA, 180 SCRA 266 (1989); Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).
135
China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).
66
business of the corporation, as well as in the Registry of Deeds of the shareholders’ domicile.
Therefore, when only one of the double-registration requirements has been complied with, the chattel
mortgage over the shares would not be valid and binding on the world, and any writ of attachment
served upon the corporation on behalf of the judgment creditor of the mortgagor-shareholder would
have priority over the earlier chattel mortgage effected on said shares. Chua Guan v. Samahang
Magsasaka, Inc., 62 Phil. 472 (1935).
The pledge of shares covered by a certificate is valid and binding on third parties, when the stock
certificate has been endorsed and delivered to the creditor, notwithstanding the fact that the contract
does not appear in a public instrument (chattel mortgage). “Certificates of stock … are quasi-negotiable
instruments in the sense that they may be given in pledge or mortgage to secure an obligation.”
Bachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681 (1937).
Only fully paid shares for which stock certificates have been issued are subject to the registration
requirement in the stock and transfer book in cases dealing with their sales and absolute disposition.
Nava v. Peers Marketing Corp., 74 SCRA 65 (1976).
The process of registering lis pendens is inapplicable to shares which are personal properties;
however, however, formal notice given to the Corporate Secretary of claims to the shall be deemed
equivalent of registration of an encumbrance or assignment of the shares on the corporate books; and
that by virtue of such registration through notice to the corporation, pending litigation, third parties, or
potential transferees pendente lite, may therefore be charged with constructive notice of claimants
lien/title over the subject shares and the pending litigation involving the same. MR Holdings, Ltd. V.
Bajar, 683 SCRA 336 (2012).
Equitable Mortgage Assignment: The assignment of voting shares as security for a loan
operates to give the assignee not only the right to vote on the shares, but would also treat the assignee
as the owner of the shares (not just an equitable mortgage): “It is true that the assignment was
predicated on the intention that it would serve as security vis-à-vis DBP’s financial accommodation
extended to PJI, but it was a valid and duly executed assignment, subject to a resolutory condition,
which was the settlement of PJI’s loan obligation with DBP.” APT v. Sandiganbayan, 341 SCRA 551
(2000).
12. Situs of Shares of Stocks: Situs of shares is the domicile of the corporation that issued them. Wells
Fargo Bank and Union v. Collector, 70 Phil. 325 (1940).136
MODULE 10
1. “Assets-Only” Transfers
136
Tayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968); cf. Perkins v. Dizon, 69 Phil. 186 (1939).
67
As a Rule, a corporation that purchases the assets of another will not be liable for the debts of the
selling corporation, provided the former acted in good faith and paid adequate consideration for such
assets; EXCEPT: When any of the following circumstances is present: (1) where the purchasers
expressly or impliedly agrees to assume the debts; (2) where the selling corporation fraudulently enters
into the transactions to escape liability for those debts (3) where the purchasing corporation is merely a
continuation of the selling corporation, and (4) where the transaction amounts to a consolidation or
merger of the corporations. Edward J. Nell Co. v. Pacific, 15 SCRA 415 (1965).137
The disposition of the assets of a corporation shall be deemed to cover substantially all the
corporate property and assets, if thereby the corporation would be rendered incapable of continuing the
business or accomplishing the purposes for which it was incorporated. Such a sale or disposition must
be understood as valid only if it does not prejudice the creditors of the assignor, which necessarily
implies that the assignee assumes the debts of the assignor. Even under the provisions of the Civil
Code, a creditor has a real interest to go after any person to whom the debtor fraudulently transferred its
assets. Caltex (Phils.), Inc. v. PNOC Shipping and Transport Corp., 498 SCRA 400 (2006).
PSALM took ownership over most of NPC’s assets by operation of law—these properties may be
used to satisfy the Court’s judgment, and such being the case, the employees may go after such
properties. NPC Drivers and Mechanics Assn. (NPC DAMA) v. NPC, 606 SCRA 409 (2009).
3. “EQUITY” TRANSFERS
The disposition by the controlling shareholder of all of its equity in the corporation warrants the
application of the alter ego piercing doctrine since it shows that the transferor had complete control of
the corporation (?). PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990).
