CORPORATION LAW

CHAPTER 1 GENERAL PRINCIPLES

1. Definition of Corporation; Four Attributes of a Corporation

Sec. 2 A corporation is an artificial being created by operation of law, having the right
of succession and the powers, attributes, and properties expressly authorized by law or
incident to its existence. (RA 11232, or the Revised Corporation Code)

a. An Artificial Being
A corporation is a juridical entity that exists apart from its stockholders. It has its
own set of rights and obligations as provided for by law. Technically, it has no physical
existence although it occupies a principal place of business.

Being only a juridical entity, the physical acts of the corporation, like the signing of
documents, can be performed only by natural persons duly authorized for such purpose
by corporate by-laws or by a special act of the Board of Directors (BOD) [Swedish Match
Philippines, Inc. v. Treasurer of the City of Manila, G.R. No.181277 (2013)].

A corporation, upon coming into existence, is invested by law with a personality

separate and distinct from those persons composing it as well as from any other legal entity
to which it may be related [Yutivo Sons Hardware v. CTA, G.R. No. L-13203 (1961)].

b. Created by Operation of Law

Mere consent of the parties to form a corporation is not sufficient. The State must
give its consent either through a special law (in case of government corporations) or a
general law (i.e., Revised Corporation Code in case of private corporations).

A corporation comes into existence upon the issuance of the certificate of

incorporation. Then, and only then, will it acquire juridical personality to sue and be
sued, enter contracts, hold or convey property or perform any legal act in its own name.

c. Right of Succession
Since one of the attributes of a corporation is that it is an artificial being with a
distinct personality, the corporation’s existence is unaffected by a change in the
composition of stockholders. Its existence is limited only by the Articles of Incorporation
(AOI), may be subject to Quo Warranto proceedings (Rule 66 of the Rules of Court), and
may be shortened by dissolution (Title XIV).

d. Power, Attributes and properties authorized by law or incident to its

existence
A corporation has no power except those expressly conferred on it by the Revised
Corporation Code and by its articles of incorporation, those which may be incidental to
such conferred powers, those that are implied from its existence, and those reasonably
necessary to accomplish its purposes. In turn, a corporation exercises said powers
through its BOD and/or its duly authorized officers and agents [Monfort Hermanos
Agricultural Dev. Corp. v. Monfort III, G.R. No. 152542 (2004)].

Being a creature of the law, its powers are limited by:

1. The law (see Sec. 35 for general powers and Secs. 36 to 43 for specific
powers);
2. By the express terms of its AOI as well those essential or necessary to carry
out its purpose or purposes under such Articles (see Sec. 35, last par.); and
3. By those necessary or incidental to its powers so conferred (see Sec. 44)
 2. Comparison with Other Business Establishment Options

SOLE PROPRIETORSHIP vs. CORPORATION

SOLE PROPRIETORSHIP CORPORATION

Separate No separate juridical personality Has a separate juridical

Judicial personality
Personality

Requirements Less saddled with many Strict Compliance with

requirements and regulations requirements and regulations
for corporation

Control Owner Board of Directors/ Board of

Trustees

Liability In the event business venture goes Doctrine of limited liability

bankrupt, he stands to lose as applies; claims of business
much as he puts in and even more creditors limited to the assets
to the extent of all his personal of enterprise
belongings

The owner is the main beneficiary One person corporation which

of the income and fruits of is a sort of incorporated sole
operation. proprietorship

This type of business works well for

simple or small business endeavors

BUSINESS TRUSTS vs. CORPORATION

BUSINESS TRUSTS CORPORATION

Manner of Created under the terms of deed of Created by operation of the

Creation trust which is easier and less law
expensive to constitute for it its not
bounded by any legal requirements
Separate Juridical No, mainly governed by Has a separate juridical
Personality contractual doctrines and the personality
common law principle of “Trusts”
Similarity Note that the basic set-up of a business trust, which splits naked
title from beneficial title in the corpus, is akin to the basic set-up
in corporate enterprise, where the naked title to the corporate
properties are held by the BOD; whereas the beneficial title to the
corporate title is vested with the group of shareholders or
members.

