CORPORATION LAW

DOCTRINES/ PRINCIPLES

 DOCTRINE OF CORPORATE ENTITY

A corporation is invested by law with a personality distinct and separate from its SHs
or members. In the same vein, a corporation by legal fiction and convenience is an entity
shielded by a protective mantle and imbued by law with a character alien to the person
comprising it. (Lim v. CA)

 DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY

An exception to the doctrine of corporate entity. Under this doctrine, where the fiction
of the corporate entity is being used as a cloak for fraud or illegality, or “to defeat public
convenience, justify wrong, protect fraud or defend crime”, or for ends subversive of the policy
and purpose behind its creation, this fiction will be disregarded and the individuals comprising
it will be treated as identical. Liability will attach personally or directly to the SHs or officers or
where there are two corporations, they will be merged as one, the one being merely regarded
as the instrumentality, agency, conduit or adjunct of the other.

A corporation will be looked upon as a legal entity as a rule, and until sufficient
reason to the contrary appears; but 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. (Villanueva Commercial Law Reviewer citing U.S. v.
Milwaukee, p.575)

 DOCTRINE OF BUSINESS-ENTERPRISE TRANSFERS

A corporation which purchases or takes over the entire business enterprise of another
corporation or entity, becomes liable for debts pertaining to such business enterprise.
Likewise, the mere change of the medium of holding the same business (e.g. from a
partnership or corporation) enterprise would authorize piercing to enforce the obligations
incurred. (Villanueva, p. 592)

 DOCTRINE OF ESTOPPEL/ CORPORATION BY ESTOPPEL

A party is estopped to challenge the personality of a foreign corporation and its
standing to sue in the Philippines even when it has no license to do business, after having
acknowledged the same by entering into a contract with it. The doctrine of estoppel to deny
corporate existence applies to foreign as well as to domestic corporations; one who has dealt
with a foreign corporation as a corporate entity is estopped from denying its corporate
existence and capacity. The principle will be applied to prevent a person contracting with a
foreign corporation from taking advantage of its non-compliance with the statutes, chiefly in
cases where such person has received the benefits of the contract. (Merill Lynch v. CA, 211
SCRA 825)

A 3rd party who, knowing an association to be incorporated, nonetheless treated it as

a corporation and received benefits from it, may be barred from denying its corporate
existence in a suit brought against the alleged corporation.

Under the law on estoppel, those acting on behalf of the corporation and those
benefited by it, knowing it to be without valid existence, are held liable as general partners.
(Read sec. 21)

 INSTRUMENTALITY RULE OR ALTER EGO DOCTRINE

Where one corporation is so organized and controlled and its affairs are conducted so
that, it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate
entity of the “instrumentality” may be disregarded.

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 DOCTRINE OF CORPORATE OPPORTUNITY
A rule by the Corporation Code making a director account to his corporation, gains
and profits from any transaction entered into by him or another competing corporation or
entity where he has a substantial interest which could have been a transaction undertaken by
his corporation.

 TRUST FUND DOCTRINE

It considers the subscribed capital stock as a trust fund for the payment of the debts
of the corporation, and to which creditors have a right to look up to for the satisfaction of their
credits. Hence, the corporation cannot dissipate it to the prejudice of creditors.
The TFD is also applicable in case of appraisal right of a withdrawing SH. The
corporation is prohibited from paying the withdrawing SH if the rights of creditors are affected.
Only unrestricted retained earnings of the corporation are available for said payment.

Notes: Exceptions to the Trust Fund Doctrine:

(1) Wasting assets corporation- oil exploration companies etc. can distribute
capital as dividends to investors.

This doctrine (TFD) holds that the assets of the corporation as represented by its
capital stock are “trust funds” to be maintained unimpaired and to be used to pay corporate
creditors in the sense that there can be no distribution of such assets among the stockholders
without provision being first made for the payment of corporate debts and that any such
disposition of it is a fraud on the creditors of the corporation who extend credit to the
corporation on the faith of its OCS and therefore, void. The purchase, in effect amounts to
repayment to the SH of his proportionate share from the corporate assets and hence, an
impairment of the capital available for the benefit and protection of creditors who are preferred
over the SHs in the distribution of corporate assets.