PROPER DOCTRINE: The fact that a shareholder sells his shares during the pendency of a collection
case against the corporation, does not make such shareholder personally liable for the corporate debt,
since disposing shareholder has no personal obligation to the creditor, and it is the inherent right of
shareholder to dispose of his shares anytime he desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989).
137
Jiao v. NLRC, 670 SCRA 184 (2012).
138
Oromeca Lumber Co. v. SSS, 4 SCRA 1188 (1962); San Teodoro Dev. v. SSS, 8 SCRA 96 (1963).
139
McLeod v. NLRC, 512 SCRA 222 (2007).
68
properties, claims, liabilities and obligations of the absorbed corporation. The absorbing corporation
continues its existence while the life or lives of the other corporation is or are terminated. Bank of
Commerce v. Radio Philippines Network, Inc., 722 SCRA 529 (2014).
e. Approval by SEC (Sec. 78): SEC’s issuance of the certificate of merger is crucial—not only does
it bear out SEC’s approval but also marks the moment whereupon the consequences of a merger
take place. By operation of law, upon the effectivity of the merger, the absorbed corporation ceases
to exist but its rights, and properties as well as liabilities shall be taken and deemed transferred to
and vested in the surviving corporation. Poliand Industrial Ltd. V. NDC, 467 SCRA 500 (2005).140
f. Prior Notification and Approval by PCC for M&A Exceeding Threshold Value (Secs. 16
and 17, R.A. 10667; PCC Resolution No. 02-2020)
4. De Facto Mergers
In his book, Dean Cesar Villanueva explained that under the [Revised] Corporation Code, “a de
facto merger can be pursued by one corporation acquiring all or substantially all of the properties of
another corporation in exchange of shares of the acquiring corporation. The acquiring corporation would
end up with the business enterprise of the target corporation; whereas, the target corporation would end
up with basically its only remaining assets being the shares of the acquiring corporation.” No de facto
merger took place in the present case simply because the TRB owners did not get in exchange for the
bank’s assets and liabilities an equivalent value in Bancommerce shares. Bancommerce and TRB
agreed with BSP approval to exclude from the sale the TRB's contingent judicial liabilities, including
those owing to RPN. Bank of Commerce v. RPN 9, 722 SCRA 520 (2014).
140
Associated Bank v. CA, 291 SCRA 511 (1998); Mindanao Savings and Loan Assn. v. Willkom, 634 SCRA 291 (2010).
69
There is no law requiring that the purchaser of MDII’s assets should absorb its employees. The
most that the NLRC could do, for reasons of public policy and social justice, was to direct [the buyer] to
give preference to the qualified separated employees of MDII in the filling up of vacancies in the
facilities. MDII Supervisors & Confidential Employees Assn. v. Pres. Assistance on Legal Affairs, 79
SCRA 40 (1977).
Unless expressly assumed, employment contracts and CBAs are not enforceable against a
transferee of an enterprise, labor contracts being in personam, thus binding only between the parties. A
labor contract merely creates an action in personam and does not create any real right which should be
respected by third parties. Sundowner Dev. Corp. v. Drilon, 180 SCRA 14 (1989).
2. “Business-Enterprise” Transfers
There is no law requiring that the purchaser should absorb the employees of the selling company.
Well-established is the principle “that it is within the employer’s legitimate sphere of management
control of the business to adopt economic policies to make some changes or adjustments in their
organization or operations that would ensure profit to itself or protect the investments of its
shareholders. As in the exercise of such management prerogative, the employer may merge or
consolidate its business with another or sell or dispose all or substantially all of its assets and properties
which may bring about the dismissal or termination of its employees in the process. Central
Azucarera del Danao v. Court of Appeals, 137 SCRA 295 (1985).
Where a corporation is closed for alleged losses and its equipment are transferred to another
company which engaged in the same operations, the separate juridical personality of the latter can be
pierced to make it liable for the labor claims of the employees of the closed company. National
Federation of Labor Union v. Ople, 143 SCRA 124 (1986).
