Corpo Law 2001 Reviewer 131 Pages

EDWIN PADILLO BAR 2013
CORPORATION LAW
INTRODUCTION
Definition and attributes of a 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 or incident to its existence. A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "a creature without any existence until it has received the imprimatur of the state acting according to law." A corporation will have no rights and privileges of a higher priority than that of its creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet Corporation) A corporation has four (4) attributes: (1) (2) (3) (4) It is an artificial being; Created by operation of law; With right of succession; Has the powers, attributes, and properties as expressly authorized by law or incident to its existence.
I. HISTORICAL BACKGROUND
1. Philippine Corporate Law:1 A-sort-of codification of American Corporate Law Under American sovereignty, attention was drawn to the fact that there was no entity in Spanish law exactly corresponding to the notion of a "corporation" in English and American law; the Philippine Commission enacted the Corporation Law (Act No. 1459), to introduce the American corporation into the Philippines as the standard commercial entity and to hasten the day when the sociedad annima of the Spanish law would be obsolete. The statute is a sort of codification of American Corporate Law. Harden v. Benguet Consolidated Mining, 58 Phil. 141 (1933). 2. The Corporation Law The first corporate statute, the Corporation Law, or Act No. 1459, became effective on 1 April 1906. It had various piece-meal amendments during its 74-year history. It rapidly became antiquated and not adapted to the changing times. 3. The Corporation Code Batas Pambansa Blg. 68 took effect on 1 May 1980. It adopted various corporate doctrines enunciated by the Supreme Court under the old Corporation Law; clarified the obligations of corporate directors and officers, expressed in statutory language established principles and doctrines; and provided for a chapter on close corporations. Corporation Code applies even to corporations organized under the old Corporation Law. xCastillo v. Balinghasay, 440 SCRA 442 (2004). 4. Proper Treatment of Philippine Corporate Law Philippine Corporate Law comes from the common law system of the United States. Although we have a Corporation Code that provides for statutory principles, Corporate Law is essentially, and continues to be, the product of commercial developments. Much of such developments can be expected to happen in the world of commerce, and some expressed jurisprudential rules that try to apply and adopt corporate principles into the changing concepts and mechanism of the commercial world.
II. CONCEPTS
1. Definition (Sec. 2; Articles 44(3), 45, 46, and 1775, Civil Code) A corporation is an artificial being created by operation of law. With a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may be related. PNB v. Andrada Electric & Engring Co. , 381 SCRA 244 (2002). Upon coming into existence, a corporation is invested by law with a personality separate and distinct from those persons comprising it as well as from any other legal entity to which it may be
1 The whole body of statutory and jurisprudential rules pertaining to corporations is referred to as "Corporate Law" to differentiate it from the old statute known as "The Corporation Law," or Act No. 1459. Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto. Includes ATTY DY AND VILLANUEVA OUTLINE ATENEO 2011
related. Construction & Dev. Corp. of the Phils. v. Cuenca, 466 SCRA 714 (2005); EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008). Corporation is a Creature of Limited Powers A corporation has no powers except for the powers which are expressly conferred on it by the Corporation Code found in its charter, and those that are implied by or are 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. The Members of the Tramo Wakas Neighborhood Association, Inc. , 442 SCRA 438 (2004).2 2. FOUR CORPORATE ATTRIBUTES BASED ON SECTION 2: (a) (b) (c) (d) A corporation is an artificial being (Ability to Contract and Transact) Created by operation of law (Creature of the Law) With right of succession (Strong Juridical Personality) Has the powers, attributes and properties expressly authorized by law or incident to its existence (Creature of Limited Powers)
3. TRI-LEVEL EXISTENCE OF THE CORPORATION (a) Aggregation of Assets and Resources (b) Business Enterprise or Economic Unit (c) Juridical Entity 4. RELATIONSHIPS INVOLVED IN A CORPORATE SETTING (a) JURIDICAL ENTITY LEVEL, which views the State-corporation relationship (b) INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a contractual relationship on four (4) levels: Between the corporation and its agents/representatives to act in the real world, such as its directors and officers, which is governed also by the Law on Agency Between the corporation and its shareholders or members Between the shareholders and the corporate directors, trustees and officers Between and among the shareholders in a common venture (c) EXTRA-CORPORATE LEVEL, which views the relationship between the corporation and third-parties or outsiders, essentially governed by Contract Law and Labor Law. 5. THEORIES ON THE FORMATION OF CORPORATION (a) Theory of Concession (Tayag v. Benguet Consolidated, 26 SCRA 242 [1968]). To organize a corporation that could claim a juridical personality of its own and transact business as such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose. cf. Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 (1962) 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 proced ure 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 separate juridical personality, even when it adopts sets of constitution and by-laws. Intl Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000). When the law vests in a government instrumentality corporate powers, the instrumentality does not become necessarily a corporation. Unless the government instrumentality is organized as a stock or nonstock corporation, it remains a government instrumentality exercising not only governmental but also corporate powers. Manila International Airport Authority v. Court of Appeals, 495 SCRA 591 (2006). Since all corporations, big or small, must abide by the provisions of the Corporation Code, then 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). (b) Theory of Enterprise Entity (BERLE, 47 COL. L. REV. 343 [1947])
A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no
2 De Liano v. Court of Appeals, 370 SCRA 349 (2001); Monfort Hermanos Agricultural Dev. Corp. v. Monfort III , 434 SCRA 27 (2004); United Paragon Mining Corp. v. Court of Appeals, 497 SCRA 638 (2006). Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto. Includes ATTY DY AND VILLANUEVA OUTLINE ATENEO 2011
constitutional immunities and perquisites appropriate to such a body. PSE v. Court of Appeals, 281 SCRA 232 (1997). Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not a shield for the commission of injustice and inequity, such as to avoid the execution of the property of a sister company. Tan Boon Bee & Co., Inc. v. Jarencio , 163 SCRA 205 (1988). 6. ADVANTAGES AND DISADVANTAGES OF CORPORATE FORM: (a) Four Advantageous Characteristics of Corporate Organization: (i) STRONG JURIDICAL PERSONALITY A corporation is an entity separate and distinct from its stockholders. While not in fact and in reality a person, the law treats the corporation as though it were a person by process of fiction or by regarding it as an artificial person distinct and sepa rate from its individual stockholders. Remo, Jr. v. IAC, 172 SCRA 405 (1989). The transfer of the corporate assets to the stockholder is not in the nature of a partition but is a conveyance from one party to another. Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962). Execution pending appeal maybe allowed when the prevailing party is already of advanced age and in danger of extinction, but not in this case where the winning party is a corporation. [A] juridical entitys existence cannot be likened to a natural personits precarious financial condition is not by itself a compelling circumstance warranting immediate execution and does not outweigh the long standing general policy of enforcing only final and executory judgment. Manacop v. Equitable PCIBank, 468 SCRA 256 (2005). (ii) CENTRALIZED MANAGEMENT As can be gleaned from Sec. 23 of Corporation Code It is the board of directors or trustees which exercises almost all the corporate powers in a corporation. Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003). The exercise of the corporate powers of the corporation rest in the Board of Directors save in those instances where the Corporation Code requires stockholders approval for certain specific acts. Great Asian Sales Center Corp. v. Court of Appeals, 381 SCRA 557 (2002). (iii) LIMITED LIABILITY TO INVESTORS AND OFFICERS The owners of a corporate organization are its stockholders and they are to be distinguished from its directors and officers. They cannot be charged in their capacities as stockholders of Bicol Gas, since in a corporation the management of its business is generally vested in its board of directors, not its stockholders. Stockholders are basically investors in a corporation. They do not have a hand in running the day-to-day business operations of the corporation unless they are at the same time directors or officers of the corporation. Before a stockholder may be held criminally liable for acts committed by the corporation, therefore, it must be shown that he had knowledge of the criminal act committed in the name of the corporation and that he took part in the same or gave his consent to its commission, whether by action or inaction. Espiritu v. Petron Corp., 605 SCRA 245 (2009). One of the advantages of the corporation is the limitation of an investors liability to the amount of investment, which flows from the legal theory that a corporate entity is separate and distinct from its stockholders. San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals , 296 SCRA 631 (1998). It is hornbook law that corporate personality is a shield against personal liability of its officersa corporate officer and his spouse cannot be made personally liable under a trust receipt where he entered into and signed the contract clearly in his official capacity. Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001). Obligations incurred by the corporation acting through its directors, officers and employees, are its sole liabilities. Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001). (iv) FREE TRANSFERABILITY OF UNITS OF OWNERSHIP FOR INVESTORS It is the inherent right of the stockholder to dispose of his shares of stock anytime he so desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001). Authority granted to corporations to regulate the transfer of its stock does not empower the corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998). (b) Disadvantages: (1) Abuse of corporate management
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto. Includes ATTY DY AND VILLANUEVA OUTLINE ATENEO 2011
EDWIN PADILLO BAR 2013 (2) Abuse of limited liability feature (3) High cost of maintenance (4) Double taxation
Dividends received by individuals from domestic corporations are subject to final 10% tax for income earned on or after 1 January 1998 (Sec. 24(B)(2), 1997 NIRC) Inter-corporate dividends between domestic corporations, however, are not subject to any income tax (Sec. 27(D)(4), 1997 NIRC) There is re-imposition of the 10% improperly accumulated earnings tax for holding companies (Sec. 29, 1997 NIRC) 7.
COMPARED WITH OTHER BUSINESS MEDIA

[Distribution of Risk, Profits and Control] (a) Sole Proprietorships A sole proprietorship is not vested with juridical personality to file or defend an action. xExcellent Quality Apparel, Inc. v. Win Multiple-Rich Builders, Inc., 578 SCRA 272 (2009). (b) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code) Can a Defective Attempt to Form a Forporation Result at Least in a Partnership? Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989); Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999). (c) Joint Ventures 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 duty, which may be altered by agreement to share both in profit and losses. Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994). (d) Cooperatives (Art. 3, R.A. No. 6938) Cooperatives are established to provide a strong social and economic organization to ensure that the tenant-farmers will enjoy on a lasting basis the benefits of agrarian reforms. Corpuz v. Grospe, 333 SCRA 425 (2000). (e) Business Trusts (Article 1442, Civil Code) (f) Sociedades Annimas A sociedad annima was considered a commercial partnership where upon the execution of the public instrument in which its articles of agreement appear, and the contribution of funds and personal property, becomes a juridical personan artificial being, invisible, intangible, and existing only in contemplation of lawwith power to hold, buy, and sell property, and to sue and be sued a corporationnot a general copartnership nor a limited copartnership . . . The inscribing of its articles of agreement in the commercial register was not necessary to make it a juridical person a corporation. Such inscription only operated to show that it partook of the form of a commercial corporation. Mead v. McCullough, 21 Phil. 95 (1911). The sociedades annimas were introduced in Philippine jurisdiction on 1 December 1888 with the extension to Philippine territorial application of Articles 151 to 159 of the Spanish Code of Commerce. Those articles contained the features of limited liability and centralized management granted to a juridical entity. But they were more similar to the English joint stock companies than the modern commercial corporations. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956). Our Corporation Law recognizes the difference between sociedades annimas and corporations and will not apply legal provisions pertaining to the latter to the former. Phil. Product Co. v. Primateria Societe Anonyme, 15 SCRA 301 (1965). (g) Cuentas En Participacion A cuentas en participacion is an accidental partnership constituted in a manner that its existence was only known to those who had an interest in the same, there being no mutual agreement between the partners, and without a corporate name indicating to the public in some way that there were other people besides the one who ostensibly managed and conducted the business, governed under Article 239 of the Code of Commerce. Those who contract with the person under whose name the business of such partnership of cuentas en participacion is conducted, shall have only a right of action against such person and not against the other persons interested, and the latter, on the other hand, shall have no right of action against third person who contracted with the manager unless such manager formally transfers his right to them. Bourns v. Carman, 7 Phil. 117 (1906).
III. NATURE AND ATTRIBUTES OF A CORPORATION

1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitution)
The Constitution explicitly prohibits the regulation by special laws of private corporations, except for government-owned or controlled corporations (GOCCs). Veterans Federation of the Philippines v. Reyes, 483 SCRA 526 (2006). Congress cannot enact a law creating a private corporation with a special charter, and it follows that Congress can create corporations with special charters only if such are GOCCs. Feliciano v. Commission on Audit, 419 SCRA 363 (2004). P.D. 1717 creating New Agrix, Inc. violates the Constitution which prohibits the formation of a private corporation by special legislative act which 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 stockholders of the insolvent Agrix upon proof of their claims against the abolished corporation. NDC v. Philippine Veterans Bank, 192 SCRA 257 (1990). 2. CORPORATION AS A PERSON: (a) Entitled to Due Process and Equal Protection The due process clause is universal in its application to all persons, and covers private corporations within the scope of the guaranty insofar as their property is concerned. Smith Bell & Co. v. Natividad, 40 Phil. 136, 144 (1920). (b) Unreasonable Searches and Seizure A corporation is protected by the constitutional guarantee against unreasonable searches and seizures, but its officers 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 because the corporation has a personality distinct and separate from those of said officers. Stonehill v. Diokno, 20 SCRA 383 (1967). A corporation is 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 for such body. Its property cannot be taken without compensation; can only be proceeded against by due process of law; and is protected against unlawful discrimination. Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823, 837 (1971), quoting from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652. (c) Not Entitled to Privilege Against Self incrimination It is elementary that the right against self -incrimination has no application to juridical persons. Bataan Shipyard & Engineering v. PCGG , 150 SCRA 181 (1987). 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 privilege. Hale v. Henkel, 201 U.S. 43 (1906); Wilson v. United States, 221 U.S. 361 (1911); United States v. White, 322 U.S. 694 (1944). 3. Practice of Profession 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 International Corp., 270 SCRA 298 (1997); Alfafara v. Acebedo Optical Company, 381 SCRA 293 (2002). COUNTER-REVOLUTION: Architectural professional corporations allowed under Rep. Act 9266. 4. Liability for Torts A corporation is civilly liable in the same manner as natural persons for torts, because the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial person. That a principal or master is liable for every tort which he expressly directs or authorizes, is just as true of a corporation as a natural person. PNB 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 law-imposed duty under the Labor Code to grant separation pay to employees in case of cessation of operations constitutes tort and its stockholder 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). While in theory a hospital as a juridical entity cannot practice medicine, in reality it utilizes doctors, surgeons and medical practitioners in the conduct of its business of facilitating medical and surgical treatment. Within that reality, three legal relationships crisscross: (1) between the hospital and the doctor practicing within its premises; (2) between the hospital and the patient being treated or examined within its premises; and (3) between the patient and the doctor. Regardless of its relationship with the doctor, the hospital may be held directly liable to the patient for its own negligence or failure to follow established standard of conduct to which it should conform as a corporation. Professional Services, Inc. v. Court of Appeals, 611 SCRA 282 (2010).
5. Corporate Criminal Liability (Articles 102 and 103, Revised Penal CodeWest Coast Life Ins. Co. v. Hurd, 27 Phil. 401 (1914); People v. Tan Boon Kong, 54 Phil. 607 [1930]; Sia v. Court of Appeals, 121 SCRA 655 [1983] The Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment on a corporation, hence, if the entrustee is a corporation, the law makes the officers or employees or other persons responsible for the offense liable to suffer the penalty of imprisonment. Ong v. Court of Appeals, 401 SCRA 6478 (2003). No criminal suit can lie against an accused who is a corporation. Times, Inc. v. Reyes, 39 SCRA 303 (1971). When a criminal statute forbids the corporation itself from doing an act, the prohibition extends to the board of directors, and to each director separately and individually. People v. Concepcion, 44 Phil. 129 (1922). The existence of the corporate entity does not shield from prosecution the corporate agent who knowingly and intentionally causes the corporation to commit the crime. The corporation obviously acts, and can act, only by and through its human agents, and it is their conduct which the law must deter. The employee or agent of a corporation engaged in unlawful business naturally aids and abets in the carrying on of such business and will be prosecuted as principal if, with knowledge of the business, its purpose and effect, he consciously contributes his efforts to its conduct and promotion [illegal recruitment in this case], however slight his contribution may be. The Executive Secretary v. Court of Appeals, 429 SCRA 81 (2004). If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other officers thereof responsible for the offense shall be charged and penalized for the crime, precisely because of the nature of the crime and the penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment. However, a corporation may be charged and prosecuted for a crime if the imposable penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined. Ching v. Secretary of Justice, 481 SCRA 602 (2006). When a criminal statute designates an act of a corporation or a crime and prescribes punishment therefor, it creates a criminal offense which, otherwise, would not exist and such can be committed only by the corporation. But when a penal statute does not expressly apply to corporations, it does not create an offense for which a corporation may be punished. On the other hand, if the statute, defines a crime that may be committed by a corporation but prescribes the penalty therefor to be suffered by the officers, directors, or employees of such corporation or other persons responsible for the offense, only such individuals will suffer such penalty. Corporate officers or employees, through whose act, default or omission the corporation commits a crime, are themselves individually guilty of the crime. Ching v. Secretary of Justice, 481 SCRA 602 (2006). BUT SEE Consolidated Bank v. Court of Appeals, 356 SCRA 671 (2003). While it is true that 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). Moreover, apart from its sweeping allegation that respondents misappropriated or converted its money placements, petitioner failed to establish the particular role or actual participation of each respondent in the criminal act. Neither was it shown that they assented to its commission. It is basic that only corporate officers shown to have participated in the alleged anomalous acts may be held criminally liable. Cruzvale, Inc. v. Eduque, 589 SCRA 534, 546 (2009). 6. Recovery of Moral and Other Damages A corporation, being an artificial person, cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis for moral damages under Art. 2217 of the Civil Code. However, a corporation may have a good reputation which, if besmirched, may be a ground for the award of moral damages . Mambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968); APT v. Court of Appeals, 300 SCRA 579 (1998). A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, emotions nor senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life all of which cannot be suffered by an artificial person. Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993); LBC Express, Inc. v. Court of Appeals, 236 SCRA 602 (1994); Acme Shoe, Rubber & Plastic Corp. v. Court of Appeals, 260 SCRA 714 (1996); Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997); NPC v. Philipp Brothers Oceanic, Inc., 369 SCRA 629 (2001); Flight Attendants and Stewards Association of the Philippines v. Philippine Airlines, 559 SCRA 252 (2008).
The statement in People v. Manero and Mambulao Lumber Co. v. PNB, that a corporation may recover moral damages if it has a good reputation that is debased, resulting in social humiliation is an obiter dictum. Recovery of a corporation would be under Articles 19, 20 and 21 of the Civil Code, but which requires a clear proof of malice or bad faith. ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999). Likewise, an educational corporations claim for moral damages a rising from libel falls under Article 2219(7) of the Civil Code, which expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation, and does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person can validly complain for libel or any other form of defamation and claim for moral damages. Filipinas Broadcasting Network v. Ago Medical and Educational Center, 448 SCRA 413 (2005). 7. CORPORATE NATIONALITY: UNDER WHOSE LAWS INCORPORATED (Sec. 123)
EXCEPTION: TEST OF CONTROLLING OWNERSHIP also applies in:

(a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Constitution; Roman Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the Register of Deeds of Davao, 102 Phil. 596 [1957]). (b) Ownership of Private Land Radstock, a foreign corporation with unknown owners whose nationalities are also unknown, is not qualified to own land in the Philippines. Since such foreign corporation is disqualified to own land in the Philippines, it is also disqualified to own the rights to ownership of lands in the Philippinesit is basic that an assignor or seller cannot assign or sell something he does not own at the time the ownership, or the rights to the ownership, are to be transferred to the assignee or buyer. The assignment by PNCC of the real properties to a nominee to be designated by Radstock is a circumvention of the constitutional prohibition against a private foreign corporation owning lands in the Philippines. Strategic Alliance Dev. Corp. v. Radstock Securities Ltd. , 607 SCRA 413 (2009) The registration of the donation of land to an unincorporated religious organization, whose trustees are foreigners, would violate constitutional prohibition and the refusal would not be in violation of the freedom of religion clause. The fact that the rel igious association has no capital stock does not suffice to escape the constitutional inhibition, since it is admitted that its members are of foreign nationality. . . and the spirit of the Constitution demands that in the absence of capital stock, the controlling membership should be composed of Filipino citizens. Register of Deeds of Rizal v. Ung Sui Si Temple , 97 Phil. 58 (1955). If the foreign shareholdings in a landholding corporation exceed 40%, it is not the foreign stockholders ownership of the shares which is adversely affected by the capacity of the corporation to own landthat is, the corporation becomes disqualified to own land. J.G. Summit Holdings, Inc. v. Court of Appeals, 450 SCRA 169 (2005). The prohibition in the Constitution applies only to ownership of land; it does not extend to immovable or real property as defined under Article 415 of the Civil Code. Otherwise, we would have a strange situation where the ownership of immovable property such as trees, plants and growing fruit attached to the land would be limited to Filipinos and Filipino corporations only. J.G. Summit Holdings, Inc. v. Court of Appeals, 450 SCRA 169 (2005). (b) Public Utilities (Sec. 11, Art. XII, Constitution; People v. Quasha, 93 Phil. 333) The primary franchise, that is, the right to exist as such, is vested in the individuals who compose the corporation and not in the corporation itself and cannot be conveyed in the absence of a legislative authority so to do. The special or secondary franchises are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such special or secondary franchises as are charged with a public use. J.R.S. Business Corp. v. Imperial Insurance, 11 SCRA 634 (1964). The Constitution requires a franchise for the operation of a public utility; however, it does not require a franchise before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the public. There is a clear distinction between operation of a public utility and the ownership of the facilities and equipment used to serve the public. Tatad v.Garcia, Jr., 243 SCRA 436 (1995). (c) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution) Sources: P.D. 36, amended by P.D.s 191 and 197; DOJ Opinion No. 120, s. of 1982; Sec. 2, P.D. 576; SEC Opinion, 24 March 1983; DOJ Opinion 163, s. 1973; SEC Opinion, 15 July 1991, XXV SEC QUARTERLY BULLETIN, (No. 4 - December, 1991), at p. 31. (i) Cable Industry: Cable TV operations shall be governed by E.O. No. 205, s. 1987. If CATV operators offer public telecommunications services, they shall be treated just like a public telecommunications entity. (NTC Memo Circular No. 8 -9-95)
Cable TV as a form of mass media which must, therefore, be owned and managed by Filipino citizens, or corporations, cooperatives or associations, wholly-owned and managed by Filipino citizens pursuant to the mandate of the Constitution. (DOJ Opinion No. 95, s. 1999, citing Allied Broadcasting, Inc. v. Federal Communications Commission, 435 F. 2d 70). (d) Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution) (e) War-Time Test (Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc. , 89 Phil. 54 [1951]; Davis Winship v. Philippine Trust Co., 90 Phil. 744 [1952]; Haw Pia v. China Banking Corp., 80 Phil. 604 [1948]). (f) Investment Test as to Philippine Nationals (Sec. 3(a) & (b), R.A. 7042, Foreign Investments Act of 1992) Under Sec. 3 of the FIA 91, a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines, is considered a Philippine National. Unchuan v. Lozada, 585 SCRA 421 (2009). (g) Grandfather Rule (Opinion of DOJ No. 18, s. 1989, 19 January 1989; SEC Opinion, 6 November 1989, XXIV SEC QUARTERLY BULLETIN (No. 1- March 1990); SEC Opinion, 14 December 1989, XXIV SEC QUARTERLY BULLETIN (No. 2 -June 1990) Up to what level do you apply the grandfather rule? Palting v. San Jose Petroleum Inc., 18 SCRA 924 (1966). (h) Special Classifications (Sec. 140)
IV.
SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION
MAIN DOCTRINE: A Corporation Has A Personality Separate and Distinct from its Stockholders or Members. Jardine Davies, Inc. v. JRB Realty, Inc. , 463 SCRA 555 (2005).
A.
1. Sources: Sec. 2; Article 44, Civil Code 2. Importance of Main Doctrine: 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. This separate and distinct personality is, however, merely a fiction created by law for conveyance and to promote the ends of justice. LBP v. Court of Appeals, 364 SCRA 375 (2001); Martinez v. Court of Appeals, 438 SCRA 139 (2004); Prudential Bank v. Alviar, 464 SCRA 353 (2005); EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008); Siain Enterprises, Inc v. Cupertino Realty Corp., 590 SCRA 435 (2009); A corporation is an artificial being vested by law with a personality distinct and separate from those of the persons composing it as well as from that of any other entity to which it may be related. The first consequence of the doctrine of legal entity of the separate personality of the corporation may not be made to answer for acts and liabilities of its stockholders or those of legal entities to which it may be connected or vice versa. General Credit Corp. v. Alsons Dev. and Investment Corp. , 513 SCRA 225 (2007); McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007); Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); Shrimp Specialists, Inc. v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009). 3. Applications: (a) Majority Equity Ownership and Interlocking Directorship: Ownership of a majority of capital stock and the fact that majority of directors of a corporation are the directors of another corporation creates no employer-employee relationship with the latter's employees. DBP v. NLRC, 186 SCRA 841 (1990). Also Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006); Union Bank of the Philippines v. Ong , 491 SCRA 581 (2006); Shrimp Specialists, Inc. v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009). Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Sunio v. NLRC , 127 SCRA 390 (1984); Asionics Philippines, Inc. v. NLRC, 290 SCRA 164 (1998); Francisco v. Mejia, 362 SCRA 738 (2001); Matutina Integrated Wood Products, Inc. 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 and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008); Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009).
A corporate defendant against whom a writ of possession has been issued, cannot use the fact that it has obtained controlling equities in the corporate plaintiffs to suspend enforcement of the writ, for their separate juridical personality, and thus their separate business and proprietary interests remain. Silverio, Jr. v. Filipino Business Consultants, Inc. , 466 SCRA 584 (2005). Mere substantial identity of incorporators of two corporations does not necessarily imply fraud, nor warrant the piercing of the veil of corporate fiction. In the absence of clear and convincing evidence to show that the 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). Having interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations. Velarde v. Lopez, 419 SCRA 422 (2004); Sesbreno v. Court of Appeals, 222 SCRA 466 (1993); G Holdings, Inc. v. National Mines and Allied Workers Union Local, 103 (NAMAWU) , 604 SCRA 73 (2010). (b) Being Corporate Officer: Being an officer or stockholder of a corporation does not by itself make ones property also that of the corporation, and vice-versa, for they are separate entities, and that shareholders who are officers are in no legal sense the owners of corporate property which is owned by the corporation as a distinct legal person. Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991); Bautista v. Auto Plus Traders, Inc. 561 SCRA 223 (2008); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010). The mere fact that one is president of the corporation does not render the property he owns the property of the corporation, since that president, as an individual, and the corporation are separate entities. Cruz v. Dalisay, 152 SCRA 487 (1987); Booc v. Bantuas, 354 SCRA 279 (2001). 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 liable under a trust receipt where he entered into and signed the contract clearly in his official capacity. Intestate Estate of Alexander T. Ty v. Court of Appeals, 356 SCRA 61 (2001); Consolidated Bank and Trust Corp. v. Court of Appeals , 356 SCRA 671 (2001). 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 the fact alone of 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). When the compulsory counterclaim filed against corporate officers for their alleged fraudulent act indicate that such corporate officers are indispensable parties in the litigation, the original inclusion of the corporation in the suit does not thereby allow the denial of a specific counter-claim being filed to make the corporate officers personally liable. A corporation has a legal personality entirely separate and distinct from that of its officers and cannot act for and on their behalf, without being so authorized. Lafarge Cement Phils., Inc. v. Continental Cement Corp. , 443 SCRA 522 (2004). (c) Dealings Between Corporation and Stockholders: The fact that the majority stockholder had used his own money to pay part of the loan of the corporation cannot be used as the basis to pierce. It is understandable that a shareholder would want to help his corporation and in the process, assure that his stakes in the said corporation are secured. LBP v. Court of Appeals, 364 SCRA 375 (2001). Use of a controlling stockholders initials in the corporate name is not sufficient reason to pierce the corporate veil, since by that practice alone does it mean that the said corporation is merely a dummy of the individual stockholder. A corporation may assume any name provided it is lawful, and there is nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its shareholders. LBP v. Court of Appeals, 364 SCRA 375 (2001). The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a collection case against the corporation, does not make such stockholder personally liable for the corporate debt, since the disposing stockholder has no personal obligation to the creditor, and it is the inherent right of the stockholder to dispose of his shares of stock anytime he so desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001). Just because two foreign companies came from the same country and closely worked together on certain projects would the conclusion arise that one was the conduit of the other, thus piercing the veil of corporate fiction. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001). 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). The property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporations board of
10
directors. Woodchild Holdings, Inc. v. Roxas Electric and Construction Company, Inc. , 436 SCRA 235 (2004). (d) On Privileges Enjoyed: The tax exemption clause in the charter of a corporation cannot be extended to nor enjoyed by even its controlling stockholders. Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895 (1936). (e) Obligations and Debts: Corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's debt or credit that of the corporation. Traders Royal Bank v. Court of Appeals, 177 SCRA 789 (1989). A corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its members in their individual capacity, even when the corporation is organized for the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347 (1976). Stockholders have no personality to intervene in a collection case covering the loans of the corporation since the interest of shareholders in corporate property is purely inchoate. Saw v. CA, 195 SCRA 740 (1991); and vice-versa Francisco Motors Corp. v. Court of Appeals, 309 SCRA 72 (1999). The majority stockholder cannot be held personality liable for the attorneys fees charged by a lawyer for representing the corporation. Laperal Dev. Corp. v. Court of Appeals, 223 SCRA 261 (1993). Even when the foreclosure on the corporate assets was wrongful done, stockholders have no standing to recover for themselves moral damages; otherwise, it would amount to the appropriation by, and the distribution to, such stockholders of part of the corporations assets before the dissolution of the corporation and the liquidation of its debts and liabilities. APT v. Court of Appeals, 300 SCRA 579 (1998). . SEPARATE JURIDICAL
PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION

A. MAIN DOCTRINE: A Corporation Has A Personality Separate and Distinct from its Stockholders or Members. Jardine Davies, Inc. v. JRB Realty, Inc. , 463 SCRA 555 (2005).
1. Sources: Sec. 2; Article 44, Civil Code 2. Importance of Main Doctrine: 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. This separate and distinct personality is, however, merely a fiction created by law for conveyance and to promote the ends of justice. LBP v. Court of Appeals, 364 SCRA 375 (2001); Martinez v. Court of Appeals, 438 SCRA 139 (2004); Prudential Bank v. Alviar, 464 SCRA 353 (2005); EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008); Siain Enterprises, Inc v. Cupertino Realty Corp., 590 SCRA 435 (2009); A corporation is an artificial being vested by law with a personality distinct and separate from those of the persons composing it as well as from that of any other entity to which it may be related. The first consequence of the doctrine of legal entity of the separate personality of the corporation may not be made to answer for acts and liabilities of its stockholders or those of legal entities to which it may be connected or vice versa. General Credit Corp. v. Alsons Dev. and Investment Corp. , 513 SCRA 225 (2007); McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007); Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); Shrimp Specialists, Inc. v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009). 3. Applications: (a) Majority Equity Ownership and Interlocking Directorship: Ownership of a majority of capital stock and the fact that majority of directors of a corporation are the directors of another corporation creates no employer-employee relationship with the latter's employees. DBP v. NLRC, 186 SCRA 841 (1990). Also Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006); Union Bank of the Philippines v. Ong , 491 SCRA 581 (2006); Shrimp Specialists, Inc. v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009). Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Sunio v. NLRC , 127 SCRA 390 (1984); Asionics Philippines, Inc. v. NLRC, 290 SCRA 164 (1998); Francisco v. Mejia, 362 SCRA 738 (2001); Matutina Integrated Wood Products, Inc. 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 and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008); Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009).
11
A corporate defendant against whom a writ of possession has been issued, cannot use the fact that it has obtained controlling equities in the corporate plaintiffs to suspend enforcement of the writ, for their separate juridical personality, and thus their separate business and proprietary interests remain. Silverio, Jr. v. Filipino Business Consultants, Inc. , 466 SCRA 584 (2005). Mere substantial identity of incorporators of two corporations does not necessarily imply fraud, nor warrant the piercing of the veil of corporate fiction. In the absence of clear and convincing evidence to show that the 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). Having interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations. Velarde v. Lopez, 419 SCRA 422 (2004); Sesbreno v. Court of Appeals, 222 SCRA 466 (1993); G Holdings, Inc. v. National Mines and Allied Workers Union Local, 103 (NAMAWU) , 604 SCRA 73 (2010). (b) Being Corporate Officer: Being an officer or stockholder of a corporation does not by itself make ones property also that of the corporation, and vice-versa, for they are separate entities, and that shareholders who are officers are in no legal sense the owners of corporate property which is owned by the corporation as a distinct legal person. Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991); Bautista v. Auto Plus Traders, Inc. 561 SCRA 223 (2008); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010). The mere fact that one is president of the corporation does not render the property he owns the property of the corporation, since that president, as an individual, and the corporation are separate entities. Cruz v. Dalisay, 152 SCRA 487 (1987); Booc v. Bantuas, 354 SCRA 279 (2001). 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 liable under a trust receipt where he entered into and signed the contract clearly in his official capacity. Intestate Estate of Alexander T. Ty v. Court of Appeals, 356 SCRA 61 (2001); Consolidated Bank and Trust Corp. v. Court of Appeals , 356 SCRA 671 (2001). 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 the fact alone of 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). When the compulsory counterclaim filed against corporate officers for their alleged fraudulent act indicate that such corporate officers are indispensable parties in the litigation, the original inclusion of the corporation in the suit does not thereby allow the denial of a specific counter-claim being filed to make the corporate officers personally liable. A corporation has a legal personality entirely separate and distinct from that of its officers and cannot act for and on their behalf, without being so authorized. Lafarge Cement Phils., Inc. v. Continental Cement Corp. , 443 SCRA 522 (2004). (c) Dealings Between Corporation and Stockholders: The fact that the majority stockholder had used his own money to pay part of the loan of the corporation cannot be used as the basis to pierce. It is understandable that a shareholder would want to help his corporation and in the process, assure that his stakes in the said corporation are secured. LBP v. Court of Appeals, 364 SCRA 375 (2001). Use of a controlling stockholders initials in the corporate name is not sufficient reason to pierce the corporate veil, since by that practice alone does it mean that the said corporation is merely a dummy of the individual stockholder. A corporation may assume any name provided it is lawful, and there is nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its shareholders. LBP v. Court of Appeals, 364 SCRA 375 (2001). The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a collection case against the corporation, does not make such stockholder personally liable for the corporate debt, since the disposing stockholder has no personal obligation to the creditor, and it is the inherent right of the stockholder to dispose of his shares of stock anytime he so desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001). Just because two foreign companies came from the same country and closely worked together on certain projects would the conclusion arise that one was the conduit of the other, thus piercing the veil of corporate fiction. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001). 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). The property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporations board of
12
directors. Woodchild Holdings, Inc. v. Roxas Electric and Construction Company, Inc. , 436 SCRA 235 (2004). (d) On Privileges Enjoyed: The tax exemption clause in the charter of a corporation cannot be extended to nor enjoyed by even its controlling stockholders. Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895 (1936). (e) Obligations and Debts: Corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's debt or credit that of the corporation. Traders Royal Bank v. Court of Appeals, 177 SCRA 789 (1989). A corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its members in their individual capacity, even when the corporation is organized for the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347 (1976). Stockholders have no personality to intervene in a collection case covering the loans of the corporation since the interest of shareholders in corporate property is purely inchoate. Saw v. CA, 195 SCRA 740 (1991); and vice-versa Francisco Motors Corp. v. Court of Appeals, 309 SCRA 72 (1999). The majority stockholder cannot be held personality liable for the attorneys fees charged by a lawyer for representing the corporation. Laperal Dev. Corp. v. Court of Appeals, 223 SCRA 261 (1993). Even when the foreclosure on the corporate assets was wrongful done, stockholders have no standing to recover for themselves moral damages; otherwise, it would amount to the appropriation by, and the distribution to, such stockholders of part of the corporations asse ts before the dissolution of the corporation and the liquidation of its debts and liabilities. APT v. Court of Appeals, 300 SCRA 579 (1998). The obligations of a stockholder in one corporation cannot be offset from the obligation of the stockholder 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). B.
PIERCING THE VEIL OF CORPORATE FICTION:

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 stockholders. Gochan v. Young, 354 SCRA 207 (2001); DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001); R & E Transport, Inc. v. Latag , 422 SCRA 698 (2004);.Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004); Martinez v. Court of Appeals, 438 SCRA 139 (2004); McLeod v. NLRC, 512 SCRA 222 (2007); Siain Enterprises, Inc v. Cupertino Realty Corp. , 590 SCRA 435 (2009). As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud and proof of it. For the separate juridical personality of a corporation to be disregarded, the wrong-doing must be clearly and convincingly established. It cannot be presumed. Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006).
1. Source of Incantation: U.S. v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 (1905).
2. Nature and Effect of the Doctrine Under the doctrine of piercing the veil of corporate fiction, the court looks at the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the group. Any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009). The rationale behind piercing a corporations identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar, instead of holding certain individuals or person responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been turned upside down because of its erroneous invocation. Francisco Motors Corp. v Court of Appeals, 309 SCRA 72 (1999). The notion of separate personality, however, may be disregarded under the doctrine piercing the veil of corporate fictionas in fact the court will often look at the corporation as a mere collection of
13
individuals or an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the group. Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997). Another formulation of this doctrine is that when two (2) business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entitled and treat them as identical or one and the same. General Credit Corp. v. Alsons Dev. and Investment Corp. , 513 SCRA 225 (2007). Piercing the veil of corporation fiction is warranted only in cases when the separate legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, such that in the case of two corporations, the law will regard the corporation as merged into one. Velarde v. Lopez, 419 SCRA 422 (2004). The legal fiction of separate corporate existence is not at all times invincible and the same may be pierced when employed as a means to perpetrate a fraud, confuse legitimate issues, or used as a vehicle to promote unfair objectives or to shield an otherwise blatant violation of the prohibition against forumshopping. While it is settled that the piercing of the corporate veil has to be done with caution, this corporate fiction may be disregarded when necessary in the interest of justice. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002). (a) Equitable Remedy: The doctrine of piercing the corporate veil is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001). Whether the separate personality of the corporation should be pierced hinges on the obtaining facts, appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. After all, the concept of corporate entity was not mean to promote unfair objectives. General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007). (b) 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. Court of Appeals, 189 SCRA 529 (1990). (c) 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. (?) Indophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697 (1992). But See: Where clear evidence presented support the fact that a corporations affiliates have received large amounts which became the consideration for the company 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, Inc v. Cupertino Realty Corp., 590 SCRA 435 (2009). 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 and Vidal , 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 attempt to make the security agencies appear as two separate entities, when in reality they were but one, was a devise to defeat the law [i.e., in this case to avoid liabilities under labor laws] and should not be permitted. Enriquez Security Services, Inc. v. Cabotaje, 496 SCRA 169 (2006); where, the fraud was committed by petitioners to the prejudice of respondent bank. Mendoza v. Banco Real Dev. Bank, 470 SCRA 86 (2005). (d) Basis Must Be Clear Evidence To disregard the separate juridical personality of a corporation, it is elementary that the wrongdoing cannot be presumed and must be clearly and convincingly established. The organization of the corporation at the time when the relationship between the landowner and the developer were still cordial cannot be used as a basis to hold the corporation liable later on for the obligations of the landowner to the developer under the mere allegation that the corporation is being used to evade the performance of obligation by one of its major stockholders. Luxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999). 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). To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed. In this case, 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.
14
Court of Appeals, 363 SCRA 307 (2001). Also McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007). The party seeking for the piercing of the corporate veil has the burden of presenting clear and convincing evidence to justify the setting aside of the separate corporate personality rule. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002). Application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous application. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002); Pantranco Employees Association (PEAPTGWO) v. NLRC, 581 SCRA 598 (2009). (e) Not Applicable to Theorizing: Piercing of the veil of corporate fiction is not allowed when it is resorted under a theory of coownership to justify continued use and possession by stockholders of corporate properties. BoyerRoxas v. Court of Appeals, 211 SCRA 470 (1992). The piercing doctrine cannot be availed of to dislodge from SECs jurisdiction a petition for suspension of payments filed under P.D. 902-A, on the ground that the petitioning individuals should be treated as the real petitioners to the exclusion of the pe titioning corporate debtor. The doctrine of piercing the veil of corporate fiction heavily relied upon by the petitioner is entirely misplaced, as said doctrine only 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 the veil of separate fiction of the subsidiary company to merge it with the holding company was not 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 has officially retired from the company and availed of her retirement benefit, but who continued to be employed as a consultant with affiliate companies, cannot employ the doctrine of piercing the veil of corporate fiction in order to treat her stint with the affiliate companies as part of her employment with the main company she retired from. The application of the doctrine of piercing the veil of corporate fiction comes into play only when such 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 legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, or conduit or adjunct of another corporation. Rivera v. United Laboratories, Inc., 586 SCRA 269 (2009). Where clear evidence presented support the fact that a corporations affiliates have received large amounts which became the consideration for the company 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, Inc v. Cupertino Realty Corp., 590 SCRA 435 (2009). (f) Applicable to Third-Parties: That respondents are not stockholders of the sister corporations does not make them non-parties to this case, since it is alleged that the sister 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 stockholders. Gochan v. Young, 354 SCRA 207 (2001). (g) Piercing is a power belonging to the court and cannot be assumed improvidently by a sheriff. Cruz v. Dalisay, 152 SCRA 482 (1987); D.R. CATC Services, Inc. v. Ramos, 477 SCRA 18 (2005). (h) Consequences Application of Piercing Doctrine: 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); Tantoco v. Kaisahan ng Mga Manggagawa sa La Campana, 106 Phil. 198 (1959); Francisco v. Mejia, 362 SCRA 738 (2001). 3. Classification of Piercing Cases: (a) Defeat of Public Convenience (Equity Piercing) : When the corporate fiction is resorted to as a means to avoid ones obligations; or when piercing the corporate fiction is necessary to achieve justice or equity. (b) Fraud Piercing: When corporate entity used to commit fraud or do a wrong (c) Alter-ego Piercing: When corporate entity merely a farce since the corporation is merely the alter ego, business conduit, or instrumentality of a person or another entity
15
Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law covers and isolates the corporation from any other legal entity to which it may be related, is allowed. These are: 1) defeat of public convenience, as when the 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), citing VILLANUEVA, COMMERCIAL LAW REVIEW (2004 ed), at p. 576; Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010). (i) Rundown on Piercing Application: This Court 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). (ii) Summary of Probative Factors: Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996); 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 Association (PEAPTGWO) v. NLRC, 581 SCRA 598 (2009). The absence of these elements prevents piercing the corporate veil. Lim v. Court of Appeals, 323 SCRA 102; Child Learning Center, Inc. v. Tagorio , 475 SCRA 236 (2005); General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007). 4. Defeat of Public Convenience (Equity Piercing): (a) Corporate Personality Cannot be Used to Defeat Public Convenience: (i) When used to confuse legitimate issues. Telephone Engineering and Service Co., Inc. V. WCC, 104 SCRA 354 (1981). (ii) When used to raise technicalities. Emilio Cano Ent. v. CIR, 13 SCRA 291 (1965). 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), it would be discarded and the two corporations would be merged as one. Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999). (b) Avoidance of Contractual Commitments or Civil Liabilities: One cannot evade civil liability by incorporating properties or the business. Palacio v. Fely Transportation Co., 5 SCRA 1011 (1962). Also Mendoza and Yotoko v. Banco Real Dev. Bank, 470 SCRA 86 (2005). When used to avoid a contractual commitment against non-competition. Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968). Where a debtor registers his residence to a family corporation in exchange of shares of stock and continues to live therein, then the separate juridical personality may be disregarded. PBCom v. CA, 195 SCRA 567 (1991). (c) Avoiding Legal Restrictions: The corporate veil cannot be used to shield an otherwise blatant violation of the prohibition against forum-shopping. Shareholders, whether suing as the majority in direct actions or as the minority in a derivative suit, cannot be allowed to trifle with court processes, particularly where the corporation itself has not been remiss in vigorously prosecuting or defending corporate causes and in using and applying remedies available to it. First Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996). (d) Thinly-Capitalized Corporations: McConnel v. CA, 1 SCRA 722 (1961). 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 fact that it had an authorized capital stock of only P500,000.00 and paid up capital of only P125,000.00) The deficient capitalization of ASBHI is evinced by its articles of incorporation, the treasurers affidavit executed by Nolasco, the audited financial statements of the corporation from 1998 and the general information sheets for 1998 and 1999, all of which petitioners attached to their respective affidavits. Moreover, respondents 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 latt ers 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).
16
(e) Parent-Subsidiary Relations; Affiliates: (Commissioner of Internal Revenue v. Norton and Harrison, 11 SCRA 704, [1954]; Tomas Lao Construction v. NLRC, 278 SCRA 716 [1997]). The fact that a corporation owns all of the stocks of another corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiarys 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. A corporation has a separate personality distinct from its stockholders and from other corporations to which it may be conducted. This separate and distinct personality of a corporation is a fiction created by law for convenience and to prevent injustice. Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007). However, mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stocks of a corporation is not by itself a sufficient ground to disregard the separate corporate personality. The substantial identity of the incorporators of two or more corporations does not warrantly imply that there was fraud so as to justify the piercing of the writ of corporate fiction. To disregard the said separate juridical personality of a corporation, the wrongdoing must be proven clearly and convincingly. Martinez v. Court of Appeals, 438 SCRA 130 (2004). (f) Avoidance or Minimization of Taxes: Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160 (1961); Liddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961). Use of nominees to constitute the corporation for the benefit of the controlling stockholder who sought to avoid payment of taxes. Marvel Building v. David, 9 Phil. 376 (1951). The plea to pierce the veil of corporate fiction on the allegation that the corporations true purpose is to avoid payment by the incorporating spouses of the estate taxes on the properties transferred to the corporations: With regard to their claim that [the companies] Ellice and Margo were meant to be used as mere tools for the avoidance of estate taxes, suffice it to say that the legal right of a taxpayer to reduce the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003). 5. Fraud Cases: When the legal fiction of the separate corporate personality is abused, such as when the same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate veil. Francisco v. Mejia, 362 SCRA 738 (2001). The general rule is that obligations incurred by a corporation, acting through its directors, officers or employees, are its sole liabilities. However, the veil with which the law covers and isolates the corporation from its directors, officers or employees will be lifted when the corporation is used by any of them as a cloak or cover for fraud or illegality or injustice. Here, the fraud was committed by petitioners to the prejudice of respondent bank. Mendoza v. Banco Real Dev. Bank, 470 SCRA 86 (2005). Fraud and bad faith on the part of certain corporate officers or stockholders may warrant the piercing of the veil of corporate fiction so that the said individual may not seek refuge therein, but may be held individually and personally liable for his or her actions. Lafarge Cement Phils., Inc. v. Continental Cement Corp., 443 SCRA 522 (2004). However, mere allegation of fraud or bad faith, without evidence supporting such claims cannot warrant the piercing of the corporate veil. DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001). (a) Acts by Controlling Shareholder: Where a stockholder, who has absolute control over the business and affairs of the corporation, entered into a contract with another corporation through fraud and false representations, such stockholder shall be liable solidarily with co-defendant corporation even when the contract sued upon was entered into on behalf of the corporation. Namarco v. Associated Finance Co., 19 SCRA 962 (1967). Where the corporation is used as a means to appropriate a property by fraud which property was later resold to the controlling stockholders, then piercing should be allowed. Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000). (b) Tax Evasion or Fraud: In a number of cases, the Court has shredded the veil of corporate identity and ruled that where a corporation is merely an adjunct, business conduit or alter ego of another corporation or when they practice fraud on internal revenue laws, the fiction of their separate and distinct corporate identities shall be disregarded, and both entities treated as one taxable person, subject to assessment for the same taxable transaction. Commissioner of Internal Revenue v. Menguito , 565 SCRA 461 (2008). (c) Guiding Principles in Fraud Cases: Why is there inordinate showing of alter-ego elements?
17
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; The 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 stockholders. Respondent corporations may be engaged in the same business or even share the same address, or have interlocking incorporators, directors or officers, in the absence of fraud or other public policy consideration, does not warrant piercing the veil of corporate fiction. McLeod v. NLRC, 512 SCRA 222 (2007), quoting from Indophil Textile Mill Workers Union v. Calica, 205 SCRA 697 (1992), and Del Rosario v. NLRC, 187 SCRA 777 (1990). 6. Alter-Ego Cases: (a) Factual Basis: The question of whether a corporation is a mere alter ego is a purely one of fact, and the burden is on the party who alleges it. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002). Also Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996); Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); MR Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002). (b) Using Corporation as Conduit or Alter Ego: Where the capital stock is owned by one person and it functions only for the benefit of such individual owner, the corporation and the individual should be deemed the same. Arnold v. Willets and Patterson, Ltd., 44 Phil. 634 (1923). When corporation is merely an adjunct, business conduit or alter ego of another corporation, the fiction of separate and distinct corporation entities should be disregarded. Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988). 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 of their rights. Francisco v. Mejia, 362 SCRA 738 (2001). The Court agrees with the disposition of the appellate court on the application of the piercing doctrine to the transaction subject of this case. Per the Courts count, the trial court enumerated no less than 20 documented circumstances and transaction, which taken as a package, indeed strongly supported the conclusion that respondent was but an adjunct, as instrumentality or business conduit of petitioner General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007). The fictive veil of corporate personality gives way to reality when the corporate personality is foisted to justify wrong, protect fraud, or defend crime, thwarting the ends of justice. The fiction even holds lesser sway for subsidiary corporations whose shares are wholly if not almost wholly owned by its parent company. The structural and systems overlap inherent in parent and subsidiary relations often render the subsidiary as mere local branch, agency or adjunct of the foreign parent. Thus, when the foreign parent company leased a large parcel of land purposely for the benefit of its subsidiary, which took over possession of the leased premises, the subsidiary was a mere alter ego of ESSO Eastern. Mariano v. Petron Corp., 610 SCRA 487 (2010). (c) Mixing-up Operations; Disrespect to the Corporate Entity: Employment of same workers; single place of business, etc., may indicate alter ego situation. La Campana Coffee Factory v. Kaisahan ng Manggagawa , 93 Phil. 160 (1953); Shoemart v. NLRC, 225 SCRA 311 (1993). The facts that two corporations may be sister companies, and that they may be sharing personnel and resources, without more, is insufficient to prove that their separate corporate personalities are being used to defeat public convenience, justify wrong, protect fraud, or defend crime. Padilla v. Court of Appeals, 370 SCRA 208 (2001). Where two business enterprises are owned, conducted, and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities and treat them as identical. Sibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992). Mixing of personal accounts with corporate bank deposit accounts. Ramirez Telephone Corp. v. Bank of America, 29 SCRA 191 (1969). (d) Parent-Subsidiary Relationship; Affiliated Companies: Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946); PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990). A subsidiary corporation has an independent and separate juridical personality, distinct from that of its parent company, hence, any claim or suit against the latter does not bind the former and vice-versa. Jardine Davies, Inc. v. JRB Realty, Inc. , 463 SCRA 555 (2005).
18
Absence of proof that control over a corporation is being used by a mother company to commit fraud or wrong, there would be no basis to disregard their separate juridical personalities. Ramoso v. Court of Appeals, 347 SCRA 463 (2000); Guatson Intl Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990). If used to perform legitimate functions, a subsidiarys separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective businesses. Even when the parent corporation agreed to the terms to support a standby credit agreement in favor of the subsidiary, does not mean that its personality has merged with that of the subsidiary. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002). (e) Guiding Principles in Alter-Ego Cases: Doctrine applies even in the absence of evil intent, because of the direct violation of a central corporate law principle of separating ownership from management; Doctrine in such cased is based on estoppel: if stockholders do not respect the separate entity, others cannot also be expected to be bound by the separate juridical entity; Piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced against the stockholders or officers of the corporation. (f) Distinction Between Fraud Piercing and Alter-ego Piercing: Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003). 7. Piercing Doctrine and the Due Process Clause (a) Need to bring a new case against the officer. McConnel v. Court of Appeals, 1 SCRA 723 (1961). A suit against individual shareholders in a corporation is not a suit against the corporation. 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 lower 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 the Supreme Court held 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); Violago v. BA Finance Corp., 559 SCRA 69 (2008). (b) When corporate officers are sued in their official capacity when the corporation was not made a party, the corporation is not denied due process. Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965). We suggest as much in Arcilla v. Court of Appeals, (215 SCRA 120 [1992]), an appellate proceedings involving petitioner Arcillas bid to avoid the adverse CA decision on argument that he is not personally liable for the amount adjudged since the same constitutes a corporate liability which nevertheless cannot be enforced against the corporation which has not been impleaded as a party below. Violago v. BA Finance Corp., 559 SCRA 69 (2008). (c) Provided that evidential basis has been adduced during trial to apply the piercing doctrine. Jacinto v. Court of Appeals, 198 SCRA 211 (1991); Arcilla v. Court of Appeals, 215 SCRA 120 (1992).
The obligations of a stockholder in one corporation cannot be offset from the obligation of the stockholder in a second corporation, since the corporation has a separate juridical personality. CKH Industrial and Dev. Corp v. Court of Appeals, 272 SCRA 333 (
CLASSIFICATION OF CORPORATIONS
V. CLASSIFICATIONS OF CORPORATIONS
1. In Relation to the State: (a) Public Corporation (Sec. 3, Act No. 1459). (b) Quasi-public Corporation. Marilao Water Consumers Associates v. IAC, 201 SCRA 437 (1991); (c) Private Corporation (Sec. 3, Act 1459). Governments majority shares does not make an entity a public corporation. National Coal Co., v. Collector of Internal Revenue, 46 Phil. 583 (1924).
19
A corporation is created by operation of law under the Corporation Code while a government corporation is normally created by special law referred to often as a charter. Bliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271 (1994). The test to determine whether a corporation is government owned or controlled, or private in nature is simple. Is it created by its own charter for the exercise of a public function, or by incorporation under the general corporation law? Those with special charters are government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are compulsory members of the GSIS. Camparedondo v. NLRC, 312 SCRA 47 (1999) While public benefit and public welfare may be attributable to the operation of the Bases Conversion and Development Authority (BCDA), yet it is certain that the functions it performs are basically proprietary in naturethe promotion of economic and social development of Central Luzon, particularly, and the countrys goal for enhancement. Therefore, the rule that prescri ption does not run against the State will not apply to BCDA, it being said that when title of the Republic has been divested, its grantees, although artificial bodies of its own creation, are in the same category as ordinary persons. Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001); Although Boy Scouts of the Philippines does not receive any monetary or financial subsidy from the Government, and its funds and assets are not considered government in nature and not subject to audit by the COA, the fact that it received a special charter from the government, that its governing board are appointed by the Government, and that its purpose are of public character, for they pertain to the educational, civic and social development of the youth which constitute a very substantial and important part of the nation, it is not a public corporation in the same sense that municipal corporation or local governments are public corporation since its does not govern a portion of the state, but it also does not have proprietary functions in the same sense that the functions or activities of governmentowned or controlled corporations, is may still be considered as such, or under the 1987 Administrative Code as an instrumentality of the Government, and it employees are subject to the Civil Service Law. Boy Scouts of the Philippines v. NLRC, 196 SCRA 176 (1991). But being a GOCC makes it liable for laws and provisions applicable to the Government or its entities and subject to the control of the Government. Cervantes v. Auditor General, 91 Phil. 359 (1952). A government-owned or controlled corporation must be organized as a stock or non-stock corporation. The MIAA is not a government-owned or controlled corporation because it is not constituted of capital divided into shares of stock, and neither is it a nonstock corporation because it has no members. MIAA is a government instrumentality vested with corporate powers to perform efficiently its government functions. Manila International Airport Authority v. Court of Appeals, 495 SCRA 591 (2006). Beyond cavil, a GOCC has a personality of its own, distinct and separate from that of the government, and the intervention in a transaction of the Office of the President through the Executive Secretary does not change the independent existence of a government entity as it deals with another government entity. PUP v. Court of Appeals, 368 SCRA 691 (2001). The doctrine that employees of GOCCs, whether created by special law or formed as subsidiaries under the general corporation law are governed by the Civil Service Law and not by the Labor Code, has been supplanted by the 1987 Constitution. The present doctrine in determining whether a GOCC is subject to the Civil Service Law is the manner of its creation, such that government corporations created by special charter are subject the Civil Service Law, while those incorporated under the general corporation law are governed by the Labor Code. PNOC-Energy Development Corp. v. NLRC, 201 SCRA 487 (1991); Davao City Water District v. Civil Service Commission, 201 SCRA 593 (1991). Section 31 of Corporation Code (Liability of Directors and Officers) is applicable to corporations which have been organized by special charters since Sec. 4 of Corporation Code renders the provisions supplementarily applicable to all corporations, including those with special or individual charters, such as cooperatives organized under P.D. 269, so long as those provisions are not inconsistent with such charters. Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992). Water districts can validly exists as corporate entities under PD 198, and provided they are government-owned or controlled, and their board of directors and other personnel are government employees subject to civil service laws and anti-graft laws. Feliciano v. Commission on Audit, 419 SCRA 363 (2004). 2. As to Place of Incorporation: (a) Domestic Corporation (b) Foreign Corporation (Sec. 123) 3. As to Purpose of Incorporation: (a) Municipal Corporation (b) Religious Corporation (Secs. 109 and 116) Since in matters purely ecclesiastical the decisions of the proper church tribunals are conclusive upon the civil tribunals, then a church member who is expelled from the membership by the church
20
authorities, or a priest or minister who is by them deprived of his sacred office, is without remedy in the civil courts. Long v. Basa, 366 SCRA 113 (2001). (c) Educational Corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232 ) (d) Charitable, Scientific or Vocational Corporations (e) Business Corporation 4. As to Number of Members: (a) Aggregate Corporation (b) Corporation Sole (Secs. 110 to 115; 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).3 5. As to Legal Status: (a) De Jure Corporation (b) De Facto Corporation (Sec. 20) (c) Corporation by Estoppel (Sec. 21) 6. As to Existence of Shares (Secs. 3 and 5): (a) Stock Corporation (b) Non-Stock Corporation
Stock v. Non-Stock Corporations

Stock Definition Corporations which have capital stock divided into shares and are authorized to distribute to the holders of shares dividends or allotments of the surplus profits on the basis of the shares (3) Non-Stock All other private corporations (3) One where no part of its income is distributable as dividends to its members, trustees or officers. (87)
Purpose
Primarily to make profits for its shareholders
May be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes like trade, industry, agricultural and like chambers, or any combination thereof. (88)
Distribution of Profits
Profit is distributed to shareholders
Whatever incidental profit made is not distributed among its members but is used for furtherance of its purpose. AOI or by-laws may provide for the distribution of its assets among its members upon its dissolution. Before then, no profit may be made by members. Members Each member, regardless of class, is entitled to one (1) vote UNLESS
Composition Scope of right to vote
Stockholders Each stockholder votes according to the proportion of
3 Overturning affirmed in Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984); Republic v. IAC, 168 SCRA 165 (1988). Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto. Includes ATTY DY AND VILLANUEVA OUTLINE ATENEO 2011
EDWIN PADILLO BAR 2013 his shares in the corporation. No shares may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, and as otherwise provided by the Code. (Sec. 6) Voting by proxy May be denied by the AOI or the by-laws. (Sec. 89) May be authorized by the bylaws, with the approval of and under the conditions prescribed by the SEC. (Sec. 89) Board of Directors or Trustees
21 such right to vote has been limited, broadened, or denied in the AOI or by-laws. (Sec. 89)
Cannot be denied. (Sec. 58)
Voting by mail
Not possible.
Who exercises Corporate Powers 23 Governing Board
Members of the corporation
Board of Directors or Trustees, consisting of 5-15 directors / trustees.
Board of Trustees, which may consist of more than 15 trustees unless otherwise provided by the AOI or by-laws. (Sec, 92) Board classified in such a way that the term of office of 1/3 of their number shall expire every year. Subsequent elections of trustees comprising 1/3 of the board shall be held annually, and trustees so elected shall have a term of 3 years. (Sec. 92) Officers may directly elected by the members UNLESS the AOI or bylaws provide otherwise. (Sec. 92)
Term of trustees
directors
or
Directors / trustees shall hold office for 1 year and until their successors are elected and qualified (Sec. 23).
Election of officers
Officers are elected by the Board of Directors (Sec. 25), except in close corporations where the stockholders themselves may elect the officers. (Sec. 97) Any place within the Philippines, if provided for by the by-laws (Sec. 93)
Place of meetings
Generally, the meetings must be held at the principal office of the corporation, if practicable. If not, then anyplace in the city or municipality where the principal office of the corporation is located. (Sec. 51) Generally non-transferable since membership and all rights arising therefrom are personal. However, the AOI or by-laws can provide otherwise. (Sec. 90) See Sec. 94.
Transferability of interest or membership
Transferable.
Distribution of assets in case of dissolution
CIR VS. CLUB FILIPINO (5 SCRA 321; 1962) FACTS: Club Filipino owns and operates a club house, a sports complex, and a bar restaurant, which is incident to the operation of the club and its golf course. The club is operated mainly with funds derived from membership fees and dues. The BIR seeks to tax the said restaurant as a business. HELD: The Club was organized to develop and cultivate sports of all class and denomination for the healthful recreation and entertainment of its stockholders and
22
members. There was in fact, no cash dividend distribution to its stockholders and whatever was derived on retail from its bar and restaurants used were to defray its overhead expenses and to improve its golf course. For a stock corporation to exist, 2 requisites must be complied with: (1) a capital stock divided into shares (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of shares held. In the case at bar, nowhere in the AOI or by-laws of Club Filipino could be found an authority for the distribution of its dividends or surplus profits.
FORMATION AND ORGANIZATION OF CORPORATION Requirements in the formation of a corporation

Who may form a corporation (See SEC. 10) INCORPORATORS Definition REQUIREMENTS stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof natural persons COMMENTS compare with Corporators which include all stockholders or members, whether incorporators or joining the corporation after its incorporation.
Characteristic
excludes corporations and partnerships may be more than 15 for nonstock corp. except educational corp. does not prevent the one-man (person) corporation wherein the other incorporators may have only nominal ownership of only one share of stock; not necessarily illegal
Number
not less than 5; not more than 15
Age Residence
of legal age majority should be residents of the Philippines residence a requirement; citizenship requirement only in certain areas such as public utilities, retail trade banks, investment houses, savings and loan associations, schools
VI. CORPORATE CONTRACT LAW

1. Pre-Incorporation Contracts (a) Who Are Promoters?
23
Promoter is a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. (Sec. 3.10, Securities Regulation Code [R.A. 8799]) (b) Nature of Pre-incorporation Agreements (Secs. 60 and 61; Bayla v. Silang Traffic Co., Inc., 73 Phil. 557 [1942]). (c) Theories on Liabilities for Promoter's Contracts: Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223 (1937); Rizal Light & Ice Co., Inc. v. Public Service Comm., 25 SCRA 285 (1968); Caram, Jr. v. CA, 151 SCRA 372 (1987). 2. De Facto Corporation (Sec. 20) (a) Elements: Arnold Hall v. Piccio, 86 Phil. 634 (1950). By its failure to submit its by-laws on time, the AIIBP may be considered a de facto corporation whose right to exercise corporate powers may not be inquired into collaterally in any private suit to which such corporations may be a party. Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005). 3. Corporation by Estoppel Doctrine (Sec. 21; Salvatierra v. Garlitos, 103 Phil. 757 [1958]; Albert v. University Publishing Co., 13 SCRA 84 [1965]; Asia Banking Corp. v. Standard Products, 46 Phil. 145 [1924]; Madrigal Shipping Co., v. Ogilvie, 55 O.G. No. 35, p. 7331) (a) Nature of Doctrine Founded on principles of equity and designed to prevent injustice and unfairness, the doctrine applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Where no third person is involved in the 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 into the contract with the plaintiff as such corporation for the transportation of its merchandise. Ohta Dev. Co. v. Steamship Pompey, 49 Phil. 117 (1926).4 A person who accepts employment in an unincorporated charitable association is estopped from alleging its lack of juridical personality. Christian Childrens Fund v. NLRC, 174 SCRA 681 (1989). One who deals with an unincorporated association which is not duly incorporated 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. Intl Express Travel v. Court of Appeals, 343 SCRA 674 (2000). Under the law on estoppel including that under Sec. 21 of Corporation Code, 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. Philippine Fishing Gear Industries, Inc. , 317 SCRA 728 (1999). (b) Two Levels: (i) With Fraud; and (ii) Without Fraud When the incorporators represent themselves to be officers of the corporation which was never duly registered with the SEC, and engage in the name of the purported corporation in illegal recruitment, they are estopped from claiming that they are not liable as corporate officers under Sec. 25 of Corporation Code 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); People v. Pineda, G.R. No. 117010, 18 April 1997 (unpub). 4. TRUST FUND DOCTRINE (a) Commercial/Common Law Premise: Equity versus Debts (Art. 2236, Civil Code) (b) Nature of Doctrine: Under the trust fund doctrine, the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Comm. of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999). The trust fund doctrine considers the subscribed capital stock as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital stock may be turned over or released to the stockholder (except in the redemption of the redeemable shares) without violating this principle. Thus dividends must never impair the subscribed capital stock; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the consideration therefore. NTC v. Court of Appeals, 311 SCRA 508 (1999).
4 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). Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto. Includes ATTY DY AND VILLANUEVA OUTLINE ATENEO 2011
24
The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the capital stock, property and other assets of a corporation are regarded as equtiy in trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void. Boman Environmental Dev. Corp. v. CA, 167 SCRA 540 (1988). (c) To Purchase Own Shares (Secs. 8, 41, 43 and 122, last paragraph; Phil. Trust Co. v. Rivera, 44 Phil. 469 [1923]; Steinberg v. Velasco, 52 Phil. 953 [1929]) (d) Rescission of Subscription Agreement Based on Breach The violation of terms embodied in a subscription agreement, with are personal commitments, do not constitute legal ground to rescind the subscription agreement since such would violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property under the Corporation Code. 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. Ong Yong v. Tiu, 401 SCRA 1 (2003). (e) Distribution of Corporate Assets The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire of the court a quo to prevent further squabbles and future litigations unless the indispensable conditions and procedures for the protection of the corporate creditors are followed. Otherwise, the corporate peace laudably hoped for by the court will remain nothing but a dream because this time, it will be the creditors turn to engage in squabbles and litigations should the court order an unlawful distribution in blatant disregard of the Trust Fund Doctrine. Ong Yong v. Tiu, 401 SCRA 1 (2003).
Steps in the formation of a corporation

Mutual Agreement to perform certain acts required for organizing a corporation
12345-
Organize and establish a corporation Comply with requirements of corporation code Contribute capital/resources Mode of use of capital/resource and control/management of capital/resource distribution/disposition of capital/resource (embodied in constitutive documents)
STEPS a. Promotional Stage (See SEC. 2. Definitions)
COMMENTS Promoter brings together persons who become interested in the enterprise aids in procuring subscriptions and sets in motion the machinery which leads to the formation of the corporation itself formulates the necessary initial business and financial plans and, if necessary, buys the rights and property which the business may need, with the understanding that the corporation when formed, shall take over the same.
25
b. Drafting articles of
incorporation (See SEC. 14)
(see chart below)
c. Filing of articles; payment of fees.
AOI & the treasurers affidavit duly signed & acknowledged must be filed w/ the SEC & the corresponding fees paid failure to file the AOI will prevent due incorporation of the proposed corporation & will not give rise to its juridical personality. It will not even be a de facto corp. Under present SEC rules, the AOI once filed , will be published in the SEC Weekly Bulletin at the expense of the corp. (SEC Circular # 4, 1982).
d. Examination of articles; approval or rejection by SEC.
Process: a) SEC shall examine them in order to determine whether they are in conformity w/ law. b) If not, the SEC must give the incorporators a reasonable time w/in w/c to correct or modify the objectionable portions. Grounds for rejection or disapproval of AOI: a) AOI /amendment not substantially in accordance w/ the form prescribed b) purpose/s are patently unconstitutional, illegal, immoral, or contrary to government rules & regulations; c) Treasurers Affidavit is false; d) required percentage of ownership has not been complied with (Sec. 17) e) corp.s establishment, organization or operation will not be consistent w/ the declared national economic policies (to be determined by the SEC, after consultation w/ BOI, NEDA or any appropriate government agency -- PD 902-A as amended by PD 1758, Sec. 6 (k)) Decisions of the SEC disapproving or rejecting AOI may be appealed to the CA by petition for review in accordance w/ the ROC.
e. Issuance of certificate of incorporation.
Certificate of Incorporation will be issued if: a) SEC is satisfied that all legal requirements have been complied with; and b) there are no reasons for rejecting or disapproving the AOI. It is only upon such issuance that the corporation acquires juridical personality. (See Sec. 19. Commencement of corporate existence) Should it be subsequently found that the incorporators were guilty of fraud in procuring the certificate of incorporation, the same may be revoked by the SEC, after proper notice & hearing.
b. Drafting articles of incorporation (See SEC. 14)

CONTENTS OF AOI COMMENTS
26
Corporate Name
Essential to its existence since it is through it that the corporation can sue and be sued and perform all legal acts A corporate name shall be disallowed by the SEC if the proposed name is either: (1) identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or patently deceptive, confusing or contrary to existing laws. (Sec. 18)
(2)
LYCEUM OF THE PHILS. VS. CA (219 SCRA 610) The policy underlying the prohibition against the registration of a corporate name which is identical or deceptively or confusingly similar to that of any existing corporation or which is patently deceptive or patently confusing or contrary to existing laws is: 1. the avoidance of fraud upon the public which would have occasion to deal with the entity concerned; 2. the prevention of evasion of legal obligations and duties, and 3. the reduction of difficulties of administration and supervision over corporations.
Purpose Clause
A corporation can only have one (1) primary purpose. However, it can have several secondary purposes. A corporation has only such powers as are expressly granted to it by law & by its articles of incorporation, those which may be incidental to such conferred powers , those reasonably necessary to accomplish its purposes & those which may be incident to its existence. Corporation may not be formed for the purpose of practicing a profession like law, medicine or accountancy
Principal Office
must be within the Philippines specify city or province street/number not necessary important in determining venue in an action by or against the corp., or on determining the province where a chattel mortgage of shares should be registered cannot specify term which is longer than 50 years at a time may be renewed for another 50 years, but not earlier than 5 years prior to the original or subsequent expiry date UNLESS there are justifiable reasons for an earlier extension. names, nationalities & residences of the incorporators; names, nationalities & residences of the directors or trustees who will act as such until the first regular directors or trustees are elected; treasurer who has been chosen by the pre-incorporation subscribers/members to receive on behalf of the corporation, all subscriptions /contributions paid by them. amount of its authorized capital stock in lawful money of the Philippines number of shares into which it is divided in case the shares are par value shares, the par value of each, names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription,
Term of Existence
Incorporators and Directors
Capital Stock
EDWIN PADILLO BAR 2013 and if some or all of the shares are without par value, such fact must be stated for a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each 25% of 25% rule to be certified by Treasurer paid up capital should not be less than P5,000 Classes of shares into w/c the shares of stock have been divided; preferences of & restrictions on any such class; and any denial or restriction of the pre-emptive right of stockholders should also be expressly stated in said articles. If the corporation is engaged in a wholly or partially nationalized business or activity, the AOI must contain a prohibition against a transfer of stock which would reduce the Filipino ownership of its stock to less than the required minimum.
27
Other matters
Any corporation may be incorporated as a close corporation, except: a) mining or oil companies; b) stock exchanges; c) banks; d) insurance companies; e) public utilities; f) educational institutions; & g) corporations declared to be vested w/ public interest
VII. ARTICLES OF INCORPORATION

1. Nature of Charter: The charter is in the nature of a contract between the corporation and the government. Government of P.I. v. Manila Railroad Co., 52 Phil. 699 (1929). The articles of incorporation has been described as one that defines the charter of the corporation and the contractual relationships between the state and the corporation, the stockholders and the State, and between the corporation and its stockholders. Lanuza v. Court of Appeals, 454 SCRA 54 (2005). 2. Procedure and Documentary Requirements (Sec. 14 and 15) (a) As to Number and Residency of Incorporators (Sec. 10) It is possible for a business to be wholly owned by one individual, and the validity of its incorporation is not affected when he gives nominal ownership of only 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 privy to the agreement. It does not bind the corporation which will consider all stockholders of record as the lawful owners of their registered shares. As between the corporation on the one hand, and its stockholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. Nautica Canny Corp. v. Yumul, 473 SCRA 415 (2005). (b) Corporate Name (Secs. 18, 14(1) and 42; Red Line Trans. v. Rural Transit, 60 Phil. 549). Parties organizing a corporation must choose a name at their peril; and the use of a name similar to 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 Dristo Jesus, 372 SCRA 171 (2001). 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: (1) identical, or (2) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or
EDWIN PADILLO BAR 2013 (3) patently deceptive, confusing or contrary to existing laws. Philips Export B.V. v. Court of Appeals, 206 SCRA 457, 463 (1992)
28
Section 18 of Corporation Code 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. The policy behind the foregoing prohibition 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); Lyceum of the Philippines v. Court of Appeals, 219 SCRA 610, 615 (1993). A corporation has no right to intervene in a suit using a name, not even its acronym, other than its registered name, as the law requires and not another name which it had not registered. Laureano Investment and Dev. Corp. v. Court of Appeals, 272 SCRA 253 (1997). There would be no denial of due process when a corporation is sued and judgment is rendered against it under its unregistered trade name, holding that [a] corporation may be sued under the name by which it makes itself known to its workers. Pison-Arceo Agricultural Dev. Corp. v. NLRC, 279 SCRA 312 (1997). 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. Philippine 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); P.C. Javier & Sons, Inc. v. Court of Appeals, 462 SCRA 36 (2005). (c) Purpose Clause (Secs. 14(2) and 42; Uy Siuliong v. Director of Commerce and Industry, 40 Phil. 541 [1919]) The best proof of the purpose of a corporation is its articles of incorporation and by -laws. The articles of incorporation must state the primary and secondary purposes of the corporation, while the by-laws outline the administrative organization of the corporation, which, in turn, is supposed to insure or facilitate the accomplishment of said purpose. Therefore, the Court brushed aside the contention that the corporations were organized to illegally avoid the provisions on land reform and to avoid the payment of estate taxes, as being prohibited collateral attack. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003). (d) Corporate Term (Sec. 11) No extension of term can be effected once dissolution stage has been reached, as it constitutes new business. Alhambra Cigar v. SEC, 24 SCRA 269 (1968). Article 605 of the Civil Code clearly limits any usufruct constituted in favor of a corpora tion or association to 50 years. A usufruct is meant only as a lifetime grant. Unlike a natural person, a corporation or associations lifetime may be extended indefinitely. The usufruct would then be perpetual. This is especially invidious in cases where the usufruct given to a corporation or association covers public land. NHA v. Court of Appeals, 456 SCRA 17 (2005). (e) Principal Place of Business (Sec. 51) Well established in our jurisprudence is the rule that the residence of a corporation is the place where its principal office is located, as stated in its Articles of Incorporation. . . . It now becomes apparent that the residence or domicile of a juridical person is fixed by the law creating or recognizing it. Under Section 14(3) of the Corporation Code, the place where the principal office of the corporation is to be located is one of the required contents of the articles of incorporation, which shall be filed with the Securities and Exchange Commission (SEC). Hyatt Elevators and Escalators Corp. v. Goldstar Elevators, Phils., Inc., 473 SCRA 705 (2005). Although the Rules of Court do not provide that when the plaintiff is a corporation, the complaint should be filed in the location of its principal office as indicated in its articles of incorporation, jurisprudence has, however, settled that the place where the principal office of a corporation is located, as stated in the articles, indeed establishes its residence. This ruling is important in determining the venue of an action by or against a corporation, as in the present case. Hyatt Elevators and Escalators Corp. v. Goldstar Elevators, Phils., Inc., 473 SCRA 705 (2005), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (1998), p. 162. Place of residence of the corporation is the place of its principal office. Clavecilla Radio System v. Antillon, 19 SCRA 379 (1967) The residence of its president is not the residence of the corporation because a corporation has a personality separate and distinct from that of its officers and stockholders. Sy v. Tyson Enterprises, Inc., 119 SCRA 367 (1982). (f) Minimum Capitalization (Sec. 12) - Why is maximum capitalization required to be indicated?
29
(g) Subscription and Paid-up Requirements (Sec. 13) The entries in the articles of incorporation of the original issuances of shares of stock has a stronger weight that the stock and transfer book in determining the validity and issuance of such shares. Lanuza v. Court of Appeals, 454 SCRA 54 (2005). (h) Steps and Documents Required in SEC 3. Grounds for Disapproval (Sec. 17) When the proposed articles show that the object is to organize a barrio into a separate corporation for the purpose of taking possession and having control of all municipal property within the incorporated barrio and administer it exclusively for the benefit of the residents, the object is unlawful and the articles can be denied registration. Asuncion v. De Yriarte, 28 Phil. 67 (1914). It is well to note that, if a corporations purpose, as stated in the articles of i ncorporation, is lawful, then the SEC has no authority to inquire whether the corporation has purposes other than those stated, and mandamus will lie to compel it to issue the certificate of incorporation. Gala v. Ellice AgroIndustrial Corp., 418 SCRA 431 (2003). 4. Amendments to the Articles of Incorporation (Sec. 16). 5. Commencement of Corporate Existence (Sec. 19).
De Facto Corporations: Requisites User of Corporate Powers

What is a de facto corporation? A de facto corporation is a defectively organized corporation, which has all the powers and liabilities of a de jure corporation and, except as to the State, has a juridical personality distinct and separate from its shareholders, provided that the following requisites are concurrently present: (1) That there is an apparently valid statute under which the corporation with its purposes may be formed; (2) That there has been colorable compliance with the legal requirements in good faith; and, (3) That there has been use of corporate powers, i.e., the transaction of business in some way as if it were a corporation. Can a corporation transact business as a de facto corporation while application is still pending with SEC? No. In the case of Hall v. Piccio (86 Phil. 603; 1950), where the supposed corporation transacted business as a corporation pending action by the SEC on its articles of incorporation, the Court held that there was no de facto corporation on the ground that the corporation cannot claim to be in good faith to be a corporation when it has not yet obtained its certificate of incorporation.
Formation under apparently valid statute.

MUNICIPALITY OF MALABANG V. BENITO (29 SCRA 533; 1969) WON a corporation organized under a statute subsequently declared void acquires status as de facto corporation. No. A corporation organized under a statute subsequently declared invalid cannot acquire the status of a de facto corporation unless there is some other statute under which the supposed corporation may be validly organized. Hence, in the case at bar, the mere fact that the municipality was organized before the statute had been invalidated cannot
30
conceivably make it a de facto corporation since there is no other valid statute to give color of authority to its creation.
Colorable compliance with the legal requirements in good faith.