BOD/BOT = Trustee, SH/members = beneficiary

PARTNERSHIP vs. CORPORATION

PARTNERSHIP CORPORATION

Definition A partnership is an agreement A corporation is an artificial

whereby two or more persons bind being created by operation
themselves to contribute money, of law, having the right of
 property, or industry to a common succession and the powers,
fund, with the intention of dividing attributes, and properties
the profits among themselves. expressly authorized by law
(Article 1767, NCC) or incidental to its
existence. (Section 2, RCC)
Manner of creation By agreement By the operation of law
Composition At least 2 persons One person may compose a
corporation
Commencement of From the moment 2 or more Upon issuance by SEC of
juridical persons agree to form a partnership Certificate of Incorporation
personality (However, with SEC registration, it
cannot obtain the requisite licenses
and permits to conduct its business)
Liability General partners may be held liable Liability of the
beyond their contribution to the stockholders, who are not
partnership if the assets thereof are directors, officers and
not sufficient to answer for creditors’ agents, is limited to their
claims subscription to the capital
stock of the corporation
Transfer of shares A partner cannot assign his interest Stockholder may sell his
or rights in favor of a third party without the fully-paid shares of stock
consent of the partners, because a without the necessity of
partnership is essentially based on securing the consent of the
trust and confidence corporation and/or other
stockholders
Management Managed by the Managing Partner Conducted by the Board of
designated in the Articles of Directors
Partnership, or in the absence of
designation, by anyone of the
general partners.
Exercise of powers May perform any act unless it is Cannot exercise powers
contrary to laws, good morals, except those conferred by
custom, public order and public law and its articles of
policy incorporation, those implied
from expresslyconferred
powers and those incidental
to its existence

JOINT VENTURES vs. CORPORATION

JOINT VENTURES CORPORATION

Definition Common law so no precise
legal definition. Under
Philippine Law, JV is a form
of partnership and should
thus be governed by the
law on partnerships
Other features Separate juridical
personality, mutual agency,
unlimited liability
A corporation is an artificial
being created by operation
of law, having the right of
succession and the powers,
attributes, and properties
expressly authorized by law
or incidental to its
existence. (Section 2, RCC)
Separate juridical
personality, no mutual
agency, limited liability

COOPERATIVES vs. CORPORATION

COOPERATIVES
Definition A cooperative is an autonomous and duly
registered association of persons, with a
common bond of interest, who have
voluntarily joined together to achieve
their social, economic, and cultural
needs and aspirations by making
CORPORATION
A corporation is an artificial
being created by operation
of law, having the right of
succession and the powers,
attributes, and properties
expressly authorized by law
 equitable contributions to the capital or incidental to its
required, patronizing their products and existence. (Section 2, RCC)
services and accepting a fair share of the
risks and benefits of the undertaking in
accordance with universally accepted
cooperative principles.(Section 3, PH
Cooperative Code)
Other features Separate juridical personality, limited Separate juridical
liability personality, limited liability
Control Democratic control (one-member-one- Mainly by the BOD
vote principle) BOD manages affairs but
General Assembly of full membership
exercises all the rights and performs all
the obligations of the cooperative
Primary Self-help Stock corporation- profit
objective Nonstock corporation- any
eleemosynary purpose

3. Entitlement of Corporations to Constitutional Rights: Other

Rights

a. Due Process and Equal Protection

“Section 1. No person shall be deprived of life, liberty, or property without due process
of law, nor shall any person be denied the equal protection of the laws.” (Article III, The
1987 Constitution of the Philippines)

Right to due process ensures that corporations are afforded fair treatment by the
government and are not subjected to arbitrary or unjust actions.

Right to equal protection of the laws guarantees that corporations are treated on an
equal basis with other entities in similar circumstances. There must be no discrimination
against corporations based on factors such as nationality, industry, or size.

The due process and equal protection clause are universal in their application to all
persons within the territorial jurisdiction, without regard to any differences of race,
color, or nationality. The word "person" found in the Fourteenth Amendment and in the
first sentence of the first paragraph of the Philippine Bill of Rights includes aliens. Private
corporations are "persons" within the scope of the guaranties in so far as their property
is concerned. (Smith, Bell & Co. vs. Natividad., 40 Phil. 136, No. 15574 September 17,
1919)

b. Unreasonable Searches and Seizures

“Section 2. The right of the people to be secure in their persons, houses, papers, and
effects against unreasonable searches and seizures of whatever nature and for any
purpose shall be inviolable, and no search warrant or warrant of arrest shall issue except
upon probable cause to be determined personally by the judge after examination under
oath or affirmation of the complainant and the witnesses he may produce, and
particularly describing the place to be searched and the persons or things to be seized.”
(Article III, The 1987 Constitution of the Philippines)

General Rule: Corporations are protected by the constitutional guarantee against

unreasonable searches and seizures. (Stonehill vs. Diokno, 5 SCRA 466, No. L-19550
June 29, 1962)

Exception: The officers of a corporation from which documents, papers and things were
seized have no cause of action to assail the legality of the seizures, regardless of the
amount of shares of stock or of the interest of each of them in said corporation, and
whatever the offices they hold therein may be, because the corporation has a
personality distinct and separate from those of said officers. The legality of a seizure can
be contested only by the party whose rights have been impaired thereby; and the
objection to an unlawful search is purely personal and cannot be availed of by such
officers of the corporation who interpose it for their personal interests. (Stonehill vs.
Diokno, 5 SCRA 466, No. L-19550 June 29, 1962)

A corporation is entitled to immunity against unreasonable searches and seizures. A

corporation is, after all, but an association of individuals under an assumed name and
with a distinct legal entity. In organizing itself as a collective body it waives no
constitutional immunities appropriate to such body. Its property cannot be taken without
compensation. It can only be proceeded against by due process of law, and is protected
against unlawful discrimination. (Bache & Co. (Phil.), Inc. vs. Ruiz, 37 SCRA 823, No. L-
32409 February 27, 1971)

c. No Right Against Self-Incrimination

“Section 17. No person shall be compelled to be a witness against himself.” (Article III,
The 1987 Constitution of the Philippines)

General Rule: A corporation has no right against self-incrimination as this right is only
granted to individuals that protects them from being compelled to provide evidence that
could incriminate themselves.