Although a corporation may have ceased business operations and an entirely new company has
been organized to take over the same type of operations, it does not necessarily follow that no one may
now be held liable for illegal acts committed by the earlier firm. Pepsi-Cola Bottling Co., v. NLRC,
210 SCRA 277 (1992).141
Under the principle of absorption, a bona fide buyer of all, or substantially all, the properties of the
seller or transferor is not obliged to absorb the latter’s employees. The most that the purchasing
company may do, for reasons of public policy and social justice, is to give preference of reemployment
to the selling company’s qualified separated employees, who in its judgment are necessary to the
continued operation of the business establishment. In the case of a transfer of all or substantially all of
the assets of a corporation (i.e., business enterprise transfers), the liabilities of the previous owners to
its employees are not enforceable against the buyer or transferee, unless (a) the latter unequivocally
assumes them; or (b) the sale or transfer was made in bad faith. Barayoga v. APT, 473 SCRA 690
(2005).142
Where a corporation transferred all its assets to another corporation “to settle its obligations” and
not amounting to a fraudulent transfer, that does not authorize application of the piercing doctrine to
make the transferee liable for labor claims against the transferor. McLeod v. NLRC, 512 SCRA 222
(2007).
Settled now 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. Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009).
3. “Equity” Transfers
Where the change of ownership is done in bad faith, or is used to defeat the rights of labor, the
successor-employer is deemed to have absorbed the employees and is held liable for the
transgressions of his or her predecessor. Peñafrancia Tours and Travel Transport v. Sarmiento, 634
SCRA 279 (2010).
Where transfer of ownership is in good faith, the transferee is under no legal duty to absorb the
transferor’s employees as there is no law compelling such absorption. For reasons of public policy and
social justice, transferee may give preference to the qualified separated employees in the filling of
vacancies in the facilities of the purchaser. Manlimos v. NLRC, 242 SCRA 145 (1995).143
5. Spin-Offs
Where a spin-off by the corporation of a division into another corporation is done for a valid
business reason and in good faith, the employees in the spun-off unit no longer belong to the bargaining
unit of the mother company, and that the employees in the new corporations constitute new bargaining
unit. SMC Employees Union-PTGWO v. Confessor, 262 SCRA 81 (1996).
In business parlance, a corporate spin-off occurs when a department, division or portions of the
corporate business enterprise is sold-off or assigned to a new corporation that will arise by the process
which may constitute it into a subsidiary of the original corporation. To spin-off and the attendant transfer
of employees are legitimate business interests of Marsman. The transfer of employees through the
Memorandum of Agreement was proper and did not violate any existing law and jurisprudence. Thus,
the employment of the doctrine of piercing the veil of corporate fiction cannot be applied in the case of a
spin-off since no fraud attended the transaction. Marsman & Company, Inc. v. Sta. Rita, 862 SCRA 211
(2018), citing VILLANUEVA, PHILIPPINE CORPORATE LAW, p. 705 (2010).
147
Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
148
Republic v. Marsman Dev. Co., 44 SCRA 418 (1972).
149
Paramount Insurance Corp. v. A.C. Ordonez Corp., 561 SCRA 327 (2008).
73
c. Liquidation Pursued Through a Trustee
Where the affairs of the dissolved corporation were placed in a Board of Liquidators, they were
duly constituted as trustees for the liquidation of the corporate affairs, and there being no term
placed on the Board, their power to pursue liquidation did not terminate upon the expiration of the 3-
year period. Board of Liquidators v. Kalaw, 20 SCRA 987 (1967).
For purposes of dissolution and liquidation of a corporation, the term “trustee” should include
counsel of record who may be deemed to have authority to pursue pending litigation after the
expiration of the 3-year liquidation period. Gelano v. Court of Appeals, 103 SCRA 90 (1981).
If the 3-year extended life has expired without a trustee or receiver having been designated, the
Board of Directors itself, following the rationale of the decision in Gelano, may be permitted to so
continue as “trustees” to complete liquidation; and in the absence of a Board, those having pecuniary
interest in the assets, including the shareholders and the creditors of the corporation, acting for and
in its behalf, might make proper representations with the appropriate body for working out a final
settlement of the corporate concerns. Clemente v. Court of Appeals, 242 SCRA 717 (1995).150
A trustee appointed for purposes of liquidation does not become personally liable for the
outstanding obligations of the corporation. Republic v. Tancinco, 394 SCRA 386 (2003).