BERGERON V. HOBBS (71 N.W. 1056, 65 Am. St. Rep. 85) The constitutive documents of the proposed corporation were deposited with the Register of Deeds but not on file in said office. One of the requirements for valid incorporation is the filing of constitutive documents in the Register of Deeds. Was there colorable compliance enough to give the supposed corporation at least the status of a de facto corporation? No. The filing of the constitutive documents in the Register of Deeds is a condition precedent to the right to act as a corporate body. As long as an act, required as a condition precedent, remains undone, no immunity from individual liability is secured.
HARRIL V. DAVIS (168 F. 187; 1909) The constitutive documents were filed with the clerk of the Court of Appeals but not with the clerk of court in the judicial district where the business was located. Arkansas law requires filing in both offices. Was there colorable compliance enough to give the supposed corporation at least the status of a de facto corporation? No. Neither the hope, the belief, nor the statement by parties that they are incorporated, nor the signing of the articles of incorporation which are not filed, where filing is requisite to create the corporation, nor the use of the pretended franchise of the nonexistent corporation, will constitute such a corporation de facto as will exempt those who actively and knowingly use s name to incur legal obligations from their individual liability to pay them. There could be no incorporation or color of it under the law until the articles were filed (requisites for valid incorporation).
HALL v. PICCIO (29 SCRA 533; 1969) In the case of Hall v. Piccio, where the supposed corporation transacted business as a corporation pending action by the SEC on its articles of incorporation, the Court held that there was no de facto corporation on the ground that the corporation cannot claim to be in good faith to be a corporation when it has not yet obtained its certificate of incorporation.
NOTE: The validity of incorporation cannot be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry must be through a quo warranto proceeding made by the Solicitor General. (Sec. 20)
CORPORATION BY ESTOPPEL (Sec. 21)

Distinguish a de facto corporation from a corporation by estoppel.
The de facto doctrine differs from the estoppel doctrine in that where all the requisites of a de facto corporation are present, then the defectively organized corporation will have the status of a de jure corporation in all cases brought by and against it, except only as to the State in a direct proceeding. On the other hand, if any of the requisites are absent, then the estoppel doctrine can apply only if under
EDWIN PADILLO BAR 2013 the circumstances of the particular case then before the court, either the defendant association is estopped from defending on the ground of lack of capacity to be sued, or the defendant third party had dealt with the plaintiff as a corporation and is deemed to have admitted its existence.
31
(De facto has status of de jure corpo, except separate personality against State, provided all requisites are present)
What are the effects of a Corporation by Estoppel in suits brought:

(1) against the Corporation? Considered a corporation in suits brought against it if it held itself out as such and denies capacity to be sued; (2) against third party? Third party cannot deny existence of corporation if it dealt with it as such.
EMPIRE vs. STUART (46 Mich. 482, 9 N.W. 527; 1881) Company was sued on a promissory note. Its defense was that at the time of its issuance, it was defectively organized and therefore could not be sued as such. The Corporation cannot repudiate the transaction or evade responsibility when sued thereon by setting up its own mistake affecting the original organization.
LOWELL-WOODWARD vs. WOODS (104 Kan. 729; 1919) Corporation sued a partnership on a promissory note. The latter as defense alleged that the plaintiff was not a corporation. One who enters into a contract with a party described therein as a corporation is precluded, in an action brought thereon by such party under the same designation, from denying its corporate existence.
ASIA BANKING VS STANDARD PRODUCTS (46 Phil. 145; 1924) The corporation sued another corporation a promissory note. The defense was that the plaintiff was not able to prove the corporate existence of both parties. The defendant is estopped from denying its own corporate existence. It is also estopped from denying the others corporate existence. The general rule is that in the absence of fraud, a person who has contracted or otherwise dealt with an association is such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped from denying its corporate existence. CRANSON VS IBM (234 MD. 477, 200 A. 2D 33 ; 1964) IBM sued Cranson in his personal capacity regarding a typewriter bought by him as President of a defectively organized company whose Articles were not yet filed when the obligation was contracted. IBM, having dealt with the defectively organized company as if it were properly organized and having relied on its credit instead of Cransons, is estopped from asserting that it was not incorporated. It cannot sue Cranson personally. SALVATIERRA VS GARLITOS (103 Phil. 757; 1958)
32
Salvatierra leased his land to the corporation. He filed a suit for accounting, rescission and damages against the corporation and its president for his share of the produce. Judgment against both was obtained. President complains for being held personally liable. He is liable. An agent who acts for a non-existent principal is himself the principal. In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk arising from the transaction. ALBERT VS UNIVERSITY PUBLISHING CO., INC. (Jan. 30, 1965) Mariano Albert entered into a contract with University Publishing Co., Inc. through Jose M. Aruego, its President, whereby University would pay plaintiff for the exclusive right to publish his revised Commentaries on the Revised Penal Code. The contract stipulated that failure to pay one installment would render the rest of the payments due. When University failed to pay the second installment, Albert sued for collection and won. However, upon execution, it was found that University was not registered with the SEC. Albert petitioned for a writ of execution against Jose M. Aruego as the real defendant. University opposed, on the ground that Aruego was not a party to the case. The Supreme Court found that Aruego represented a non-existent entity and induced not only Albert but the court to believe in such representation. Aruego, acting as representative of such non-existent principal, was the real party to the contract sued upon, and thus assumed such privileges and obligations and became personally liable for the contract entered into or for other acts performed as such agent. The Supreme Court likewise held that the doctrine of corporation by estoppel cannot be set up against Albert since it was Aruego who had induced him to act upon his (Aruego's) willful representation that University had been duly organized and was existing under the law.
BY-LAWS (Sec. 46 & 47)

When adopted: (a) No later than one (1) month after receipt from SEC of official notice of issuance of Cert. of incorporation. Requirement: Affirmative vote of stockholders representing at least majority of outstanding capital stock (Stock Corp.) or members (Non-Stock) Must be signed by stockholders or members voting for them
(b) Prior to incorporation

Requirement: Approval of all incorporators; must be signed by all of them
Where kept:
(1) In the principal office of the corporation ; and (2) Securities and Exchange Commission Only upon the SECs issuance of a certification that the by-laws are not inconsistent with the Corporation Code.
When effective:
Special corporations: By-laws and/or amendments thereto must be accompanied by a certificate of the appropriate government agency to the effect that such by-laws / amendments are in accordance with law. banks or banking institutions building and loan associations trust companies
EDWIN PADILLO BAR 2013 insurance companies public utilities educational institutions other special corporations governed by special laws
33
Contents of By-laws - Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1) the time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2) the time and manner of calling and conducting regular and special meetings of the stockholders or members; 3) the required quorum in meetings of stockholders or members and the manner of voting herein; 4) the form for proxies of stockholders and members and the manner of voting them; 5) the qualifications, duties and compensation of directors or trustees, officers and employees; 6) the time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof; 7) the manner of election or appointment and the term of office of all officers other than directors or trustees; 8) the penalties for violation of the by-laws; 9) in the case of stock corporations, the manner of issuing certificates; and 10) such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.
FLEISCHER V. BOTICA NOLASCO CO. (47 Phil. 583; 1925) As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objective of the corporation and are not contradictory to the general policy of the laws of the land. Under a statute authorizing by-laws for the transfer of stock, a corp. can do no more than prescribe a general mode of transfer on the corp. books and cannot justify an restriction upon the right of sale. GOVT. OF P.I. V. EL HOGAR Is a provision in the by-laws allowing the BOD, by vote of absolute majority, to cancel shares valid? No. It is a patent nullity, being in direct conflict with Sec. 187 of the Corp. Law which prohibits forced surrender of unmatured stocks except in case of dissolution. Is a provision in the by-laws fixing the salary of directors valid? Yes. Since the Corporation Law does not prescribe the rate of compensation, the power to fix compensation lies with the corporation. Is a provision requiring persons elected to the Board of Directors to own at least P 5,000 shares valid? Yes. The Corporation Law gives the corporation the power to provide qualifications of its directors. CITIBANK, N.A. v. CHUA (220 SCRA 75)
34
Where the SEC grants a license to a foreign corporation, it is deemed to have approved its foreign-enacted by-laws. Sec. 46 of the Corporation Code which states that by-laws are not valid without SEC approval applies only to domestic corporations. A board resolution appointing an attorney-in-fact to represent the corporation during pre-trial is not necessary where the by-laws authorize an officer of the corporation to make such appointment.
LOYOLA GRAND VILLAS v. CA (276 SCRA 681) ISSUE: Whether the failure of a corporation to file its by-laws within one (1) month from the date of its incorporation, as mandated by Art. 46 of the Corporation Code, results in the corporation's automatic dissolution. RULING: No. Failure to file by-laws does not result in the automatic dissolution of the corporation. It only constitutes a ground for such dissolution. (Cf. Chung Ka Bio v. IAC, 163 SCRA 534) Incorporators must be given the chance to explain their neglect or omission and remedy the same.
VIII. BY-LAWS
1. Nature and Functions: Gokongwei v. SEC, 89 SCRA 337 (1979); Pea v. Court of Appeals, 193 SCRA 717 (1991). By-laws has traditionally been defined as regulations, ordinances, rules or laws adopted by an association or corporation or the like for its internal governance, including rules for routine matters such as calling meetings and the like. If those key by-law 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 by-laws. Indeed in such an event, to insist on the submission of a separate document denominated as By-Laws would be an undue technicality, as well as a redundancy. San Miguel Corp. v. Mandaue Packing Products Plants Union-FFW, 467 SCRA 107 (2005). 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 or members and directors and officers with relation thereto and among themselves in their relation to it, by -laws are indispensable to corporations. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 (1997). (a) Common Law Limitations on By-Laws (i) By-Laws Cannot Be Contrary to Law and Charter A by-law provision granting to a stockholder permanent seat in the Board of Directors is contrary to the provision in Corporation Code requiring all members of the Board to be elected by the stockholders. Even when the members of the association may have formally adopted the provision, their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law. Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997). (ii) By-Law Provisions Cannot Be Unreasonable or Be Contrary to the Nature of By-laws. Government of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927). Authority granted to a corporation to regulate the transfer of its stock does not empower the corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998). By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restriction; they are always subject to the charter of the corporation. Rural Bank of Salinas, Inc. v. CA, 210 SCRA 510 (1992). (iii) By-Law provisions cannot discriminate (b) Binding Effects on By-laws:China Banking Corp. v. Court of Appeals, 270 SCRA 503
35
Neither can we concede that such contract would be invalid just because the signatory thereon was not the Chairman of the Board which allegedly violated the corporations by-laws. Since by-laws operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons who deal with the corporation, unless they have knowledge of the same. PMI Colleges v. NLRC, 277 SCRA 462 (1997).
2. Adoption Procedure (Sec. 46) There can be no automatic dissolution simply because the incorporators failed to file the required by-laws under Sec. 46 of Corporation Code. There is no outright demise of corporate existence. Proper notice and hearing are cardinal components of due process in any democratic institution, agency or society. In other words, the incorporators must be given the chance to explain their neglect or omission and remedy the same. Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 (1997). A corporation which has failed to file its by-laws within the prescribed period does not ipso facto lose its powers as such, and may be considered a de facto corporation whose right to exercise corporate powers may not be inquired into collaterally in any private suit to which such corporations may be a party. Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005). Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005). 3. Contents (Sec. 47) 4. Amendments and Revisions of By Laws (Sec. 48) Admittedly, the right to amend the by-laws lies solely in the discretion of the employer, this being in the exercise of management prerogative or business judgment. However this right, extensive as it may be, cannot impair the obligation of existing contracts or rights. . . If we were to rule otherwise, it would enable an employer to remove any employee from his employment by the simple expediency of amending its by-laws and providing that his/her position shall cease to exist upon the occurrence of a specified event. Salafranca v. Philamlife (Pamplona) Village Homeowners, 300 SCRA 469 (1998).
THE CORPORATE ENTITY The Theory of Corporate Entity

When does the corporations existence as a legal entity commence?
Upon issuance by the SEC of the certificate of incorporation (Sec. 19)
What rights does the corporation acquire?

The right to: 1) 2) 3) 4) sue and be sued; hold property in its own name; enter into contracts with third persons; & perform all other legal acts.
Since corporate property is owned by the corporation as a juridical person, the stockholders have no claim on it as owners, but have merely an expectancy or inchoate right to the same should any of it remain upon the dissolution of the corporation after all corporate creditors have been paid. Conversely, a corporation has no interest in the individual property of its stockholders, unless transferred to the corporation. Remember that the liability of the stockholders is limited to the amount of shares.
SAN JUAN STRUCTURAL & STEEL FABRICATORS v. CA (296 SCRA 631) A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporation's Board of Directors. In this case, the sale of a piece of land belonging to Motorich Corporation by the corporation treasurer (Gruenberg) was held to be invalid in the absence of evidence that said
36
corporate treasurer was authorized to enter into the contract of sale, or that the said contract was ratified by Motorich. Even though Gruenberg and her husband owned 99.866% of Motorich, her act could not bind the corporation since she was not the sole controlling stockholder. STOCKHOLDERS OF F. GUANZON V. REGISTER OF DEEDS (6 SCRA 373) 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. A share of stock only typifies an aliquot part of the corporation's property or the right to share in its proceeds to that extent when distributed according to law and equity, but its holder is not the owner of any part of the capital of the corporation. Nor is he entitled to the possession of any definite portion of its property or assets. The act of liquidation made by the stockholders of the corp of the latters assets is not and cannot be considered a partition of community property, but rather a transfer or conveyance of the title of its assets to the individual stockholders. Since the purpose of the liquidation, as well as the distribution of the assets, 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. It is, therefore, fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance. CARAM V. CA (151 SCRA 373; 1987) The case of the unpaid compensation for the preparation of the project study. The petitioners were not involved in the initial stages of the organization of the airline. They were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the strength of the project study, to invest in the proposed airline. There was no showing that the Airline was a fictitious corp and did not have a separate juridical personality to justify making the petitioners, as principal stockholders thereof, responsible for its obligations. As a bona fide corp, the Airline should alone be liable for its corporate acts as duly authorized by its officers and directors. Granting that the petitioners benefited from the services rendered, such is no justification to hold them personally liable therefor. Otherwise, all the other stockholders of the corporation, including those who came in late, and regardless of the amount of their shareholdings, would be equally and personally liable also with the petitioner for the claims of the private respondent. PALAY V. CLAVE (124 SCRA 640; 1983) The case of the reliance on a default provision of the contract granting automatic extrajudicial rescission. The court found no badges of fraud on the part of the president of the corporation. The BOD had literally and mistakenly relied on the default provision of the contract. As president and controlling stockholder of the corp, no sufficient proof exists on record that he used the corp to defraud private respondent. He cannot, therefore, be made personally liable because he appears to be the controlling stockholder. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. MAGSAYSAY V. LABRADOR (180 SCRA 266) The case of the assignment by Senator Magsaysay of a certain portion of his shareholdings in SUBIC granting his sisters the right to intervene in a case filed by the widow against SUBIC.
37
The words "an interest in the subject," to allow petitioners to intervene, mean a direct interest in the cause of action as pleaded, and which would put the intervenor in a legal position to litigate a fact alleged in the complaint, without the establishment of which plaintiff could not recover. Here, the interest, of petitioners, if it exists at all, is indirect, contingent, remote, conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations. While a share of stock represents a proportionate or aliquot interest in the property of the corp, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable and beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corp as a distinct legal person.
PIERCING THE CORPORATE VEIL

Q: What is the theory of corporate entity?
A: That a corporation has a personality distinct from its stockholders, and is not affected by the personal rights, obligations and transactions of the latter.
Q: When Can the Veil of Corporate Entity be Pierced?

A: The veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice, or for purposes that could not have been intended by law that created it or to defeat public convenience, justify wrong, protect fraud or defend crime or to perpetuate fraud or confuse legitimate issues or to circumvent the law or perpetuate deception or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders.
Q: What are the effects of disregarding the corporate veil?

(1) Stockholders would be personally liable for the acts and contracts of the corporation whose existence at least for the purpose of the particular situation involved is ignored. (2) Court is not denying corporate existence for all purposes but merely refuses to allow the corporation to use the corporate privilege for the particular purpose involved. B.
PIERCING THE VEIL OF CORPORATE FICTION:

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 stockholders. Gochan v. Young, 354 SCRA 207 (2001); DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001); R & E Transport, Inc. v. Latag , 422 SCRA 698 (2004);.Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004); Martinez v. Court of Appeals, 438 SCRA 139 (2004); McLeod v. NLRC, 512 SCRA 222 (2007); Siain Enterprises, Inc v. Cupertino Realty Corp. , 590 SCRA 435 (2009). As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud and proof of it. For the separate juridical personality of a corporation to be disregarded, the wrong-doing must be clearly and convincingly established. It cannot be presumed. Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006).
1. Source of Incantation: U.S. v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 (1905).
38
2. Nature and Effect of the Doctrine Under the doctrine of piercing the veil of corporate fiction, the court looks at the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the group. Any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009). The rationale behind piercing a corporations identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar, instead of holding certain individuals or person responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been turned upside down because of its erroneous invocation. Francisco Motors Corp. v Court of Appeals, 309 SCRA 72 (1999). The notion of separate personality, however, may be disregarded under the doctrine piercing the veil of corporate fictionas in fact the court will often look at the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the group. Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997). Another formulation of this doctrine is that when two (2) business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entitled and treat them as identical or one and the same. General Credit Corp. v. Alsons Dev. and Investment Corp. , 513 SCRA 225 (2007). Piercing the veil of corporation fiction is warranted only in cases when the separate legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, such that in the case of two corporations, the law will regard the corporation as merged into one. Velarde v. Lopez, 419 SCRA 422 (2004). The legal fiction of separate corporate existence is not at all times invincible and the same may be pierced when employed as a means to perpetrate a fraud, confuse legitimate issues, or used as a vehicle to promote unfair objectives or to shield an otherwise blatant violation of the prohibition against forumshopping. While it is settled that the piercing of the corporate veil has to be done with caution, this corporate fiction may be disregarded when necessary in the interest of justice. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002). (a) Equitable Remedy: The doctrine of piercing the corporate veil is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001). Whether the separate personality of the corporation should be pierced hinges on the obtaining facts, appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. After all, the concept of corporate entity was not mean to promote unfair objectives. General Credit Corp. v. Alsons Dev. and Investment Corp. , 513 SCRA 225 (2007). (b) 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. Court of Appeals, 189 SCRA 529 (1990). (c) 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. (?) Indophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697 (1992). But See: Where clear evidence presented support the fact that a corporations affiliates have received large amounts which became the consideration for the company 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, Inc v. Cupertino Realty Corp., 590 SCRA 435 (2009). 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 and Vidal , 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 attempt to make the security agencies appear as two separate entities, when in reality they were but one, was a devise to defeat the law [i.e., in this case to avoid liabilities under labor laws] and should not be permitted. Enriquez Security Services, Inc. v. Cabotaje, 496 SCRA 169 (2006); where, the fraud was committed by petitioners to the prejudice of respondent bank. Mendoza v. Banco Real Dev. Bank, 470 SCRA 86 (2005).
EDWIN PADILLO BAR 2013 (d) Basis Must Be Clear Evidence
39
To disregard the separate juridical personality of a corporation, it is elementary that the wrongdoing cannot be presumed and must be clearly and convincingly established. The organization of the corporation at the time when the relationship between the landowner and the developer were still cordial cannot be used as a basis to hold the corporation liable later on for the obligations of the landowner to the developer under the mere allegation that the corporation is being used to evade the performance of obligation by one of its major stockholders. Luxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999). 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). To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed. In this case, 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. Court of Appeals, 363 SCRA 307 (2001). Also McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007). The party seeking for the piercing of the corporate veil has the burden of presenting clear and convincing evidence to justify the setting aside of the separate corporate personality rule. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002). Application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous application. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002); Pantranco Employees Association (PEAPTGWO) v. NLRC, 581 SCRA 598 (2009). (e) Not Applicable to Theorizing: Piercing of the veil of corporate fiction is not allowed when it is resorted under a theory of coownership to justify continued use and possession by stockholders of corporate properties. BoyerRoxas v. Court of Appeals, 211 SCRA 470 (1992). The piercing doctrine cannot be availed of to dislodge from SECs jurisdiction a petition for suspension of payments filed under P.D. 902-A, on the ground that the petitioning individuals should be treated as the real petitioners to the exclusion of the pe titioning corporate debtor. The doctrine of piercing the veil of corporate fiction heavily relied upon by the petitioner is entirely misplaced, as said doctrine only 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 the veil of separate fiction of the subsidiary company to merge it with the holding company was not 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 has officially retired from the company and availed of her retirement benefit, but who continued to be employed as a consultant with affiliate companies, cannot employ the doctrine of piercing the veil of corporate fiction in order to treat her stint with the affiliate companies as part of her employment with the main company she retired from. The application of the doctrine of piercing the veil of corporate fiction comes into play only when such 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 legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, or conduit or adjunct of another corporation. Rivera v. United Laboratories, Inc., 586 SCRA 269 (2009). Where clear evidence presented support the fact that a corporations affiliates have received large amounts which became the consideration for the company 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, Inc v. Cupertino Realty Corp., 590 SCRA 435 (2009). (f) Applicable to Third-Parties: That respondents are not stockholders of the sister corporations does not make them non-parties to this case, since it is alleged that the sister 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 stockholders. Gochan v. Young, 354 SCRA 207 (2001).
40
(g) Piercing is a power belonging to the court and cannot be assumed improvidently by a sheriff. Cruz v. Dalisay, 152 SCRA 482 (1987); D.R. CATC Services, Inc. v. Ramos, 477 SCRA 18 (2005). (h) Consequences Application of Piercing Doctrine: 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); Tantoco v. Kaisahan ng Mga Manggagawa sa La Campana, 106 Phil. 198 (1959); Francisco v. Mejia, 362 SCRA 738 (2001). 3. Classification of Piercing Cases: (a) Defeat of Public Convenience (Equity Piercing) : When the corporate fiction is resorted to as a means to avoid ones obligations; or when piercing the corporate fiction is necessary to achieve justice or equity. (b) Fraud Piercing: When corporate entity used to commit fraud or do a wrong (c) Alter-ego Piercing: When corporate entity merely a farce since the corporation is merely the alter ego, business conduit, or instrumentality of a person or another entity Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law covers and isolates the corporation from any other legal entity to which it may be related, is allowed. These are: 1) defeat of public convenience, as when the 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), citing VILLANUEVA, COMMERCIAL LAW REVIEW (2004 ed), at p. 576; Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010). (i) Rundown on Piercing Application: This Court 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). (ii) Summary of Probative Factors: Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996); 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 Association (PEAPTGWO) v. NLRC, 581 SCRA 598 (2009). The absence of these elements prevents piercing the corporate veil. Lim v. Court of Appeals, 323 SCRA 102; Child Learning Center, Inc. v. Tagorio , 475 SCRA 236 (2005); General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007). 4. Defeat of Public Convenience (Equity Piercing): (a) Corporate Personality Cannot be Used to Defeat Public Convenience: (i) When used to confuse legitimate issues. Telephone Engineering and Service Co., Inc. V. WCC , 104 SCRA 354 (1981). (ii) When used to raise technicalities. Emilio Cano Ent. v. CIR, 13 SCRA 291 (1965). 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), it would be discarded and the two corporations would be merged as one. Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999). (b) Avoidance of Contractual Commitments or Civil Liabilities: One cannot evade civil liability by incorporating properties or the business. Palacio v. Fely Transportation Co., 5 SCRA 1011 (1962). Also Mendoza and Yotoko v. Banco Real Dev. Bank, 470 SCRA 86 (2005). When used to avoid a contractual commitment against non-competition. Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968). Where a debtor registers his residence to a family corporation in exchange of shares of stock and continues to live therein, then the separate juridical personality may be disregarded. PBCom v. CA, 195 SCRA 567 (1991). (c) Avoiding Legal Restrictions: The corporate veil cannot be used to shield an otherwise blatant violation of the prohibition against forum-shopping. Shareholders, whether suing as the majority in direct actions or as the minority in a
41
derivative suit, cannot be allowed to trifle with court processes, particularly where the corporation itself has not been remiss in vigorously prosecuting or defending corporate causes and in using and applying remedies available to it. First Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996). (d) Thinly-Capitalized Corporations: McConnel v. CA, 1 SCRA 722 (1961). 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 fact that it had an authorized capital stock of only P500,000.00 and paid up capital of only P125,000.00) The deficient capitalization of ASBHI is evinced by its articles of incorporation, the treasurers affidavit executed by Nolasco, the audited financial statements of the corporation from 1998 and the general information sheets for 1998 and 1999, all of which petitioners attached to their respective affidavits. Moreover, res pondents 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 latters 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). (e) Parent-Subsidiary Relations; Affiliates: (Commissioner of Internal Revenue v. Norton and Harrison, 11 SCRA 704, [1954]; Tomas Lao Construction v. NLRC, 278 SCRA 716 [1997]). The fact that a corporation owns all of the stocks of another corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiarys separate existence shall be respected, and the l iability of the parent corporation, as well as the subsidiary shall be confined to those arising in their respective business. A corporation has a separate personality distinct from its stockholders and from other corporations to which it may be conducted. This separate and distinct personality of a corporation is a fiction created by law for convenience and to prevent injustice. Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007). However, mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stocks of a corporation is not by itself a sufficient ground to disregard the separate corporate personality. The substantial identity of the incorporators of two or more corporations does not warrantly imply that there was fraud so as to justify the piercing of the writ of corporate fiction. To disregard the said separate juridical personality of a corporation, the wrongdoing must be proven clearly and convincingly. Martinez v. Court of Appeals, 438 SCRA 130 (2004). (f) Avoidance or Minimization of Taxes: Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160 (1961); Liddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961). Use of nominees to constitute the corporation for the benefit of the controlling stockholder who sought to avoid payment of taxes. Marvel Building v. David, 9 Phil. 376 (1951). The plea to pierce the veil of corporate fiction on the allegation that the corporations true purpose is to avoid payment by the incorporating spouses of the estate taxes on the properties transferred to the corporations: With regard to their claim that [the companies] Ellice and Margo were meant to be used as mere tools for the avoidance of estate taxes, suffice it to say that the legal right of a taxpayer to reduce the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003). 5. Fraud Cases: When the legal fiction of the separate corporate personality is abused, such as when the same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate veil. Francisco v. Mejia, 362 SCRA 738 (2001). The general rule is that obligations incurred by a corporation, acting through its directors, officers or employees, are its sole liabilities. However, the veil with which the law covers and isolates the corporation from its directors, officers or employees will be lifted when the corporation is used by any of them as a cloak or cover for fraud or illegality or injustice. Here, the fraud was committed by petitioners to the prejudice of respondent bank. Mendoza v. Banco Real Dev. Bank, 470 SCRA 86 (2005). Fraud and bad faith on the part of certain corporate officers or stockholders may warrant the piercing of the veil of corporate fiction so that the said individual may not seek refuge therein, but may be held individually and personally liable for his or her actions. Lafarge Cement Phils., Inc. v. Continental Cement Corp., 443 SCRA 522 (2004). However, mere allegation of fraud or bad faith, without evidence supporting such claims cannot warrant the piercing of the corporate veil. DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001). (a) Acts by Controlling Shareholder: Where a stockholder, who has absolute control over the business and affairs of the corporation, entered into a contract with another corporation through fraud and false representations, such stockholder shall be liable solidarily with co-defendant corporation even when the contract sued upon
42
was entered into on behalf of the corporation. Namarco v. Associated Finance Co., 19 SCRA 962 (1967). Where the corporation is used as a means to appropriate a property by fraud which property was later resold to the controlling stockholders, then piercing should be allowed. Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000). (b) Tax Evasion or Fraud: In a number of cases, the Court has shredded the veil of corporate identity and ruled that where a corporation is merely an adjunct, business conduit or alter ego of another corporation or when they practice fraud on internal revenue laws, the fiction of their separate and distinct corporate identities shall be disregarded, and both entities treated as one taxable person, subject to assessment for the same taxable transaction. Commissioner of Internal Revenue v. Menguito , 565 SCRA 461 (2008). (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; The 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 stockholders. Respondent corporations may be engaged in the same business or even share the same address, or have interlocking incorporators, directors or officers, in the absence of fraud or other public policy consideration, does not warrant piercing the veil of corporate fiction. McLeod v. NLRC, 512 SCRA 222 (2007), quoting from Indophil Textile Mill Workers Union v. Calica, 205 SCRA 697 (1992), and Del Rosario v. NLRC, 187 SCRA 777 (1990). 6. Alter-Ego Cases: (a) Factual Basis: The question of whether a corporation is a mere alter ego is a purely one of fact, and the burden is on the party who alleges it. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002). Also Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996); Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); MR Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002). (b) Using Corporation as Conduit or Alter Ego: Where the capital stock is owned by one person and it functions only for the benefit of such individual owner, the corporation and the individual should be deemed the same. Arnold v. Willets and Patterson, Ltd., 44 Phil. 634 (1923). When corporation is merely an adjunct, business conduit or alter ego of another corporation, the fiction of separate and distinct corporation entities should be disregarded. Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988). 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 of their rights. Francisco v. Mejia, 362 SCRA 738 (2001). The Court agrees with the disposition of the appellate court on the application of the piercing doctrine to the transaction subject of this case. Per the Courts count, the trial court enumerated no less than 20 documented circumstances and transaction, which taken as a package, indeed strongly supported the conclusion that respondent was but an adjunct, as instrumentality or business conduit of petitioner General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007). The fictive veil of corporate personality gives way to reality when the corporate personality is foisted to justify wrong, protect fraud, or defend crime, thwarting the ends of justice. The fiction even holds lesser sway for subsidiary corporations whose shares are wholly if not almost wholly owned by its parent company. The structural and systems overlap inherent in parent and subsidiary relations often render the subsidiary as mere local branch, agency or adjunct of the foreign parent. Thus, when the foreign parent company leased a large parcel of land purposely for the benefit of its subsidiary, which took over possession of the leased premises, the subsidiary was a mere alter ego of ESSO Eastern. Mariano v. Petron Corp., 610 SCRA 487 (2010). (c) Mixing-up Operations; Disrespect to the Corporate Entity: Employment of same workers; single place of business, etc., may indicate alter ego situation. La Campana Coffee Factory v. Kaisahan ng Manggagawa , 93 Phil. 160 (1953); Shoemart v. NLRC, 225 SCRA 311 (1993). The facts that two corporations may be sister companies, and that they may be sharing personnel and resources, without more, is insufficient to prove that their separate corporate personalities are being
43
used to defeat public convenience, justify wrong, protect fraud, or defend crime. Padilla v. Court of Appeals, 370 SCRA 208 (2001). Where two business enterprises are owned, conducted, and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities and treat them as identical. Sibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992). Mixing of personal accounts with corporate bank deposit accounts. Ramirez Telephone Corp. v. Bank of America, 29 SCRA 191 (1969). (d) Parent-Subsidiary Relationship; Affiliated Companies: Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946); PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990). A subsidiary corporation has an independent and separate juridical personality, distinct from that of its parent company, hence, any claim or suit against the latter does not bind the former and vice-versa. Jardine Davies, Inc. v. JRB Realty, Inc. , 463 SCRA 555 (2005). Absence of proof that control over a corporation is being used by a mother company to commit fraud or wrong, there would be no basis to disregard their separate juridical personalities. Ramoso v. Court of Appeals, 347 SCRA 463 (2000); Guatson Intl Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990). If used to perform legitimate functions, a subsidiarys separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective businesses. Even when the parent corporation agreed to the terms to support a standby credit agreement in favor of the subsidiary, does not mean that its personality has merged with that of the subsidiary. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002). (e) Guiding Principles in Alter-Ego Cases: Doctrine applies even in the absence of evil intent, because of the direct violation of a central corporate law principle of separating ownership from management; Doctrine in such cased is based on estoppel: if stockholders do not respect the separate entity, others cannot also be expected to be bound by the separate juridical entity; Piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced against the stockholders or officers of the corporation. (f) Distinction Between Fraud Piercing and Alter-ego Piercing: Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003). 7. Piercing Doctrine and the Due Process Clause (a) Need to bring a new case against the officer. McConnel v. Court of Appeals, 1 SCRA 723 (1961). A suit against individual shareholders in a corporation is not a suit against the corporation. 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 lower 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 the Supreme Court held 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); Violago v. BA Finance Corp., 559 SCRA 69 (2008). (b) When corporate officers are sued in their official capacity when the corporation was not made a party, the corporation is not denied due process. Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965). We suggest as much in Arcilla v. Court of Appeals, (215 SCRA 120 [1992]), an appellate proceedings involving petitioner Arcillas bid to avoid the adverse CA decision on argument that he is not personally liable for the amount adjudged since the same constitutes a corporate liability which nevertheless cannot be enforced against the corporation which has not been impleaded as a party below. Violago v. BA Finance Corp., 559 SCRA 69 (2008). (c) Provided that evidential basis has been adduced during trial to apply the piercing doctrine. Jacinto v. Court of Appeals, 198 SCRA 211 (1991); Arcilla v. Court of Appeals, 215 SCRA 120 (1992).
Contrary to law / public policy; evasion of liability to government