Note: Since a corporation is considered a separate legal entity from its owners or
officers, the corporation can be compelled to provide evidence or testimony that may
incriminate the corporation itself or its officers and employees.

It is elementary that the right against self-incrimination has no application to juridical

persons. While an individual may lawfully refuse to answer incriminating questions
unless protected by an immunity statute, it does not follow that a corporation, vested
with special privileges and franchises, may refuse to show its hand when charged with
an abuse of such privileges. (Bataan Shipyard & Engineering Co., Inc. vs. Presidential
Commission on Good Government, 150 SCRA 181, No. L-75885 May 27, 1987)

d. Entitlement to Moral and Other Damages

General Rule: Moral damages are not granted to a corporation. While it is true that
besmirched reputation is included in moral damages, it cannot cause mental anguish to
a corporation, unlike in the case of a natural person, for a corporation has no reputation
in the sense that an individual has, and besides, it is inherently impossible for a
corporation to suffer mental anguish. (National Power Corporation vs. Philipp Brothers
Oceanic, Inc., 369 SCRA 629, G.R. No. 126204 November 20, 2001)

Exceptions:
1. Under item 7 of Article 2219 of the Civil Code, it expressly authorizes the recovery
of moral damages in cases of libel, slander or any other form of defamation.
Article 2219(7) does not qualify whether the plaintiff is a natural or juridical
person. Therefore, a juridical person such as a corporation can validly complain for
libel or any other form of defamation and claim for moral damages. (Filipinas
Broadcasting Network, Inc. vs. Ago Medical and Educational Central-Bicol Christian
College of Medicine (AMEC-BCCM), 448 SCRA 413, G.R. No. 141994, January 17,
2005)

2. When the corporation has a reputation that is debased, resulting in its humiliation
in the business realm. But in such a case, it is imperative for the claimant to
present proof to justify the award. It is essential to prove the existence of the
factual basis of the damage and its causal relation to petitioner’s acts. (Manila
Electric Company vs. T.E.A.M. Electronics Corporation, 540 SCRA 62, G.R. No.
131723 December 13, 2007)

4. Liability for Torts

A corporation is liable whenever a tortious act is committed by an officer or agent under
express direction or authority from the stockholders or members acting as a body, or,
generally, from the directors as the governing body. (PNB v. CA, G.R. No.L-27155, 18
May 1978)

Reason for Liability in Cases of Torts

A corporation is civilly liable in the same manner as natural persons for torts, because
generally speaking, the rules governing the liability of a principal or master for a tort
committed by an agent or servant are the same, whether the servant or agent is a
natural person or a corporation and whether the servant or agent be a natural or
artificial person.

5. Liability for Crimes

As a rule, if the crime is committed by a corporation ornother juridical entity, the
directors, officers, employees, or other officers thereof responsible for the offense shall
be charged and penalized for the crime, precisely because of the nature of the crime and
the penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be
penalized for a crime punishable by imprisonment. (Ching v. Secretary of Justice, G.R.
No.164317, 06 Feb. 2006)

Exceptions: A corporation may be charged and prosecuted for a crime if the imposable
penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a
corporation may be prosecuted and, if found guilty, may be fined. (Ibid.)

*Recovery of Damages

General Rule:

A corporation is not entitled to moral damagesbecause, being an artificial person and

having existence only in legal contemplation, it has no feelings, no emotions, no senses.
It cannot, therefore, experience physical suffering and mental anguish, which can be
experienced only by one having a nervous system. (ABS-CBN Broadcasting Corp. v. CA,
G.R. No. 128690, 21 Jan. 1999)

Exceptions:

1. A corporation may recover moral damages under item 7 of Art. 2219, of the NCC
because said provision expressly authorizes the recovery of moral damages in cases of
libel, slander, or any other form of defamation.