The prohibition against the distribution of its capital as cash dividend is also based on
the same doctrine. (De Leon, p. 363)

 DOCTRINE OF SECONDARY MEANING

A word or phrase originally incapable of exclusive appropriation with reference to an
article on the market, because geographically or otherwise descriptive, might nevertheless
have been used so long and so exclusively by one producer with reference to his article that,
in that trade and to that branch of the purchasing public, the word or phrase has come to
mean that the article was his product. (Phil. Nut Industry v. Standard Brands, Inc. 65 SCRA
575)

 HOLD-OVER PRINCIPLE
Upon failure of a quorum at any meeting of the SHs or members called for an
election, the directorate naturally holds over and continues to function until another directorate
is chosen and qualified. (sec. 24)

 DELEGATION THEORY
The directors are the officers and agents of the corporation, representing the interests
of that abstract legal entity and of those who own shares of stock, and as such, they can bind
the corporation provided they act within the scope of their authority. (De Leon, Corpo. p.213)

 CONSENT DOCTRINE
An exception to the rule that a corporation cannot operate beyond the bounds of the
state or sovereignty by which it is created or incorporated and organized. With the consent of
the foreign state, the corporation may not be prevented from acting in another state with the
latter’s express or implied consent. However, a corporation can exercise none of the functions

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 and privileges conferred by its charter in another state or country except by the comity and
consent of such State or country.
 PRINCIPLE OF DELEGATION OF BOARD POWER
The BOD may authorize and delegate some of its functions and power to officers,
committees or agents. The authority of such agents may be derived from law, corporate by-
laws or authorization from the board, either expressly or impliedly by habit, custom, or
acquiescence in the general course of business. (People’s Aircargo v. CA, 297 SCRA 170,
Villanueva, p. 626)

 BUSINESS JUDGMENT RULE

Under sec. 23, all corporate powers and property are exercised by the BOD. The
consequences are: (a) BOD resolutions, contracts and transactions cannot be overturned by
the SHs or Ms or even by the courts; (b) directors or authorized officers cannot be held
personally liable for acts or contracts done with the exercise of their business judgment.

 DOCTRINE OF RELATION
Under the doctrine of relation which has been applied in American decisions, where
the delay in effecting the amendment is due to the neglect of the officer with whom the
application is required to be filed or to a wrongful refusal on his part to receive it, the same will
be treated as having been filed before the expiry date. The doctrine does not apply where the
delay is attributable to the corporation. (SEC Opinion, May 14, 1987).

The occurrence of a fortuitous event or force majeure is considered a meritorious

reason by the SEC to justify the doctrine. The test applied by the SEC is whether under the
particular circumstances there was such an insuperable interference occurring without the
corporation’s intervention as could not have been prevented by prudence, diligence, and care.
However, since the privilege of extension is purely statutory, all of the statutory conditions
precedent for extension of corporate life are not to be given a liberal interpretation. (SEC, July
7, 1987) (also read sec.11, corporation code)

 DOCTRINE OF RATIFICATION
As a general rule, the acts of the corporate officers within the scope of their authority
are binding on the corporation. But when their acts exceed their authority, their actions cannot
bind the corporation, unless it has ratified such acts or is estopped from disclaiming them.
(San Juan v. CA, 296 SCRA 631)

 DOCTRINE OF APPARENT AUTHORITY

If a corporation knowingly permits one of its officers, or any other agent, to act within
the scope of an apparent authority, it holds him out to the public possessing the power to do
those acts; and thus, 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. (Soler v. CA, 21 May
2001)

• The Corporate Secretary is the custodian of corporate records and if

he certifies that a certain action had been taken by the Board, such certification is
binding upon the corporation although the same may have been erroneously
made. The reason for this is that the corporate secretary is clothed with apparent
authority. (Francisco v. GSIS, 7 SCRA 577; Villanueva, p. 665)

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 DOCTRINE OF INDIVISIBILITY OF SUBSCRIPTION CONTRACT
A subscription is one, entire and indivisible contract. It cannot be divided into portions so
that the SHs shall not be entitled to a certificate of stock until he has paid the full amount together
with interest and expenses (in case of delinquent shares) if any is due.

 DOCTRINE OF ISOLATED TRANSACTION

A foreign corporation can sue on a transaction or series of transactions set apart from the
common business of a foreign enterprise in the sense that there is no intention to engage in a
progressive suit of the purpose and object of the business transaction.

 DOCTRINE OF EQUALITY OF SHARES

Where the AOI do not provide for any distinction of the shares of stock, all shares issued
by the corporation are presumed to be equal and enjoy the same rights and privileges and are
also subject to the same liabilities.

SUMMARY:
DOCTRINE OF CORPORATE ENTITY
DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY
DOCTRINE OF BUSINESS-ENTERPRISE TRANSFERS
DOCTRINE OF ESTOPPEL/ CORPORATION BY ESTOPPEL
INSTRUMENTALITY RULE OR ALTER EGO DOCTRINE
DOCTRINE OF CORPORATE OPPORTUNITY
TRUST FUND DOCTRINE
DOCTRINE OF SECONDARY MEANING
HOLD-OVER PRINCIPLE
DELEGATION THEORY
CONSENT DOCTRINE
PRINCIPLE OF DELEGATION OF BOARD POWER
BUSINESS JUDGMENT RULE
DOCTRINE OF RELATION
DOCTRINE OF RATIFICATION
DOCTRINE OF APPARENT AUTHORITY
DOCTRINE OF INDIVISIBILITY OF SUBSCRIPTION CONTRACT
DOCTRINE OF ISOLATED TRANSACTION
DOCTRINE OF EQUALITY OF SHARES