EDWIN PADILLO BAR 2013 STATE V. STANDARD OIL (49 Ohio, St., 137, N.E. 279, 15; 1892)
44
Where all or a majority of stockholders comprising a corporation do an act which is designed to affect the property and business of the company, as if it had been a formal resolution of its Board of Directors and the acts done is ultra vires, the act should be regarded as the act of the corporation, and may be challenged by the state in a quo warrranto proceeding.
LAGUNA TRANS V. SSS (107 Phil. 833; 1960) Where the corporation was formed by and consisted of the members of a partnership whose business and property was conveyed to the corporation for the purpose of continuing its business, such corporation is presumed to have assumed partnership debts.
MARVEL BLDG. CORP. V. DAVID (94 Phil. 376; 1954) The fact that: certificates in possession of Castro were endorsed in blank; Castro had enormous profits and had motive to hide them; other subscribers had no incomes of sufficient magnitude; and directors never met;
shows that other shareholders may be considered dummies of Castro. Hence, corporate veil may be pierced.
Evasion of liability to creditors TAN BOON BEE CO. V. JARENCIO (163 SCRA 205; 1988) Tan BBC (T) supplies paper to Graphics Publishing Inc (G) but the latter fails to pay. G's printing machine levied upon to satisfy claim but PADCO, another corpo intercedes, saying it is the owner of the machine, having leased such to G. Printing machine was allowed by the Court to satisfy G's liability. Both G and PADCO's corporate entities pierced because they have: the same board of directors, PADCO owns 50% of G, PADCO never engaged in the business of printing. Obviously, the board is using PADCO to shield G from fulfilling liability to T. NAMARCO v. AFCorp (19 SCRA 962; 1967) Associated Financing Corp. (AFC), through its pres. F. Sycip (who together with wife, own 76% of AFC) contracts with NAMARCO for an exchange of sugar (raw v. refined). N delivers, AFC doesn't since it did not have sugar to supply in the first place. N sues to recover sum of money plus damages. Sycip held jointly and severally liable with AFC. AFC's corporate veil was pierced because it was used as Sycip's alter ego, corpo used merely as an instrumentality, agency or conduit of another to evade liability. JACINTO V. CA (198 SCRA 211) Jacinto, president/GM and owner of 52% of corpo, owes MetroBank sum of money, signs trust receipts therefor. Jacinto absconds. Jacinto ordered to jointly and severally pay MetroBank. Corpo veil pierced because it was used as a shield to perpetuate fraud and/or confuse legitimate issues. There was no clear cut delimitation between the personality of Jacinto and the corporation.
Evasion of liability / obligation to employees CLAPAROLS V. CIR (65 SCRA 613; 1975) Both predecessor and successor were owned and controlled by petitioner and there was no break in the succession and continuity of the same business. All the assets of the dissolved Plant
45
were turned over to the emerging corporation. The veil of corporate fiction must be pierced as it was deliberately and maliciously designed to evade its financial obligation to its employees.
INDOPHIL TEXTILE MILL WORKERS UNION V. CALICA (205 SCRA 698) Rule: The doctrine of piercing the veil of corporate entity applies when 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 or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. Case at bar: Union sought to pierce corporate veil alleging that the creation of Acrylic is a devise to evade the application of the CBA Indophil had with them (or it sought to include the other union in its bargaining leverage). SC: Legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. Union does not seek to impose such claim against Acrylic. Mere fact that businesses were related, that some of the employees of Indophil are the same persons manning and providing for auxiliary services to the other company, and that physical plants, officers and facilities are situated in the same compound - not sufficient to apply doctrine. NAFLU V. OPLE (143 SCRA 125; 1986) Libra/Dolphin Garments was but an alter ego of Lawman Industrial, therefore, the former must bear the consequences of the latter's unfair acts. It cannot deny reinstatement of petitioners simply because of cessation of Lawman's operations, since it was in fact an illegal lock-out, the company having maintained a run-away shop and transferred its machines and assets there. Here, the veil of corporate fiction was pierced in order to safeguard the right to selforganization and certain vested rights which had accrued in favor of the union. Second corporation sought the protective shield of corporate fiction to achieve an illegal purpose.
ASIONICS PHILS. v. NLRC (290 SCRA 164) A corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Where there is nothing on record to indicate the President and majority stockholder of a corporation had acted in bad faith or with malice in carrying out the retrenchment program of the company, he cannot be held solidarily and personally liable with the corporation.
Evasion of liability on contract VILLA-REY TRANSIT V. FERRER (25 SCRA 849; 1968) Jose M. Villarama, operator of a bus company, Villa Rey Transit, which was authorized to operate 32 units from Pangasinan to Manila and vice-versa, sold 2 CPCs to Pantranco. One of the conditions included in the contract of sale was that the seller (Villarama) "shall not, for a period of 10 years from the date of the sale, apply for any TPU service identical or competing with the buyer (Pantranco)." Barely 3 months after the sale, a corporation called Villa Rey Transit, Inc. was organized, with the wife of Jose M. Villarama as one of the incorporators and who was subsequently elected as treasurer of the Corporation. Barely a month after its registration with the SEC, the corporation bought 5 CPCs and 49 buses from one Valentin Fernando, and applied with the Public Service Commission (PSC) for approval of the sale. Before the PSC could take final action on the said application, however, 2 of the 5 CPCs were levied upon pursuant to a writ of execution issued by the CFI in favor of Eusebio Ferrer, judgment creditor, against Valentin Fernando, judgment debtor. During the public sale conducted, Ferrer was the highest bidder, and a certificate of sale was issued
46
in his name. Shortly thereafter, he sold the said CPCs to Pantranco, and they jointly submitted their contract of sale to the PSC for approval. The PSC issued an order that pending resolution of the applications, Pantranco shall have the authority to provisionally operate the service under the 2 CPCS that were the subject of the contract between Ferrer and Pantranco. Villa Rey Transit took issue with this, and filed a complaint for annulment of the sheriff's sale of the CPCs and prayed that all the orders of the PSC relative to the dispute over the CPCs in question be annulled. Pantranco filed a third-party complaint against Jose M. Villarama, alleging that Villarama and Villa Rey Transit are one and the same, and that Villarama and/or the Corporation is qualified from operating the CPCs by virtue of the agreement entered into between Villarama and Pantranco. Given the evidence, the Court found that the finances of Villa-Rey, Inc. were managed as if they were the private funds of Villarama and in such a way and extent that Villarama appeared to be the actual owner of the business without regard to the rights of the stockholders. Villarama even admitted that he mingled the corporate funds with his own money. These circumstances negate Villarama's claim that he was only a part-time General Manager, and show beyond doubt that the corporation is his alter ego. Thus, the restrictive clause with Pantranco applies. A seller may not make use of a corporate entity as a means of evading the obligation of his covenant. Where the Corporation is substantially the alter ego of one of the parties to the covenant or the restrictive agreement, it can be enjoined from competing with the covenantee. IX. CORPORATE POWERS AND AUTHORITY
1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45; Land Bank of the Philippines v. COA, 190 SCRA 154 [1990]) A corporation has only such powers as are expressly granted to it by law and by its articles of incorporation, those which may be incidental to such conferred powers, those reasonably necessary to accomplish its purposes and those which may be incident to its existence. Pilipinas Loan Company v. SEC, 356 SCRA 193 (2001). (a) Classification of Corporate Powers: Express; Implied; and Incidental (b) Where Corporate Power Lodged A corporation has no power except those expressly conferred on it by the 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 and agents. . . 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 by-laws or by a specific act of the board of directors. Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001). Unless otherwise provided by the Corporation Code, corporate powers are exercised by the Board of Directors, which they may delegate to either an executive committee, officers or contracted managers. The delegation, except for the executive committee, must be for specific purposes, which makes the officers the agents of the corporation, and accordingly the general rules of agency as to the binding effects of their acts would apply. For such officers to be deemed fully clothed by the corporation to exercise a power of the Board, the latter must specially authorize them to do so. ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 572 (1999). 2. ULTRA VIRES DOCTRINE (a) Concept Contracts or acts of a corporation must be made either by the board of directors or by a corporate agent duly authorized by the boardabsent 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). (b) Types of Ultra Vires Acts (Sec. 45) A corporation has no power except those expressly conferred on it by the 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 and agents. Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004). 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. International Exchange Bank , 581 SCRA 115 (2009). (i)First Type Ultra Vires: An ultra vires act is one committed outside the object for which a corporation is crated as defined by the law of its organization and therefore beyond the power conferred
47
upon it by law. The term ultra vires is distinguished from an illegal act for the former is mer ely 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). (ii)Second Type Ultra Vires: When the President enters into speculative contracts, without prior board approval, and without subsequent submission of those contracts to the Board for approval or ratification, nor were the transactions included in the reports of the corporation, such contracts do not bind the corporation. It must be pointed out that the Board of Directors, not the President, exercises corporate powers. Safic Alcan & Cie v. Imperial Vegetable Oil Co., Inc. , 355 SCRA 559 (2001). Generally, the acts of the corporate officers within the scope of their authority are binding on the corporation. However, under Article 1910 of the New 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. . . . Thus, contracts entered into by corporate officers beyond the scope of authority are unenforceable against the corporation unless ratified by the Corporation. Woodchild Holdings, Inc. v. Roxas Electric Constructions Company, Inc. , 436 SCRA 235 (2004). (c) 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. International Exchange Bank, 581 SCRA 115 (2009).
(d) Ratification of Ultra Vires Acts: (Pirovano v. De la Rama Steamship Co., Inc., 96 Phil. 335 [1954]; Carlos v. Mindoro Sugar Co., 57 Phil. 343 [1932]; Republic v. Acoje Mining Co., 3 SCRA 361 [1963]; Crisologo Jose v. Court of Appeals, 177 SCRA 594 [1989]; Harden v. Benguet Consolidated Mining Co., 58 Phil. 140 [1933]) . Acts done in excess of corporate 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 con firmatory act signifying ratification of all prior acts of its officers. National Power Corp. v. Alonzo-Legasto, 443 SCRA 342 (2004). 3. Express Powers (a) Enumerated Powers (Secs. 36) (b) Extend or Shorten Corporate Term (Secs. 37 and 81 [1]) (c) Increase or Decrease Capital Stock (Sec. 38) Despite the board resolution approving the increase in capital stock and the receipt of payment on the future issues of the shares from the increased capital stock, such funds do not constitute part of the capital stock of the corporation until approval of the increase by SEC. Central Textile Mills, Inc. v. NWPC, 260 SCRA368 (1996). A reduction of capital to justify the mass layoff of employees, especially of union members, amounts to nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital through the years, and would constitute unfair labor practice. Madrigal & Co. v. Zamora, 151 SCRA 355 (1987). (d) Incur, Create or Increase Bonded Indebtedness (Sec. 38) (e) Sell or Dispose of Assets (Sec. 40) The Corporation Code defines a sale or disposition of substantially all assets and property of a corporation as one by which the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporatedany sale or disposition short of this will not need stockholder ratification, and may be pursued by the majority vote of the Board of Directors. Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009). The property of the corporation is not the property of the stockholders or members, and as such, may not be sold without express authority from the board of directors. Litonjua v. Eternit Corp., 490 SCRA 204 (2006). The disposition of the assets of a corporation shall be deemed to cover substantially all the corporate property and assts, 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. Caltex (Phils.), Inc. v. PNOC Shipping and Transport Corp., 498 SCRA 400 (2006). Sale by Board of Trustees of the only corporate property without compliance with Sec. 40 of Corporation Code requiring ratification of members representing at least two-thirds of the membership, would make the sale null and void. Islamic Directorate v. Court of Appeals, 272 SCRA 454 (1997); Pea v. CA, 193 SCRA 717 (1991).
48
(f) Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 42;De la Rama v. Ma-ao Sugar Central Co., 27 SCRA 247 [1969] ) (g) Declare Dividends (Sec. 43;Nielson & Co. v. Lepanto Consolidated Mining Co., 26 SCRA 540 [1968]) Stock dividend is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can loosel y be termed as the trust fund of the corporation. NTC v. CA, 311 SCRA 508 (1999). (h) Enter into Management Contracts (Sec. 44;Nielson & Co., Inc. v. Lepanto Consolidated Mining, 26 SCRA 540 [1968]; Ricafort v. Moya, 195 SCRA 247 [1991]). Why the difference in rule between entity and individual? ) 4. Implied Powers When the articles expressly provide that the purpose of the corporation 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, and, for which reason, may not acquire any certificate of public convenience to operate a taxicab service. 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. NPC v. Vera, 170 SCRA 721 (1989). A corporation organized to engage as a lending investor cannot engage in pawbroker. Philipinas 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). 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 of stock. Inter-Asia Investments Industries v. Court of Appeals, 403 SCRA 452 (2003). 5. 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. CA, 353 SCRA 23 (2001). 6. Other Powers (Sec. 36) (a) Sell Land and Other Properties When the corporations primary purpose is to market, distribute, export and import merchandise, the sale of land is not within the actual or apparent authority of the corporation acting through its officers, much less when acting through the treasurer. Likewise Articles 1874 and 1878 of Civil Code requires that when land is sold through an agent, the agents authority must be in writing, otherwise the sale is void. San Juan Structural v. CA, 296 SCRA 631 (1998); AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp. , 414 SCRA 190 (2003). (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 in the corporation was to explicitly authorize an officer to contract loans in behalf of the corporation. China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997). (c) Power to Sue and Be Sued Under Sec. 36 of Corporation Code, in relation to Sec. 23, where a corporation is an injured party, its power to sue is lodged with its Board of Directors. A minority stockholder who is a member of the Board has no such power or authority to sue on the corporations behalf. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001); Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002); United Paragon Mining Corp. v. Court of Appeals , 497 SCRA 638 (2006); Mediserv, Inc. v. Court of Appeals, 617 SCRA 284 (2010). (i) Certificate of Non-Forum Shopping: Where the corporation is real party-in-interest, neither administrator or a project manager could sign the certificate against forum-shopping without being duly authorized by resolution of the Board of Directors (Esteban, Jr. v. Vda. de Onorio, 360 SCRA 230 [2001]), nor the General Manager who has no authority to institute a suit on behalf of the corporation even when the purpose is to protect corporate assets. Central Cooperative Exchange Inc. v. Enciso, 162 SCRA 706 (1988).
49
When the power to sue is delegated by the by-laws to a particular officer, such officer may appoint counsel to represent the corporation in a pre-trial hearing without need of a formal board resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993). For counsel to sign the certification for the corporation, he must specifically be authorized by the Board of Directors. BPI Leasing Corp. v. CA, 416 SCRA 4 (2003); Mariveles Shipyard Corp. v. CA, 415 SCRA 573 (2003). If the petitioner is a corporation, a board resolution authorizing a corporate officer to execute the certification against forum shopping is necessarya certification not signed by a duly authorized person renders the petition subject to dismissal. Gonzales v. Climax Mining Ltd., 452 SCRA 607 (2005); DBP v. Court of Appeals, 440 SCRA 200 (2004); Public Estates Authority v. Uy, 372 SCRA 180 (2001); Metro Drug Distribution, Inc. v. Narcisco, 495 SCRA 286 (2006); Mediserv, Inc. v. Court of Appeals, 617 SCRA 284 (2010). When a corporate officers 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). In a number of cases, the Court has declared invalid an act of an officer in behalf of the corporation without covering board resolution: signing the certificate of non-forum shopping in a petition filed in behalf of the corporation.5 Nonetheless, even if the counsel executed the verification and certificate of non-forum shopping before the board authorized him, the passing of the board resolution of authorization before the actual filing of the complaint. Median Container Corp. v. Metropolitan Bank and Trust Co., 561 SCRA 622 (2008); the submission in the motion for reconsideration of the authority to sign the verification and certification constitutes substantial compliance with the procedural requirements. Asean Pacific Planners v. City of Urdaneta, 566 SCRA 219 (2008). (ii) Service of Summons on Corporations Corporate Bookkeeper: For purposes of determining proper service of summons to a corporation in a quasi-judicial proceeding before the NLRC, a bookkeeper can be considered as an agent of the corporation within the purview of the Rules of Court. The rationale of all rules with respect to service of process on a corporation is that such service must be made to an agent or a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him. The bookkeepers task is one under consideration that his regular recording of the corporations business accounts and essential facts about the transactions of a business or enterprise safeguards the corporation from possible fraud being committed adverse to its own corporate interest . Pabon v. NLRC, 296 SCRA 7 (1998). Prevailing Rule: Section 11, Rule 14 of the 1997 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 re stricted, limited and exclusive following the rule on statutory construction expressio unios est exclusion alterius. Therefore, the earlier cases that uphold service of summons upon a construction project manager;6 a corporations assistant manager;7 ordinary clerk of a corporation;8 private secretary of corporate executives;9 retained counsel;10 officials who had charge or control of the operations of the corporation, like the assistant general manager;11 or the corporations Chief Finance and Administrative Officer;12 no longer apply since they were decided under the old rule that allows service of summons upon an agent13 of the corporation. E.B. Villarosa & Partners Co., Ltd. v. Benito , 312 SCRA 65 (1999). (d) Power to Hire Employees and Appoint Agents It is well settled that except where the authority of employing servants and agents is expressly vested in the board of directors or trustees, an officer or agent who has general control and management of the corporations business, or a specific part thereof, may bind the corporation by the employment of such agents and employees as are usual and necessary in the conduct of such business. But the contracts of employment must be reasonable. Yu Chuck v. Kong Li Po, 46 Phil. 608, 614 (1924). (e) Provide Gratuity Pay for Employees (Sec. 36[10])
5 Philippine Airlines, Inc. v. Flight Attendance and Stewards Association of the Philippines (FASAP) , 479 SCRA 605 (2006); Metro Drug Distribution, Inc. v. Narciso, 495 SCRA 286 (2006); Cagayan Valley Drug Corp. v. Commissioner of Internal Revenue, 545 SCRA 10 (2008). 6 Kanlaon Construction Enterprises Co., Inc. v. NLRC, 279 SCRA 337 (1997). 7 Gesulgon v. NLRC, 219 SCRA 561 (1993). 8 Golden Country Farms, Inc. v. Sanvar Development Corp., 214 SCRA 295 (1992); G & G Trading Corp. v. Court of Appeals, 158 SCRA 466 (1988). 9 Summit Trading and Dev. Corp. v. Avendao, 135 SCRA 397 (1985); also Vlason Enterprises Corp. v. Court of Appeals, 310 SCRA 26 (1999). 10 Republic v. Ker & Co., Ltd., 18 SCRA 207 (1966). 11 Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298 (1978). 12 Far Corporation v. Francisco, 146 SCRA 197 (1986). 13 Filoil Marketing Corp. v. Marine Dev. Corp. of the Philippines, 177 SCRA 86 (1982). Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto. Includes ATTY DY AND VILLANUEVA OUTLINE ATENEO 2011
50
Providing gratuity pay for employees is an express power of a corporation under the Corporation Code, and cannot be considered to be ultra vires to avoid any liability arising from the issuance of resolution granting such gratuity pay. Lopez Realty v. Fontecha, 247 SCRA 183, 192 (1995). (f) Donate (Sec. 36[9]) (g) Enter Partnership or Joint Venture. Tuason & Co. v. Bolanos, 95 Phil. 106 (1954); SEC Opinion, dated 29 February 1980.
X5. Payment of Balance of Subscription (Secs. 66 and 67; Lingayen Gulf Electric Power Co. v.
Baltazar, 93 Phil. 404 [1953]). A stockholder who is employed with the company, cannot offset his unpaid subscription against his awarded claims for wages, where there has been no call for the payment of such subscription. Apodaca v. NLRC, 172 SCRA 442 (1989). 6. Delinquency on Subscription (Secs. 68, 69, 70 and 71; Philippine Trust Co. v. Rivera, 44 Phil. 469 [1923]; Miranda v. Tarlac Rice Mill Co., 57 Phil. 619 [1932]) The prescriptive period to recover on unpaid subscription does not commence from the time of subscription but from the time of demand by Board of Directors to pay the balance of subscription. Garcia v. Suarez, 67 Phil. 441 (1939).
1. Doctrine of CENTRALIZED MANAGEMENT: Powers of Board of Directors (Sec. 23; Gamboa v. Victoriano, 90 SCRA 40 [1979]). Section 23 expressly provides that the corporate powers of all corporations shall be exercised by the board of directors. Just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it. Thus, 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 declarations of an individual director 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).14 Rationale for Centralized Management Doctrine. Section 23 of the Corporation Code explicitly provides that unless otherwise provided therein, the corporate powers of all corporations formed under the Code shall be exercised, all business conducted and all property of the corporation shall be controlled and held by a board of directors. The raison detre behind the conferment of corporate powers on the board of directors is not lost on the Court indeed, the concentration in the board of the powers of control of corporate business and appointment of corporate officers and managers is necessary for efficiency in any large organization. Stockholders are too numerous, scattered and unfamiliar with the business of a corporation to conduct its business directly. And so the plan of corporate organization is for the stockholders to choose the directors who shall control and supervise the conduct of corporate business. Filipinas Port Services v. Go, 518 SCRA 453 (2007). Board of Directors is the body which (1) exercises all powers provided for under the Corporat ion Code; (2) conducts all business of the corporation; and (3) controls and holds all property of the corporation. Its members have been characterized as trustees or directors clothed with a fiduciary character. It is clearly separate and distinct from the corporate entity itself. Hornilla v. Salunat, 405 SCRA 220 (2003). A corporation is an artificial being and can only exercise its powers and transact its business through the instrumentalities of its Board of Directors, and through its officers and agents, when authorized by resolution or by its by-laws. Consequently, when legal counsel was clothed with authority through formal board resolution, his acts bind the corporation which must be held bound the actuations of its counsel of record. De Liano v. Court of Appeals, 370 SCRA 349 (2001). The physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a special act of the board of directors. Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003); Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001). (a) Theories on Source of Board Power (Angeles v. Santos, 64 Phil. 697 [1937]). One of the most important rights of a qualified shareholder or member is the right to vote either personally or by proxyfor the directors or trustees who are to manage the corporate affairs. The right to choose the persons who will direct, manage and operate the corporation is significant, because it is the main way in which a stockholder can have a voice in the management of corporate affairs, or in
14 Also Reyes v. RCPI Employees Credit Union, Inc., 499 SCRA 319 (2006); Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006); Raniel v. Jochico, 517 SCRA 221 (2007); Yu Chuck v. Kong Li Po, 46 Phil. 608, 614 (1924); Republic v. Coalbrine International, G.R. No. 161838, 27 April (2010). Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto. Includes ATTY DY AND VILLANUEVA OUTLINE ATENEO 2011
51
which a member in a nonstick corporation can have a say on how the purposes and goals of the corporation may be achieved. Once the directors or trustees are elected, the stockholders or members relinquish corporate powers to the board in accordance with law. Tan v. Sycip, 499 SCRA 216 (2006). (b) Board Must Act As a Body (Sec. 25; Board of Liquidators v. Heirs of Maximo M. Kalaw, 20 SCRA 987 [1967]; Ramirez v. Orientalist Co., 38 Phil. 634 [1918]; Acua v. Batac Producers Cooperative Marketing Assn., 20 SCRA 526 [1967]). A corporation, through its Board of Directors, should act in the manner and within the formalities prescribed by its charter or by the general law. Thus, directors must act as a body in a meeting called pursuant, otherwise, any action taken therein may be questioned by any objecting director or shareholder. Be that as it may, jurisprudence tells us that an action of the board of directors during a meeting, which was illegal for lack of notice, may be ratified either expressly, by the action of the directors in subsequent legal meeting, or impliedly, by the corporation's subsequent course of conduct. Lopez Realty v. Fontecha, 247 SCRA 183 (1995). (c) Effects of 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 Committee (Sec. 35;Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007) 2.
BUSINESS JUDGMENT RULE (Montelibano v. Bacolod-Murcia Miling Co., Inc., 5 SCRA 36

[1962]; PSE v. Court of Appeals, 281 SCRA 232 [1997]) 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. Cua, Jr. v. Tan, 607 SCRA 645 (2009). The board of directors is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts. Estacio v. Pampanga I Electric Cooperative, Inc. , 596 SCRA 542 (2009). 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 on account thereof are not the only matters to be proven; it is likewise necessary to show that the directors and/or officers acted in 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 obligquity 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). No court can, as an integral part of resolving the issues between squabbling stockholders, 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). 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).
3. COUNTER-VEILING DOCTRINES TO PROTECT CORPORATE CONTRACTS (a) Theory of Estoppel or Ratification The principle of estoppel precludes a corporation and its Board of Directors from denying the validity of the transaction entered into 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). In order to ratify the unauthorized act of an agent and make it binding on the corporation, it must be shown that the governing body 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 on the part of the corporation 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 latters 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 principle of laches or stale demands provides that 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
52
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). (b) Doctrine of Apparent Authority (Art. 1883, Civil Code; Woodchild Holdings, Inc. v. Roxas Electric Constructions Company, Inc., 436 SCRA 235 (2004); Francisco v. GSIS, 7 SCRA 577 [1963]; Prime White Cement Corp. v. IAC, 220 SCRA 103, 113-114 [1993]; Yao Ka Sin Trading v. CA, 209 SCRA 763 [1992]). Just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors 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 by-laws 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). 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 officers authority. . . Unmistakably, the Courts directive in Ya 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, 243-244 (2009). If a corporation knowingly permits one of its officers 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 agents authority. Soler v. Court of Appeals, 358 SCRA 57 (2001); Rural Bank of Milaor (Camarines Sur) v. Ocfemia, 325 SCRA 99, 110-111 (2000) 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 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 International 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). Apparent authority may be ascertained through (1) the general manner in 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 is clothes them; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers. Inter-Asia Investment Industries v. Court of Appeals, 403 SCRA 452 (2003); Associated Bank v. Pronstroller, 558 SCRA 113 (2008). When an officer in a banking corporation arrange a credit line agreement and forwards the same to the legal department at its head officer, and the bank did no disaffirm the contract, then it is bound by it. Premier Dev. Bank v. Court of Appeals, 427 SCRA 686 (2004. A corporation cannot disown its Presidents act of applying to the bank for credit accommodation, simply on the ground that it never authorized the President by the lack of any formal board resolution. The following placed the corporation and its Board of Directors in estoppel in pais: Firstly, the by-laws provides for the powers of the President, which includes, executing contracts and agreements, borrowing money, signing, indorsing and delivering checks; secondly, 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). Per its Secretarys 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 Presidents authority to obtain the subject loans from the respondent Bank. Lapulapu Foundation, Inc., v. Court of Appeals, 421 SCRA 328 (2004). A verbal promise given by the Chairman and President of the company to the general manager and chief operating officer to give the latter unlimited sick leave and vacation leave benefits and its cash conversion upon his retirement or resignation, when not an integral part of the companys 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). Corporate policies need not be in writing. Contracts entered into by a corporate officer or obligations or prestations assumed by such officer for and in 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. Kwok v. Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005).
53
The acceptance of the offer to purchase by the clerk of the branch of the bank, and the representation that the manager had already approved the sale (which in fact was 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). Acts done in excess of corporate 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. National Power Corp. v. Alonzo-Legasto, 443 SCRA 342 (2004). Rationale for the Doctrine of Apparent Authority: Naturally, the third person has little or no information as to what occurs in corporate meeting; and he 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. What transpires in the corporate board room is entirely an internal matter. Hence, petitioner may not impute negligence on the part of the respondents in failing to find out the scope of Atty. Solutas 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). 4. Qualifications of Directors and Trustees (Secs. 23 and 27; Gokongwei, Jr. v. SEC, 89 SCRA 336 [1979]). (a) A director must own at least one share of stock. Pea v. CA, 193 SCRA 717 (1991); Detective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 (1969). The law does not require that a Vice-President be a stockholder. Baguio v. Court of Appeals, 226 SCRA 366 (1993). (b) Beneficial ownership under voting trust arrangement no longer qualifies ( Lee v. CA, 205 SCRA 752 [1992]). 5. Election of Directors and Trustees (a) Directors (Secs. 24 and 26; Premium Marble Resources v. Court of Appeals, 264 SCRA 11). The underlying policy of the Corporation Code is that the business and affairs of a corporation must be governed by a board of directors whose members have stood for election, and who have actually been elected by the stockholders, on an annual basis. Only in that way can the directors continued accountability to the shareholders, and the legitimacy of their decisions that bind the corporations stockholders, be assured. The shareholder vote is critical to the theory that legitimizes the exercise of power by the directors or officers over properties that they do not own. Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202, 213 (2009). Corporations are required under Section 26 of the Corporation Code to submit to the SEC within thirty (30) days after the election the names, nationalities, and residences of the directors, trustees and officers of the Corporation. In order to keep stockholders and the public transacting business with domestic corporation properly informed of their organization operational status, the SEC has issued the rule requiring the filing of the General Information Sheet. Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004). When the names of some of the directors who signed the board resolution does not appear in the General Information Sheet filed with the SEC, then there is doubt whether they were indeed duly elected members of the Board legally constituted to bring suit in behalf of the Corporation. Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004). (b) Trustee (Secs. 92 and 138) (c) CUMULATIVE VOTING (Sec. 24; Cumulative Voting in Corporate Elections: Introducing Strategy in the Equation, 35 SOUTH CAROLINA L. REV. 295) 6. Vacancy in Board (Sec. 29) A by-law provision or company practice of giving a stockholder a permanent seat in the Board would be against the provision of Secs. 28 and 29 of Corporation Code which requires member of the board of corporations to be elected. Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997). The theory of delegated power of the board of directors similarly explains why, under Section 29 of the Corporation Code, in cases where the vacancy in the corporations board of directors is caused not only by the expiration of a members term, the successor so elected to fill in a vacancy shall be elected only for the unexpired term of his predecessors in office. The law has authorized the remaining members of the board to fill in a vacancy only in specified instances, so as not to retard or impair the corporations operations; yet, in recognition of the stockholders right to elect the members of the board,
54
it limited the period during which the successor shall serve only to the unexpired term of his predecessor in office. Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009). 7. Term of Office, Hold-over Principle Directors may lawfully fill vacancies occurring in the board, and such officials, as well as the original directors, hold-over until qualification of their successors. Government v. El Hogar Filipino, 50 Phil. 399 (1927). The remedy is quo warranto to question the legality and proper qualification of persons elected to the board. Ponce v. Encarnacion, 94 Phil. 81 (1953). The remaining members of a corporations board of directors cannot elect another director to fill in a vacancy caused by the resignation of a hold-over director. The holdover period is not part of the term of office of a member of the board of directors. Consequently, when during the holdover period, a director resigns from the board, the vacancy can only be filled-up by the stockholders, since there is no term left to fill-up pursuant to the provisions of Section 29 of the Corporation which mandates that a vacancy occurring in the board of directors caused by the expiration of a members term shall be filled by the corporations stockholders. That a director continues to serve after one year from his election (i.e., on a holdover capacity), cannot be considered as extending his term. This holdover period, however, is not to be considered as part of his term, which, as declared, had already expired. Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009). 8. Removal of Directors or Trustees (Sec. 28; Roxas v. De la Rosa, 49 Phil. 609 [1926]). Only stockholders or members have the power to remove the directors or trustees elected by them, as laid down in Section 28 of the Corporation Code. Raniel v. Jochico, 517 SCRA 221, 230 (2007). 9. Directors or Trustees Meetings (Secs. 49, 53, 54 and 92) (a) Quorum: For stock corporations, the quorum referred to in Section 52 of the Corporation Code is based on the number of outstanding voting stocks. For nonstok corporations, only those who are actual, living members with voting rights shall be counted in determining the existence of a quorum during members meetings. Dead members shall not be counted. Tan v. Sycip, 499 SCRA 216 (2006). In stock corporations, the presence of a quorum is ascertained and counted on the basis of the outstanding capital stock, as defined by Section 137 of the Corporation Code. Tan v. Sycip, 499 SCRA 216 (2006). When the principle for determining quorum for stock corporations is applied by analogy to nonstick corporations, only those who are actual members with voting rights should be counted. Tan v. Sycip, 499 SCRA 216 (2006). (b) Abstention: In a board meeting, an abstention is presumed to be counted as an affirmative vote insofar as it may be construed as an acquiescence in the action of those who voted affirmatively; but such presumption, being merely prima facie would not hold in the face of clear evidence to the contrary. Lopez v. Ericta, 45 SCRA 539 (1972). (c) Minutes of Meetings The signing of the minutes by all the members of the board is not requiredthere is no provision in the Corporation Code that requires that the minutes of the meeting should be signed by all the members of the board. The signature of the corporate secretary gives the minutes of the meting probative value and credibility. People v. Dumlao, 580 SCRA 409 (2009). The entries contained in the minutes are prima facie evidence of what actually took place during the meeting, pursuant to Section 44, Rule 130 of the Revised Rule on Evidence. People v. Dumlao, 580 SCRA 409 (2009). (i) Resolution versus Minutes of Meetings: A resolution is distinct and different from the minutes of the meetinga board resolution is a formal action by a corporate board of directors or other corporate body authorizing a particular act, transaction, or appointment, while, on the other hand, minutes are a brief statement not only of what transpired at a meeting, usually of stockholders/members or directors/trustees, but also at a meeting of an executive committee. People v. Dumlao, 580 SCRA 409 (2009). 10. Compensation of Directors (Sec. 30) Directors and trustees are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office, founded on the presumption that directors and trustees render service gratuitously, and that the return upon their shares adequately furnishes the motives for service, without compensation. But they can receive remunerations for executive officer position. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216, 223 (1997). 11. FIDUCIARY DUTIES OF DIRECTORS AND OFFICERS (a) Directors as Fiduciaries Pre-Corporation Code: Palting v. San Jose Petroleum, Inc., 18 SCRA 924.
55
Nature of Duties of Directors and Officers: Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993). In Philippine jurisdiction, the members of the Board of Directors have a three-fold duty: duty of obedience, duty of diligence, and the duty of loyalty. Accordingly, the members of the board of directors (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. (b) Duty of Obedience A corporation, through its Board of Directors, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law. Lopez Realty, Inc. v. Fontecha, 247 SCRA 183 (1995) (c) Duty of Diligence (Sec. 31; Steinberg v. Velasco, 52 Phil. 953 [1929]; Bates v. Dresser, 251 U.S. 524, 64 L. Ed. 388, 40 S. Ct. 247 [1919]; Smith v. Van Gorkam, 488 A.2d 858, Supreme Court of Delaware, 1985). For wrongdoing to make a director personally liable for debts of the corporation, the wrongdoing approved or assented to by the director must be a patently unlawful act. Mere failure to comply with the notice requirement of labor laws on company closure or dismissal of employees does not amount to a patently unlawful act. Patently unlawful acts are those declared unlawful by law which imposes penalties for commission of such unlawful acts. There must be a law declaring the act unlawful and penalizing the act. Carag v. NLRC, 520 SCRA 28 (2007); Dy-Dumalasa v. Fernandez, 593 SCRA 656 (2009). Holding a corporate officer personally liable for directing the corporate affairs with gross negligence or in bad faith does not amount to an application of the doctrine of piercing the veil of corporate fiction, for such personal liability is imposed directly under Section 31 to directors and officers of corporation who are guilty of violating their duty of diligence. Sanchez v. Republic, 603 SCRA 229 (2009). (d) Duty of Loyalty (Secs. 31 to 34; Mead v. McCullough, 21 Phil. 95 [1911]). - Doctrine of Corporate Opportunity (Gokongwei v. SEC, 89 SCRA 336 [1979]). - Self-dealings (Secs. 32 and 33) - Using Inside Information (Gokongwei v. SEC, 89 SCRA 336 [1979]). When a director-majority stockholder, who is the administrator of corporate affairs directly negotiating the sale of corporate landholdings to the Government at great prices, purchases the stocks of a shareholder without informing the latter of the on-going negotiations, such director is deemed to have fraudulently acquired the shareholdings by way of deceit practiced by means of concealing his knowledge of important corporate affairs. Strong v. Repide, 41 Phil. 947 (1909). - Applies to confidential employees (cf. Sing Juco v. Llorente, 43 Phil. 589 [1922]) (e) Duty to Creditors and Outsiders (f) Corporate Dealings with Directors and Officers (Sec. 32; Gokongwei v. SEC, 89 SCRA 336 [1979]; Prime White Cement Corp. v. IAC, 220 SCRA 103 [1993]). (g) Contracts Between Corporations with Interlocking Directors (Sec. 33) The rule under Sec. 33 of Corporation Code allowing annulment of contracts between corporations with interlocking directors resulting in the prejudice to one of the corporation, has no application to cases where fraud is alleged to have been committed to third parties. DBP v. Court of Appeals, 363 SCRA 307 (2001). (h) SEC Revised Code of Corporate Governance (SEC Memorandum. Circular No. 6, series of 2009) 12. CORPORATE OFFICERS The general principles of agency govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, by-laws, or relevant provisions of lawwhen 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). (a) Powers of Corporate Officers: While it is a general rule that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation, the Board may validly delegate some of its functions and powers to its officers, committee and agents. Associated Bank v. Pronstroller, 558 SCRA 113 (2008); Yu Chuck v. Kong Li Po, 46 Phil. 608, 614 (1924); Cebu Mactan Members Center Inc. v. Tsukahara, 593 SCRA 172 (2009).
56
While the Court agrees that 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). Even though a judgment, decree 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 courts 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. Court of Appeals , 422 SCRA 101 (2004). (i) Rule on Corporate Officers Power to Bind Corporation An officers power as an agent of the corporation must be sought from the statute, charter, the by laws or in a delegation of authority to such officer, from the acts of the board of directors formally expressed or implied from a habit or custom of doing business. Vicente v. Geraldez, 52 SCRA 210 (1973); Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992). 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). (ii) President. Peoples Aircargo v. Court of Appeals, 297 SCRA 170 (1998). 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 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). A corporation may not distance itself from the acts of a senior officer: "the dual roles of Romulo F. Sugay should not be allowed to confuse the facts." R.F. Sugay v. Reyes, 12 SCRA 700 (1961). The President is considered as the corporations agent, and as such, 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, Inc. 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 the fact alone of 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). (iii) Corporate Secretary In the absence of provisions to the contrary, the corporate secretary is the custodian of corporate recordshe 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 books of the corporation; and in the event he refuses to comply with such duty, the transferor-stockholder may rightfully bring suit to compel performance. Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997). Although the corporate secretarys duty to record transfers of stock is ministerial, he cannot be compelled to do so when the transferees 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); TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001). A sale that fails to comply with Sec. 40 of Corporation Code, cannot be invalidated when the buyer relies upon a Secretarys Certificate confirming authority. A secretarys certificate which is 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 business transactions of corporations would become tortuously slow and unnecessarily hampered. Esguerra v. Court of Appeals, 267 SCRA 380 (1997). (iv) Corporate Treasurer A corporate treasurers function 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 co rporate treasurers function. San Juan Structural v. Court of Appeals, 296 SCRA 631, 645 (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 payees 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).
EDWIN PADILLO BAR 2013 (b) POWER OF THE BOARD TO APPOINT AND TERMINATE CORPORATE OFFICERS
57
(i) Who Is a Corporate Officer? (Sec. 25; Gurrea v. Lezama, 103 Phil. 553 [1958]; Mita Pardo de Tavera v. Tuberculosis Society, 112 SCRA 243 [1982]; PSBA v. Leao, 127 SCRA 778 [1984]; Dy v. NLRC, 145 SCRA 211 [1986]; Visayan v. NLRC, 196 SCRA 410 [1991]; Easycall Communications Phils., Inc. v. King , 478 SCRA 102 [2005]). An office is created by the charter of the corporation and the officer is elected by the directors or stockholders, while an employee usually occupies no of fice and generally is employed not by action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee. Okol v. Slimmers World International, 608 SCRA 97 (2009). Ordinary company employees are generally employed not by action of the directors and stockholders but by that of the management officer of the corporation who also determines the compensation to be paid such employees. Corporate officers, on the other hand, are elected or appointed by the directors or stockholders, and are those who are given that character either by the Corporation Code or by the corporations by-laws. Gomez v. PNOC Dev. and Management Corp., 606 SCRA 187 (2009). Corporate officers in the context of Presidential Decree No. 902-A are those officers of the corporation who are given that character by the Corporation Code or by the corporations by-laws. Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009); WQPP Marketing Communications, Inc. v. Galera, 616 SCRA 422 (2010). A mere manager not so named in the by-laws does is not an officer of the corporation. Pamplona Plantation Company v. Acosta , 510 SCRA 249 (2006). When the by-laws provide for the position of Superintendent/ Administrator, it is clearly a corporate officer position and issues of reinstatement would be within the jurisdiction of the SEC and not the NLRC. Ongkingco v. NLRC, 270 SCRA 613 (1997). When the by-laws provides that one of the powers of the Board is [T]o appoint a Medical Director, Comptroller/Administrator, Chiefs of Services and such other officers as it may deem necessary and prescribe their powers and duties, then such specifically designated positions should be considered corporate officers. The determination of the rights and the concomitant liability arising from any ouster from such positions, would be intra-corporate controversy subject to SECs jurisdiction. Tabang v. NLRC, 266 SCRA 462 (1997). The fact that Comptroller is not mentioned in the by-laws does not undermine the appointment to such position since under Sec. 25 of Corporation Code, the Board of Directors is authorized to appoint such other officers as it may deem necessary. In this case the by-laws provided and such other officers as the Board of Directors may from time to time does fit to provide for. Said officers shall be elected by majority vote of the Board of Directors. By-laws may and usually do provide for such other officers, and that where a corporate office is not specifically indicated in the roster of corporate offices in the by-laws of a corporation, the Board of Directors may also be empowered under the by-laws to create additional officers as may be necessary. Nacpil v. International Broadcasting Corp., 379 SCRA 653 (2002). Corporate officers in the context of Presidential Decree No. 902 -A are those officers of the corporation who are given that character by the Corporation Code or by the corporations by-laws. Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009). (ii) Nature of Exercise of Power to Terminate Officers An officers removal is a corporate act, and if such removal occasions an intra -corporate controversy, 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 International, 608 SCRA 97 (2009). One who is included in the by-laws of a corporation in its roster of corporate officers is an officer of said corporation and not a mere employeebeing a corporate officer, his removal is deemed to be an intra-corporate dispute cognizable by the SEC and not by the Labor Arbiter. Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009). 13.
LIABILITIES OF CORPORATE OFFICERS: (Sec. 31; Vazquez v. Borja, 74 Phil. 560 [1944];
Palay, Inc. v. Clave, 124 SCRA 638 [1093]; Pabalan v. NLRC, 184 SCRA 495 [1990]; Sulo ng Bayan, Inc. v. Araneta, Inc. Inc. , 72 SCRA 347 [1976]; Mindanao Motors Lines, Inc. v. CIR, 6 SCRA 710 [1962]).
Unless they have exceeded their authority, corporate officers are, as a general rule, not personally liable for their official acts, because a corporation, by legal fiction, has a personality separate and
58
distinct from its officers, stockholders and members. Price v. Innodata Phils., Inc., 567 SCRA 269 (2008); Lowe, Inc. v. Court of Appeals, 596 SCRA 140 (2009). Officers of a corporation may become liable for its loans when they have breached their duty of diligence under Section 31 of the Corporation Code. Aratea v. Suico, 518 SCRA 501 (2007); Singian, Jr. v. Sandiganbayan, 478 SCRA 348 (2005); or when they have contractually made themselves personally liable for a corporate loan. Contractuall. Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010). In the absence of malice, bad faith, or a specific provision of law making a corporate officer, liable, such corporate officer cannot be made personally liable for corporate liabilities. Where the the Chairman and President of the corporation has made himself accountable in the promissory note in his personal capacity and as authorized by the Board Resolution, and in the absence of any representation on the part of corporation that the obligation is all its own because of its separate corporate identity, we see no occasion to consider piercing the corporate veil as material to the case. Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010). To hold a director personally liable for debts of the corporation, and thus pierce the veil of corporate fiction, the bad faith or wrongdoing of the director must be established clearly and convincingly. Bad faith is never presumed. Bad faith does not connote bad judgment or negligence. Bad faith imports a dishonest purpose. Bad faith means [a] breach of a known duty through some ill motive or interest. Bad faith partakes of the nature of fraud. Carag v. NLRC, 520 SCRA 28 (2007). Generally, officers or directors under the old corporate name bear no personal liability for acts done or contracts entered into for the corporation, if duly authorized. Republic Planters Bank v. Court of Appeals, 216 SCRA 738 (1992). Corporate officers who entered into and signed contracts on behalf of the corporation in their official capacities cannot be made personally liable thereunder in the absence of stipulation to that effect, due to the personality of the corporation being separate and distinct from the persons composing it. Western Agro Industrial Corp. v. Court of Appeals, 188 SCRA 709 (1990); Rustan Pulp & Paper Mills, Inc. v. IAC, 214 SCRA 665 (1992); Banque Generale Belge v. Walter Bull and Co., 84 Phil. 164 (1949). A president cannot be held solidarily liable personally with the corporation absent evidence of showing that he acted maliciously or in bad faith. EPG Constructions Co. v. CA, 210 SCRA 230 (1992). The finding of solidary liability among the corporation, its officers and directors would patently be baseless when the decision contains no allegation, finding or conclusion 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); Emilio Cano Enterprises, Inc. v. CIR, 13 SCRA 291 (1965); Arcilla v. Court of Appeals, 215 SCRA 120 (1992). An officer-stockholder who signs in behalf of the corporation to a fraudulent contract 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 Corporation v. Ng , 181 SCRA 719 (1990). (a) Rundown on Officers Liabilities. Tramat Mercantile, Inc. v. Court of Appeals, 238 SCRA 14 (1994); MAM Realty v. NLRC, 244 SCRA 797 (1995); NFA v. Court of Appeals, 311 SCRA 700 (1999); Atrium Management Corp. v. Court of Appeals, 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, Inc. v. Marina Properties Corp., 421 SCRA 428 (2004); McLeod v. NLRC, 512 SCRA 222 (2007). Bad faith does not arise just because a corporation fails to pay its obligation, because the inability to pay ones obligation is not synonymous with fraudulent intent not to honor the obligations. In order to piece the veil of corporate fiction, for reasons of negligence by the director, trustee or officer in the conduct of the transactions of the corporation, such negligence must be gross. Magaling v. Ong, 562 SCRA 152 (2008). Directors or trustees who willfully or knowingly vote for or assent to patently unlawful acts of the corporation or acquire any pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation. EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008). While the limited liability doctrine is intended to protect the stockholder by immunizing him from personal liability for the corporate debts, a corporate officer may nevertheless divest himself of this protection by voluntarily binding himself to the payment of the corporate debts. Toh v. Solid Bank Corp., 408 SCRA 544 (2003).
59
The corporate representatives signing as a solidary guarantee as corporate representative did not undertake to guarantee personally the payment of the corporations debt embodied in the trust receipts. 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 corporations debt if they so contractually agree or sti pulate. Tupaz IV v. Court of Appeals, 476 SCRA 398 (2005). x(b) Special Provisions in Labor Laws: Since a corporate employer is an artificial person, it must have an officer who can be presumed to be the employer, being the person acting in the interest of (the) employer as defined in Art. 283 of the Labor Code. A.C. Ransom Labor Union-CCLU v. NLRC, 142 SCRA 269 (1986). (i) Overturning the A.C. Ransom Ruling: Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation because Section 31 of the Corporation Code is still the governing law on personal liability of officers for the debts of the corporation. David v. National Federation of Labor Unions, 586 SCRA 100 (2009). Corporate officers cannot be held personally liable for damages on account of the employees dismissal because the employer corporation has a personality separate and distinct from its officers who merely acted as its agents. Malayang Samahan ng mga Mangagagawa sa M. Greenfields v. Ramos, 357 SCRA 77 (2001); AMA Computer College-East Rizal v. Ignacio, 590 SCRA 633, 659-660 (2009). Only the responsible officer of a corporation 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); reiterated in Gudez v. NLRC, 183 SCRA 644 (1990); Chua v. NLRC, 182 SCRA 353 (1990); Reahs Corp. v. NLRC, 271 SCRA 247 (1997); and 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). 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); Nicario v. NLRC, 295 SCRA 619 (1998); Flight Attendants and Stewards Association of the Philippines v. Philippine Airlines, 559 SCRA 252 (2008); M+W Zander Philippines, Inc. v. Enriquez, 588 SCRA 590 (2009); AMA Computer College-East Rizal v. Ignacio, 590 SCRA 633, 659-660 (2009); Lowe, Inc. v. Court of Appeals, 596 SCRA 140, 155 (2009); Peaflor v. Outdoor Clothing Manufacturing Corp., 618 SCRA 208 (2010). 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 they represent. Brent Hospital, Inc. v. NLRC, 292 SCRA 304 (1998). In labor cases, corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. In this case, it is undisputed that the corporate officers have a direct hand in the illegal dismissal of the employees. They were the one, who as high-ranking officers and directors of the corporation, 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 Profit and Loss Statement which, to repeat, had no evidentiary value whatsoever. Uichico v. NLRC, 273 SCRA 35 (1997). (ii) 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, the 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 stockholders-officers of employer-corporation. In the case at bar, a mere general manager while admittedly the highest ranking local representative of the corporation, is nevertheless not a stockholder and much less a member of the Board of Directors nor an officer thereof. De Guzman v. NLRC, 211 SCRA 723 (1992). (iii) Upholding the A.C. Ransom Ruling: Under the Labor Code, in the case of corporations, it is the president who responds personally for violation of the labor pay laws. Villanueva v. Adre, 172 SCRA 876 (1989). A.C. Ransom doctrine has been reiterated subsequently in Restuarante Las Conchas v. Llego, 314 SCRA 24 (1999); Carmelcraft Corp. v. NLRC, 186 SCRA 393 (1990); Valderrama v. NLRC, 256 SCRA 466 (1996). Since a corporation is an artificial person, it must have an officer who can be presumed to be the employer, being the person acting in the interest of the employerthe corporation, in the technical sense only, is the employer. The manager of the corporation falls within the meaning of an employer as contemplated by the Labor code, who may be held jointly and severally liable for the obligation of
60
the corporation to its dismissed employees. NYK International Knitwear Corp. Phil. V. NLRC, 397 SCRA 607 (2003). (iv) Definitive Overturning of A.C. Ransom Ruling: It is settled that in the absence of malice, bad faith, or specific provisions of law, a stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities. McLeod v. NLRC, 512 SCRA 222 (2007), citing Land Bank of the Philippines v. Court of Appeals, 364 SCRA 375 (2001); Bogo-Medellin Sugarcane Planters Asso., Inc. v. NLRC, 296 SCRA 108 (1998); Complex Electronics Employees Assn. v. NLRC, 310 SCRA 403 (1999); Acesite Corp. v. NLRC, 449 SCRA 360 (2005); CocaCola Bottlers Phils., Inc. v. Daniel, 460 SCRA 494 (2005); Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006); Supreme Steel Pipe Corp. v. Bardaje, 522 SCRA 155 (2007). Clearly, in A.C. Ransom, RANSOM, through its 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); H.R. Carlos Construction, Inc. v. Marina Properties Corp., 421 SCRA 428 (2004); Pamplona Plantation Company v. Acosta , 510 SCRA 249 (2006); Elcee Farms, Inc. v. NLRC, 512 SCRA 602 (2007); Uy v. Villanueva, 526 SCRA 73 (2007). It was clarified in Carag v. NLRC, 520 SCRA 28 (2007), and McCleod v. NLRC, 512 SCRA 22 (2007), that Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporationthe governing law on personal liability of directors or officers for debts of the corporation is still Section 31 of the Corporation Cede. Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); David v. National Federation of Labor Unions, 586 SCRA 100 (2009). (c) Personal Liability of Trustees and Officers of Non-Stock Corporation The non-stock corporation acted in clear bad faith when it sent the final notice to a member under the pretense they believed him to be still alive, when in fact it had very well known that he had already died. Valley Golf and Country Club, Inc. v. Vda. De Caram, 585 SCRA 218 (2009). Non-stock corporations and their officers are not exempt from the obligation imposed by Articles 19, 20 and 21 under the Chapter on Human Relations of the Civil Code, which provisions enunciate a general obligation under law for every person to act fairly and in good faith towards one another. Valley Golf and Country Club, Inc. v. Vda. De Caram, 585 SCRA 218 (2009).
Close Corporations CEASE V. CA (93 SCRA 483; 1979) The Cease plantation was solely composed of the assets and properties of the defunct Tiaong plantation whose license to operate already expired. The legal fiction of separate corporate personality was attempted to be used to delay and deprive the respondents of their succession rights to the estate of their deceased father. While originally, there were other incorporators of Tiaong, it has developed into a closed family corporation (Cease). The head of the corporation, Cease, used the Tiaong plantation as his instrumentality. It was his business conduit and an extension of his personality. There is not even a showing that his children were subscribers or purchasers of the stocks they own.
DELPHER TRADES V. CA (157 SCRA 349; 1988) The Delpher Trades Corp. is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher and placing the control of their properties under the corporation. This saved them inheritance taxes. This is the reverse of Cease; however, it does not modify the other cases. It stands on its own because of the facts.
61
Parent-Subsidiary Relationship Q: What is the general rule governing parent-subsidiary relationship? A: The mere fact that a corporation owns all or substantially all of the stocks of another corporation is not alone sufficient to justify their being treated as one entity. Q: When may it be disregarded by the courts? (1) if the subsidiary was formed for the payment of evading the payment of higher taxes (2) where it was controlled by the parent that its separate identity was hardly discernible (3) parent corporations may be held responsible for the contracts as well as the torts of the subsidiary
Q: What are the criteria by which the subsidiary can be considered a mere instrumentality of the parent company?
1. the parent corp. owns all or most of the capital stock of the subsidiary. 2. the parent and subsidiary have common directors and officers 3. the parent finances the subsidiary 4. the parent subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation 5. the subsidiary has grossly inadequate capital 6. the parent pays the salaries and other expenses or losses of the subsidiary 7. the subsidiary has substantially no business except with the parent corp. or no assets except those conveyed to or by the parent corp. 8. in the papers of the parent corp. or in the statements of its officers, the subsidiary is described as a department or division of the parent corp. or its business or financial responsibility is referred as the parents own 9. the parent uses the property of the subsidiary as its own 10. the directors or the executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corp. in the latters interest 11. the formal legal requirements of the subsidiary are not observed (Garrett vs. Southern Railway) (Note: Sir Jack said that we must not stop after weve gone through the 11 points in order to determine whether or not there is a subsidiary or instrumentality. We must go further and consider other circumstances which may help determine clearly the true nature of the relationship. --- Em)
GARRETT VS. SOUTHERN RAILWAY (173 F. Supp. 915, E.D. Tenn. 1959) This case involved a Workers Compensation claim by a wheel moulder employed by Lenoir Car Works. The plaintiff sought to claim from Southern Railway Company, which acquired the entire capital stock of Lenoir Car Works. Plaintiff contended that Southern so completely dominated Lenoir that the latter was a mere adjunct or instrumentality of Southern. The general rule is that stock ownership alone by one corporation of the stock of another does not thereby render the dominant corporation liable for the torts of the subsidiary, unless the separate corporate existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation.
62
In the case, it was found that there were two distinct operations. There was no evidence that Southern dictated the management of Lenoir. In fact, evidence shows that Marius, the manager of the subsidiary, was in full control of the operation. He established prices, handled negotiations in CBAs, etc. Lenoir paid local taxes, had local counsel and maintain a Workmens Compensation Fund. There was also no evidence that Lenoir was run solely for the benefit of Southern. In fact, a substantial part of its requirements in the field of operation of Lenoir was bought elsewhere. Lenoir sold substantial quantities to other companies. Policy decisions remained in the hands of Marius. Hence, the complaint against Southern Railway was dismissed. KOPPEL VS. YATCO (77 Phil. 496; 1946) This case involved a complaint for the recovery of merchant sales tax paid by Koppel (Philippines), Inc. under protest to the Collector of Internal Revenue. Although the Court of First Instance did not deny legal personality to Koppel (Philippines), Inc. for any and all purposes, it dismissed the complaint saying that in the transactions involved in the case, the public interest and convenience would be defeated and would amount to a perpetration of tax evasion unless resort was had to the doctrine of "disregard of the corporate fiction." The facts show that 99.5% of the shares of stocks of K-Phil were owned by K-USA. K-Phil. acted as a representative of K-USA and not as an agent. K-Phil. also bore alone its own incidental expenses (e.g. Cable expenses) and also those of its principal. Moreover, K-Phils share in the profits was left in the hands of K-USA. Clearly, K-Phil was a mere branch or dummy of K-USA, and was therefore liable for merchant sales tax. To allow otherwise would be to sanction a circumvention of our tax laws and permit a tax evasion of no mean proportion and the consequent commission of a grave injustice to the Government. Moreover, it would allow the taxpayer to do by indirection what the tax laws prohibit to be done directly. LIDDELL & CO. VS. CIR (2 SCRA 632; 1961) Liddel Motors Inc. was an alter ego of Liddel & Co. At the time of its incorporation, 98% of the Liddel Inc.s stock belonged to Frank Liddel. As to Liddel Motors, Frank supplied the original capital funds. The bulk of the business of Liddel Inc. was channeled through Liddel Motors. Also, Liddel Motors pursued no other activities except to secure cars, trucks and spare parts from Liddel Inc. and then sell them to the general public. To allow the taxpayer to deny tax liability on the ground that the sales were made through another and distinct corporation when it is proved that the latter is virtually owned by the former or that they were practically one and the same is to sanction the circumvention of tax laws. YUTIVO VS. CTA (1 SCRA 160; 1961) Southern Motors was actually owned and controlled by Yutivo as to make it a mere subsidiary or branch of the latter created for the purpose of selling vehicles at retail. Yutivo financed principally, if not wholly, the business of Southern Motors and actually exceeded the credit of the latter . At all times, Yutivo, through the officers and directors common to it and the Southern Motors exercised full control over the cash funds, policies, expenditures and obligations of the latter. Hence, Southern Motors, being a mere instrumentality or adjunct of Yutivo, the CTA correctly disregarded the technical defense of separate corporate identity in order to arrive at the true tax liability of Yutivo. LA CAMPANA VS. KAISAHAN (93 Phil. 160; 1953) The La Campana Gaugau Packing and La Campana Coffee Factory were operating under one single business although with 2 trade names. It is a settled doctrine that the fiction of law of having the corporate identity separate and distinct from the identity of the persons running it cannot be invoked to further the end subversive of the purpose for which it was created. In the case at bar, the attempt to make the two businesses appear as one is but a device to defeat the ends of the law governing capital and labor relations and should not be permitted to prevail.
PROMOTERS CONTRACTS PRIOR TO INCORPORATION Liability of Corporation for Promoters Contracts