NOTE: Art. 2219(7) does not qualify whether the injured party is a natural or juridical
person. Therefore, a corporation, as a juridical person, can validly complain for libel or
any other form of defamation and claim for moral damages. (Filipinas Broadcasting
Network, Inc. v. AMEC- BCCM, G.R. No. 141994, 17 Jan. 2005)

2. When the corporation has a reputation that is debased, resulting in its humiliation in
the business realm. But in such a case, it is imperative for the claimant to present proof
to justify the award. It is essential to prove the existence of the factual basis of the
damage and its causal relation to petitioner’s acts. (MERALCO v. T.E.A.M. Electronics
Corp., et. al., G.R. No. 131723, 13 Dec. 2007)

NOTE: While the court may allow the grant of moral damages to corporations, it is not
automatically granted; there must still be proof of the existence of the factual basis of
the damage and its causal relation to the defendant’s acts. This is so because moral
damages, though incapable of pecuniary estimation, are in the category of an award
designed to compensate the claimant for actual injury suffered and not to impose a
penalty on the wrongdoer. (Crystal v. BPI, G.R. No. 172428, 28 Nov. 2008)
6. NATIONALITY OF COPRORATION

a. PURPOSES OF DETERMINING THE NATIONALITY OF THE CORPORATION

 The nationality of a corporation serves as a legal basis for subjecting an
enterprise or its activities to the laws, the economic and fiscal powers, and the
 various social and financial policies of the state to which it is supposed to belong.
(SEC OGC Opinion No. 22-07);

 It spells out the nature of business and area of investment a corporation may
engage and invest in.
 Compliance with the limitation on foreign ownership protects Filipinos and their
economic interest as required by the 1987 Constitution.
b. TEST TO DETERMINE THE NATIONALITY OF THE CORPORATION
There are several tests employed to determine the nationality of corporations, these are:
1. Place of Incorporation Test – place of incorporation
2. Control Test - nationality of the controlling stockholders or members of the
corporation
3. Investment Test or "Grandfather Rule."- nationality is attributed to the percentage of
equity in the corporation used in nationalized or partly nationalized area
4. War Time Test- the nationality of the corporation will be based on citizenship of
majority stockholders in times of war.
5. Domiciliary Test- principal place of business
In our jurisdiction, the place of incorporation test serves as the primary
test. Meanwhile, the control test and the Grandfather Rule, are used for purposes of
compliance with the provisions of the Constitution and of other laws on nationality
requirements, in order to safeguard or regulate certain areas of investment and
activities for the protection of the interest of Filipinos.
b.1. Place of Incorporation Test
Under this test, the nationality of corporation is determined by the place (country)
where it was organized or incorporated.
The primary test is always the Place of Incorporation Test since we adhere to the
doctrine that a corporation is a creature of the State whose laws it has been created. A
corporation organized under the laws of a foreign country, irrespective of the nationality
of the persons who control it, is necessarily a foreign corporation.
b.2. Control Test
The nationality of the corporation is determined by the “citizenship or
nationality” of the controlling stockholders.
A “Philippine National”, provides that share belonging to corporations or
partnerships at least 60 percent of the capital of which is owned by Filipino citizens.
Under the control test, there is no need to further trace the ownership of the 60%
(or more) Filipino stockholdings of the investing corporation since a corporation which
is at least 60% Filipino owned is considered Filipino. (Narra Nickel Mining &
Development Corp. vs Redmont Consolidated Mines Corp, G.R. No. 195580, (2014)).
Absent any “DOUBT”, Control test shall be used in determining the nationality of
the corporation specially where foreign ownership restriction apply (SEC OGC Opinion.
16-19)