There is no time limit within which the trustees must complete a liquidation placed in their
hands. What is provided in what is now Sec. 139 of RCC is that the conveyance to the trustees must
be made within the 3-year period. But it may be found impossible to complete the work of liquidation
within the 3-year period or to reduce disputed claims to judgment. Furthermore, what is now Sec.
184 of RCC clearly provides that “no right or remedy in favor of or against any corporation, its
shareholders, members, directors, trustees, or officers, nor any liability incurred by any such
corporation, shareholders, members, directors, trustees, or officers, shall be removed or impaired
either by the subsequent dissolution of said corporation.” Vigilla v. Philippine College of
Criminology, Inc., 698 SCRA 247 (2013).
A trustee may continue to prosecute a case commenced by the corporation within 3 years from
its dissolution until rendition of the final judgment, even when rendered beyond the 3-year period
allowed in what is now Sec. 139 of RCC. However, there is nothing in the said cases that allows an
already defunct corporation to initiate a suit after the lapse of said 3-year period. To allow
petitioner to initiate the subject complaint and pursue it until final judgment, on the ground that such
complaint was filed for the sole purpose of liquidating its assets, would be to circumvent the
provisions of what is now Sec. 139 . Alabang Dev. Corp. v. Alabang Hills Village Assn., 724
SCRA 321 (2014).151
MODULE 11
150
Reburiano v. CA, 301 SCRA 342 (1999); Knecht v. United Cigarette Corp., 384 SCRA 48 (2002); Pepsi-Cola Products Phils. v. CA, 443 SCRA 580
(2004).
151
National Electrification Administration v. Maguindanao Electric Cooperative, Inc., 861 SCRA 1 (2018).
74
c. Corporate Treasurer (Sec. 122)
d. Nominee and Alternate Nominee (Secs. 124, 125 and 126)
1
Bustos v. Millians Shoe, Inc., 824 SCRA 67 (2017).
75
The Court cannot lose sight of the fact that the enterprise is a closed family corporation where the
incorporators and directors belong to one single family. It cannot be concealed that Manuel R. Dulay
as president, treasurer and general manager almost had absolute control of the corporation. The
nomenclature, if imprecise, however, fairly reflects the cohesiveness of a group and the parochial
instincts of the individual members of such an aggrupation of which Manuel R. Dulay Enterprises, Inc.
is typical: four-fifths of its incorporators being close relatives namely, three (3) children and their father
whose name identifies their corporation. Hence, the contract is valid and binding on the corporation
even without formal Board resolution. Manuel R. Dulay Enterprises v. CA, 225 SCRA 678 (1993).
The petitioners conceded tha both CFTI and Naguiat Enterprises were “close family corporations”
owned by the Naguiat family. What is now Sec. 99(e) of RCC] states: “(e) To the extent that the
shareholders are actively engage(d) in the management or operation of the business and affairs of a
close corporation, the shareholders shall be held to strict fiduciary duties to each other and among
themselves. Said shareholders shall be personally liable for corporate tort unless the corporation has
obtained adequate liability insurance.” Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).
2. Liability of the Shareholders for Managing the Corporation (Secs. 96 and 99)
It was wrong to conclude that under what is now Sec. 96 of RCC “in a close corporation, the
shareholders and/or officers usually manage the business of the corporation and are subject to all
liabilities of directors, i.e., personally liable for corporate debts and obligations.” Nowhere in what is now
Sec. 96 of the RCC do we find any inference that shareholders of a close corporation are automatically
liable for corporate debts and obligations. Parenthetically, only what is now Section 99(e) of RCC
explicitly provides for personal liability of shareholders of close corporation, viz.: “5. To the extent that
the shareholders are actively engaged in the management or operation of the business and affairs of a
close corporation, the shareholders shall be held to strict fiduciary duties to each other and among
themselves. Said shareholders shall be personally liable for corporate torts unless the corporation
has obtained reasonably adequate liability insurance.” As can be read in that provision, several
requisites must be present for its applicability. None of these were alleged in the case to hold the
spouses liable, and no factual circumstances were discussed for this Court to discuss the personally
liability of respondents to their creditors because of “corporate torts.” We thus apply the general doctrine
of separate juridical personality and limited liability. Bustos v. Millians Shoe, Inc., 824 SCRA 67
(2017).