63
While a corporation could not have been a party to a promoter's contract since it did yet exist at the time the contract was entered into and thus could not possibly have had an agent who could legally bind it, the corporation may make the contracts its own and become bound thereon if, after incorporation, it: (1) Adopts or ratifies the contract; or (2) Accepts its benefits with knowledge of the terms thereof. It must be noted, however, that the contract must be adopted in its entirety; the corporation cannot adopt only the part that is beneficial to it and discard that which is burdensome. Moreover, the contract must be one which is within the powers of the corporation to enter, and one which the usual agents of the company have express or implied authority to enter.
McARTHUR V. TIMES PRINTING CO. (48 Minn. 319, 51 N.W. 216; 1892) It is not a requisite that a corporation's adoption or acceptance of a promoter's contract be expressed, but it may be inferred from acts or acquiescence on the part of the corporation, or its authorized agents, as any similar original contract might be shown. The right of agents to adopt an agreement originally made by promoters depends upon the purposes of the corporation and the nature of the agreement. The agreement must be one which the corporation itself could make and one which the usual agents of the company have express or implied authority to enter into. CLIFTON v. TOMB (21 F. 2d 893; 1921) Whatever may be the proper legal theory by which a corporation may be bound by the contract (ratification, adoption, novation, a continuing offer to be accepted or rejected by the corporation), it is necessary in all cases that the corporation should have full knowledge of the facts, or at least should be put upon such notice as would lead, upon reasonable inquiry, to the knowledge of the facts. CAGAYAN FISHING DEV. CO. v. SANDIKO (65 Phil. 223; 1937) A promoter could not have acted as agent for a corporation that had no legal existence. A corporation, until organized, has no life therefore no faculties. The corporation had no juridical personality to enter into a contract. Also see Caram v. CA
Corporate Rights under Promoters Contracts

Should the other contracting party fail to perform its part of the bargain, the corporation which has adopted or ratified the contract may either sue for: (1) Specific performance; or (2) Damages resulting from breach of contract.
The fact of bringing an action on the contract has been held to constitute sufficient adoption or ratification to give the corporation a cause of action.
BUILDERS DUNTILE CO. v. DUNN (229 Ky. 569, 17 S.W. 2d 715; 1929) When the corporation was formed, the incorporators took upon themselves the whole thing, and ratified all that had been done on its behalf. Though there was no formal
64
assignment of the contract to the corporation, the acts of the incorporators were an adoption of the contract. Therefore the corporation has the right to sue for damages for the breach of contract. RIZAL LIGHT V. PSC (25 SCRA 285; 1968) The incorporation of (Morong) and its acceptance of the franchise as shown by this action in prosecuting the application filed with the Commission for approval of said franchise, not only perfected a contract between the municipality and Morong but also cured the deficiency pointed out by the petition. The fact that Morong did not have a corporate existence on the day the franchise was granted does not render the franchise invalid, as Morong later obtained its certificate of incorporation and accepted the franchise.
Personal Liability of Promoter on Pre-Incorporation Contracts
GENERAL RULE:
Promoters are personally liable on their contracts made on behalf of a corporation to be formed. If there is an express or implied agreement to the contrary. It must be noted that the fact that the corporation when formed has adopted or ratified the contract does not release the promoter from responsibility unless a novation was intended.
EXCEPTION:
WELLS VS. FAY & EGAN CO. (143 Ga. 732, 85 S.E. 873; 1915) Individual promoters cannot escape liability where they buy machinery, receive them in their possession and authorize one member to issue a note, in contemplation of organizing a corporation which was not formed. (see Campos' notes p. 258-259). The agent is personally liable for contracts if there is no principal. The making of partial payments by the corporation, when later formed, does not release the promoters here from liability because the corporation acted as a mere stranger paying the debt of another, the acceptance of which by the creditor does not release the debtors from liability over the balance. Hence, there is no adoption or ratification.
HOW & ASSOCIATES INC. VS. BOSS (222 F. Supp. 936; 1963) The rule is that if the contract is partly to be performed before incorporation, the promoters solely are liable. Even if the promoter signed "on behalf of corporation to be formed, who will be obligor," there was here an intention of the parties to have a present obligor, because three-fourths of the payment are to be made at the time the drawings or plans in the architectural contract are completed, with or without incorporation. A purported adoption by the corporation of the contract must be expressed in a novation or agreement to that effect. The promoter is liable unless the contract is to be construed to mean: 1) that the creditor agreed to look solely to the new corporation for payment; or 2) that the promoter did not have any duty toward the creditor to form the corporation and give the corporation the opportunity to assume and pay the liability.
QUAKER HILL VS. PARR (148 Colo. 45, 364 P. 2d 1056; 1961) The promoters here are not liable because the contract imposed no obligation on them to form a corporation and they were not named there as obligors/promissors. The creditor-plaintiff was aware of the inexistence of the corporation but insisted on naming it as obligor because the planting season was fast approaching and he needed to dispose of the
65
seedlings. There was no intent here by plaintiff-creditor to look to the promoters for the performance of the obligation. This is an exception to the general rule that promoters are personally liable on their contracts, though made on behalf of a corporation to be formed.
Fiduciary relationship between corporation and promoter

OLD DOMINION VS. BIGELOW (203 Mass. 159, 89 N.E. 193; 1909) A promoter, notwithstanding his fiduciary duties to the corporation, may still sell properties to it, but he must pursue one of four courses to make the contract binding. These are: 1) provide an independent board of officers in no respect directly or indirectly under his control, and make full disclosure to the corporation through them; 2) make full disclosure of all material facts to each original subscriber of shares in the corporation; 3) procure a ratification of the contract after disclosing its circumstances by vote of the stockholders of the completely established corporation; or 4) be himself the real subscriber of all the shares of the capital stock contemplated as a part of the promotion scheme. The promoter is liable, even if owning all the stock of the corporation at the time of the transaction, if further original subscription to capital stock contemplated as an essential part of the scheme of promotion came in after such transaction.
CORPORATE POWERS
General Powers of Corporation (Sec. 36)

IX. CORPORATE POWERS AND AUTHORITY
1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45; Land Bank of the Philippines v. COA, 190 SCRA 154 [1990]) A corporation has only such powers as are expressly granted to it by law and by its articles of incorporation, those which may be incidental to such conferred powers, those reasonably necessary to accomplish its purposes and those which may be incident to its existence. Pilipinas Loan Company v. SEC, 356 SCRA 193 (2001). (a) Classification of Corporate Powers: Express; Implied; and Incidental (b) Where Corporate Power Lodged A corporation has no power except those expressly conferred on it by the 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 and agents. . . 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 by-laws or by a specific act of the board of directors. Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001). Unless otherwise provided by the Corporation Code, corporate powers are exercised by the Board of Directors, which they may delegate to either an executive committee, officers or contracted managers. The delegation, except for the executive committee, must be for specific purposes, which makes the officers the agents of the corporation, and accordingly the general rules of agency as to the binding effects of their acts would apply. For such officers to be deemed fully clothed by the corporation to exercise a power of the Board, the latter must specially authorize them to do so. ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 572 (1999).
SUMMARY CORPORATE POWERS: ENUMERATED UNDER S36==EXPRESS

To sue and be sued in its corporate name; Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; To adopt and use a corporate seal; To amend its articles of incorporation in accordance with the provisions of this Code;
66
To adopt by-laws not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; In case of stock corporations, to issue of sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; To purchase, receive, take, grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; (NOTE: There are two (2) general restrictions on the power of the corp. to acquire and hold properties:
(1) that the property must be reasonable and necessarily

required by the transaction of its lawful business, and
(2) that the power shall be subject to the limitations prescribed

by other special laws and the Constitution.) To adopt any plan of merger or consolidation as provided in this Code; To make reasonable donations, including those for the public welfare of for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided that: no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity;
To establish pension, retirement and other plans for the benefit of its directors, trustees, officers and employees; and To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in its articles of incorporation.
Specific Powers of Corporation === EXPRESS

Extension or shortening of the corporate term (Sec. 37) Increase or decrease of the capital stock (Sec. 38) Incur, create or increase bonded indebtedness (Sec. 38) Denial of the pre-emptive right (Sec. 39) Sale or other disposition of substantially all its assets. (Sec. 40)
A sale is deemed to substantially cover all the corporate property and assets if such sale renders the corporation incapable of continuing the business or accomplishing the purpose for which it was incorporated.
Express Powers
Acquisition of its own shares. (Sec. 41) Investment in another corporation or business. (Sec. 42) Declaration of dividends. (Sec. 43) Entering into management contracts. (Sec. 44)
(a) Enumerated Powers (Secs. 36) (b) Extend or Shorten Corporate Term (Secs. 37 and 81 [1])== MAJORITY VOTE BOD; 2/3 SH/MEMBERS (c) Increase or Decrease Capital Stock (Sec. 38)MAJORITY BOD; 2/3 SH /MEMBERS
67
Despite the board resolution approving the increase in capital stock and the receipt of payment on the future issues of the shares from the increased capital stock, such funds do not constitute part of the capital stock of the corporation until approval of the increase by SEC. Central Textile Mills, Inc. v. NWPC, 260 SCRA368 (1996). A reduction of capital to justify the mass layoff of employees, especially of union members, amounts to nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital through the years, and would constitute unfair labor practice. Madrigal & Co. v. Zamora, 151 SCRA 355 (1987). (d) Incur, Create or Increase Bonded Indebtedness (Sec. 38) SAME ABOVE (e) Sell or Dispose of Assets (Sec. 40)MAJORITY OF BOD ; 2/3 SH/ MEMBERS The Corporation Code defines a sale or disposition of substantially all assets and property of a corporation as one by which the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporatedany sale or disposition short of this will not need stockholder ratification, and may be pursued by the majority vote of the Board of Directors. Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009). The property of the corporation is not the property of the stockholders or members, and as such, may not be sold without express authority from the board of directors. Litonjua v. Eternit Corp., 490 SCRA 204 (2006). The disposition of the assets of a corporation shall be deemed to cover substantially all the corporate property and assts, 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. Caltex (Phils.), Inc. v. PNOC Shipping and Transport Corp., 498 SCRA 400 (2006). Sale by Board of Trustees of the only corporate property without compliance with Sec. 40 of Corporation Code requiring ratification of members representing at least two-thirds of the membership, would make the sale null and void. Islamic Directorate v. Court of Appeals, 272 SCRA 454 (1997); Pea v. CA, 193 SCRA 717 (1991). (f) Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 42;De la Rama v. Ma-ao Sugar Central Co., 27 SCRA 247 [1969] )MAJORITY ; 2/3 SH /MEMBERS (g) Declare Dividends (Sec. 43;Nielson & Co. v. Lepanto Consolidated Mining Co., 26 SCRA 540 [1968]) 2/3 SH Stock dividend is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can loosely be termed as the trust fund of the corporation. NTC v. CA, 311 SCRA 508 (1999). (h) Enter into Management Contracts (Sec. 44;Nielson & Co., Inc. v. Lepanto Consolidated Mining, 26 SCRA 540 [1968]; Ricafort v. Moya, 195 SCRA 247 [1991]). Why the difference in rule between entity and individual? ) MAJORITY; 2/3 SH MEMBERS
Implied Powers
Under Sec. 36, a corporation is given such powers as are essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. This phrase gives rise to such a wide range of implied powers, that it would not be at all difficult to defend a corporate act versus an allegation that it is ultra vires. A corporation is presumed to act within its powers and when a contract is not its face necessarily beyond its authority; it will, in the absence of proof to the contrary, be presumed valid. 4. Implied Powers When the articles expressly provide that the purpose of the corporation wa s 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, and, for which reason, may not acquire any certificate of public convenience to operate a taxicab service. 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. NPC v. Vera, 170 SCRA 721 (1989).
68
A corporation organized to engage as a lending investor cannot engage in pawN broker. Philipinas 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). 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 of stock. Inter-Asia Investments Industries v. Court of Appeals, 403 SCRA 452 (2003).
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. CA, 353 SCRA 23 (2001). Other Powers (Sec. 36) (a) Sell Land and Other Properties When the corporations primary purpose is to market, distribute, export and import merchandise, the sale of land is not within the actual or apparent authority of the corporation acting through its officers, much less when acting through the treasurer. Likewise Articles 1874 and 1878 of Civil Code requires that when land is sold through an agent, the agents authority must be in writing, otherwise the sale is void. San Juan Structural v. CA, 296 SCRA 631 (1998); AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp. , 414 SCRA 190 (2003). (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 in the corporation was to explicitly authorize an officer to contract loans in behalf of the corporation. China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).
(c) Power to Sue and Be Sued Under Sec. 36 of Corporation Code, in relation to Sec. 23, where a corporation is an injured party, its power to sue is lodged with its Board of Directors. A minority stockholder who is a member of the Board has no such power or authority to sue on the cor porations behalf. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001); Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002); United Paragon Mining Corp. v. Court of Appeals , 497 SCRA 638 (2006); Mediserv, Inc. v. Court of Appeals, 617 SCRA 284 (2010). (i) Certificate of Non-Forum Shopping: Where the corporation is real party-in-interest, neither administrator or a project manager could sign the certificate against forum-shopping without being duly authorized by resolution of the Board of Directors (Esteban, Jr. v. Vda. de Onorio, 360 SCRA 230 [2001]), nor the General Manager who has no authority to institute a suit on behalf of the corporation even when the purpose is to protect corporate assets. Central Cooperative Exchange Inc. v. Enciso, 162 SCRA 706 (1988). When the power to sue is delegated by the by-laws to a particular officer, such officer may appoint counsel to represent the corporation in a pre-trial hearing without need of a formal board resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993). For counsel to sign the certification for the corporation, he must specifically be authorized by the Board of Directors. BPI Leasing Corp. v. CA, 416 SCRA 4 (2003); Mariveles Shipyard Corp. v. CA, 415 SCRA 573 (2003). If the petitioner is a corporation, a board resolution authorizing a corporate officer to execute the certification against forum shopping is necessarya certification not signed by a duly authorized person renders the petition subject to dismissal. Gonzales v. Climax Mining Ltd., 452 SCRA 607 (2005); DBP v. Court of Appeals, 440 SCRA 200 (2004); Public Estates Authority v. Uy, 372 SCRA 180 (2001); Metro Drug Distribution, Inc. v. Narcisco, 495 SCRA 286 (2006); Mediserv, Inc. v. Court of Appeals, 617 SCRA 284 (2010). When a corporate officers 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). In a number of cases, the Court has declared invalid an act of an officer in behalf of the corporation without covering board resolution: signing the certificate of non-forum shopping in a petition filed in
69
behalf of the corporation.15 Nonetheless, even if the counsel executed the verification and certificate of non-forum shopping before the board authorized him, the passing of the board resolution of authorization before the actual filing of the complaint. Median Container Corp. v. Metropolitan Bank and Trust Co., 561 SCRA 622 (2008); the submission in the motion for reconsideration of the authority to sign the verification and certification constitutes substantial compliance with the procedural requirements. Asean Pacific Planners v. City of Urdaneta, 566 SCRA 219 (2008). (ii) Service of Summons on Corporations Corporate Bookkeeper: For purposes of determining proper service of summons to a corporation in a quasi-judicial proceeding before the NLRC, a bookkeeper can be considered as an agent of the corporation within the purview of the Rules of Court. The rationale of all rules with respect to service of process on a corporation is that such service must be made to an agent or a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him. The bookkeepers task is one under consideration that his regular recording of the corporations business accounts and essential facts about the transactions of a business or enterprise safeguards the corporation from possible fraud being committed adverse to its own corporate interest. Pabon v. NLRC, 296 SCRA 7 (1998).
Prevailing Rule: Section 11, Rule 14 of the 1997 Rules of Civil Procedure uses the term general manager, SECRETARY, TREASURER,IN HOUSE COUNSEL,MANAGING PARTNER, PRESIDENT 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 exclusion alterius. Therefore, the earlier cases that uphold service of summons upon a construction project manager; 16 a corporations assistant manager;17 ordinary clerk of a corporation; 18 private secretary of corporate executives;19 retained counsel;20 officials who had charge or control of the operations of the corporation, like the assistant general manager;21 or the corporations Chief Finance and Administrative Officer;22 no longer apply since they were decided under the old rule that allows service of summons upon an agent 23 of the corporation. E.B. Villarosa & Partners Co., Ltd. v. Benito , 312 SCRA 65 (1999). (d) Power to Hire Employees and Appoint Agents It is well settled that except where the authority of employing servants and agents is expressly vested in the board of directors or trustees, an officer or agent who has general control and management of the corporations business, or a specific part ther eof, may bind the corporation by the employment of such agents and employees as are usual and necessary in the conduct of such business. But the contracts of employment must be reasonable. Yu Chuck v. Kong Li Po, 46 Phil. 608, 614 (1924). (e) Provide Gratuity Pay for Employees (Sec. 36[10]) Providing gratuity pay for employees is an express power of a corporation under the Corporation Code, and cannot be considered to be ultra vires to avoid any liability arising from the issuance of resolution granting such gratuity pay. Lopez Realty v. Fontecha, 247 SCRA 183, 192 (1995). (f) Donate (Sec. 36[9]) PROHIBITION ON DONATION IN AID OF A POLITICAL PARTY OR CANDIDATE OR FOR THE PURPOSE OF PARTISAN ACTIVITY. (g) Enter Partnership or Joint Venture. Tuason & Co. v. Bolanos, 95 Phil. 106 (1954); SEC Opinion, dated 29 February 1980.
The Ultra Vires Doctrine

Blacks Law Dictionary Definition: Ultra vires acts are those acts beyond the scope of the powers of the corporation , as defined by its charter or laws of state of incorporation. The term has a broad application and includes not
15 Philippine Airlines, Inc. v. Flight Attendance and Stewards Association of the Philippines (FASAP) , 479 SCRA 605 (2006); Metro Drug Distribution, Inc. v. Narciso, 495 SCRA 286 (2006); Cagayan Valley Drug Corp. v. Commissioner of Internal Revenue, 545 SCRA 10 (2008). 16 Kanlaon Construction Enterprises Co., Inc. v. NLRC, 279 SCRA 337 (1997). 17 Gesulgon v. NLRC, 219 SCRA 561 (1993). 18 Golden Country Farms, Inc. v. Sanvar Development Corp. , 214 SCRA 295 (1992); G & G Trading Corp. v. Court of Appeals, 158 SCRA 466 (1988). 19 Summit Trading and Dev. Corp. v. Avendao, 135 SCRA 397 (1985); also Vlason Enterprises Corp. v. Court of Appeals, 310 SCRA 26 (1999). 20 Republic v. Ker & Co., Ltd., 18 SCRA 207 (1966). 21 Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298 (1978). 22 Far Corporation v. Francisco, 146 SCRA 197 (1986). 23 Filoil Marketing Corp. v. Marine Dev. Corp. of the Philippines, 177 SCRA 86 (1982). Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto. Includes ATTY DY AND VILLANUEVA OUTLINE ATENEO 2011
70
only acts prohibited by the charter, but acts which are in excess of powers granted and not prohibited, and generally applied either when a corporation has no power whatever to do an act, or when the corporation has the power but exercises it irregularly. 2. ULTRA VIRES DOCTRINE (a) Concept Contracts or acts of a corporation must be made either by the board of directors or by a corporate agent duly authorized by the boardabsent 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). (b) Types of Ultra Vires Acts (Sec. 45) A corporation has no power except those expressly conferred on it by the 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 and agents. Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004). 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. International Exchange Bank , 581 SCRA 115 (2009). (i)First Type Ultra Vires: 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). (ii)Second Type Ultra Vires: When the President enters into speculative contracts, without prior board approval, and without subsequent submission of those contracts to the Board for approval or ratification, nor were the transactions included in the reports of the corporation, such contracts do not bind the corporation. It must be pointed out that the Board of Directors, not the President, exercises corporate powers. Safic Alcan & Cie v. Imperial Vegetable Oil Co., Inc. , 355 SCRA 559 (2001). Generally, the acts of the corporate officers within the scope of their authority are binding on the corporation. However, under Article 1910 of the New 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. . . . Thus, contracts entered into by corporate officers beyond the scope of authority are unenforceable against the corporation unless ratified by the Corporation . Woodchild Holdings, Inc. v. Roxas Electric Constructions Company, Inc. , 436 SCRA 235 (2004). (c) 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. International Exchange Bank, 581 SCRA 115 (2009).
(d) Ratification of Ultra Vires Acts: (Pirovano v. De la Rama Steamship Co., Inc., 96 Phil. 335 [1954]; Carlos v. Mindoro Sugar Co., 57 Phil. 343 [1932]; Republic v. Acoje Mining Co., 3 SCRA 361 [1963]; Crisologo Jose v. Court of Appeals, 177 SCRA 594 [1989]; Harden v. Benguet Consolidated Mining Co., 58 Phil. 140 [1933]) . Acts done in excess of corporate 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. National Power Corp. v. Alonzo-Legasto, 443 SCRA 342 (2004).
Q AND A: Q: What are the consequences of ultra vires acts?

The corporation may be dissolved under a quo warrranto proceeding. The Certificate of Registration may be suspended or revoked by the SEC. Parties to the ultra vires contract will be left as they are, if the contract has been fully executed on both sides. Neither party can ask for specific performance, if the contract is executory on both sides. The contract, provided that it is not
EDWIN PADILLO BAR 2013 illegal, will be enforced, where one party has performed his part, and the other has not with the latter having benefited from the formers performance. Any stockholder may bring an individual or derivative suit to enjoin a threatened ultra vires act or contract. If the act or contract has already been performed, a derivative suit for damages against the directors maybe filed, but their liability will depend on whether they acted in good faith and with reasonable diligence in entering into the contracts. When the suit against the injured party who had no knowledge that the corporation was engaging in an act not included expressly or impliedly in its purposes clause. Ultra vires acts may become binding by the ratification of all the stockholders, unless third parties are prejudiced thereby, or unless the acts are illegal.
71
REPUBLIC OF THE PHILS. v. ACOJE MINING (7 SCRA 361; 1963) Resolution adopted by the company to open a post office branch at the mining camp and to assume sole and direct responsibility for any dishonest, careless or negligent act of its appointed postmaster is NOT ULTRA VIRES because the act covers a subject which concerns the benefit, convenience, and welfare of the companys employees and their families. While as a rule 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 powers conferred upon it by law, there are however certain corporate acts that may be performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation. CARLOS v. MINDORO SUGAR CO. (57 SCRA 343, 1932) The BOD of the Phil Trust Co. adopted a resolution which authorized its president to purchase at par and in the name of the corp. bonds of MSC. These bonds were later resold and guaranteed by PTC to third persons. PTC paid plaintiff the corresponding interest payments until July 1, 1928 when it alleged that it is not bound to pay such interest or to redeem the obligation because the guarantee given for the bonds was illegal and void. Held: The act of guaranty by PTC was well within its corporate powers. Furthermore, having received money or property by virtue of the contract which is not illegal, it is estopped from denying liability. Even if the then prevailing law (Corp. Law) prohibited PTC from guaranteeing bonds with a total value in excess of its capital, with all the MSC properties transferred to PTC based on the deed of trust, sufficient assets were made available to secure the payment of the corresponding liabilities brought about by the bonds. GOVT v. EL HOGAR (50 Phil 399; 1932) (This case is an example of how the implied powers concept may be used to justify certain acts of a corporation.) A quo warranto proceeding instituted by the Gov't against El Hogar, a building and loan ass'n to deprive it of its corp. franchise. 1. El Hogar held title to real property for a period in excess of 5 years in good faith, hence this cause will not prosper. 2. El Hogar owned a lot and bldg. at a business district in Manila allegedly in excess of its reasonable requirements, held valid bec, it was found to be necessary and legally acquired and developed.
72
3. El Hogar leased some office space in its bldg.; it administered and managed properties belonging to delinquent SHs; and managed properties of its SHs even if such were not mortgaged to them. Held: first two valid, but the third is ultra vires bec. the administration of property in that manner is more befitting of the business of a real estate agent or trust company and not of a building and loan ass'n. ( no compatibility. Kalayo sa purpose of incorporation) 4. Compensation to the promoter and organizer allegedly excessive and unconscionable. Held: Court cannot dwell on the issue since the promoter is not a party in the proceeding and it is the corp. or its SHs who may bring a complaint on such. 5. Issuance of special shares did not affect El Hogar's character as a building and loan ass'n nor make its loans usurious. 6. Corporate policy of using a depreciation rate of 10 % per annum is not excessive, bec. accdg. to the SC, the by-laws expressly authorizes the BOD to determine each year the amount to be written down upon the expenses of installation and the property of the corp. 7. The Corp. Law does not expressly grant the power of maintaining reserve funds but such power is implied. All business enterprises encounter periods of gains and losses, and its officers would usually provide for the creation of a reserve to act as a buffer for such circumstances. 8. That loans issued to member borrowers are being used for purposes other than the bldg. of homes not invalid bec. there is no statute which expressly declares that loans may be made by these ass'ns solely for the purpose of bldg. homes. 9. Sec. 173 of the Corp. Law provides that "any person" may become a SH on a bldg. and loan ass'n. The word "person" is used on a broad sense including not only natural persons but also artificial persons.
BISSEL v. MICHIGAN SOUTHERN ( 22 NY 258; 1860) Two railroad corporations contend that they transcended their own powers and violated their own organic laws. Hence, they should not be held liable for the injury of the plaintiff who was a passenger in one of their trains. Held: The contract between the two corporations was an ultra vires act. However, it is not one tainted with illegality, therefore, the accompanying rights and obligations based on the contract of carriage between them and the plaintiff cannot be avoided by raising such a defense.
PIROVANO v. DELA RAMA STEAMSHIP (96 Phil 335 , 1954) This case involved the issue of whether or not the defendant corporation performed an ultra vires act by donating the life insurance proceeds to the minor children of Pirovano, the deceased president of the defendant company under whose management the company grew and progressed to become a multi-million peso corporation. Held: NO.
The AOI of the corporation provided two relevant items: (1) to invest and deal with moneys of the company not immediately required, in such manner as from time to time may be determined; and
73
(2) to aid in any other manner any person, association or corporation of which any obligation or in which any interest is held by this corporation or in the affairs of prosperity of which this corporation has a lawful interest. From this, it is obvious that the corporation properly exercised within its chartered powers the act of availing of insurance proceeds to the heirs of the insured and deceased officer. HARDEN v. BENGUET CONSOLIDATED (58 Phil 141) A contract between Benguet and Balatoc provided that Benguet will bring in capital, eqpt. and technical expertise in exchange for capital shares in Balatoc. Harden was a SH of Balatoc and he contends that this contract violated the Corp.Law which restricts the acquisition of interest by a mining corp. in another mining corp. Held: Harden has no standing bec. if any violation has been committed, the same can be enforced only in a criminal prosecution by an action of quo warranto which may be maintained only by the Attorney-General.
CONTROL AND MANAGEMENT Allocation of Power and Control Q: What are the three levels of corporate control/power? Board of directors or trustees- responsible for corporate policies and the general management of the business and affairs of the corporation. Officers- execute the policies laid down by the board. Stockholders or members- have residual power over fundamental corporate changes like amendments of articles of incorporation.
Who Exercises Corporate Powers Board of directors or trustees Q: What are the powers of the BOD? The BOD is responsible for corporate policies and the general management of the business affairs of the corporation. (See Citibank v Chua) (a) Authority (Sec. 24) Requirements (i) Qualifying share (Sec. 24) must own 1 share of the capital stock of the corporation of which he is a director; trustees (NS) must be a member Residence (Sec. 24) majority must be a resident of the Philippines. Nationality Filipino or foreign Disqualifications (Sec. 27) - conviction by final judgment of offense punishable > 6 yrs. prison - violation of Corporation code within 5 years prior to date of election or appointment
(ii) (iii) (iv)
(b) How elected (Sec. 24) The formula for determining the number of shares needed to elect a given number of directors is as follows: X = Y x N1 N+1 +1
X = being the number of shares needed to elect a given number of directors Y = being the total number of shares present or represented at the meeting N1 = being the number of directors desired to be elected N = being the total number of directors to be elected

(c) How removed (Sec. 28)
74
By a vote of the SHs holding or representing at least 2/3 of the outstanding capital stock, or by a vote of at least 2/3 of the members entitled to vote, provided that such removal takes place at either a regular meeting of the corporation or at a special meeting called for the purpose. In both cases, there must be previous notice to the SHs / members of the intention to propose such removal at the meeting. Removal may be with or without cause. However, removal without cause may not be used to deprive minority SHs or members of the right of representation to which they may be entitled under Sec. 24 of the Code. (d) How vacancy filled (Sec. 29) If vacancy due to removal or expiration of term: If "vacancy" due to increase in number of directors or trustees: Must be filled by the SHs in a regular or special meeting called for that purpose. Only by means of an election at a regular or special SHs meeting duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting.
All other vacancies:
May be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum.
Note:
Directors or trustees so elected to fill vacancies shall be elected only for the unexpired term of their predecessors in office.
(e) How compensated (Sec. 30) If provided in by-laws: That compensation stated in the by-laws. If not provided in by-laws: Directors shall not receive any compensation other than reasonable per diems, as directors. However, compensation other than per diems may be granted to directors by a majority vote of the SHs at a regular or special stockholders' meeting.
Note: In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the net income before income tax of the corporation during the preceding year. (f) Matters requiring Board of Directors' action
(g) Liability (See subsequent discussion under Duties of Directors and Controlling Stockholders.) (i) In general (Sec. 31) (ii) Business judgment rule (iii) Dealings with the corporation (Sec. 32) (iv) Contracts between corporations with interlocking directors (Sec. 33) (v) (vi) (vii) Disloyalty (Sec. 34) Watered stocks (Sec. 65) Executive Committee (Sec. 35)
Board Committees The By-laws of the corporation may create an executive committee, composed of not less than 3 members of the Board, to be appointed by the Board. The executive committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in either (1) the By-laws, or (2) on a majority vote of the board. However, the following acts may never be delegated to an executive committee: (1) (2) (3) (4) approval of any action for which shareholders' approval is also required; the filling of vacancies in the board (refer to Sec. 29); the amendment or repeal of by-laws or the adoption of new by-laws; the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and
(5) a distribution of cash dividends to the shareholders.