SERIES OF DISCUSSION ON THE INTERPRETATION OF OWNERSHIP

REQUIREMENTS:
Under the Foreign Investment Act of 1991, a corporation is a “Philippine National”
if it is organized under the laws of the Philippines and at least 60 percent of its capital
stock outstanding and entitled to vote are owned and held by Filipino citizens. (60-40
equity ownership)
THE GAMBOA RULINGS:
2011 (Gamboa vs Teves, G.R. no. 176579 (2011))
 ISSUE: Whether or not the term “capital” under Section 11 of Article 12 of
the 1987 Constitution refers to the total common shares only or to the total
outstanding capital stock (common and non-voting preferred shares?
 RULING: The SC said that the capital refers only to the shares of stock
entitled to vote in the election of directors, hence only COMMON SHARES.
The SC also emphasized that it must not only possess legal title but full
beneficial ownership coupled with appropriate voting rights are essential
2012 (Gamboa vs Teves, G.R. No. 176579 (2012))
SC modified its ruling:
The term “capital” is not only limited to the voting shares since the
constitutional requirement of 60% Filipino ownership applies not only to voting
control but also to the beneficial ownership of the corporation.
 Capital is both common and preferred outstanding shares. Preferred shares
are denied the right to vote in the election of directors, are still entitled to
vote on the eight (8) specific corporate matters under Section 6 of the
Corporation Code.
2017 ( Roy III vs Herbosa, G.R. No. 207246, (2017))
 Upheld the SEC Memorandum Circular No. 8 dated May 20, 2013, where for
the purposes of determining compliance with the constitutional or statutory
ownership, the required percentage of Filipino ownership shall be applied to
both the:
1. total number of outstanding shares of stock entitled to vote in the election
of directors; AND
2. the total number of shares of stock, whether entitled to vote in the
election of board of directors
Thus, the 60% Filipino ownership requirements, is NOT needed for every each and
every class.
APPLICATIONS OF THE CONTROL TEST
1. Exploitation of natural resources – only Filipino citizens or corporations whose
capital stock is at least 60% owned Filipinos can qualify to exploit our natural
resources (Section 2, Article XII of the 1987 Constitution)
2. Public Utilities – no franchise, certificate or any other form of authorization for the
operation of public utility shall be granted, except to citizens of the Philippines or
to corporations or associations organized under the law of the Philippines at least
60% of whose capital is owned by such citizens (Section 2, Article XII of the 1987
Constitution, Sec. 16, CA 146)
3. Contracts for the supply of materials, goods and commodities to GOCC, agency or
municipal corporation (Sec. 1, R.A. 5183);
4. Ownership of private Lands (Sec. 7, Art. XII, Constitution; Sec. 22, Ch. 5, CA 141;
Sec. 4, R.A. 9182);
5. Ownership/establishment and administration of Educational institutions (Sec. 4,
Art. XIV, Constitution);
6. Adjustment Companies (Sec. 323, P.D. 613);
7. Culture, production, milling, processing, trading excepting retailing, of rice and
corn and acquiring, by barter, purchase or otherwise, Rice and corn and the by-
products thereof (Sec. 5, P.D. 194);
8. Ownership of Condominium units where the common areas in the condominium
project are co-owned by the owners of the separate units or owned by a
corporation (Sec. 5, R.A. 4726).
9. Project Proponent and Facility Operator of a BOT project requiring a public utilities
franchise (Sec. 11, Art. XII, Constitution; Sec. 2a, R.A. 7718);
10. Manufacture, repair, storage and/ or distribution of products/ Ingredients requiring
PNP clearance (R.A. 7042 as amended by R.A. 8179);
11. Operation of Deep-Sea commercial fishing vessel (Sec. 27, R.A. 8550);

b.3 GRANDFATHER RULE

The Grandfather Rule is a method pf determining the nationality of a corporation
which is owned in part by another corporation, by breaking down the equity structure of
the shareholder corporation (De Leon)
 The method by which the percentage of Filipino equity in a corporation engaged in
nationalized and/or partly nationalized areas of activities, provided for under the
Constitution and other nationalization laws, is computed, in cases where corporate
shareholders are present, by attributing the nationality of the second or even
subsequent tier of ownership to determine the nationality of the corporate
shareholder. Thus, to arrive at the actual Filipino ownership and control in a
corporation, both the direct and indirect shareholdings in the corporation are
determined.
ILLUSTRATION:
Corporation X has a direct foreign equity ownership of 40% and Filipino equity of 60%.
Meanwhile the Filipino equity (the 60%) of Corporation X is partly naturalized, where
40% is foreign owned and 60% for Filipino shareholders.
Applying the Grandfather Rule, determine whether Corporation X is a Filipino owned
corporation entitled to own land and exploit natural resources:
ANSWER:
No, the corporation is not Filipino owned.
COMPUTATION FORMULA:
First, determine the Direct Foreign Ownership
In this case 40%
Second, determine the Indirect Foreign Ownership
60% (Filipino equity in Corp X ) x 40 % = 24%
Third, add the direct and indirect foreign ownership to determine the total Foreign equity
ownership
60% + 24% = 64% Foreign ownership ; 36% Filipino ownership
Hence, the corporation did not meet the 60-40 equity ownership required by the
Constitution to buy and exploit natural resources.
TAKE NOTE: Applies only when the 60-40 Filipino-foreign equity ownership is in
doubt. If there is no doubt, apply the control test.
“Doubt” refers to various indicia that the “beneficial ownership” and “control” of the
corporation do not in fact reside in Filipino shareholders but in foreign stakeholders.
The following are indicators of doubt:
1. the foreign investors provide practically all the funds for the joint investment
undertaken by these Filipino businessmen and their foreign partner.
2. the foreign investors undertook to provide practically all the technological support
for the joint venture.
3. the foreign investors, while being minority stockholders, manage the company and
prepare all economic viability studies (Narra Nickel Mining and Dev. Corp vs
Redmont Consolidated Mines Corp., G.R. No. 195580, (2014))
APPLICATIONS OF GRANDFATHER RULE:
1. In enterprises where the Filipino ownership requirements is 100% such as:
1.Cooperatives (Art. 26, Ch. III, R.A. 6938);
2.Manufacture of Firecrackers and other pyrotechnic devices (Sec. 5, R.A.
7183).
3.Manufacture, repair, stockpiling and/or distribution of biological, chemical
and radiological weapons and Anti- personnel mines (Various treaties to
which the Philippines is a signatory and conventions supported by the
Philippines).
4.Mass media except recording
5.Utilization of Marine resources (Sec. 2, Art. XII, Constitution);
6.Manufacture, repair, stockpiling and/or distribution of Nuclear weapons
(Sec. 8, Art. II, Constitution);
7.Cockpits (Sec. 5, P.D. 449);
8.Small-scale Mining (Sec. 3, R.A. 7076);
9.Private Security agencies (Sec. 4, R.A. 5487);
10.Retail trade enterprises with paid-up capital of less than US$2.5 M (Sec.
5, R.A. 8762);
2. In other instances when the 60-40 Filipino foreign equity ownership is in doubt.
OTHER LIST OF CORPORATIONS WHERE FOREIGN-FILIPINO EQUITY
REQUIREMENTS MUST BE SATISFIED:
80 % Filipino Owned (Up to twenty percent (20%) foreign equity)
1.Private Radio Communications network (R.A. 3846).
75 % Filipino Owned (Up to twenty percent (25%) foreign equity)
1.Contracts for the construction and repair of Locally funded public works (Sec. 1, CA
541, LOI 630) except:
a. infrastructure/development projects covered in R.A. 7718; and
b. projects which are foreign funded or assisted and required to undergo
international competitive bidding (Sec. 2[a],R.A. 7718);
2.Private Recruitment, whether for local or overseas employment (Art. 27, P.D. 442);
3.Contracts for the construction of Defense-related structures (Sec. 1, CA 541).
4. Under the Flag Law, in the purchase of articles for the Government, preference shall
be given to materials and supplies produced, made, or manufactured in the Philippines,
and to domestic entities. Domestic entities means any citizen of the Philippines or
commercial company at least 75% of the capital of which is owned by citizens of the
Philippines (Sec.1, CA 138)
70 % Filipino Owned(Up to twenty percent (30%) foreign equity)
1.Advertising (Art. XVI, Constitution)
2.Corporations engaged in pawnshop business (Sec. 8, P.D. 114)
 7. DOCTRINE OF SEPARATE JURIDICAL PERSONALITY