76
effects or profit was ever used for personal or individual gain, and not for the purpose of carrying out the
objectives of the enterprise. Manila Sanitarium and Hospital v. Gabuco, 7 SCRA 14 (1963).
A nonstock corporation may only be formed or organized for charitable, religious, educational,
professional, cultural, fraternal, literary, scientific, social, civic or other similar purposes. It may not
engage in investment business where profit is the main or underlying purpose. Although it may obtain
profits as an incident to its operation, such profits are not to be distributed among its members but must
be used for the furtherance of its purposes. People v. Menil, 340 SCRA 125 (2000).
In a mutual life insurance company organized as a nonstock corporation, the so-called “dividends”
received by members-policyholders are not a portion of profits set aside for distribution to the
shareholders. One, a mutual company has no capital stock to which subscription is necessary; there are
no shareholders to speak of, but only members. Two, the amount they receive does not partake of the
nature of a profit or income, such distribution represents overpayment, a benefit to which the member-
policyholder is equitably entitled. Republic v. Sunlife Assurance Co., 473 SCRA 129 (2005).
1
Magallanes Watercraft Assn. v. Auguis, 791 SCRA 445 (2016)
77
The conversion of a nonstock educational institution into a stock corporation is not legally feasible,
as it violates what is now Sec. 86 of RCC, that no part of the income of a nonstock corporation may be
distributable as dividends to its members, trustees or officers. “Thus, the [SEC] has previously ruled that
a nonstock corporation cannot be converted into a stock corporation by a mere amendment of the
articles of incorporation. For purposes of transformation, it is fundamental that the nonstock corporation
be dissolved first under any of the methods specified in what is now Title XIV of the RCC. Thereafter,
the members may organize as a stock corporation directed to bring profits or pecuniary gains to
themselves.” SEC Opinion dated 10 Dec. 1992; SEC Opinion dated 24 Feb. 2003.
(1) Soliciting Orders or Contracts in the Philippines: When a foreign corporation, through its
affiliate company licensed to do business in the Philippines, solicits within the Philippines for the
design and supplying of equipment for the construction of a local lime plant business, said
foreign corporation is doing business in the Philippines under R.A. 5455 that defines “Soliciting
orders, purchases (sales) or service contracts,” even though the final contract was executed in
Japan. Marubeni Nederland B.V. v. Tensuan, 190 SCRA 105 (1990).
(2) Opening of Offices or Branches in the Philippines: “The phrase ‘doing business’ shall
include … opening offices, whether called ‘liaison’ offices or branches,” leads to no other
conclusion than that Saudia is a foreign corporation doing business in the Philippines, and it
may be sued in the Philippines and is subject to the jurisdiction of Philippine tribunals. Saudi
Arabian Airlines v. Rebesencio, 746 SCRA 140 (2015).
(3) Appointment of Indentors or Broker: When it is shown that the foreign corporation
exercised control over the business of its brokers, then it is deemed doing business in the
country. Granger Associates v. Microwave Systems, Inc., 189 SCRA 631 (1990).3
Under Sec. 3(d) of FIA ‘91, and Sec. 1(f), Rule I of its IRR, the appointment of a distributor
is not sufficient to constitute “doing business” unless it is under the full control of the foreign
corporation. If the distributor is an independent entity that buys and distributes products, other
than those of the foreign corporation, for its own name and its own account, the latter cannot be
considered doing business in the Philippines. Steelcase, Inc. v. Design Int’l Selections, Inc., 670
SCRA 64 (2012).
(4) Foreign Investment in a Domestic Corporation : It is clear from the provision of R.A. 7042
that the IGC’s act of subscribing shares of stocks from McCann, a duly registered domestic
corporation, maintaining investments therein, and deriving dividend income therefrom, does not
qualify as "doing business", and is not required to secure a license before it can file a claim for
tax refund. CIR v. Interpublic Group of Companies, Inc., 913 SCRA 223 (2019).