HAYES V. CANADA, ATLANTIC AND PLANT S.S CO., LTD. (181 F. 289; 1910)

In this case, the Executive Committee: a) b) c) d)
75
removed the Treasurer and appointed a new one fixed the annual salary of the members of the Executive Committee amended the by-laws by giving the President the sole authority to call a stockholder's meeting and a board of directors meeting amended the composition of the ExeCom by limiting it to just 2 persons.
Was these actions valid? No, because the Executive Commmittee usurped the powers vested in the board and the stockholders. If their actions was valid, it would put the corp. in a situation wherein only two men, acting in their own pecuniary interests, would have absorbed the powers of the entire corporation. "Full powers" should be interpreted only in the ordinary conduct of business and not total abdication of board and stockholders' powers to the ExeCom. "FULL POWERS" does not mean unlimited or absolute power. (h) See subsequent discussion under Board Committees. RAMIREZ VS. ORIENTALIST CO AND FERNANDEZ (38 Phil. 634; 1918) In this case, the board of directors, before the financial inability of the corporation to proceed with the project was revealed, had already recognized the contracts as being in existence and had proceed with the necessary steps to utilize the films. The subsequent action by the stockholders in not ratifying the contract must be ignored. The functions of the stockholders are limited of nature. The theory of a corporation is that the stockholders may have all the profits but shall return over the complete management of the enterprise to their representatives and agents, called directors. Accordingly, there is little for the stockholders to do beyond electing directors, making by-laws, and exercising certain other special powers defined by law. In conformity with this idea, it is settled that contracts between a corporation and a third person must be made by directors and not stockholders. LOPEZ VS. ERICTA (45 SCRA 539; 1972) In this case, the Board of Regents of the University of the Philippines terminated the ad interim appointment of Dr. Blanco as Dean of the College of Education by not acting on the matter. In the transcript of the meeting which was latter agreed to be deleted, it was found out that the BOR, consisting of 12 members, voted 5 in favor of Dr. Blanco's appointment 3 voted against, and 4 abstained. The core of the issue is WON the 4 abstentions will be counted in favor of Dr. Blanco's appointment or against it. The SC held that such abstentions be counted as negative vote considering that those who abstained, 3 of which members of the Screening Committee, intended to reject Dr. Blanco's appointment. ZACHARY VS. MILLIN (294 Mic. 622; 1940) The issue in this case is regarding the validity of the director's meeting at the company's laboratory on December 8, 1937 wherein Zachary was removed as president of the company. Zachary that he was not notified of the meeting thus, the action was void. On the other hand, the defendants contend that the notice requirement was waived by Zachary's presence at the meeting. The SC held that the validity of the meeting was not affected by the failure to give notice as required by the bylaws, provided that the parties were personally present. Since all the parties were present at the meeting of December 8, and understood that the meeting was to be a directors' meeting, then the action taken is final and may not be voided by any informality in connection with its being called. PNB VS. CA (83 SCRA 238; 1978) The action was brought by the mortgagor (Tapnio) against PNB for damages in connection with the failure of the latter's board of directors to act expeditiously on the proposed lease of the former's sugar quota to one Tuazon. The Supreme Court held that while the PNB has the ultimate authority to approve or disapprove the proposed lease since the quota was mortgaged to PNB, the latter certainly cannot escape liability for observing, for the protection of the interest of the private respondents, that degree of care, precaution and vigilance which the circumstances justly demand in approving or disapproving the lease of the said sugar quota.
Corporate officers and agents (a) Minimum set of officers and their qualifications (Sec. 25) The minimum set of officers are: (1) president (who shall be a director); (2) secretary (who shall be a resident and Filipino citizen); and (3) treasurer (who may or may not be a director) The by-laws, however, may provide for other officers.
76
Any 2 or more positions may be held concurrently by the same person, except that no one shall act as (a) president and secretary, or (b) president and treasurer at the same time. (b) Disqualifications (Sec. 27) - Conviction by final judgment of an offense punishable by imprisonment > 6 yrs. Violation of Corporation Code committed within 6 yrs. prior to the date of election or appointment
(c) Liability in general (Sec. 31) See discussion under Duties of Directors and Controlling Stockholders. . (d) Dealings with the corporation (Sec. 32) Generally voidable (See discussion under Duties of Directors and Controlling Stockholders)
What is the doctrine of apparent authority? The doctrine of apparent authority provides that a corporation will be liable to innocent third persons for the acts of its agent where the representation was made by the agent in the course of business and acting within his/her general scope of authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his/her principal or some other person for his/her own ultimate benefit.
FIRST PHILIPPINE INTERNATIONAL BANK & RIVERA v. CA (January 24, 1996) The authority of a corporate officer in dealing with third persons may be actual or apparent. The doctrine of "apparent authority," with special reference to banks, was laid out in Prudential Bank v. CA (223 SCRA 350) where it was held that: A bank is liable for the wrongful acts of its officers done in the interest of the bank or in the course of dealings of the officers in their representative capacity but not for acts outside the scope of their authority. A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds they may thus be enabled to perpetrate in the apparent scope of their employment; nor will it be permitted to shrink from its responsibility for such frauds, even though no benefit may accrue to the bank therefrom. Accordingly, a bank is liable to innocent third persons where the representation is made in the course of its business by its agent acting within the general scope of his authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other person for his own ultimate benefit. Application of these principles is especially necessary because banks have a fiduciary relationship with the public and their stability depends on the confidence of the people in their honesty and efficiency. Such faith will be eroded where banks do not exercise strict care in the selection and supervision of its employees, resulting in prejudice to their depositors.
YU CHUCK V. KONG LI PO (46 Phil. 608; 1924) The power to bind a corporation by contract lies with its board of directors or trustees. Such power may be expressly or impliedly be delegated to other officers and agents of the corporation. It is also well settled that except where the authority of employing servants or agents is expressly vested in the board, officers or agents who have general control and management of the corporation's business, or at least a specific part thereof, may bind the corporation by the employment of such agents and employees as are usual and necessary in the conduct of such business. Those contracts of employment should be reasonable. Case at bar: contract of employment in the printing business was too long and onerous to the business (3-year employment; shall receive salary even if corp. is insolvent).
THE BOARD OF LIQUIDATORS V. HEIRS OF MAXIMO KALAW (20 SCRA 987; 1967) Kalaw was a corporate officer entrusted with general management and control of NACOCO. He had implied authority to make any contract or do any act which is necessary for the conduct of the business. He may, without authority from the board, perform acts of ordinary nature for as long as these redound to the interest of the corporation. Particularly, he contracted forward sales with business entities. Long before some of these contracts were disputed, he contracted by himself alone, without board approval. All of the members of the board knew about this practice and have entrusted fully such decisions with Kalaw. He was never questioned nor reprimanded nor prevented from this practice. In fact, the board itself, through its acts and by acquiescence, have laid aside the by-law requirement of prior board approval. Thus, it cannot now declare that these contracts (failures) are not binding on NACOCO. ZAMBOANGA TRANSPO V. BACHRACH MOTORS (52 Phil. 244; 1928) A chattel mortgage, although not approved by the board of directors as stipulated in the by-laws, shall still be valid and binding when the corporation, through the board, tacitly approved and ratified it. The following acts of the board constitute implied ratification:

1.
77
Erquiaga is one of the largest stockholder, and was the all-in-one officer (he was the President, GM, Attorney, Auditor, etc.) Two other directors approved his actions and expressed satisfaction with the advantages obtained by him in securing the chattel mortgage. The corporation took advantage of the benefits of the chattel mortgage. There were even partial payments made with the knowledge of the three directors.
2.
3.
ACUNA V. BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION (20 SCRA 526; 1967) Acuna entered into an agreement with Verano, manager of PROCOMA, in which the former would be constituted as the latter's agent in Manila. Acuna diligently went about his business and even used personal funds for the benefit of the corporation. During the face-to-face meeting with the board, Acuna was assured that there need not be any board approval for his constitution as agent for it would only be a mere formality. Later on, the board disapproved the agency and did not pay him. The SC ruled that the agreement was valid due to the ratification of the corp. proven by these acts: 1. 2. 3. He was assured by the board that no board approval was necessary. He delivered P 20,000, performed his work with the knowledge of the board. Due to acquiescence, the board cannot disown or disapprove the contract.
Stockholders or Members In the following basic changes in the corporation, although action is usually initiated by the
board of directors or trustees, their decision is not final, and approval of the stockholders or members would be necessary:
(1) (2) (3) (4) (5) Amendment of articles of incorporation; Increase and decrease of capital stock; Incurring, creating or increasing bonded indebtedness; Sale, lease, mortgage or other disposition of substantially all corporate assets; Investment of funds in another business or corporation or for a purpose other than the primary purpose for which the corporation was organized; (6) Adoption, amendment and repeal of by-laws; (7) Merger and consolidation; (8) Dissolution of corporation In all of these cases, even non-voting stocks, or non-voting members, as the case may be, will be entitled to vote. (Sec. 6)
BOARD OF DIRECTORS AND ELECTION COMMITTEE OF SMB VS. TAN (105 Phil. 426; 1959) Meeting was invalid for lack of notice. By-laws provide for a 5-day notice before meeting. March 26 posting not enough for March 28 election.
JOHNSTON VS. JOHNSTON (61 O.G. No. 39, 6160; 1965) As a general rule, a quorum at a stockholders' meeting, once reached, cannot be nullified by a subsequent walkout. However, the proceedings can be nullified if the walkout was for a reasonable and justifiable cause. In this case, F. Logan Johnston, who owned and/or represented more than 50% of the corporation's outstanding shares, was prohibited from voting the shares of the Silos family (which he had validly purchased) and of the minor children of Albert S. Johnston (of whom he was guardian) on the ground that such shares must first be registered in the names of the wards, thereby prompting the walkout. The Court of Appeals held that the walkout was neither unreasonable nor unjustifiable. It noted however that there was no formal declaration of a quorum before the withdrawal from the meeting by F. Logan Johnston. PONCE VS. ENCARNACION (94 Phil. 81; 1953) Upon good cause, such as a Chairman of the Board failing to call a meeting, either by his absence or neglect, the Court may grant a stockholder the authority to call such a meeting. DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL (26 SCRA 225; 1968) The Corporation Law says that every director must own at least one (1) share of the capital stock of the corporation. GOKONGWEI VS. SEC (89 SCRA 336; 1979) Section 21 of the Corporation Law provides that a corporation may prescribe in its by-laws the qualifications, duties, and compensation of its directors.

78
A stockholder has no vested right to be elected director for he impliedly contracts that the will of the majority shall govern. Amended by-laws are valid for the corporation has its inherent right to protect itself.
ROXAS V. DELA ROSA (49 Phil. 609; 1926) Under the Law, directors can only be removed from office by a vote of the stockholders representing 2/3 of subscribed capital stock, while vacancies can be filled by a mere majority. A director cannot be removed by a mere majority by disguising it as filling a vacancy. ANGELES V. SANTOS (64 Phil. 697; 1937) Court may appoint a receiver when corporate remedy is unavailable when board of directors perform acts harmful to the corporation. Generally, stockholders cannot sue on behalf of the corporation. The exception is when the defendants are in complete control of the corporation. CAMPBELL V. LEOWS INC. (134 A. 2d 852; 1957) The stockholders have an implied power to remove a director for cause. Even when there is cumulative voting, stockholders can still remove directors for cause. DELA RAMA V. MA-AO SUGAR CENTRAL CO, INC. (27 SCRA 247; 1969)
A corporation may use its funds to invest in another corporation without the approval of the stockholders if done in pursuance of a corporate purpose. However, if it is purely for investment, the vote of the stockholders is necessary.
XI. STOCKHOLDERS AND MEMBERS

1. Shareholders Not Corporate Creditors. Garcia v. Lim Chu Sing, 59 Phil. 562 (1934). 2. Subscription Contract (Secs. 60 and 72; Trillana v. Quezon Colegialla, 93 Phil. 383 [1953]). (a) Purchase Agreement. Bayla v. Silang Traffic Co., Inc., 73 Phil. 557 (1942). (b) Pre-Incorporation Subscription (Sec. 61) When properties were assigned pursuant to a pre-incorporation subscription agreement, but the corporation fails to issue the covered shares, the return of such properties to the subscriber is a direct consequence of rescission and does not amount to corporate distribution of assets prior to dissolution. On Yong v. Tiu, 375 SCRA 614 (2002). (c) Release from Subscription Obligation: Tan v. Sycip, 499 SCRA 216 (2006); Velasco v. Poizat, 37 Phil. 802 (1918); PNB v. Bitulok Sawmill, Inc., 23 SCRA 1968 (1968); National Exchange Co. v. Dexter, 51 Phil. 601 (1928). (d) When Condition of Payment Provided in By-laws. De Silva v. Aboitiz & Co., 44 Phil. 755 (1923). 3. Consideration (Sec. 62): (a) Cash (b) Property (c) Service (d) Shares (d) Retained Earnings
Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings converted into equity in the corporations books. Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998).24 When a person pays to the corporation a deposit for future subscription, no subscription agreement has been constituted, and consequently there is no liability for the payment of the documentary stamp tax on such deposit for future subscription for the reason that there is yet no subscription that creates rights and obligations between the subscriber and the corporation. Commissioner of Internal Revenue v. First Express Pawnshop Company, Inc., 589 SCRA 253 (2009). 4. Watered Stocks (Sec. 65) 5. Payment of Balance of Subscription (Secs. 66 and 67; Lingayen Gulf Electric Power Co. v. Baltazar, 93 Phil. 404 [1953]). A stockholder who is employed with the company, cannot offset his unpaid subscription against his awarded claims for wages, where there has been no call for the payment of such subscription. Apodaca v. NLRC, 172 SCRA 442 (1989).
24 The basis for determining the documentary stamps due on stock dividends declared would be their book value as indicated in the latest audited financial statements of the corporation, and not the par value thereof. Commissioner of Internal Revenue v. Lincoln Phil. Life Insurance Co., 379 SCRA 423 (2002). Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto. Includes ATTY DY AND VILLANUEVA OUTLINE ATENEO 2011
79
6. Delinquency on Subscription (Secs. 68, 69, 70 and 71; Philippine Trust Co. v. Rivera, 44 Phil. 469 [1923]; Miranda v. Tarlac Rice Mill Co., 57 Phil. 619 [1932]) The prescriptive period to recover on unpaid subscription does not commence from the time of subscription but from the time of demand by Board of Directors to pay the balance of subscription. Garcia v. Suarez, 67 Phil. 441 (1939). (a) Who May Question a Delinquency Sale (Sec. 68 and 69). 7. Certificate of Stock (Sec. 63) (a) Nature of Certificate:Tan v. SEC, 206 SCRA 740 (1992);De los Santos v. Republic, 96 Phil. 577 (1955);Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002); Nautica Canning Corp. v. Yumul, 473 SCRA 415 (2005); C.N. Hodges v. Lezama, 14 SCRA 1030 (1965). A certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests therein. The certificate is not a stock in the corporation but is merely evidence of the holders interest and status in the corporatio n, his ownership of the share represented thereby. It is not in law the equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but is not essential to the existence of a share of stock or the nature of the relation of shareholder to the corporation. Makati Sports Club, Inc. v. Cheng, G.R. No. 178523, 16 June (2010). A certificate of stock is the evidence of a holders interest and status in a corporationit is prima facie evidence that the holder is a shareholder of a corporation. Lao v. Lao, 567 SCRA 558 (2008). A stock certificate is merely evidence of a share of stock and not the share itself. Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998); Lao v. Lao, 567 SCRA 558 (2008). The fact that the stock certificates registered in the name of one person are found in the possession of another stockholder does not prove that the possessor is the owner of the covered shares. A stock certificate is merely a tangible evidence of ownership of shares of stock. Its presence or absence does not affect the right of the registered owner to dispose of the shares covered by the stock certificate. Republic v. Estate of Hans Menzi, 475 SCRA 20 (2005). A certificate of stock could not be considered issued in contemplation of law unless signed by the president or vice-president and countersigned by the secretary or assistance secretary. Bitong v. Court of Appeals, 292 SCRA 503 (1998). (b) Quasi-negotiable Character of Certificate of Stock: Bachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681 (1937). In order for a transfer of stock certificate to be effective, it must be properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. Indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. Razon v. IAC, 207 SCRA 234 (1992). The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or any other person legally authorized to make the transfer shall be sufficient to effect the transfer of shares only if the same is coupled with delivery. The delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new transferee. But to be valid against third parties, the transfer must be recorded in the books of the corporation. Bitong v. Court of Appeals, 292 SCRA 503 (1998); Raquel-Santos v. Court of Appeals, 592 SCRA 169 (2009). Even when a formal Deed of Assignment covering the shares was duly executed, without the endorsement and delivery of the covering certificates of stocks, the covered shares cannot be deemed to transferred and registered in the names of the assignees. Rural Bank of Lipa City v. Court of Appeals, 366 SCRA 188 (2001); Rivera V. Florendo, 144 SCRA 643 (1986). (c) Right to Issuance (Sec. 64; Baltazar v. Lingayen Gulf Elect. Power Co., Inc., 14 SCRA 522 [1965]). (d) Lost or Destroyed Certificates (Sec. 63 and 73) While Sec. 73 of Corporation Code appears to be mandatory, the same admits exceptions, such that a corporation may voluntarily issue a new certificate in lieu of the original certificate of stock which has been lost without complying with the requirements under said section. It would be an internal matter for the corporation to find measures in ascertaining who are the real owners of stock for purposes of liquidation. It is well-settled that unless proven otherwise, the stock and transfer book is the best evidence to establish stock ownership. (SEC Opinion, dated 28 January 1999, addressed to Ms. Ma. Cecilia Salazar-Santos). (e) Forged and Unauthorized Transfers. J. Santamaria v. HongKong and Shanghai Banking Corp., 89 Phil. 780 (1951); Neugene Marketing, Inc. v. Court of Appeals, 303 SCRA 295 (1999). 8. STOCK AND TRANSFER BOOK: Secs. 63, 72 and 74; Fua Cun v. Summers, 44 Phil. 704 (1923); Monserrat v. Ceran, 58 Phil. 469 (1933); Chua Guan v. Samahang Magsasaka, Inc., 62 Phil.
80
472 (1935); Uson v. Diosomito, 61 Phil. 535 (1935); Escao v. Filipinas Mining Corporation, 74 Phil. 71 (1944); Bachrach Motors v. Lacson-Ledesma, 64 Phil. 681 (1937); Nava v. Peers Marketing Corp., 74 SCRA 65 (1976). A stock and transfer book records the names and addresses of all stockholders arranged alphabetically, the installments paid and unpaid on all stock for which subscription has been made, and the date of payment thereof, a statement of every alienation, sale or transfer of stock made the date thereof and by and to whom made, and such other entries as may be prescribed by law. A stock and transfer book, like other corporate books and records, is not in any sense a public record, and thus is not exclusive evidence of the matters and things which ordinarily are or sh9ould be written therein. Lanuza v. Court of Appeals, 454 SCRA 54 (2005). (a) Validity of Transfers: Under Sec. 63 of Corporation Code, the sale of stocks shall not be recognized as valid unless registered in the books of the corporation insofar as third persons, including the corporation, are concerned as between the parties to the sale, the transfer shall be valid even if not recorded in the books of the corporation. Batangas Laguna Tayabas Bus Co. v. Bitanga, 362 SCRA 635 (2001). As between the General Information Sheet and the corporate books, it is the latter that is controlling. Lao v. Lao, 567 SCRA 558 (2008). A transfer of shares which is not recorded in the books of the corporation is valid only as between the parties, hence, the transferor has the right to dividends as against the corporation without notice of transfer but it serves as trustee of the real owner of the dividends, subject to the contract between the transferor and transferee as to who is entitled to receive the dividends. Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009). The view that under Section 63 of the Corporation Code, the sale of the stocks shall not be recognized as valid unless registered in the books of the corporation is valid only insofar as third persons, including the corporation, are concerned as between the parties to the sale, the transfer shall be valid even if not recorded in the books of the corporation. Batangas Laguna Tayabas Bus Co. v. Bitanga, 362 SCRA 635 (2001). A transferee has no right to intervene as a stockholder in corporate issue on the strength of the transfer of shares allegedly executed by a registered stockholder. It is explicit under Sec. 63 that the transfer must be registered to affect the corporation and third persons. Magsaysay-Labrador v. CA, 180 SCRA 266 (1989). The purpose of registration is two-fold: to enable the transferee to exercise all the rights of a stockholder, including the right to vote and to be voted for, and to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting; his vote can be properly counted to determine whether a stockholders resolution was approved, despite the claim of the alleged transferee. On the other hand, a person who has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the corporate books. Until the transfer is registered, the transferee is not a stockholder but an outsider. Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 362 SCRA 635 (2001). A bona fide transfer of shares, not registered in the corporate books, is not valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not. All transfers not so entered on the books of the corporation are absolutely void; not because they are without notice or fraudulent in law or fact, but because they are made so void by statute. Garcia v. Jomouad, 323 SCRA 424 (2000). Pursuant to Sec. 63, a transfer of shares of stock not recorded in the stock and transfer book is nonexistent as far as the corporation is concerned. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only into its books for the purpose of determining who its shareholders are. Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002). Indeed, until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. Thus, the unrecorded transferee, the Bitanga group in this case, cannot vote nor be voted for. The purpose of registration, therefore, is two-fold: to enable the transferee to exercise all the rights of a stockholder, including the right to vote and to be voted for, and to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting; his vote can be properly counted to determine whether a stockholders resolution was approved, despite the claim of the alleged transferee. On the other hand, a person who has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the corporate books. Until the transfer is registered, the transferee is not a stockholder but an outsider. Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 362 SCRA 635 (2001). [CLV- I agree with the dissenting opinion of Justice Puno: The rule [Section 63] is intended to protect the interest of the corporation and third persons who may be prejudiced by the transfer of the shares of stocks. It follows, therefore,
81
that as between the parties to the sale, the transfer shall be valid even if not recorded in the books of the corporation.] The absence of a deed of sale evidencing the sale of shares of stock does not necessarily show irregularity since Section 63 of the Corporation Code itself does not require any deed for the validity of the transfer of shares stock, it being sufficient that such transfer be effected by delivery of the stock certificates duly endorsed. The Corporation Code acknowledges that the delivery of a duly indorsed stock certificate is sufficient to transfer ownership of shares of stock in stock corporations. Such mode of transfer is valid between the parties. In order to bind third persons, however, the transfer must be recorded in the books of the corporation. Clearly then, the absence of a deed of assignment is not a fatal flaw which renders the transfer invalid as the Republic posits. In fact, as has been held in Rural Bank of Lipa City, Inc. v. Court of Appeals, [366 SCRA 188 (2001)] the execution not a deed of sale does not necessarily make the transfer effective. Republic v. Estate of Hans Menzi, 475 SCRA 20, 38 (2005). (b) Who May Make Entries: Entries made on the stock and transfer book by any person other than the corporate secretary, such as those made by the President and Chairman, cannot be given any valid effect. Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997) (c) Attachments: Attachments of shares of stock are not included in the term transfer as provided in Sec. 63 of Corporation Code. Both the Revised Rules of Court and the Corporation Code do not require annotation in the corporations stock and transfer books for the attachment of shares to be valid and binding on the corporation and third parties. Chemphil Export & Import Corp. v. CA, 251 SCRA 257 (1995). (d) Meaning of Unpaid Claims: Unpaid claims under Sec. 63 refers to any unpaid subscription, and not to any indebtedness which a stockholder may owe the corporation arising from any other transactions, like unpaid monthly dues. China Banking Corp. v. CA, 270 SCRA 503 (1997) (e) Equitable Mortgage Assignment: It seems that 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 mort gage): It is true that the assignment was predicated on the intention that it would serve as security vis--vis DBPs financial accommodation extended to PJI, but it was a valid and duly executed assignment, subject to a resolutory condition, which was the settlement of PJIs loan obligation with DBP. APT v. Sandiganbayan, 341 SCRA 551, 560 (2000). 9. Situs of Shares of Stocks (Sec. 55) Situs of shares of stock is the domicile of the corporation to which they pertain to. Wells Fargo Bank and Union v. Collector, 70 Phil. 325 (1940); Tayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968); cf. Perkins v. Dizon, 69 Phil. 186 (1939).
XII. RIGHTS OF STOCKHOLDERS