a. Corporate Personality

The corporate existence and juridical personality commences from the date of the
issuance of the Certificate of Incorporation (COI). (Sec. 18, RCC)

The following must be submitted to the SEC for incorporation:

1. The intended corporate name for verification; and,

2. The articles of incorporation and bylaws. (Sec. 18, RCC)

Note: The issuance of the COI is considered the birth of the corporation and is the
best evidence of corporation’s existence.

a.1 Doctrine of Separate Juridical Personality

A corporation, whether stock or nonstock, is a legal or juridical person with legal

personality separate from its owners or investors and from any other legal entity to
which it may be connected or related. (De Leon, 2022)

a.2 SIGNIFICANCE OF THE DOCTRINE

1. Liability for acts or contracts

General Rule:

A bona fide corporation should alone be liable for its corporate acts duly authorized by
its officers and directors. (Caram v. CA, G.R. No. L-48627, 1987)

A stockholder may not be made to answer for acts or liabilities of said corporation, and
vice-versa. (Land Bank of the Philippines v. CA, G.R. No. 127181, 2001; Palay Inc. v.
Clave, G.R. No. L-56076, 1983)

Exceptions:

The juridical personality cannot be invoked to escape liability when:

a. The legal fiction is used for ends subversive to the policy and purpose behind its
creation or which could not have been intended by law to which it owes its being.

b. The corporate entity is a mere alter ego, adjunct, or business conduit for the sole
benefit of the stockholders or of another corporate entity. (Land Bank of the Philippines
v. CA, G.R. No. 127181, 2001)

The corporation is merely a farce, as it so organized and controlled, and its affairs are so
conducted, as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation. (Lanuza et al v. BF Corporation, et al, G.R. No. 174938, 2014)

2. Right to bring actions

A corporation mar bring civil and criminal actions in its own name in the same manner
as natural persons.

3. Right to acquire and possess property

Properties registered in the name of the corporation are owned by it as an entity separate and
distinct from its members. While shares of stock constitute personal property, they do not
represent property of the corporation. The corporation has property of its own which consists
chiefly of real estate.
Where the purpose of the liquidation, as well as the distribution of the assets of the
corporation, is to transfer their title from the corporation to the stockholders in
proportion to their shareholdings, that transfer cannot be effected without the
corresponding deed of conveyance from the corporation to the stockholders, and the
certificate should be considered as one in the nature of a transfer or conveyance.
(Stockholders of Guanzon & Sons, Inc. v. Register of Deeds of Manila, G.R. No. L-18216,
1962)

OTHER CONSEQUENCES OF SEPARATE JURIDICAL PERSONALITY

1. Stockholders are not the owners of corporate properties and assets

Corporate property is owned by the corporation as a juridical person, and the

stockholders have no claim on corporate property as owners. The latter only have a
mere expectancy or inchoate right to the same upon dissolution of the corporation and
after all corporate creditors have been paid.