2
Agilent Technologies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp., 427 SCRA 593 (2004).
3
La Chemise Lacoste, S.A. v. Fernandez, 129 SCRA 373 (1984); Schmid & Oberly v. RJL, 166 SCRA 493 (1988); Wang Laboratories v. Mendoza, 156
SCRA 44 (1974).
79
b. Jurisprudential Concepts of “Doing Business”: It implies a continuity of commercial dealings
and arrangements, and the performance of acts or works or the exercise of some of the functions
normally incident to the main purpose or object for which a foreign corporation has been organized.
Mentholatum Co., Inc. v. Mangaliman, 72 Phil. 525 (1941).
(1) “Territoriality Rule” – To be doing or “transaction business in the Philippines” for purposes of
what is now Sec. 150 of RCC, the foreign corporation must actually transact business in the
Philippines, that is, perform specific business transactions within the Philippine territory on a
continuing basis in its own name and for its own account. B. Van Zuiden Bros., Ltd v. GTVL
Manufacturing Industries, Inc., 523 SCRA 233 (2007), citing VILLANUEVA, PHILIPPINE CORPORATE LAW 813
(2001).
(2) “Contract Test” – Pacific Vegetable Oil Corp. v. Singson, G.R. No. L-7917, 29 April 1955,
Advanced Decision Supreme Court, April 1955 Vol., p. 100-A ; Aetna Casualty & Surety Co.
v. Pacific Star Line, 80 SCRA 635 (1977).4
(3) “Profit-Seeking Transactions Rule” – Although each case must be judged in the light of
attendant circumstances, jurisprudence has evolved several guiding principles for the application
of these tests. “By and large, to constitute ‘doing business,’ the activity to be undertaken in the
Philippines is one that is for profit-making.” Agilent Technologies Singapore (PTE) Ltd. v.
Integrated Silicon Technology Phil. Corp., 427 SCRA 593 (2004), citing VILLANUEVA, PHILIPPINE
CORPORATE LAW 596 et seq. (1998 ed.) ; Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304
(2010), citing VILLANUEVA, PHILIPPINE CORPORATE LAW 801-802 (2001).
Examples:
Insurance Business – A foreign corporation with a Philippine settling agent that issues
twelve marine policies covering different shipments to the Philippines is doing business here.
General Corp. of the Phil. v. Union Insurance Society of Canton, Ltd., 87 Phil. 313 (1950).
A foreign corporation which had been collecting premiums on outstanding policies is
doing business in the Philippines. Manufacturing Life Ins. v. Meer, 89 Phil. 351 (1951).
Those that file collection suits with Philippine courts arising from insurance contracts
entered into and premiums paid abroad are not doing business in the Philippines. Aetna
Casualty & Surety Co. v. Pacific Star Line, 80 SCRA 635 (1977).5
Air Carriers – Off-line air carriers having general sales agents in the Philippines are
engaged in business in the Philippines and that their income from sales of passage here
(i.e., uplifts of passengers and cargo occur to or from the Philippines) is income from within
the Philippines. South African Airways v. Commissioner of Internal Revenue, 612 SCRA 665
(2010).
c. Special Cases on Infringement of Business Names and Trademarks: The right to corporate
name and trade name of a foreign corporation is a property right in rem, which it may assert and
protect in any of the courts of the world even in countries where it does not personally transact any
business. Western Equipment & Supply Co. v. Reyes, 51 Phil. 115 (1927).
Infringement of trademark may be pursued in local courts separate from the issue of whether
there is the proper license to do business in the Philippines. General Garments Corp. v. Director of
Patens, 41 SCRA 50 (1971).6
d. Doctrine on Unrelated or Isolated Transactions: Isolated acts, contracts, or transactions of
foreign corporations are not regarded as carrying on of business. Typical examples: making of a
single contract, sale with the taking of a note and mortgage in the state to secure payment thereof,
purchase, or note, or the mere commission of a tort. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617
(2002).7
A foreign corporation needs no license to sue before Philippine courts on an isolated
transaction. Even a series of transactions which are occasional, incidental and casual—not of a
character to indicate a purpose to engage in business—do not constitute the doing or engaging in
business as contemplated by law. Lorenzo Shipping v. Chubb and Sons, Inc., 431 SCRA 266 (2004).