1. What Does Share Represent? While shares of stock constitute personal property, they do not represent property of the corporation [i.e., they are properties of the stockholders who own them]. A share of stock only typifies an aliquot part of the corporations property, or the right to share in its proceeds to that extent when distributed according to law and equity, but the holder is not the owner of any part of the capital [properties] of the corporation, nor is he entitled to the possession of any definite portion of its assets. The stockholder is not a co-owner of corporate property. Stockholders of F. Guanson and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962). The registration of shares in a stockholders name, the issuance of stock certificates, and the right to receive dividends which pertain to the shares are all rights that flow from ownership. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998); TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001). As early as the case of Fisher v. Trinidad, the Court already declared that [t]he distinction between the title of a corporation, and the interest of its members or stockholders in the property of the corporation, is familiar and well-settled. The ownership of that property is in the corporation, and not in the holders of shares of its stock. The interest of each stockholder consists in the right to a proportionate part of the profits whenever dividends are declared by the corporation, during its existence, under its charter, and to a like proportion of the property remaining, upon the termination or dissolution of the corporation, after payment of its debts. Mobilia Products, Inc. v. Umezawa, 452 SCRA 736 (2005). 2. Right to Certificate of Stock for Fully Paid Shares: Sec. 64; Tan v. SEC, 206 SCRA 740 (1992). 3. Preemptive Rights: Sec. 39; Datu Tagoranao Benito v. SEC, 123 SCRA 722 (1983); Dee v. SEC, 199 SCRA 238 (1991). 4. Right to Transfer or Dispose of Shareholdings (Sec. 63) (a) Restriction on Transfers: Lambert v. Fox, 26 Phil. 588 (1914). (i) Right of Refusal: Padgett v. Babcock & Templeton, Inc., 59 Phil. 232 (1933).
82
Section 63 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 them in favor of whomever he pleases, without limitation in this respect, than the general provisions of law. Fleishcher v. Botica Nolasco, 47 Phil. 583 (1925). The only limitation imposed by Sec. 63 is when the corporation holds any unpaid claim against the shares intended to be transferred. A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers, because Restrictions in the traf fic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. Bylaws are intended merely for the protection of the corporation, and prescribe relation, not restriction; they are always subject to the charter of the corporation. Rural Bank of Salinas v. CA, 210 SCRA 510 (1992). The right of first refusal is primarily an attribute of ownership. Conversely, 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 Jun3 1988 (unrep.) The agreement of co-shareholders to mutually grant the right of first refusal to each other, by itself, does not constitute a violation of the provisions of the Constitution limiting land ownership to Filipinos and Filipino corporations; if the foreign shareholdings of a landholding corporation exceed 40%, it is not the foreign stockholders ownership of the shares which is adversely affected by the capacity of the corporation to own landthat is, the corporation becomes disqualified to own land. This finds support under the basic corporate law principle that the corporation and its stockholders are separate juridical entities. In this vein, the right of first refusal over shares pertains to the shareholders whereas the capacity to own land pertains to the corporation. J.G. Summit Holdings, Inc. v. Court of Appeals, 450 SCRA 169 (2005). In a landholding corporation which by constitutional mandate is limited to 40% foreign equity, and where there exists a right of first refusal agreement between the co-shareholders, the fact that the corporations owns land cannot deprive stockholders 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, Inc. v. Court of Appeals, 450 SCRA 169 (2005). (ii)Restraint of Trade: An agreement by which a person obliges himself not to engage in competitive trade for five years is valid and reasonable and not an undue or unreasonable restraint of trade and is obligatory on the parties who voluntarily enter into such agreement. x Ollendorf v. Abrahamson, 38 Phil. 585 (1918). (b) Remedy If Registration Refused:Ponce v. Alsons Cement Corp., 393 SCRA 602. 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 stockholder nor does he hold a power of attorney from the latter. This is under the general rule that as between the corporation one the one hand and its shareholders on other, the corporation looks only to its books for the purpose of determining who its shareholders are, so that a mere indorsee of a certificate of stock, claiming to be the owner, will not necessarily be recognized as such by the corporation and its officers, in absence of express instructions of the registered owner to make such transfer to the indorsee, or a power of attorney authorizing such transfer. Hager v. Bryan, 19 Phil. 138 (1911); Rivera v. Florendo, 144 SCRA 643, 657 (1986). The claim for damages of what the shares could have sold had the demand been complied with is deemed to be speculative damage and non-recoverable Batong Buhay Gold Mines v. CA, 147 SCRA 4 (1987) Period to Enforce: Considering that 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). 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 by-laws 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). 5. Rights to Dividends (Sec. 43) Although stock certificates grant the stockholder the right to receive quarterly dividends of 1%, cumulative and participating, the stockholders do not become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividends. Sec. 43 of Corporation Code prohibits the issuance of any stock dividend without the approval of stockholders, representing not less than twothirds (2/3) of the outstanding capital stock, which underscores the fact that payment of dividends to a stockholder 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
83
stockholders, 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). In the liquidating of a corporation, after the payment of all corporate debts and liabilities, the remaining assets, if any, must be distributed to the stockholders in proportion to their interests in the corporation. The share of each stockholder in the assets upon liquidation is what is known as liquidating dividend. President of PDIC v. Reyes, 460 SCRA 473 (2005). The term dividend in its technical sense and ordinary acceptation is that part of portion of the profits of the enterprise which the corporation, by its governing agents, sets apart for ratable division among the holders of it capital stockit is a payment, and the right thereto is an incident of ownership of stock. Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009). When the Court directed that a total of 111,415 shares of PLDT be reconveyed to the Republic by way of declaring the Republic to be the rightful owner of said shares, that necessarily included the reconveyance to the Republic of the dividends and interest accruing thereto. Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009). 6. Right to Vote and to Attend Meetings (Secs. 6 and 89) The right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled that unissued stocks may not be voted or considered in determining whether a quorum is present in a stockholders meeting, or whether a requisite proportion of the stock of the corporation is voted to adopt a certain measure or act. Only stock actually issued and outstanding may be voted. Under Section 6 of the Corporation Code, each share of stock is entitled to vote, unless otherwise provided in the articles of incorporation or declared delinquent under Section 67 of the Code. Neither the stockholders nor the corporation can vote or represent shares that have never passed to the ownership of stockholders, or, having so passed, have again been purchased by the corporation. These shares are not to be taken into consideration in determining majorities. When the law speaks of a given proportion of the stock, it must be construed to mean shares that have passed from the corporation, and that may be voted. Tan v. Sycip, 499 SCRA 216 (2006). One of the rights of a stockholder is the right to participate in the control and management of the corporation that is exercised through his vote. The right to vote is a right inherent in and incidental to the ownership of corporate stock, and as such is a property right. Castillo v. Balinghasay, 440 SCRA 442 (2004). Until challenged successfully in proper proceedings, a registered stockholder has a right to participate in any meeting, and in the absence of fraud the action of the stockholders meeting cannot be collaterally attacked on account of such participation, even if it be shown later on that the shares had been previously sold (but not recorded). Price and Sulu Dev. Co. v. Martin, 58 Phil. 707 (1933). The sequestration of shares does not entitle the government to exercise acts of ownership over the shares; even sequestered shares may be voted upon by the registered stockholder. Cojuangco Jr. v. Roxas, 195 SCRA 797 (1991). The right to vote sequestered shares of stock registered in the names of private individuals or entities and alleged to have been acquired with ill-gotten wealth shall, as a rule, be exercised by the registered owner. The PCGG may, however, be granted such voting right provided it can (1) show prima facie evidence that the wealth and/or the shares are indeed ill-gotten; and (2) demonstrate imminent danger of dissipation of the assets, thus necessitating their continued sequestration and voting by the government until a decision, ruling with finality on their ownership, is promulgated by the proper court. Nevertheless, the foregoing "two-tiered" test does not apply when the funds that are prima facie public in character or, at least, are affected with public interest. Inasmuch as the subject UCPB shares in the present case were undisputably acquired with coco levy funds which are public in character, then the right to vote them shall be exercised by the PCGG. In sum, the "public character" test, not the "twotiered" one, applies. Republic v. COCOFED, 372 SCRA 462 (2001). Also Trans Middle East (Phils) v. Sandiganbayan, 490 SCRA 455 (2006). Treasury shares cannot be voted upon. Tan v. Sycip, 499 SCRA 216 (2006). (a) Instances When Stockholders Entitled to Vote:
Election of directors and trustees (Sec. 24). Amendment of articles of incorporation (Sec. 16). Investment in another business or corporation (Secs. 36 and 42). Merger and consolidation (Sec. 72). Increase and Decrease of capital stock (Sec. 38). Adoption, amendment and repeal of by-laws (Sec. 48). Declaration of stock dividends (Sec. 43). Management contracts (Sec. 44). Fixing of consideration of no par value shares (Sec. 62).
(b) Joint Ownership (Sec. 56) (c) Treasury Share No Voting Rights (Sec. 57) (d) Pledgor, Mortgagors and Administrators (Sec. 55)
84
When shares are pledged by means of endorsement in blank and delivery of the covering certificates to a loan, the pledgee does not become the owner thereof simply by the failure of the registered stockholder to pay his loan. Consequently, without proper foreclosure, the lender cannot demand that the shares be registered in his name. Lim Tay v. Court of Appeals, 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 Rights of Members In stock corporation, shareholders may generally transfer their shares. Thus, on the death of a shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or executor. On the other hand, membership in and all rights arising from a nonstick corporation are personal and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide otherwise. In other words, the determination of whether or not dead members are entitled to exercise their voting rights (through their executor or administrator), depends on those articles of incorporation or bylaws. Tan v. Sycip, 499 SCRA 216 (2006). Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the member. Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a member of the corporation, unless otherwise provided in the articles of the incorporation or the bylaws. Applying Section 91 to the present case, we hold that dead members who are dropped from the membership roster in the manner for the cause provided for in the By-Law of GCHS are not to be counted in determining the requisite vote in corporate matters or the requisite quorum for the annual members meeting. With 11 remaining members, the quorum in the present case should be 6. therefore, there being a quorum, the annual members meeting, conducted with six members present, was valid. Tan v. Sycip, 499 SCRA 216 (2006). (f) Conduct of Stockholders' Meetings: (i) Kinds and Requirements of Meetings (Secs. 49 and 50); (ii) Place and Time of Meeting (Secs. 51 and 93); (iii) Quorum (Sec. 52) Quorum is based on the totality of the shares which have been subscribed and issued whether it be founders shares or common shares. To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and transfer book, and completely disregarding the issued and outstanding shares indicated in the articles of incorporation would work injustice to the owners and/or successors in interest of the said shares. The stock and transfer book cannot be used as the sole basis for determining the quorum as it does not reflect the totality of shares which have been subscribed, more so when the articles of incorporation show a significantly larger amount of shares issued and outstanding as compared to that listed in the stock and transfer book. Lanuza v. Court of Appeals, 454 SCRA 54 (2005). 7. Contracts and Agreement Affecting Shareholdings (a) Proxy (Sec. 58) Proxy solicitation involves the securing and submission of proxies, while proxy validation concerns the validation of such secured and submitted proxies. Government Service Insurance System v. Court of Appeals, 585 SCRA 679 (2009). It is possible that an intra-corporate controversy may animate a disgruntled shareholder to complain to the Securities and Exchange Commission (SEC) a corporations violations of SEC rules and regulations, but that motive alone should not be sufficient to deprive the SEC of its investigatory and regulatory powers, especially so since such powers are exercisable on a motu proprio basis. Government Service Insurance System v. Court of Appeals, 585 SCRA 679 (2009). The Securities and Exchange Commissions (SECs) power to pass upon t he validity of proxies in relation to election controversies has effectively been withdrawn, tied as it is to its abrogated jurisdictional powers. Government Service Insurance System v. Court of Appeals, 585 SCRA 679 (2009). The fact that the jurisdiction of the regular courts under Section 5(c) is confined to the voting on election of officers, and not on all matters which may be voted upon by stockholders, elucidates that the power of the Securities and Exchange Commission (SEC) to regulate proxies remains extant and could very well be exercised when stockholders vote on matters other than the election of directors. Government Service Insurance System v. Court of Appeals, 585 SCRA 679 (2009). (b) Voting Trust Agreements (Sec. 59; Lee v. CA, 205 SCRA 752 [1992]). The trustor has a right to terminate the VTA for breach thereof. Everett v. Asia Banking Corporation, 49 Phil. 512 (1926).
EDWIN PADILLO BAR 2013 Voting trust agreement as part of a loan arrangement. NIDC v. Aquino, 163 SCRA 153 (1988). (c) Pooling Agreements or Shareholders Agreements (Sec. 100) 8. Rights to Inspect and Copy Corporate Records (a) Basis of Right (Gokongwei, Jr. v. SEC, 89 SCRA 336 [1979]).
85
The stockholders right of inspection of the corporations books and records is based upon his ownership of shares in the corporation and the necessity for self-protection. Puno v. Puno Enterprises, 599 SCRA 585 (2009).
(b) Limitations on Right The only express limitations on the right of inspection under Sec. 74 of Corporation Code are: (a) it should be exercised at reasonable hours on business days; (b) the person demanding the right to examine and copy excerpts from the corporate records and minutes has not improperly used any information secured through any previous examination of records; and (c) the demand is made in good faith or for a legitimate purpose. Africa v. PCGG, 205 SCRA 39 (1992). Summary of Rulings: The right to inspect corporate books and records: Is exercisable through agents and representatives, otherwise it would often be useless to the stockholder who does not know corporate intricacies. W.G. Philpotts v. Philippine Manufacturing Co., 40 Phil. 471 (1919). Cannot be denied on the ground that the director is on unfriendly terms with the officers of the corporation whose records are sought to be inspected. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932). Although it includes the right to make copies, does not authorize bringing the books or records outside of corporate premises. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932). Does not include the right of access to minutes until such minutes have been written up and approved by the directors. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932). Cannot be limited to a period of ten days shortly prior to the annual stockholders meeting, as such would be an unreasonable restriction and violates the legal provision granting the exercise of such right at reasonable hours. Pardo v. Hercules Lumber Co., 47 Phil. 964 (1924). (c) Specified Records (Secs. 74, 75 and 141) (d) Remedies If Denied: Mandamus Gonzales v. PNB, 122 SCRA 489 (1983). Burden of proof to show that examination is for improper purpose is on the part of the corporation. Republic v. Sandiganbayan, 199 SCRA 39 (1999). In a criminal complaint for violation of Section 74 of the Corporation Code, the defense of improper use or motive is in the nature of a justifying circumstance that would exonerate those who raise and are able to prove the samewhere the corporation denies inspection on the ground of improper motive or purpose, the burden of proof is taken from the shareholder and placed on the corporation. Sy Tiong Shiou v. Sy Chim, 582 SCRA 517 (2009). (e) Criminal Sanction under Section 144 In the recent case of Ang-Abaya v. Ang, 573 SCRA 129 (2008), the Court had the occasion to enumerate the requisites before the penal provision under Section 144 of the Corporation Code may be applied in a case of violation of a stockholder or members right to inspect the corporate books/records as provided for under Section 74 of the Corporation Code. Sy Tiong Shiou v. Sy Chim, 582 SCRA 517 (2009). In a criminal complaint for violation of Section 74 of the Corporation Code, the defense of improper use or motive is in the nature of a justifying circumstance that would exonerate those who raise and are able to prove the samewhere the corporation denies inspection on the ground of improper motive or purpose, the burden of proof is taken from the shareholder and placed on the corporation. Sy Tiong Shiou v. Sy Chim, 582 SCRA 517 (2009). (f) Confidential Nature of SEC Examinations (Sec. 142) 9. Appraisal Right (Secs. 81 to 86 and 105) 10. DERIVATIVE SUITS (Interim Rules of Procedure Governing Intra-Corporate Controversies) Derivative suits are governed by a special set of rules under A.M. No. 01-2-04-SC (which took effect on 01 April 2001), otherwise known as the Interim Rules of Procedure Governing IntraCorporate Controversies under Republic Act No. 8799. 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, 556 (2009). (a) Derivative Suit Must Be Effected When Board Cannot Properly Exercise Business Judgment Where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. An individual stockholder may be permitted to institute a derivative suit in behalf of the
86
corporation to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or when a demand upon them to file the necessary action would be futile because they are the ones to be sued, or because they hold control of the corporation. In such actions, the corporation is the real party-in-interest while the suing stockholder, in behalf of the corporation, is only a nominal party. Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007); Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 555-556 (2009); Yu v. Yukayguan, 589 SCRA 588 (2009). Under Section 36 of the Corporation Code, read in relation to Section 23, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks 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 stockholder is regarded as a nominal party, with the corporation as the real party in interest. Chua v. Court of Appeals, 443 SCRA 259 (2004). In the absence of a special authority from the Board of Directors to institute a derivative suit for and in behalf of the corporation, the president or managing director is disqualified by law to sue in her own name. The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the Board that exercises its corporate powers and not in the president or officer thereof. Bitong v. Court of Appeals, 292 SCRA 503 (1998). (b) Nature of the Power to File Derivative Suit 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 discretionand intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation. However, the corporation is the real party in interest in a derivative suit and the suing stockholder is only a nominal party. Cua, Jr. v. Tan, 607 SCRA 645 (2009). A stockholders right to institute a derivative suit is not based on any express provision of the 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 stockholders for violation of their fiduciary duties. Yu v. Yukayguan, 589 SCRA 588 (2009). The whole purpose of the law authorizing a derivative suit is to allow the stockholders/member to enforce rights which are derivative (secondary) in nature, i.e., to enforce a corporate cause of action. R.N. Symaco Trading Corp v. Santos, 467 SCRA 312 (2005); Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009); Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009). 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 stockholder may intervene and defend on behalf of the corporation. Chua v. Court of Appeals, 443 SCRA 259 (2004). A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs committed against the corporation, for which the directors refuse to sue. It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997). (c) Requisites of Derivative Suit (San Miguel Corp. v. Kahn, 176 SCRA 447 [1989]) In the case of Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007), we enumerated the foregoing requisites before a stockholder 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 stockholder bringing the suit. Reyes v. Regional Trial Court of Makati, Br. 142, 561 SCRA 593 (2008); Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009). Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies lays down the following requirements which a stockholder must comply with in filing a derivative suit: A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided, that: (1) He was a stockholder or 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, by-laws, 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); Hi-Yield Realty, Inc. v. Court of Appeals, 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).
87
The fact that Winchester, Inc. is a family corporation does not in any way exempt a stockholder from complying with the clear requirements and formalities of the rules for filing derivative suit there is nothing in the pertinent laws or rules supporting the distinction between, and the difference in the requirements for, family corporations vis-a-vis other types of corporations, in the institution by a stockholder of a derivative suit. Yu v. Yukayguan, 589 SCRA 588 (2009). (d) Who May Bring the Suit (Chua v. Court of Appeals, 443 SCRA 259 [2004]) Even then, not every suit filed on behalf of the corporation is a derivative suit. For a derivative suit to prosper, the minority stockholder 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 stockholders similarly situated who may wish to join him in the suit. [ citing Chua v. Court of Appeals, 443 SCRA259, 268 (2004)]. Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009). Since the ones to be sued are the directors/officers of the corporation itself, a stockholder, like petitioner Cruz, may validly institute a derivative suit to vindicate the alleged corporate injury, in which case Cruz is only a nominal party while Filport is the real party-in-interest. Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007). A minority stockholder and member of the board has no power or authority to sue on the corporations behalf. Nor can we uphold this as a derivative suit, since it is required that the minority stockholder 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 stockholders 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). The relators must be stockholders both at time of occurrence of the events constituting the cause of action and at the time of the filing of the derivative suit. Gochan v. Young, 354 SCRA 207 (2001); Pascual v. Orozco, 19 Phil. 83 (1911). A minority stockholder 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 the same corporations 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). The status of heirs as co-owners of shares of stocks prior to the partition o f the decedents estate does not immediately and necessarily make them stockholders of the corporation -unless and until there is compliance with the Section 63 of the Corporation Code on the manner of transferring shares, the heirs do not become registered stockholders of the corporation. Reyes v. Regional Trial Court of Makati, Br. 142, 561 SCRA 593 (2008); Puno and Puno Enterprises, Inc., 599 SCRA 585 (2009). (e) Exhaustion of Intra-Corporate Remedies: Everett v. Asia Banking Corp., 49 Phil. 512 (1927); Angeles v. Santos, 64 Phil. 697 (1937). A derivative suit to question the validity of the 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). Further, while it is true that the complaining stockholder must satisfactorily show that he has exhausted all means to redress his grievances within the corporation; 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. Court of Appeals, 590 SCRA 548, 557 (2009). The obvious intent behind the rule requiring the stockholder 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 or partnership to obtain relief he desires is to make the derivative suit the final recourse of the stockholders, after all other remedies to obtain the relief sought had failed. Yu v. Yukayguan, 589 SCRA 588 (2009). (f) Nature of Relief or Remedies Prayed For: Evangelista v. Santos, 86 Phil. 387 [1950]; Republic Bank v. Cuaderno, 19 SCRA 671 (1967); Reyes v. Tan, 3 SCRA 198 (1961). In a derivative suit, any monetary benefits under the decision of the court shall pertain to the corporation and not to the stockholders or members. R.N. Symaco Trading Corp. v. Santos, 467 SCRA 312 (2005). The allegations of injury to the relators can co-exist with those pertaining to the corporation, and does not disqualify them from filing a derivative suit on behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring directors. Gochan v. Young, 354 SCRA 207 (2001). In a derivative action, the real party in interest is the corporation itself, not the shareholders who actually instituted it. 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
88
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). Appointment of receiver can be an ancillary remedy in a derivative suit. Chase v. CFI of Manila, 18 SCRA 602 (1966). Where corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a stockholder may sue on behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to the stockholders. This is what is known as a derivative suit, and settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the stockholder filing suit for the corporations behalf is only nominal party. The corporation should be included as a party in the suit. Hornilla v. Salunat, 405 SCRA 220 (2003). (g) Venue for Derivative Suit Venue of 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. Right to Proportionate Share of Remaining Assets Upon Dissolution (Sec. 122) (a) Different Rules for Non-stock Corporations and Foundations (Secs. 94 and 95; Section 34(H)(2)(c), 1997 NIRC).
X. DIRECTORS, TRUSTEES AND OFFICERS 1. Doctrine of CENTRALIZED MANAGEMENT: Powers of Board of Directors (Sec. 23; Gamboa v. Victoriano, 90 SCRA 40 [1979]). Section 23 expressly provides that the corporate powers of all corporations shall be exercised by the board of directors. Just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it. Thus, 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 declarations of an individual director 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).25 Rationale for Centralized Management Doctrine. Section 23 of the Corporation Code explicitly provides that unless otherwise provided therein, the corporate powers of all corporations formed under the Code shall be exercised, all business conducted and all property of the corporation shall be controlled and held by a board of directors. The raison detre behind the conferment of corporate powers on the board of directors is not lost on the Courtindeed, the concentration in the board of the powers of control of corporate business and appointment of corporate officers and managers is necessary for efficiency in any large organization. Stockholders are too numerous, scattered and unfamiliar with the business of a corporation to conduct its business directly. And so the plan of corporate organization is for the stockholders to choose the directors who shall control and supervise the conduct of corporate business. Filipinas Port Services v. Go, 518 SCRA 453 (2007). Board of Directors is the body which (1) exercises all powers provided for under the Corporation Code; (2) conducts all business of the corporation; and (3) controls and holds all property of the corporation. Its members have been characterized as trustees or directors clothed with a fiduciary character. It is clearly separate and distinct from the corporate entity itself. Hornilla v. Salunat, 405 SCRA 220 (2003). A corporation is an artificial being and can only exercise its powers and transact its business through the instrumentalities of its Board of Directors, and through its officers and agents, when authorized by resolution or by its by-laws. Consequently, when legal counsel was clothed with authority through formal board resolution, his acts bind the corporation which must be held bound the actuations of its counsel of record. De Liano v. Court of Appeals, 370 SCRA 349 (2001). The physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a special act of the board of directors. Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003); Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001). (a) Theories on Source of Board Power (Angeles v. Santos, 64 Phil. 697 [1937]). One of the most important rights of a qualified shareholder or member is the right to voteeither personally or by proxyfor the directors or trustees who are to manage the corporate affairs. The right to choose the persons who will direct, manage and operate the corporation is significant, because it is the main way in which a stockholder can have a voice in the management of corporate affairs, or in which a member in a nonstick corporation can have a say on how the purposes and goals of the corporation may be achieved. Once the directors or trustees are elected, the stockholders or members relinquish corporate powers to the board in accordance with law. Tan v. Sycip, 499 SCRA 216 (2006).
25 Also Reyes v. RCPI Employees Credit Union, Inc., 499 SCRA 319 (2006); Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006); Raniel v. Jochico, 517 SCRA 221 (2007); Yu Chuck v. Kong Li Po, 46 Phil. 608, 614 (1924); Republic v. Coalbrine International, G.R. No. 161838, 27 April (2010). Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto. Includes ATTY DY AND VILLANUEVA OUTLINE ATENEO 2011
89
(b) Board Must Act As a Body (Sec. 25; Board of Liquidators v. Heirs of Maximo M. Kalaw, 20 SCRA 987 [1967]; Ramirez v. Orientalist Co., 38 Phil. 634 [1918]; Acua v. Batac Producers Cooperative Marketing Assn., 20 SCRA 526 [1967]). A corporation, through its Board of Directors, should act in the manner and within the formalities prescribed by its charter or by the general law. Thus, directors must act as a body in a meeting called pursuant, otherwise, any action taken therein may be questioned by any objecting director or shareholder. Be that as it may, jurisprudence tells us that an action of the board of directors during a meeting, which was illegal for lack of notice, may be ratified either expressly, by the action of the directors in subsequent legal meeting, or impliedly, by the corporation's subsequent course of conduct. Lopez Realty v. Fontecha, 247 SCRA 183 (1995). (c) Effects of 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 Committee (Sec. 35;Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007) see above discussion 2. BUSINESS JUDGMENT RULE (Montelibano v. Bacolod-Murcia Miling Co., Inc., 5 SCRA 36 [1962]; PSE v. Court of Appeals, 281 SCRA 232 [1997]) 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. Cua, Jr. v. Tan, 607 SCRA 645 (2009). The board of directors is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts. Estacio v. Pampanga I Electric Cooperative, Inc., 596 SCRA 542 (2009). 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 on account thereof are not the only matters to be proven; it is likewise necessary to show that the directors and/or officers acted in 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 obligquity 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). No court can, as an integral part of resolving the issues between squabbling stockholders, 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). 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). 3. COUNTER-VEILING DOCTRINES TO PROTECT CORPORATE CONTRACTS (a) Theory of Estoppel or Ratification The principle of estoppel precludes a corporation and its Board of Directors from denying the validity of the transaction entered into 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). In order to ratify the unauthorized act of an agent and make it binding on the corporation, it must be shown that the governing body 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 on the part of the corporation 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 latters 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 rati fy 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 principle of laches or stale demands provides that 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). (b) Doctrine of Apparent Authority (Art. 1883, Civil Code; Woodchild Holdings, Inc. v. Roxas Electric Constructions Company, Inc., 436 SCRA 235 (2004); Francisco v. GSIS, 7 SCRA 577 [1963]; Prime White Cement Corp. v. IAC, 220 SCRA 103, 113-114 [1993]; Yao Ka Sin Trading v. CA, 209 SCRA 763 [1992]). Just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors 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 by-laws 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).
90
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 officers authority. . . Unmistakably, the Courts directive in Ya 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, 243-244 (2009). If a corporation knowingly permits one of its officers 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 agents authority. Soler v. Court of Appeals, 358 SCRA 57 (2001); Rural Bank of Milaor (Camarines Sur) v. Ocfemia, 325 SCRA 99, 110-111 (2000) 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 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 International 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). Apparent authority may be ascertained through (1) the general manner in 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 is clothes them; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers. Inter-Asia Investment Industries v. Court of Appeals, 403 SCRA 452 (2003); Associated Bank v. Pronstroller, 558 SCRA 113 (2008). When an officer in a banking corporation arrange a credit line agreement and forwards the same to the legal department at its head officer, and the bank did no disaffirm the contract, then it is bound by it. Premier Dev. Bank v. Court of Appeals, 427 SCRA 686 (2004. A corporation cannot disown its Presidents act of applying to the bank for credit accommodation, simply on the ground that it never authorized the President by the lack of any formal board resolution. The following placed the corporation and its Board of Directors in estoppel in pais: Firstly, the by-laws provides for the powers of the President, which includes, executing contracts and agreements, borrowing money, signing, indorsing and delivering checks; secondly, 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). Per its Secretarys Certificate, the foundation had given its President ostensible (open to view/ klaro or way tago or tataw) and apparent authority to inter alia deal with the respondent Bank, and therefore the foundation is estopped from questioning the Presidents authority to obtain the subject loans from the respondent Bank. Lapulapu Foundation, Inc., v. Court of Appeals, 421 SCRA 328 (2004). A verbal promise given by the Chairman and President of the company to the general manager and chief operating officer to give the latter unlimited sick leave and vacation leave benefits and its cash conversion upon his retirement or resignation, when not an integral part of the companys 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). Corporate policies need not be in writing. Contracts entered into by a corporate officer or obligations or prestations assumed by such officer for and in 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. Kwok v. Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005). The acceptance of the offer to purchase by the clerk of the branch of the bank, and the representation that the manager had already approved the sale (which in fact was 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). Acts done in excess of corporate officers sc ope 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. National Power Corp. v. Alonzo-Legasto, 443 SCRA 342 (2004). Rationale for the Doctrine of Apparent Authority: Naturally, the third person has little or no information as to what occurs in corporate meeting; and he 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. What transpires in the corporate board room is entirely an internal matter. Hence, petitioner may not impute negligence on the part of the respondents in failing to find out the scope of Atty. Solutas 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). 4. Qualifications of Directors and Trustees (Secs. 23 and 27; Gokongwei, Jr. v. SEC, 89 SCRA 336 [1979]). (a) A director must own at least one share of stock. Pea v. CA, 193 SCRA 717 (1991); Detective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 (1969).
91
The law does not require that a Vice-President be a stockholder. Baguio v. Court of Appeals, 226 SCRA 366 (1993). (b) Beneficial ownership under voting trust arrangement no longer qualifies (Lee v. CA, 205 SCRA 752 [1992]). 5. Election of Directors and Trustees (a) Directors (Secs. 24 and 26; Premium Marble Resources v. Court of Appeals, 264 SCRA 11). The underlying policy of the Corporation Code is that the business and affairs of a corporation must be governed by a board of directors whose members have stood for election, and who have actually been elected by the stockholders, on an annual basis. Only in that way can the directors continued accountability to the shareholders, and the legitimacy of their decisions that bind the corporations stockholders, be assured. The shareholder vote is critical to the theory that legitimizes the exercise of power by the directors or officers over properties that they do not own. Valle Verde Country Club, Inc. v. Africa , 598 SCRA 202, 213 (2009). Corporations are required under Section 26 of the Corporation Code to submit to the SEC within thirty (30) days after the election the names, nationalities, and residences of the directors, trustees and officers of the Corporation. In order to keep stockholders and the public transacting business with domestic corporation properly informed of their organization operational status, the SEC has issued the rule requiring the filing of the General Information Sheet. Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004). When the names of some of the directors who signed the board resolution does not appear in the General Information Sheet filed with the SEC, then there is doubt whether they were indeed duly elected members of the Board legally constituted to bring suit in behalf of the Corporation. Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004). (b) Trustee (Secs. 92 and 138) (c) CUMULATIVE VOTING (Sec. 24; Cumulative Voting in Corporate Elections: Introducing Strategy in the Equation, 35 SOUTH CAROLINA L. REV. 295)
6. Vacancy in Board (Sec. 29) A by-law provision or company practice of giving a stockholder a permanent seat in the Board would be against the provision of Secs. 28 and 29 of Corporation Code which requires member of the board of corporations to be elected. Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997). The theory of delegated power of the board of directors similarly explains why, under Section 29 of the Corporation Code, in cases where the vacancy in the corporations board of directors is caused not only by the expiration of a members term, the successor so elected to fill in a vacancy shall be elected only for the unexpired term of his predecessors in office. The law has authorized the remaining members of the board to fill in a vacancy only in specified instances, so as not to retard or impair the corporations operations; yet, in recognition of the stockholders right to elect the members of the board, it limited the period during which the successor shall serve only to the unexpired term of his predecessor in office. Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009). 7. Term of Office, Hold-over Principle Directors may lawfully fill vacancies occurring in the board, and such officials, as well as the original directors, hold-over until qualification of their successors. Government v. El Hogar Filipino, 50 Phil. 399 (1927). The remedy is quo warranto to question the legality and proper qualification of persons elected to the board. Ponce v. Encarnacion, 94 Phil. 81 (1953). The remaining members of a corporations board of directors cannot elect another director to fill in a vacancy caused by the resignation of a hold-over director. The holdover period is not part of the term of office of a member of the board of directors. Consequently, when during the holdover period, a director resigns from the board, the vacancy can only be filled-up by the stockholders, since there is no term left to fill-up pursuant to the provisions of Section 29 of the Corporation which mandates that a vacancy occurring in the board of directors caused by the expiration of a members term shall be filled by the corporations stockholders. That a director continues to serve after one year from his election (i.e., on a holdover capacity), cannot be considered as extending his term. This holdover period, however, is not to be considered as part of his term, which, as declared, had already expired. Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009). 8. Removal of Directors or Trustees (Sec. 28; Roxas v. De la Rosa, 49 Phil. 609 [1926]). Only stockholders or members have the power to remove the directors or trustees elected by them, as laid down in Section 28 of the Corporation Code. Raniel v. Jochico, 517 SCRA 221, 230 (2007). 9. Directors or Trustees Meetings (Secs. 49, 53, 54 and 92) (a) Quorum: For stock corporations, the quorum referred to in Section 52 of the Corporation Code is based on the number of outstanding voting stocks. For nonstok corporations, only those who are actual, living members with voting rights shall be counted in determining the existence of a quorum during members meetings. Dead members shall not be counted. Tan v. Sycip, 499 SCRA 216 (2006).
92
In stock corporations, the presence of a quorum is ascertained and counted on the basis of the outstanding capital stock, as defined by Section 137 of the Corporation Code. Tan v. Sycip, 499 SCRA 216 (2006). When the principle for determining quorum for stock corporations is applied by analogy to nonstick corporations, only those who are actual members with voting rights should be counted . Tan v. Sycip, 499 SCRA 216 (2006). (b) Abstention: In a board meeting, an abstention is presumed to be counted as an affirmative vote insofar as it may be construed as an acquiescence in the action of those who voted affirmatively; but such presumption, being merely prima facie would not hold in the face of clear evidence to the contrary. Lopez v. Ericta, 45 SCRA 539 (1972). (c) Minutes of Meetings The signing of the minutes by all the members of the board is not required there is no provision in the Corporation Code that requires that the minutes of the meeting should be signed by all the members of the board. The signature of the corporate secretary gives the minutes of the meting probative value and credibility. People v. Dumlao, 580 SCRA 409 (2009). The entries contained in the minutes are prima facie evidence of what actually took place during the meeting, pursuant to Section 44, Rule 130 of the Revised Rule on Evidence. People v. Dumlao, 580 SCRA 409 (2009). (i) Resolution versus Minutes of Meetings: A resolution is distinct and different from the minutes of the meetinga board resolution is a formal action by a corporate board of directors or other corporate body authorizing a particular act, transaction, or appointment, while, on the other hand, minutes are a brief statement not only of what transpired at a meeting, usually of stockholders/members or directors/trustees, but also at a meeting of an executive committee. People v. Dumlao, 580 SCRA 409 (2009). 10. Compensation of Directors (Sec. 30) If the by-law provides: by-law prevail If not : Directors and trustees are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office, founded on the presumption that directors and trustees render service gratuitously, and that the return upon their shares adequately furnishes the motives for service, without compensation. But they can receive remunerations for executive officer position. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216, 223 (1997). 11. FIDUCIARY DUTIES OF DIRECTORS AND OFFICERS (a) Directors as Fiduciaries Pre-Corporation Code: Palting v. San Jose Petroleum, Inc., 18 SCRA 924. Nature of Duties of Directors and Officers: Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993). In Philippine jurisdiction, the members of the Board of Directors have a three-fold duty: duty of obedience, duty of diligence, and the duty of loyalty. Accordingly, the members of the board of directors (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. (b) Duty of Obedience ( with what is prescribed by law or charter) A corporation, through its Board of Directors, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law. Lopez Realty, Inc. v. Fontecha, 247 SCRA 183 (1995) (c) Duty of Diligence (Sec. 31; Steinberg v. Velasco, 52 Phil. 953 [1929]; Bates v. Dresser, 251 U.S. 524, 64 L. Ed. 388, 40 S. Ct. 247 [1919]; Smith v. Van Gorkam, 488 A.2d 858, Supreme Court of Delaware, 1985). For wrongdoing to make a director personally liable for debts of the corporation, the wrongdoing approved or assented to by the director must be a patently unlawful act. Mere failure to comply with the notice requirement of labor laws on company closure or dismissal of employees does not amount to a patently unlawful act. Patently unlawful acts are those declared unlawful by law which imposes penalties for commission of such unlawful acts. There must be a law declaring
93
the act unlawful and penalizing the act. Carag v. NLRC, 520 SCRA 28 (2007); Dy-Dumalasa v. Fernandez, 593 SCRA 656 (2009). Holding a corporate officer personally liable for directing the corporate affairs with gross negligence or in bad faith does not amount to an application of the doctrine of piercing the veil of corporate fiction, for such personal liability is imposed directly under Section 31 to directors and officers of corporation who are guilty of violating their duty of diligence. Sanchez v. Republic, 603 SCRA 229 (2009). (d) Duty of Loyalty (Secs. 31 to 34; Mead v. McCullough, 21 Phil. 95 [1911]). - Doctrine of Corporate Opportunity (Gokongwei v. SEC, 89 SCRA 336 [1979]). - Self-dealings (Secs. 32 and 33) - Using Inside Information (Gokongwei v. SEC, 89 SCRA 336 [1979]). When a director-majority stockholder, who is the administrator of corporate affairs directly negotiating the sale of corporate landholdings to the Government at great prices, purchases the stocks of a shareholder without informing the latter of the on-going negotiations, such director is deemed to have fraudulently acquired the shareholdings by way of deceit practiced by means of concealing his knowledge of important corporate affairs. Strong v. Repide, 41 Phil. 947 (1909). - Applies to confidential employees (cf. Sing Juco v. Llorente, 43 Phil. 589 [1922]) (e) Duty to Creditors and Outsiders (f) Corporate Dealings with Directors and Officers (Sec. 32; Gokongwei v. SEC, 89 SCRA 336 [1979]; Prime White Cement Corp. v. IAC, 220 SCRA 103 [1993]). (g) Contracts Between Corporations with Interlocking Directors (Sec. 33) see discussion below The rule under Sec. 33 of Corporation Code allowing annulment of contracts between corporations with interlocking directors resulting in the prejudice to one of the corporation, has no application to cases where fraud is alleged to have been committed to third parties. DBP v. Court of Appeals, 363 SCRA 307 (2001). (h) SEC Revised Code of Corporate Governance (SEC Memorandum. Circular No. 6, series of 2009)
12. CORPORATE OFFICERS The general principles of agency govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, by-laws, or relevant provisions of lawwhen 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). (a) Powers of Corporate Officers: While it is a general rule that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation, the Board may validly delegate some of its functions and powers to its officers, committee and agents. Associated Bank v. Pronstroller, 558 SCRA 113 (2008); Yu Chuck v. Kong Li Po, 46 Phil. 608, 614 (1924); Cebu Mactan Members Center Inc. v. Tsukahara, 593 SCRA 172 (2009). While the Court agrees that 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). Even though a judgment, decree 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 courts 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. Court of Appeals , 422 SCRA 101 (2004). (i) Rule on Corporate Officers Power to Bind Corporation An officers power as an agent of the corporation must be sought from the statute, charter, the by laws or in a delegation of authority to such officer, from the acts of the board of directors formally expressed or implied from a habit or custom of doing business. Vicente v. Geraldez, 52 SCRA 210 (1973); Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992). 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).
94
(ii) President. Peoples Aircargo v. Court of Appeals, 297 SCRA 170 (1998). 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 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). A corporation may not distance itself from the acts of a senior officer: "the dual roles of Romulo F. Sugay should not be allowed to confuse the facts." R.F. Sugay v. Reyes, 12 SCRA 700 (1961). The President is considered as the corporations agent, and as such, 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, Inc. 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 the fact alone of 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). (iii) Corporate Secretary In the absence of provisions to the contrary, the corporate secretary is the custodian of corporate recordshe 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 books of the corporation; and in the event he refuses to comply with such duty, the transferor-stockholder may rightfully bring suit to compel performance. Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997). Although the corporate secretarys duty to record transfers of stock is ministerial, he cannot be compelled to do so when the transferees 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); TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001). A sale that fails to comply with Sec. 40 of Corporation Code, cannot be invalidated when the buyer relies upon a Secretarys Certificate confirming authority. A secretarys certificate which is 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 business transactions of corporations would become tortuously slow and unnecessarily hampered. Esguerra v. Court of Appeals, 267 SCRA 380 (1997). (iv) Corporate Treasurer A corporate treasurers function 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 treasurers function. San Juan Structural v. Court of Appeals, 296 SCRA 631, 645 (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 payees 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). (b) POWER OF THE BOARD TO APPOINT AND TERMINATE CORPORATE OFFICERS (i) Who Is a Corporate Officer? (Sec. 25; Gurrea v. Lezama, 103 Phil. 553 [1958]; Mita Pardo de Tavera v. Tuberculosis Society, 112 SCRA 243 [1982]; PSBA v. Leao, 127 SCRA 778 [1984]; Dy v. NLRC, 145 SCRA 211 [1986]; Visayan v. NLRC, 196 SCRA 410 [1991]; Easycall Communications Phils., Inc. v. King , 478 SCRA 102 [2005]). An office is created by the charter of the corporation and the officer is elected by the directors or stockholders, while an employee usually occupies no office and generally is employed not by action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee. Okol v. Slimmers World International, 608 SCRA 97 (2009). Ordinary company employees are generally employed not by action of the directors and stockholders but by that of the management officer of the corporation who also determines the compensation to be paid such employees. Corporate officers, on the other hand, are elected or appointed by the directors or stockholders, and are those who are given that character either by the Corporation Code or by the corporations by-laws. Gomez v. PNOC Dev. and Management Corp., 606 SCRA 187 (2009). Corporate officers in the context of Presidential Decree No. 902 -A are those officers of the corporation who are given that character by the Corporation Code or by the corporations
95
by-laws. Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009); WQPP Marketing Communications, Inc. v. Galera, 616 SCRA 422 (2010). A mere manager not so named in the by-laws does is not an officer of the corporation. Pamplona Plantation Company v. Acosta , 510 SCRA 249 (2006). When the by-laws provide for the position of Superintendent/ Administrator, it is clearly a corporate officer position and issues of reinstatement would be within the jurisdiction of the SEC and not the NLRC. Ongkingco v. NLRC, 270 SCRA 613 (1997). When the by-laws provides that one of the powers of the Board is [T]o appoint a Medical Director, Comptroller/Administrator, Chiefs of Services and such other officers as it may deem necessary and prescribe their powers and duties, then such specifically designated positions should be considered corporate officers. The determination of the rights and the concomitant liability arising from any ouster from such positions, would be intra-corporate controversy subject to SECs jurisdiction. Tabang v. NLRC, 266 SCRA 462 (1997). The fact that Comptroller is not mentioned in the by-laws does not undermine the appointment to such position since under Sec. 25 of Corporation Code, the Board of Directors is authorized to appoint such other officers as it may deem necessary. In this case the by-laws provided and such other officers as the Board of Directors may from time to time does fit to provide for. Said officers shall be elected by majority vote of the Board of Directors. By-laws may and usually do provide for such other officers, and that where a corporate office is not specifically indicated in the roster of corporate offices in the by-laws of a corporation, the Board of Directors may also be empowered under the by-laws to create additional officers as may be necessary. Nacpil v. International Broadcasting Corp., 379 SCRA 653 (2002). Corporate officers in the context of Presidential Decree No. 902 -A are those officers of the corporation who are given that character by the Corporation Code or by the corporations by-laws. Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009). (ii) Nature of Exercise of Power to Terminate Officers An officers removal is a corporate act, and if such removal occasions an intra -corporate controversy, 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 International, 608 SCRA 97 (2009). One who is included in the by-laws of a corporation in its roster of corporate officers is an officer of said corporation and not a mere employee being a corporate officer, his removal is deemed to be an intra-corporate dispute cognizable by the SEC and not by the Labor Arbiter. Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009). 13.
LIABILITIES OF CORPORATE OFFICERS: (Sec. 31; Vazquez v. Borja, 74 Phil. 560 [1944];
Palay, Inc. v. Clave, 124 SCRA 638 [1093]; Pabalan v. NLRC, 184 SCRA 495 [1990]; Sulo ng Bayan, Inc. v. Araneta, Inc. Inc. , 72 SCRA 347 [1976]; Mindanao Motors Lines, Inc. v. CIR, 6 SCRA 710 [1962]).
Unless they have exceeded their authority, corporate officers are, as a general rule, not personally liable for their official acts, because a corporation, by legal fiction, has a personality separate and distinct from its officers, stockholders and members. Price v. Innodata Phils., Inc., 567 SCRA 269 (2008); Lowe, Inc. v. Court of Appeals, 596 SCRA 140 (2009). Officers of a corporation may become liable for its loans when they have breached their duty of diligence under Section 31 of the Corporation Code. Aratea v. Suico, 518 SCRA 501 (2007); Singian, Jr. v. Sandiganbayan, 478 SCRA 348 (2005); or when they have contractually made themselves personally liable for a corporate loan. Contractuall. Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010). In the absence of malice, bad faith, or a specific provision of law making a corporate officer, liable, such corporate officer cannot be made personally liable for corporate liabilities. Where the the Chairman and President of the corporation has made himself accountable in the promissory note in his personal capacity and as authorized by the Board Resolution, and in the absence of any representation on the part of corporation that the obligation is all its own because of its separate corporate identity, we see no occasion to consider piercing the corporate veil as material to the case. Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010). To hold a director personally liable for debts of the corporation, and thus pierce the veil of corporate fiction, the bad faith or wrongdoing of the director must be established clearly and convincingly. Bad faith is never presumed. Bad faith does not connote bad judgment or negligence. Bad faith imports a dishonest purpose. Bad faith means [a] breach of a known duty through some ill motive or interest. Bad faith partakes of the nature of fraud. Carag v. NLRC, 520 SCRA 28 (2007).
96
Generally, officers or directors under the old corporate name bear no personal liability for acts done or contracts entered into for the corporation, if duly authorized. Republic Planters Bank v. Court of Appeals, 216 SCRA 738 (1992). Corporate officers who entered into and signed contracts on behalf of the corporation in their official capacities cannot be made personally liable thereunder in the absence of stipulation to that effect, due to the personality of the corporation being separate and distinct from the persons composing it. Western Agro Industrial Corp. v. Court of Appeals, 188 SCRA 709 (1990); Rustan Pulp & Paper Mills, Inc. v. IAC, 214 SCRA 665 (1992); Banque Generale Belge v. Walter Bull and Co., 84 Phil. 164 (1949). A president cannot be held solidarily liable personally with the corporation absent evidence of showing that he acted maliciously or in bad faith. EPG Constructions Co. v. CA, 210 SCRA 230 (1992). The finding of solidary liability among the corporation, its officers and directors would patently be baseless when the decision contains no allegation, finding or conclusion 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); Emilio Cano Enterprises, Inc. v. CIR, 13 SCRA 291 (1965); Arcilla v. Court of Appeals, 215 SCRA 120 (1992). An officer-stockholder who signs in behalf of the corporation to a fraudulent contract 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 Corporation v. Ng , 181 SCRA 719 (1990). (a) Rundown on Officers Liabilities. Tramat Mercantile, Inc. v. Court of Appeals, 238 SCRA 14 (1994); MAM Realty v. NLRC, 244 SCRA 797 (1995); NFA v. Court of Appeals, 311 SCRA 700 (1999); Atrium Management Corp. v. Court of Appeals, 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, Inc. v. Marina Properties Corp., 421 SCRA 428 (2004); McLeod v. NLRC, 512 SCRA 222 (2007). Bad faith does not arise just because a corporation fails to pay its obligation, because the inability to pay ones obligation is not synonymous with fraudulent intent not to honor the obligations. In order to piece the veil of corporate fiction, for reasons of negligence by the director, trustee or officer in the conduct of the transactions of the corporation, such negligence must be gross. Magaling v. Ong, 562 SCRA 152 (2008). Directors or trustees who willfully or knowingly vote for or assent to patently unlawful acts of the corporation or acquire any pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation. EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008). While the limited liability doctrine is intended to protect the stockholder by immunizing him from personal liability for the corporate debts, a corporate officer may nevertheless divest himself of this protection by voluntarily binding himself to the payment of the corporate debts. Toh v. Solid Bank Corp., 408 SCRA 544 (2003). The corporate representatives signing as a solidary guarantee as corporate representative did not undertake to guarantee personally the payment of the corporations debt embodied in the trust receipts. 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 corporations debt if they so contractually agree or sti pulate. Tupaz IV v. Court of Appeals, 476 SCRA 398 (2005). x(b) Special Provisions in Labor Laws: Since a corporate employer is an artificial person, it must have an officer who can be presumed to be the employer, being the person acting in the interest of (the) employer as defined in Art. 283 of the Labor Code. A.C. Ransom Labor Union-CCLU v. NLRC, 142 SCRA 269 (1986). (i) Overturning the A.C. Ransom Ruling: Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation because Section 31 of the Corporation Code is still the governing law on personal liability of officers for the debts of the corporation . David v. National Federation of Labor Unions, 586 SCRA 100 (2009). Corporate officers cannot be held personally liable for damages on account of the employees dismissal because the employer corporation has a personality separate and distinct from its officers who merely acted as its agents. Malayang Samahan ng mga Mangagagawa sa M. Greenfields v. Ramos, 357 SCRA 77 (2001); AMA Computer College-East Rizal v. Ignacio, 590 SCRA 633, 659-660 (2009).
97
Only the responsible officer of a corporation 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); reiterated in Gudez v. NLRC, 183 SCRA 644 (1990); Chua v. NLRC, 182 SCRA 353 (1990); Reahs Corp. v. NLRC, 271 SCRA 247 (1997); and 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). 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); Nicario v. NLRC, 295 SCRA 619 (1998); Flight Attendants and Stewards Association of the Philippines v. Philippine Airlines, 559 SCRA 252 (2008); M+W Zander Philippines, Inc. v. Enriquez, 588 SCRA 590 (2009); AMA Computer College-East Rizal v. Ignacio, 590 SCRA 633, 659-660 (2009); Lowe, Inc. v. Court of Appeals, 596 SCRA 140, 155 (2009); Peaflor v. Outdoor Clothing Manufacturing Corp., 618 SCRA 208 (2010). 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 they represent. Brent Hospital, Inc. v. NLRC, 292 SCRA 304 (1998). In labor cases, corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. In this case, it is undisputed that the corporate officers have a direct hand in the illegal dismissal of the employees. They were the one, who as high-ranking officers and directors of the corporation, 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 Profit and Loss Statement which, to repeat, had no evidentiary value whatsoever. Uichico v. NLRC, 273 SCRA 35 (1997). (ii) 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, the 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 stockholders-officers of employer-corporation. In the case at bar, a mere general manager while admittedly the highest ranking local representative of the corporation, is nevertheless not a stockholder and much less a member of the Board of Directors nor an officer thereof. De Guzman v. NLRC, 211 SCRA 723 (1992). (iii) Upholding the A.C. Ransom Ruling: Under the Labor Code, in the case of corporations, it is the president who responds personally for violation of the labor pay laws. Villanueva v. Adre, 172 SCRA 876 (1989). A.C. Ransom doctrine has been reiterated subsequently in Restuarante Las Conchas v. Llego, 314 SCRA 24 (1999); Carmelcraft Corp. v. NLRC, 186 SCRA 393 (1990); Valderrama v. NLRC, 256 SCRA 466 (1996). Since a corporation is an artificial person, it must have an officer who can be presumed to be the employer, being the person acting in the interest of the employerthe corporation, in the technical sense only, is the employer. The manager of the corporation falls within the meaning of an employer as contemplated by the Labor code, who may be held jointly and severally liable for the obligation of the corporation to its dismissed employees. NYK International Knitwear Corp. Phil. V. NLRC, 397 SCRA 607 (2003). (iv) Definitive Overturning of A.C. Ransom Ruling: It is settled that in the absence of malice, bad faith, or specific provisions of law, a stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities. McLeod v. NLRC, 512 SCRA 222 (2007), citing Land Bank of the Philippines v. Court of Appeals , 364 SCRA 375 (2001); Bogo-Medellin Sugarcane Planters Asso., Inc. v. NLRC, 296 SCRA 108 (1998); Complex Electronics Employees Assn. v. NLRC, 310 SCRA 403 (1999); Acesite Corp. v. NLRC, 449 SCRA 360 (2005); CocaCola Bottlers Phils., Inc. v. Daniel, 460 SCRA 494 (2005); Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006); Supreme Steel Pipe Corp. v. Bardaje, 522 SCRA 155 (2007). Clearly, in A.C. Ransom, RANSOM, through its 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); H.R. Carlos Construction, Inc. v. Marina Properties Corp., 421 SCRA 428 (2004); Pamplona Plantation Company v. Acosta , 510 SCRA 249 (2006); Elcee Farms, Inc. v. NLRC, 512 SCRA 602 (2007); Uy v. Villanueva, 526 SCRA 73 (2007).
98
It was clarified in Carag v. NLRC, 520 SCRA 28 (2007), and McCleod v. NLRC, 512 SCRA 22 (2007), that Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporationthe governing law on personal liability of directors or officers for debts of the corporation is still Section 31 of the Corporation Cede. Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); David v. National Federation of Labor Unions, 586 SCRA 100 (2009). (c) Personal Liability of Trustees and Officers of Non-Stock Corporation The non-stock corporation acted in clear bad faith when it sent the final notice to a member under the pretense they believed him to be still alive, when in fact it had very well known that he had already died. Valley Golf and Country Club, Inc. v. Vda. De Caram, 585 SCRA 218 (2009). Non-stock corporations and their officers are not exempt from the obligation imposed by Articles 19, 20 and 21 under the Chapter on Human Relations of the Civil Code, which provisions enunciate a general obligation under law for every person to act fairly and in good faith towards one another. Valley Golf and Country Club, Inc. v. Vda. De Caram, 585 SCRA 218 (2009).
VOTING
Pledgors, mortgagors, executors, receivers, and administrators (Sec. 55)
meetings. Exception: If the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. - Executors, administrators, receivers and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy. Pledgors or mortgagors have the right to attend and vote at stockholders'
Joint owners of stock (Sec. 56)

- Generally, consent of all co-owners shall be necessary.
Treasury shares (Sec. 57)

- Treasury shares have no voting right for as long as such shares remain in the Treasury.
Proxies (Sec. 58)

- Proxies must be in writing, signed by the stockholder/member, filed before the scheduled meeting with the corporate secretary. - Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. - Voting trusts may be voted by proxy unless the agreement provides otherwise. (Sec. 59) - It must be noted however that directors or trustees cannot vote by proxy at board meetings. (Sec. 25) - Note that in Sec. 89, non-stock corporations are permitted to waive the right to use proxies via their AOI or by-laws.
99
Voting trust (Sec. 59)