2. Stockholders are not real parties in interest to claim damages and recover
compensation

3. The doctrine is not applicable In examination of officers to ascertain properties,

income which can be subjected to execution

4. Officers are not liable for dismissal of employee except in cases of evident malice
and/or bad faith

5. Corporations are entitled to due process and equal protection, but subject to the
police power of the state. insofar as their properties are concerned.

8. DOCTRINE OF PIERCING OF THE CORPORATE VEIL

A corporation will be looked upon as a legal entity as a general 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.
It is a fundamental principle of corporation law that a corporation is an entity separate
and distinct from its stockholders and from other corporations to which it may be
connected. But, this separate and distinct personality of a corporation is merely a fiction
created by law for convenience and to promote justice. So, when the notion of separate
juridical personality is used to defeat public convenience, justify wrong, protect fraud or
defend crime, or is used as a device to defeat the labor laws, this separate personality of
the corporation may be disregarded or the veil of corporate fiction pierced. (Pacific
Rehouse Corp. v. CA, GR No. 199687, 2014)

The piercing the veil of corporate entity is merely an equitable remedy. It requires the
court to see through the protective shroud which exempts its stockholders from liabilities
that ordinarily, they could be subject to, or distinguishes one corporation from a
seemingly separate one, were it not for the existing corporate fiction. (Traders Royal
Bank v. CA, G.R. No. 93397, 1997)

EFFECT OF PIERCING IF THE CORPORATE VEIL

1. The corporation will be treated merely as an association of persons, undertaking a

business and the liability will attach directly to the officers and stockholders.

2. Where there are two (2) corporations, they will be merged into one, the one being
merely regarded as the instrumentality, agency, conduit, or adjunct of the other.

GROUNDS FOR APPLICATION OF THE DOCTRINE

The veil of separate corporate personality may be lifted/pierced:

1. When the corporate fiction is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues;

2. Where a corporation is the mere alter ego or business conduit of a person; or,

3. 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. (Umali v. CA, G.R. No. 8956, 1990)

The Court has pierced the veil of corporate fiction when it was used:

1. To defraud the government of taxes due it;

2. To evade payment of civil liability;

3. By a corporation which is merely a conduit or alter ego of another corporation;

4. To evade compliance with contractual obligations;

5. To evade financial obligation to its employees;

6. To ward off a judgment credit;

7. To avoid inclusion of corporate assets as part of the estate of the decedent; and,

8. To cover up an otherwise blatant violation of the prohibition against forum shopping.

Only in these and similar instances may the veil be pierced and disregarded. (PNB v.
Andrada Electric and Engineering Co., G.R. No. 142936, 2002)

TEST OF DETERMINING APPLICABILITY OF THE DOCTRINE

1. When the liability belongs to the corporations but the plaintiff seeks to hold
the individual liable

Mere controlling interest is not enough. There must be a clear showing that the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud or
defend crime. (Koppel Phil v. Yatco, G.R. No. L-47673, 1946)

2. Where the liability is personal to the individual and he seeks to evade it by

hiding behind a corporate vehicle

The veil of corporate fiction must be pierced where the main purpose in forming the
corporation was to evade the incorporator’s subsidiary civil liability resulting from the
conviction of one of his employees. (Palacio v. Fely Transportation, G.R. No. L-15121,
1962)

3. The Instrumentality or Alter Ego Rule

Three-pronged test to determine application of the rule:

a. Instrumentality or Control Test:

Control - not mere stock control, but complete domination; not only of finances, but of
policy and business practice in respect to the transaction attacked, must have been such
that the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own;

b. Fraud Test:

Such control must have been used by the defendant to commit a fraud or a wrong to
perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an
unjust act in contravention of plaintiff ’s legal right; and,
c. Harm Test:

The said control and breach of duty must have proximately caused the injury or unjust
loss complained of. (PNB v. Andrada Electric & Engineering Co, G.R. No. 142936, 2002)

Note: The above elements must concur.

CIRCUMSTANCES WHICH DID NOT RESULT TO THE PIERCING OF THE

CORPORATE VEIL

1. A corporation owns Fifty (50%) of the capital stock of another corporation, or the
majority ownership of the stocks of a corporation is not per se a cause for piercing the
veil.
2. Two corporations have Common directors or same or single stockholder who has all or
nearly all of the capital stock of both corporations is not in itself sufficient ground to
disregard separate corporate entities.

3. There is a Substantial identity of the incorporators of the two (2) corporations does
not necessarily imply fraud and does not warrant piercing of the corporate veil.