The performance of services auxiliary to an existing isolated contract of sale which are not on a
continuing basis do not constitute “doing business in the Philippines.” Antam Consolidated v.
Court of Appeals, 143 SCRA 288 (1986).8
A single act may be considered as either doing business or an isolated transaction depending
on its nature. It may be considered as doing business if it implies a continuity of commercial dealings
and contemplates the performance of acts or the exercise of functions normally incidental to and in
the progressive pursuit of its purpose. Contrarily, it may be considered as an isolated transaction if it
4
Universal Shipping Lines, Inc. v. IAC, 188 SCRA 170 (1990).
5
Universal Shipping Lines v. IAC, 188 SCRA 170 (1990).
6
Universal Rubber Products, Inc. v. CA, 130 SCRA 104 (1988).
7
Aboitiz Shipping Corp. v. Insurance Co. of North America, 561 SCRA 262 (2008).
8
Eastboard Navigation, Ltd. v. Juan Ysmael and Co., 102 Phil. 1 (1957).
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is different from or not related to the common business of the foreign corporation in the sense that
there is no objective to increasingly pursue its purpose or object. And as stated, a license is not
required if the foreign corporation is suing on an isolated transaction. Magna Ready Mix Concrete
Corp. v. Andersen Bjornstad Kane Jacobs, Inc., G.R. No. 196158, 20 January 2021.
(1) Examples of Isolated Transactions:
Recovery on the collision of two vessels at the Manila Harbor. Dampfschieffs Rhederei
Union v. La Campañia Transatlantica, 8 Phil. 766 (1907).
Loss of goods bound for Hongkong but erroneously discharged in Manila. The Swedish East
Asia Co., Ltd. v. Manila Port Service, 25 SCRA 633 (1968).
Recovery of damages on cargo shipped to the Philippines. Bulakhidas v. Navarro, 142 SCRA
1 (1986).
Sale of construction equipment to the Government with no intent of continuity of transaction.
Gonzales v. Raquiza, 180 SCRA 254 (1989).
Recovering a Hongkong judgment from local resident. Hang Lung Bank v. Saulog, 201 SCRA
137 (1991).
Appointment of local lawyer by foreign movie companies who have registered intellectual
property rights over their movies in the Philippines, to protect such rights for piracy does not
constitute doing business in the country. Columbia Pictures Inc. v. CA, 261 SCRA 144 (1996).
9
This overturned the previous doctrine in Marshall-Wells (as well as in In re Liquidation of the Mercantile Bank of China, etc., 65 Phil. 385 (1938), that
the lack of authority of foreign corporation to sue in Philippine courts for failure to obtain the license is a matter of affirmative defense. See also
Commissioner of Customs v. K.M.K. Gani, 182 SCRA 591 (1990).
10
Georg Grotjahn GMBH & C. v. Isnani, 235 SCRA 216 (1994); Communications Material and Design, Inc. v. CA, 260 SCRA 673 (1996); Agilent
Technologies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp., 427 SCRA 593 (2004); European Resources and Technologies, Inc. v.
Ingenieuburo Birkhanh+Nolte, 435 SCRA 246 (2004); Rimbunan Hijau Group of Companies v. Oriental Wood Processing Corp., 470 SCRA 650 (2005);
Global Business Holdings, Inc. v. Surecomp Software, B.V., 633 SCRA 470 (2010); Steelcase, Inc. v. Design Int’l Selections, Inc., 670 SCRA 64 (2012).
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5. Local Suits AGAINST Foreign Corporations: A fundamental international law principle is that no
state can by its laws, and no court as a creature thereof, can by its judgments and decrees directly bind
or affect property or persons beyond state limits. Times, Inc. v. Reyes, 39 SCRA 303 (1971).
a. Jurisdiction Over Foreign Corporations (Sec. 12, Rule 14, Rules of Court)
A foreign corporation which has been granted a license to do business in the Philippines obtains
the status of a domestic corporation in that it is deemed to have residence in the country for
purposes of determine venue and status to sue. State Investment House v. Citibank, 203 SCRA 9
(1991); Northwest Orient Airlines v. Court of Appeals, 241 SCRA 192 (1995).