CIRCUMSTANCES RENDERING A SUBSIDIARY AN INSTRUMENTALITY

1. the parent corporation owns all or most of the subsidiary’s capital stock;

2. the parent and subsidiary corporations have common directors or officers;

3. the parent corporation finances the subsidiary;

4. the parent corporation subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation;

5. the subsidiary has grossly inadequate capital;

6. the parent corporation pays the salaries and other expenses or losses of the
subsidiary;

7. the subsidiary has substantially no business except with the parent corporation or no
assets except those conveyed to or by the parent corporation;

8. in the papers of the parent corporation or in the statements of its officers, the
subsidiary is described as a department or division of the parent corporation or its
business or financial responsibility is referred to as the parent corporation’s own;

9. the parent corporation uses the property of the subsidiary as its own;

10. the directors or executives of the subsidiary do not act independently in the interest
of the subsidiary but take their orders from the parent corporation in the latter’s
interest; and,

11. the formal ledger requirements of the subsidiary are not observed. (PNB v. Ritratto
Group, G.R. No. 142616, 2001)

PIERCING THE VEIL OF CORPORATE FICTION ON THE BASIS OF EQUITY

Equity cases applying the piercing doctrine are what are termed the "dumping ground,"
where no fraud or alter ego circumstances can be culled by the Court to warrant
piercing.

The equity test can be applied when:

1. The corporate personality would be inconsistent with the business purpose of the legal
fiction;
2. The piercing the corporate fiction is necessary to achieve justice or equity for those
who deal in good faith with the corporation; or

3. The use of the separate juridical personality is used to confuse legitimate issues.

9. TRUST FUND DOCTRINE

The trust fund doctrine provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their
claims. (Ong v. Tiu, G.R. Nos.144476 and 144629, 08 Apr 2003)

In a sense, they have to be unimpaired for the protection of creditors. These cover the
entire consideration received for the issuance of no par value shares or the aggregate
amount for the par value shares issued by the corporation. (Divina, 2020)

Trust fund doctrine is not limited to the stockholders’ subscriptions. The scope of the
doctrine when the corporation is insolvent encompasses not only the capital stock, but
also other property and assets generally regarded in equity as a trust fund for the
payment of corporate debts. All assets and property belonging to the corporation held in
trust for the benefit of creditors that were distributed or in the possession of the
stockholders, regardless of full payment of their subscriptions, may be reached by the
creditor in satisfaction of its claim. (Halley v. Printwell, Inc., G.R.No. 157549, 30 May
2011)

Effects of the Trust Fund Doctrine

1. Dividends must never impair the subscribed capital stock; (NTC v. CA, G.R. No.
127937, 28 July 1999)

2. Subscription commitments cannot be condoned or remitted;

3.

General Rule: The corporation cannot buy its own shares using the subscribed capital as
the consideration therefor.

Exceptions

a. Redeemable shares may be acquired even without surplus profit for as long as it will
not result to the insolvency of the Corporation; (Republic Planters Bank v. Hon. Agana,
G.R. No. 51765, 03 March 1997)

b. In a close corporation, a stockholder may demand the payment of the fair value of
shares regardless of existence of retained earnings for as long as it will not result to the
insolvency of the corporation; (Sec. 104, RCC)

c. In case of a close corporation, if the directors or stockholders are so divided on the

management of the corporation’s business and affairs that the votes required for a
corporate action cannot be obtained, with the consequence that the business and affairs
of the corporation can no longer be conducted to the advantage of the stockholders
generally, the SEC, upon written petition by any stockholder, may require the purchase
at their fair value of shares of any stockholder, either by the corporation regardless of
the availability of unrestricted retained earnings in its books, or by the other
stockholders. (Sec. 103(d), RCC)

4. Rescission of a subscription agreement is not allowed since it will effectively result in

the unauthorized distribution of the capital assets and property of the corporation. (Ong
v. Tiu, G.R. No. 144476, 08 April 2003)

When negotiations ensued in the light of a planned takeover of a company and the
counsel of the buyer advised the stockholder through a letter that he may take the
machineries he brought to the corporation out with him for his own use and sale, the
previous stockholder cannot recover said machineries and equipment because these
properties remained part of the capital property of the corporation. Under the trust fund
doctrine, the capital stock, property, and other assets of a corporation are regarded as
equity in trust for the payment of corporate creditors which are preferred over the
stockholders in the distribution of corporate assets. (Yamamoto v. Nishino Leather
Industries, Inc., G.R. No. 150283, 16 April 2008)

When Creditor is Allowed to Maintain an Action Upon Unpaid Subscriptions

A corporate creditor cannot immediately invoke the trust fund doctrine to proceed
against unpaid subscriptions of stockholders of the debtor corporation except in these
two (2) instances when the creditor is allowed to maintain an action upon any unpaid
subscriptions based on the trust fund doctrine:

1. Where the debtor corporation released the subscriber to its capital stock from the
obligation of paying for their shares, in whole or in part, without a valuable
consideration, or fraudulently, to the prejudice of creditors; and

2. Where the debtor corporation is insolvent or has been dissolved without providing for
the payment of its creditors. (Enano-Bote v. Alvarez, G.R. No. 223572, 10 Nov. 2020, J.
Caguioa)