For service of summons under Sec. 14, Rule 14, it is sufficient that it be alleged in the complaint
that the foreign corporation is doing business in the Philippines. Hahn v. CA, 266 SCRA 537 (1997).
When a foreign corporation has designated a person to receive service of summon, the
designation is exclusive and service of summons on any other person is inefficacious. H.B. Zachry
Company Int’l v. Court of Appeals, 232 SCRA 329 (1994).
For a foreign corporation is doing business in the Philippines, summons may be served on (a)
its designated resident agent; (b) if there is no resident agent, the government official designated by
law to that effect; or (c) any of its officers or agent within the Philippines. The mere allegation in the
complaint that a local company is the agent of the foreign corporation is not sufficient to allow proper
service to such alleged agent; it is necessary that there must be specific allegations that establishes
the connection between the foreign corporation and its alleged agent with respect to the transaction
in question. French Oil Mills Machinery Co. v. Court of Appeals, 295 SCRA 462 (1998).
c. ODD DOCTRINE: “Indeed, if a foreign corporation, not engaged in business in the Philippines, is not
barred from seeking redress from the courts in the Philippines, a fortiori, that same corporation
cannot claim exemption from being sued in Philippine courts for acts done against a person or
persons in the Philippines.” Facilities Management Corp. v. De la Osa, 89 SCRA 131 (1979).12
CONTRA: Sine qua non requirement for service of summons and other legal processes or any such
agent or representative is that the foreign corporation is doing business in the Philippines.
Signetics Corp. v. Court of Appeals, 225 SCRA 737 (1993).13
PRESENT RULE: There is no reason to subject to Philippine jurisdiction foreign corporations not doing
business here; insofar as the State is concerned, such foreign corporations have no legal existence,
and to subject foreign corporations not doing business to the courts’ jurisdiction would violate the
essence of sovereignty. The Court is not persuaded by the position taken invoking the ruling in
Facilities Management. Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997).
d. STIPULATION ON VENUE: When the contract sued upon has a venue clause within the Philippines, it
is deemed a confirmation by the foreign corporation, even though not doing business in the
Philippines, to be sued in local courts. Linger & Fisher GMBH v. IAC, 125 SCRA 522 (1983).
XXI. MISCELLANY
1. SEC’s Mandate to Develop and Implement Electronic Filing and Monitoring Systems
(Sec. 180; SEC Memo No. 28-2020: Requirements on Corporations to Create and/or
Designate E-mail Account Address and Cellphone Number for Transactions with the SEC)
11
Johnlo Trading Co., v. Flores, 88 Phil. 741 (1951); Johnlo Trading Co. v. Zulueta, 88 Phil. 750 (1951); Pacific Micronisian Line v. Del Rosario, 96
Phil. 23 (1954); Far East Int’l Import and Export Corp. v. Nankai Kogyo Co., Ltd., 6 SCRA 725 (1962).
12
FBA Aircraft v. Zosa, 110 SCRA 1 (1981); Royal Crown Int’l v. NLRC, 178 SCRA 569 (1989); Wang Laboratories v. Mendoza, 156 SCRA 44 (1987).
13
Hyopsung Maritime Co., Ltd. v. CA, 165 SCRA 258 1(988).
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2. BSP and Insurance Commission Shall Exercise Primary Authority Over Special
Corporations Such as Banks, Nonbank Financial Institutions and Insurance Companies
under their Supervision and Regulation (Sec. 183)
3. Effect of Repeal of the Code: No right or remedy in favor or against any corporation, its
shareholders, members, directors, trustees or officers, nor any liability incurred by any
such corporation, shareholders, members, directors, trustees or officers, shall be
removed or impaired either by the subsequent amendment or repeal of this Code or any
part thereof. (Sec. 184)
4. Existing Corporation at Adoption of RCC: A corporation lawfully existing and doing
business in the Philippines affected by the new requirements of the Revised
Corporation Code shall be given a period of not more than two (2) years from its
effectivity (23 February 2019) within which to comply. (Sec. 185)
83