- Voting trusts must be in writing, notarized, specifying the terms and conditions thereof, certified copy filed with SEC. Failure to comply with this requirement renders the agreement ineffective and unenforceable. - As a general rule, voting trusts are valid for a period not exceeding 5 years at any one time, and automatically expire at the end of the agreed period unless expressly renewed. However, in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may exceed 5 years but shall automatically expire upon payment of the loan. - Voting trusts may be voted by proxy unless the agreement provides otherwise. (Sec. 59)
Pooling agreement - Pooling agreements refer to agreements between 2 or more SHs to vote their
shares the same way. They are different from voting trust agreements in that they do not involve a transfer of stocks but are merely private agreements between 2 or more SHs to vote in the same way. - Sec. 100, par. 2 of the Corporation Code provides for pooling and voting agreements in close corporations. Although there is no equivalent provision for widely-held corporations, Justice and Prof. Campos are of the opinion that SHs of widely-held corporations should not be precluded from entering into voting agreements if these are otherwise valid and are not intended to commit any wrong or fraud on the other SHs that are not parties to the agreement.
Non-voting shares (Sec. 6) - Preferred or redeemable shares. ITF shares And/or shares (Sec. 56)
- Any one of the joint owners can vote said shares or appoint a proxy thereof. XI. STOCKHOLDERS AND MEMBERS
1. Shareholders Not Corporate Creditors. Garcia v. Lim Chu Sing, 59 Phil. 562 (1934). 2. Subscription Contract (Secs. 60 and 72; Trillana v. Quezon Colegialla, 93 Phil. 383 [1953]). (a) Purchase Agreement. Bayla v. Silang Traffic Co., Inc., 73 Phil. 557 (1942). (b) Pre-Incorporation Subscription (Sec. 61) When properties were assigned pursuant to a pre-incorporation subscription agreement, but the corporation fails to issue the covered shares, the return of such properties to the subscriber is a direct consequence of rescission and does not amount to corporate distribution of assets prior to dissolution. On Yong v. Tiu, 375 SCRA 614 (2002). (c) Release from Subscription Obligation: Tan v. Sycip, 499 SCRA 216 (2006); Velasco v. Poizat, 37 Phil. 802 (1918); PNB v. Bitulok Sawmill, Inc., 23 SCRA 1968 (1968); National Exchange Co. v. Dexter, 51 Phil. 601 (1928). (d) When Condition of Payment Provided in By-laws. De Silva v. Aboitiz & Co., 44 Phil. 755 (1923). 3. Consideration (Sec. 62): (a) Cash (b) Property (c) Service (d) Shares (d) Retained Earnings
100
Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings converted into equity in the corporations books. Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998).26 When a person pays to the corporation a deposit for future subscription, no subscription agreement has been constituted, and consequently there is no liability for the payment of the documentary stamp tax on such deposit for future subscription for the reason that there is yet no subscription that creates rights and obligations between the subscriber and the corporation. Commissioner of Internal Revenue v. First Express Pawnshop Company, Inc., 589 SCRA 253 (2009). 4. Watered Stocks (Sec. 65) 5. Payment of Balance of Subscription (Secs. 66 and 67; Lingayen Gulf Electric Power Co. v. Baltazar, 93 Phil. 404 [1953]). A stockholder who is employed with the company, cannot offset his unpaid subscription against his awarded claims for wages, where there has been no call for the payment of such subscription. Apodaca v. NLRC, 172 SCRA 442 (1989). 6. Delinquency on Subscription (Secs. 68, 69, 70 and 71; Philippine Trust Co. v. Rivera, 44 Phil. 469 [1923]; Miranda v. Tarlac Rice Mill Co., 57 Phil. 619 [1932]) The prescriptive period to recover on unpaid subscription does not commence from the time of subscription but from the time of demand by Board of Directors to pay the balance of subscription . Garcia v. Suarez, 67 Phil. 441 (1939). (a) Who May Question a Delinquency Sale (Sec. 68 and 69). 7. Certificate of Stock (Sec. 63) (a) Nature of Certificate:Tan v. SEC, 206 SCRA 740 (1992);De los Santos v. Republic, 96 Phil. 577 (1955);Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002); Nautica Canning Corp. v. Yumul, 473 SCRA 415 (2005); C.N. Hodges v. Lezama, 14 SCRA 1030 (1965). A certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests therein. The certificate is not a stock in the corporation but is merely evidence of the holders interest and status in the corporation, his ownership of the share represented thereby. It is not in law the equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but is not essential to the existence of a share of stock or the nature of the relation of shareholder to the corporation. Makati Sports Club, Inc. v. Cheng, G.R. No. 178523, 16 June (2010). A certificate of stock is the evidence of a holders interest and status in a corporationit is prima facie evidence that the holder is a shareholder of a corporation. Lao v. Lao, 567 SCRA 558 (2008). A stock certificate is merely evidence of a share of stock and not the share itself. Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998); Lao v. Lao, 567 SCRA 558 (2008). The fact that the stock certificates registered in the name of one person are found in the possession of another stockholder does not prove that the possessor is the owner of the covered shares. A stock certificate is merely a tangible evidence of ownership of shares of stock. Its presence or absence does not affect the right of the registered owner to dispose of the shares covered by the stock certificate. Republic v. Estate of Hans Menzi, 475 SCRA 20 (2005). A certificate of stock could not be considered issued in contemplation of law unless signed by the president or vice-president and countersigned by the secretary or assistance secretary. Bitong v. Court of Appeals, 292 SCRA 503 (1998). (b) Quasi-negotiable Character of Certificate of Stock: Bachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681 (1937). In order for a transfer of stock certificate to be effective, it must be properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. Indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. Razon v. IAC, 207 SCRA 234 (1992). The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or any other person legally authorized to make the transfer shall be sufficient to effect the transfer of shares only if the same is coupled with delivery. The delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new transferee. But to be valid against third parties, the transfer must be recorded in the books of the corporation. Bitong v. Court of Appeals, 292 SCRA 503 (1998); Raquel-Santos v. Court of Appeals, 592 SCRA 169 (2009). Even when a formal Deed of Assignment covering the shares was duly executed, without the endorsement and delivery of the covering certificates of stocks, the covered shares cannot be deemed to
26 The basis for determining the documentary stamps due on stock dividends declared would be their book value as indicated in the latest audited financial statements of the corporation, and not the par value thereof. Commissioner of Internal Revenue v. Lincoln Phil. Life Insurance Co., 379 SCRA 423 (2002). Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto. Includes ATTY DY AND VILLANUEVA OUTLINE ATENEO 2011
101
transferred and registered in the names of the assignees. Rural Bank of Lipa City v. Court of Appeals, 366 SCRA 188 (2001); Rivera V. Florendo, 144 SCRA 643 (1986). (c) Right to Issuance (Sec. 64; Baltazar v. Lingayen Gulf Elect. Power Co., Inc., 14 SCRA 522 [1965]). (d) Lost or Destroyed Certificates (Sec. 63 and 73) While Sec. 73 of Corporation Code appears to be mandatory, the same admits exceptions, such that a corporation may voluntarily issue a new certificate in lieu of the original certificate of stock which has been lost without complying with the requirements under said section . It would be an internal matter for the corporation to find measures in ascertaining who are the real owners of stock for purposes of liquidation. It is well-settled that unless proven otherwise, the stock and transfer book is the best evidence to establish stock ownership. (SEC Opinion, dated 28 January 1999, addressed to Ms. Ma. Cecilia Salazar-Santos). (e) Forged and Unauthorized Transfers. J. Santamaria v. HongKong and Shanghai Banking Corp., 89 Phil. 780 (1951); Neugene Marketing, Inc. v. Court of Appeals, 303 SCRA 295 (1999). 8. STOCK AND TRANSFER BOOK: Secs. 63, 72 and 74; Fua Cun v. Summers, 44 Phil. 704 (1923); Monserrat v. Ceran, 58 Phil. 469 (1933); Chua Guan v. Samahang Magsasaka, Inc., 62 Phil. 472 (1935); Uson v. Diosomito, 61 Phil. 535 (1935); Escao v. Filipinas Mining Corporation, 74 Phil. 71 (1944); Bachrach Motors v. Lacson-Ledesma, 64 Phil. 681 (1937); Nava v. Peers Marketing Corp., 74 SCRA 65 (1976). A stock and transfer book records the names and addresses of all stockholders arranged alphabetically, the installments paid and unpaid on all stock for which subscription has been made, and the date of payment thereof, a statement of every alienation, sale or transfer of stock made the date thereof and by and to whom made, and such other entries as may be prescribed by law. A stock and transfer book, like other corporate books and records, is not in any sense a public record, and thus is not exclusive evidence of the matters and things which ordinarily are or sh9ould be written therein. Lanuza v. Court of Appeals, 454 SCRA 54 (2005). (a) Validity of Transfers: Under Sec. 63 of Corporation Code, the sale of stocks shall not be recognized as valid unless registered in the books of the corporation insofar as third persons, including the corporation, are concerned as between the parties to the sale, the transfer shall be valid even if not recorded in the books of the corporation. Batangas Laguna Tayabas Bus Co. v. Bitanga, 362 SCRA 635 (2001). As between the General Information Sheet and the corporate books, it is the latter that is controlling. Lao v. Lao, 567 SCRA 558 (2008). A transfer of shares which is not recorded in the books of the corporation is valid only as between the parties, hence, the transferor has the right to dividends as against the corporation without notice of transfer but it serves as trustee of the real owner of the dividends, subject to the contract between the transferor and transferee as to who is entitled to receive the dividends. Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009). The view that under Section 63 of the Corporation Code, the sale of the stocks shall not be recognized as valid unless registered in the books of the corporation is valid only insofar as third persons, including the corporation, are concernedas between the parties to the sale, the transfer shall be valid even if not recorded in the books of the corporation. Batangas Laguna Tayabas Bus Co. v. Bitanga, 362 SCRA 635 (2001). A transferee has no right to intervene as a stockholder in corporate issue on the strength of the transfer of shares allegedly executed by a registered stockholder. It is explicit under Sec. 63 that the transfer must be registered to affect the corporation and third persons. Magsaysay-Labrador v. CA, 180 SCRA 266 (1989). The purpose of registration is two-fold: to enable the transferee to exercise all the rights of a stockholder, including the right to vote and to be voted for, and to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting; his vote can be properly counted to determine whether a stockholders resolution was approved, despite the claim of the alleged transferee. On the other hand, a person who has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the corporate books. Until the transfer is registered, the transferee is not a stockholder but an outsider. Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 362 SCRA 635 (2001).
102
A bona fide transfer of shares, not registered in the corporate books, is not valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not. All transfers not so entered on the books of the corporation are absolutely void; not because they are without notice or fraudulent in law or fact, but because they are made so void by statute. Garcia v. Jomouad, 323 SCRA 424 (2000). Pursuant to Sec. 63, a transfer of shares of stock not recorded in the stock and transfer book is nonexistent as far as the corporation is concerned. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only into its books for the purpose of determining who its shareholders are. Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002). Indeed, until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. Thus, the unrecorded transferee, the Bitanga group in this case, cannot vote nor be voted for. The purpose of registration, therefore, is two-fold: to enable the transferee to exercise all the rights of a stockholder, including the right to vote and to be voted for, and to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting; his vote can be properly counted to determine whether a stockholders resolution was approved, despite the claim of the alleged transferee. On the other hand, a person who has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the corporate books. Until the transfer is registered, the transferee is not a stockholder but an outsider. Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga , 362 SCRA 635 (2001). [CLV- I agree with the dissenting opinion of Justice Puno: The rule [Section 63] is intended to protect the interest of the corporation and third persons who may be prejudiced by the transfer of the shares of stocks. It follows, therefore, that as between the parties to the sale, the transfer shall be valid even if not recorded in the books of the corporation.] The absence of a deed of sale evidencing the sale of shares of stock does not necessarily show irregularity since Section 63 of the Corporation Code itself does not require any deed for the validity of the transfer of shares stock, it being sufficient that such transfer be effected by delivery of the stock certificates duly endorsed. The Corporation Code acknowledges that the delivery of a duly ind orsed stock certificate is sufficient to transfer ownership of shares of stock in stock corporations. Such mode of transfer is valid between the parties. In order to bind third persons, however, the transfer must be recorded in the books of the corporation. Clearly then, the absence of a deed of assignment is not a fatal flaw which renders the transfer invalid as the Republic posits. In fact, as has been held in Rural Bank of Lipa City, Inc. v. Court of Appeals, [366 SCRA 188 (2001)] the execution not a deed of sale does not necessarily make the transfer effective. Republic v. Estate of Hans Menzi, 475 SCRA 20, 38 (2005). (b) Who May Make Entries: Entries made on the stock and transfer book by any person other than the corporate secretary, such as those made by the President and Chairman, cannot be given any valid effect. Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997) (c) Attachments: Attachments of shares of stock are not included in the term transfer as provided in Sec. 63 of Corporation Code. Both the Revised Rules of Court and the Corporation Code do not require annotation in the corporations stock and transfer books for the attachment of shares to be valid and binding on the corporation and third parties. Chemphil Export & Import Corp. v. CA, 251 SCRA 257 (1995). (d) Meaning of Unpaid Claims: Unpaid claims under Sec. 63 refers to any unpaid subscription, and not to any indebtedness which a stockholder may owe the corporation arising from any other transactions, like unpaid monthly dues. China Banking Corp. v. CA, 270 SCRA 503 (1997) (e) Equitable Mortgage Assignment: It seems that 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 th e assignment was predicated on the intention that it would serve as security vis--vis DBPs financial accommodation extended to PJI, but it was a valid and duly executed assignment, subject to a resolutory condition, which was the settlement of PJIs loan obligation with DBP. APT v. Sandiganbayan, 341 SCRA 551, 560 (2000). 9. Situs of Shares of Stocks (Sec. 55) Situs of shares of stock is the domicile of the corporation to which they pertain to. Wells Fargo Bank and Union v. Collector, 70 Phil. 325 (1940); Tayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968); cf. Perkins v. Dizon, 69 Phil. 186 (1939).
103
Devices Affecting Control Proxy Device

Sec 58. Proxies. Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall be in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. Character: agency relationship; revocable at will (by express revocation, by attending the meeting) and by death, except when coupled with interest or is a security.
IN RE GIANT PORTLAND CEMENT CO. (21 A.2d 697; 1941) Even if stocks are sold, the stockholder of record remains the owner of the stocks and has the voting right until the by-law requiring recording of transfer in the transfer book is complied with. Thus, a proxy given by the stockholder of record even if he has already sold the share/s of stock remains effective. STATE EX REL EVERETT TRUST V PACIFIC WAXED PAPER, (159 A.L.R. 297; 1945) The general rule is that a proxy is revocable even though by its express terms it is irrevocable. The exceptions ( irrevocable )are: (a) when authority is coupled with interest; (b) where authority is given as part of a security and is necessary to effectuate such a security. It is coupled with interest when there is interest in the share themselves (such as a right of first refusal in case of sale) and the rights inherent in the shares (such as voting rights; capacity to obtain majority). DUFFY V LOFT (17 Del. Ch. 376, 152 A. 849; 1930) Where a stockholders meeting was validly convened, the proxies must be deemed present even if the proxies were not presented, provided: (a) their existence is established; (b) the agents were so designated to attend and act in SHs behalf; (c) the agents were present in the meeting.
Q: Is it valid for the corporation to pay the expenses for proxy solicitation? A: In the case of Rosenfeld v. Fairchild Engine and Airplane Corp. ( 128 N.E. 2d 291; 1955), it was held that in a contest over policy (as opposed to a purely personal power contest), corporate directors have the right to make reasonable and proper expenditures, subject to the scrutiny of the courts when duly challenged, from the corporate treasury for the purpose of persuading the SHs of the correctness of their position and soliciting their support for policies which the directors believe, in all good faith, are in the best interests of the corporation. The SHs, moreover, have the right to reimburse successful contestants for the reasonable and bona fide expenses incurred by them in any such policy contest, subject to like court scrutiny. However, where it is established that such monies have been spent for personal power, individual gain or private advantage, and not in the belief that such expenditures are in the best interest of the stockholders and the corporation, or where the fairness and reasonableness of the amounts allegedly expended are duly and successfully challenged, the courts will not hesitate to disallow them.
ROSENFELD V. FAIRCHILD (128 N.E. 2d 291; 1955)

104
In a contest over policy, as compared to a purely personal power contest, corporate directors have the right to make reasonable and proper expenditures. Reason: in these days of giant corporations with vast numbers of SHs, if directors are not allowed to authorize reasonable expenses in soliciting proxies, corporate business may be hampered by difficulty in procuring quorum; or corporations may be at the mercy of persons seeking to wrest control for their purposes if the directors may not freely answer their challenge. But corp expense may be disallowed by courts where money was shown to have been spent for personal power, individual gain or private advantage, or where fairness and reasonableness of amount spent has been successfully challenged.
Voting Trust
A Voting Trust Agreement (VTA) is an agreement whereby the real ownership of the shares is separated from the voting rights, the usual aim being to insure the retention of incumbent directors and remove from the stockholders the power to change the management for the duration of the trust.
Advantages
Accumulates power. Small shareholders are given the chance to have a representation in the BOD or at least a spokesperson during stockholders meetings. Continuity of management. More effective than proxies because it is irrevocable. Ensures that the required number of stockholders is met thereby facilitating smooth corporate operations.
Disadvantages
Stockholders give up rights (voting and naked title) Susceptible to abuse Not used in widely held corporations
Rights given up by the shareholder in a VTA in exchange for the fiduciary obligation of the trustee:
Voting rights Proprietary rights/naked title/legal ownership Incidental rights such as to attend meetings, to be elected, to receive dividends)
Rights retained by the shareholder

Beneficial or equitable ownership Right to revoke VTA in case of breach by trustee Regain full ownership after the lapse of the period Right to an accounting by the trustee after the period of the VTA
How is a voting trust created?

(1) A VTA is prepared in writing, notarized, and filed with the corporation and SEC. (2) The certificates of stock covered by the VTA are cancelled and new ones (voting trust certificates) are issued in the name of the trustee/s stating that they are issued pursuant to the VTA. (3) The transfer is noted in the books of the corporation. (4) The trustee/s execute and deliver to transferors the voting trust certificates. ( Note that these certificates shall be transferable in the same manner and with the same effect as certificates of stock.) (5) At the end of the period of the VTA (or the full payment of the loan to which the VTA is made a condition, as the case may be), in the absence of any express renewal, the voting trust certificates as well as the certificates of stock in the name of the trustee/s
105
shall be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors.
EVERETT V. ASIA BANKING (49 Phil. 512; 1926) This case illustrates how VTA can give rise to effective control and how it can be abused. Original stockholders can set aside the VTA when their rights are trampled upon by the trustee. MACKIN, ET AL. V. NICOLLET HOTEL (25 F. 2d 783; 1928) Invalidating circumstances of a VTA are: Want of consideration Voting power not coupled with interest Fraud Illegal or improper purpose
NIDC V. AQUINO (163 SCRA 153; 1988) A VTA transfers only voting or other rights pertaining to the shares subject of the agreement, or control over the stock. Stockholders of a corp. that lost all its assets through foreclosures cannot go after those properties. PNB-NIDC acquired those properties not as trustees but as creditors.
Pooling and voting agreements

What are the advantages/disadvantages of a pooling agreement?
Advantages: 1. there is a commitment to agree to a certain manner of voting 2. minority stockholders are able to control the corpo Disadvantages: 1. possibility of disagreement thus the need for an arbitration clause 2. there is no compelling reason for stockholders to act together
What rights does a shareholder give up/ retain with a pooling agreement?
Shareholders retain their right to vote because the parties are not constituted as agents. However, the will of the parties may not be carried out due to noncompliance with the pooling agreement.
RINGLING v. RINGLING (29 Del. Ch. 318, 49 A. 2d 603; 1946) Generally, agreements and combinations to vote stock or control corporate fiction & policy are valid if they seek without fraud to accomplish only what parties might do as stockholders and do not attempt it by illegal proxies, trusts or other means in contravention of statutes or law. BUCK RETAIL STORE v. HARKERT (62 N.W. 2d 288; 1954) Stockholders control agreements are valid where it is for the benefit of corporation where it works no fraud upon creditors or other stockholders and where it violates no statute or recognized public policy.
106
MCQUADE v. STONEHAM (189 N.E. 234; 1934) An agreement among stockholders to divest directors of their power to discharge an unfaithful employee is illegal as against public policy. Stockholders may not by agreement among themselves control the directors in the exercise of the judgment vested in them by virtue of their office to elect officers and fix salaries. CLARK v. DODGE (199 N.E. 641; 1936) If the enforcement of a particular contract damages nobody-not even the public, there is no reason for holding it illegal. Test is WON it causes damage to the corporation and stockholders.
Cumulative voting (see sec. 24)

Methods of Voting
1. Straight voting: If A has 100 shares and there are 5 directors to be elected, he shall multiply 100 by five (equals 500) and distribute equally among the five candidates without preference If A has 100 shares and there are 5 directors to be elected, he shall multiply 100 by five (equals 500) and he can vote the 500 for only one candidate.
2.
Cumulative voting: (one candidate)
3.
Cumulative voting: If A has 100 shares, there are 5 directors to be elected, and he only (multiple candidates) wants to vote for two nominees, he can divide 500 votes between the two, giving each one 250 votes.
How to compute votes needed to get a director elected by cumulative voting:

1. Freys formula (minimum no. of votes to elect one director) X= # of shares required Y= # of outstanding votes Z= # of directors to be elected X = _ Y__ + 1 Z+1 2. Baker & Carys formula (minimum no. of votes needed to elect multiple directors) X= # of shares required Y= # of shares represented at meeting D= # of directors the minority wants to elect D= total # of directors to be elected X= Y x D + 1 D' + 1
NOTES
Levels playing field or at least ensures that the minority can elect at least one representative to the board of directors (BOD) Cannot of itself give the minority control of corporate affairs, but may affect and limit the extent of the majoritys control By-laws cannot provide against cumulative voting since this right is mandated by law in Section 24.
Classification of shares (see sec. 6)

107
Type of shares
1. 2. Common: Preferred: liquidation; share with right to vote share has preference over dividends and distribution of assets upon right to vote may be restricted (Sec. 6) 3. Redeemable: fixed share is purchased or taken up by the corporation upon the expiration of a period (Sec. 8); right to vote may be restricted (Sec. 6)
NOTES
Stock can also be both preferred and redeemable. Even though the right to vote of preferred and redeemable shares may be restricted, owners of these shares can still vote on certain matter provided for in Sec. 6 (AASIMIDI). SEE CODAL SEC requires that where no dividends are declared for three consecutive years, in spite of available profits, preferred stocks will be given the right to vote until dividends are declared.
GOTTSCHALK V. AVALON REALTY (23 N.W. 2d 606; 1946) Provision granting right to vote to preferred stock previously prohibited from voting, constitutes diminution of the voting power of common stock. Provision in the articles of incorporation granting holders of preferred stock right to vote in case of default in payment of dividends after July 1, 1951 was construed as denial by necessary implication of the right to vote even prior to July 1, 1951.
Restriction on transfer of shares

Peculiar to close corporations. Most common restriction: granting first option to the other stockholders and/or the corporation to acquire the shares of a stockholder who wishes to sell them. Restrictions on shares of stock must conform to the requirements in Sec. 98 This gives to the corporation and/or to its current management the power to prevent the transfer of shares to persons who they may see as having interests adverse to theirs.
Prescribing qualifications for directors; founders shares

Directors (See Sec. 23, 27, 47)
As long as the qualifications imposed are reasonable and not meant to unjustly or unfairly deprive the minority of their rightful representation in the BOD, such provisions are within the power of the majority to provide in the by-laws. According to Gokongwei vs. SEC, aside from prescribing qualifications, by-laws can also provide for the disqualification of anyone in direct competition with the corporation.
Founders shares
See Sec. 7 for definition Exception to the rule in sec. 6 that non-voting shares shall be limited to preferred and redeemable shares
108
If founders shares enjoy the right to vote, this privilege is limited to 5 years upon SECs approval, so as to prevent the perpetual disqualification of other stockholders.
Management contracts (sec. 44)

Contract to manage the day-to-day affairs of the corporation in accordance with the policies laid down by the board of the managed corporation. BOD can and usually delegate many of its functions but it cant abdicate its responsibility to act as a governing body by giving absolute power to officers or others, by way of a management contract or otherwise. It must retain its control over such officers so that it may recall the delegation of power whenever the interests of the corporation are seriously prejudiced thereby.
SHERMAN & ELLIS VS. INDIANA MUTUAL CASUALTY (41 F. 2d 588; 1930) Although corporations may, for a limited period, delegate to a stranger certain duties usually performed by the officers, there are duties, the performance of which may not be indefinitely delegated to outsiders.
UNUSUAL VOTING AND QUORUM REQUIREMENTS (Sec. 25, 97 [for close corporations])103
Increases veto power of the minority in some cases. In exchange for the numerical majority in the BOD, minority can ask for a stronger veto power in major corporate decisions.
BENITENDI VS. KENTON HOTEL (60 N.E. 2d 829; 1945) A requirement that there shall be no election of directors at all unless every single vote be cast for the same nominees, is in direct opposition to the statutory rule that the receipt of plurality of the votes entitles a nominee to election. (See Sec. 24) Requiring unanimity before the BOD can take action on any corporate matter makes it impossible for the directors to act on any matter at all. In all acts done by the corporation, the major number must bind the lesser, or else differences could never be determined nor settled. The State has decreed that every stock corporation must have a representative government, with voting conducted conformably to the statutes, and the power of decision lodged in certain fractions, always more than half, of the stock. This whole concept is destroyed when the stockholders, by agreement, by-law or certificates of corporation provides for unanimous action, giving the minority an absolute, permanent and all-inclusive power of veto. The requirement of unanimous vote to amend by-laws is valid. Once proper by-laws have been adopted, the matter of amending them is no concern of the State.
Device Cumulative voting Classification of shares
Favorable To:
MINORITY: assures them of representation on the board MINORITY: so long as they hold more common stock as opposed to
Limitations
Cant give minority control of corp. affairs Preferred and redeemable stock can still
EDWIN PADILLO BAR 2013 the majority who holds more preferred stock
109 vote on certain matters as provided in Sec. 6 or as may be provided by the corp. See Sec. 98
Restriction on transfer of shares *applicable only to close corporations Prescribing qualifications for directors; founders shares
MAJORITY: they can choose whether to keep or release shares and they can prevent opposition from acquiring shares MAJORITY: theyre the ones who can prescribe the qualifications in the by-laws
Qualifications must be reasonable and do not deprive minority of representation on the board Cannot exceed five years BOD must retain control over corp. policies BOD must have power to recall contract
Management contracts
MAJORITY: allows them to delegate certain functions and duties without losing control over the corporation
Unusual voting and quorum requirements
MINORITY: gives them stronger veto power in certain corp. affairs
Subject to the limitations in Sec. 103.
MEETINGS Meetings of Directors / Trustees

KINDS: or Meetings of the Board of Directors or Trustees may be either regular special. (Sec. 49) REGULAR: Held monthly, unless otherwise provided in the by-laws. (Sec. 53) At any time upon call of the president or as provided in the laws. NOTICE: Must be sent at least 1 day prior to the scheduled meeting, unless otherwise provided by the by-laws. Note: 53) WHERE: Notice may be waived expressly or impliedly. (Sec.
SPECIAL: by-
Anywhere in or outside the Philippines, unless the by-laws provide otherwise. Generally, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business. (Sec. 25) Exceptions: (1) If the AOI or by-laws provide for a greater majority; (2) If the meeting is for the election of officers, which requires the vote of a majority of all the members of the Board
QUORUM:
WHO PRESIDES:
The president, unless the by-laws provide otherwise. (Sec. 54)
Meetings of Stockholders / Members

110
KINDS: special.
Meetings of stockholders or members may be either regular or (Sec. 49) REGULAR: Held annually on a date fixed in the by-laws. If no date is fixed, on any date in April of every year as determined by the Board of Directors or trustees.
Notice: Written, and sent to all stockholders or members of record at least 2 weeks prior to the meeting, unless a different period is required by the by-laws. SPECIAL: laws. Notice: Written, and sent to all stockholders or members of record at least 1 week prior to the meeting, unless otherwise provided in the by-laws. Note: Notice of any meeting may be waived expressly or impliedly by any SH or member. (Sec. 50) At any time deemed necessary or as provided in the by-
WHERE:
In the city of municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation. Metro Manila is considered a city or municipality. ( Sec. 51) Generally, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock, or a majority of the members. Exception: If otherwise provided for in the Code or in the by-laws.
QUORUM:
WHO PRESIDES:
The president, unless the by-laws provide otherwise. (Sec. 54) STOCKHOLDER'S MEETING IS
WHAT IS THE EFFECT IF A IMPROPERLY HELD OR CALLED?
Generally, the proceedings had and/or any business transacted shall be void. However, the proceedings and/or transacted business may still be deemed valid if: (1) Such proceedings or business are within the powers or authority of the corporation; and (2) All the stockholders or members of the corporation were present or duly represented at the meeting. (Sec. 51)
DUTIES OF DIRECTORS AND CONTROLLING STOCKHOLDERS
Duties and Liabilities of Directors

WHAT IS THE 3-FOLD CORPORATION? (old) (1) Diligence (2) Loyalty (3) Obedience DUTY THAT DIRECTORS OWE TO THE
Obedience - directors must act only within corporate powers and are liable for damages if they acted beyond their powers unless in good faith. Assuming that they acted within their powers, liability may still arise if they have not observed due diligence or have been disloyal to the corporation.
111
WHEN DOES LIABILITY ON THE PART OF DIRECTORS, TRUSTEES OR OFFICERS ARISE? In general, liability of directors, trustees or officers arises when they either: (1) willfully and knowingly vote for or assent to patently unlawful acts of the corporation; or (2) are guilty of gross negligence of bad faith in directing the affairs of the corporation; or (3) acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees. ( DOCTRINE OF CORPORATE OPPURTUNITY) SEC.31 In such cases, the directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which would otherwise have accrued to the corporation. (Sec. 31) In addition to this general liability, the Corporation Code provides for specific rules to govern the following situations: (1) (2) (3) (4) Self-dealing directors (Sec. 32) Contracts between interlocking directors (Sec. 33) Disloyalty to the corporation (Sec. 34) Watered stocks (Sec. 65)
Duty of Diligence: Business Judgment Rule.

WHAT IS THE BUSINESS JUDGMENT RULE? As a general rule, directors and trustees of the corporation cannot be held liable for mistakes or errors in the exercise of their business judgment, provided they have acted in good faith and with due care and prudence. Contracts intra vires entered into by the board of directors are binding upon the corporation, and the courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority. However, if due to the fault or negligence of the directors the assets of the corporation are wasted or lost, each of them may be held responsible for any amount of loss which may have been proximately caused by his wrongful acts or omissions. Where there exists gross negligence or fraud in the management of the corporation, the directors, besides being liable for damages, may be removed by the stockholders in accordance with Sec. 28 of the Code. ( Campos & Campos) GENERAL RULE: Contracts intra vires entered into by BoD are binding upon corporation and courts will not interfere. EXCEPTION: When such contracts oppressive as destruction of the rights of the minority. are so unconscionable and to amount to a wanton
the
WHAT KIND OF DILIGENCE IS EXPECTED OF DIRECTORS? Directors are expected to manage the corporation with reasonable diligence, care and prudence, i.e. the degree of care and diligence which men prompted by self-interest generally exercise in their own affairs. Thus, they can be held liable not only for willful dishonesty but also for negligence.
EDWIN PADILLO BAR 2013 Although they are not expected to interfere with the day-to-day administrative details of the business of the corporation, they should keep themselves sufficiently informed about the general condition of the business. WHAT FACTORS SHOULD BE CONSIDERED IN DETERMINING WHETHER REASONABLE DILIGENCE HAS BEEN EXERCISED? The nature of the business, as well as the particular circumstances of each case. The court should look at the facts as they exist at the time of their occurrence, not aided or enlightened by those which subsequently took place. (Litwin v. Allen)
112
OTIS AND CO. VS PENNSYLVANIA RAILROAD CO. (155 F. 2d 522; 1946) If in the course of management, the directors arrive at a decision for which there is a reasonable basis and they acted in good faith, as a result of their independent judgment, and uninfluenced by any consideration other than what they honestly believe to be for the best interest of the railroad, it is not the function of the court to say that it would have acted differently and to charge the directors for any loss or expenditures incurred. In the present case, the bond issue was adequately deliberated and planned, properly negotiated and executed; there was no lack of good faith; no motivation of personal gain or profit; there was no lack of diligence, skill or care in selling the issue at the price approved by the Commission and which resulted in a saving of approximately $9M to the corporation. MONTELIBANO VS. BACOLOD-MURCIA MILLING CO. (5 SCRA 36; 1962) The Bacolod-Murcia Milling Co. adopted a resolution which granted to its sugar planters an increase in their share in the net profits in the event that the sugar centrals of Negros Occidental should have a total annual production exceeding one-third of the production of all sugar central mills in the province. Later, the company amended its existing milling contract with its sugar planters, incorporating such resolution. The company, upon demand, refused to comply with the contract, stating that the stipulations in the resolution were made without consideration and that such resolution was, therefore, null and void ab initio, being in effect a donation that was ultra vires and beyond the powers of the corporate directors to adopt. This is an action by the sugar planters to enforce the contract. The terms embodied in the resolution were supported by the same cause and consideration underlying the main amended milling contract; i.e., the premises and obligations undertaken thereunder by the planters, and particularly, the extension of its operative period for an additional 15 years over and beyond the thirty years stipulated in the contract. As the resolution in question was passed in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them. They hold such office charged with the duty to act for the corporation according to their best judgment, and in so doing, they cannot be controlled in the reasonable exercise and performance of such duty. It is a well-known rule of law that questions of policy or of 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 of the board of directors; the board is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts. LITWIN (ROSEMARIN ET. AL., INTERVENORS) VS. ALLEN ET. AL. (25 N.Y.S. 2d 667; 1940) FACTS: Alleghany Corp. bought terminals in Kansas City and St. Joseph. It needed to raise money to pay the balance of the purchase price but could not directly borrow money due to a borrowing limitation in its charter. Thus, it sold Missouri Pacific bonds to J.P.
113
Morgan and Co. worth $IOM. J.P. Morgan, in turn, sold $3M worth of the bonds to Guaranty Trust Company. Under the contract, the seller was given an option to repurchase at same price within six months. HELD: Option given to seller is invalid. It is against public policy for a bank to sell securities and buy them back at the same price; similarly, it is against public policy for the bank to buy securities and give the seller the option to buy them back at the same price because the bank incurs the entire risk of loss with no possibility of gain other than the interest derived from the securities during the period that the bank holds them. Here, if the market price of the securities rise, the holder of the repurchase option would exercise it to recover the securities at a lower price at which he sold them. If the market price falls, the seller holding the option would not exercise it and the bank would sustain the loss. Directors are not in a position of trustees of an express trust who, regardless of good faith, are personally liable. In this case, the directors are liable for the transaction because the entire arrangement was improvident, risky, unusual and unnecessary so as to be contrary to fundamental conceptions of prudent banking practice. Yet, the advice of counsel was not sought. Absent a showing of exercise of good faith, the directors are thus liable. WALKER VS. MAN, ET. AL. (253 N.Y.S. 458; 1931) FACTS: Frederick Southack and Alwyn Ball loaned Avram $20T evidenced by a promissory note executed by Avram and endorsed by Lacey. The loan was not authorized by any meeting of the board of directors and was not for the benefit of the corporation. The note was dishonored but defendant-directors did not protest the note for non-payment; thus, Lacey, the indorser who was financially capable of meeting the obligation, was subsequently discharged. HELD: Directors are charged not with misfeasance, but with non-feasance, not only with doing wrongful acts and committing waste, but with acquiescing and confirming the wrong doing of others, and with doing nothing to retrieve the waste. Directors have the duty to attempt to prevent wrongdoing by their co-directors, and if wrong is committed, to rectify it. If the defendant knew that an unauthorized loan was made and did not take steps to salvage the loan, he is chargeable with negligence and is accountable for his conduct. STEINBERG VS. VELASCO (52 Phil. 953; 1929) FACTS: The board of directors of Sibuguey Trading Company authorized the purchase of 330 shares of stock of the corporation and declared payment of P3T as dividends to stockholders. The directors from whom 300 of the stocks were bought resigned before the board approved the purchase and declared the dividends. At the time of purchase of stocks and declaration of dividends, the corporation had accounts payable amounting to P9,241 and accounts receivable amounting to P12,512, but the receiver who made diligent efforts to collect the amounts receivable was unable to do so. It has been alleged that the payment of cash dividends to the stockholders was wrongfully done and in bad faith, and to the injury and fraud of the creditors of the corporation. The directors are sought to be made personally liable in their capacity as directors. HELD: Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the BOD will not use the assets of the corporation to buy its own stock, and will not declare dividends to stockholders when the corporation is insolvent. In this case, it was found that the corporation did not have an actual bona fide surplus from which dividends could be paid. Moreover, the Court noted that the Board of Directors purchased the stock from the corporation and declared the dividends on the stock at the same Board meeting, and that the directors were permitted to resign so that they could sell their stock to the corporation. Given all of this, it was apparent that the directors did not act in
114
good faith or were grossly ignorant of their duties. Either way, they are liable for their actions which affected the financial condition of the corporation and prejudiced creditors. BARNES V. ANDREWS (298 F. 614; 1924) A complaint was filed against a corporate director for failing to give adequate attention (he relied solely on the Presidents updates on the status of the corp) to the affairs of a corporation which suffered depletion of funds. The director was not liable. The court said that despite being guilty of misprision in his office, still the plaintiff must clearly show that the performance of the directors duties would have avoided the losses. When a business fails from general mismanagement, business incapacity, or bad judgment, it is difficult to conjecture that a single director could turn the company around, or how much dollars he could have saved had he acted properly. FOSTER V. BOWEN (41 N.E. 2d 181; 1942) Cushing, a director and in charge of leasing a roller skating rink of the corp, leased the same to himself. Minority stockholders filed suit against Bowen, the corporation's President, to recover for company losses arising out of an alleged breach of fiduciary duty. Bowen was held to be not liable because: (1) Cushing's acts were not actually dishonest or fraudulent; (2) Cushing performed personal work such as keeping the facility in repair which redounded to the benefit of the company and even increased its income; (3) Bowen did not profit personally through Cushing's lease; and (4) the issue of the possible illegality of the lease was put before the Board of Directors, but the Board did not act on it but instead moved on to the next item on the agenda. Absent any bad faith on Bowen's part, and a showing that it was a reasonable exercise of judgment to take no action on the lease agreement at the time it was entered into, Bowen was not liable. LOWELL HOIT & CO. V. DETIG (50 N.E. 2d 602; 1943) Lowell Hoit filed action against directors of a cooperative grain company for an alleged willful conversion by the manager of grain stored in the company facility. The court said that the directors were not personally liable. There was no evidence that the directors had knowledge of the transaction between the manager and Lowell Hoit. The court will treat directors with leniency with respect to a single act of fraud on the part of a subordinate officer/agent. But directors could be held liable if the act of fraud was habitual and openly committed as to have been easily detected upon proper supervision. To hold directors liable, he must have participated in the fraudulent act; or have been guilty of lack of ordinary and reasonable supervision; or guilty of lack of ordinary care in the selection of the officer/agent. BATES V. DRESSER (40 S.Ct.247; 1920) Coleman, an employee of the bank, was able to divert bank finances for his benefit, resulting in huge losses to the bank. The receiver sued the president and the other directors for the loss. The court said that the directors were not answerable as they relied in good faith on the cashiers statement of assets and liabilities found correct by the government examiner, and were also encouraged by the attitude of the president that all was well (the president had a sizable deposit in the bank). But the president is liable. He was at the bank daily; had direct control of records; and had knowledge of incidents that ordinarily would have induced scrutiny.
115
The self-dealing director

WHAT IS A SELF-DEALING DIRECTOR? (Sec. 32) A self-dealing director is one who enters into a contract with the corporation of which he is a director. WHAT IS THE NATURE OF CONTRACTS ENTERED INTO BY SELF-DEALING DIRECTORS? Voidable at the option of the corporation, whether or not it suffered damages. It is possible that the self-dealing director may have the greatest interest in its welfare and may be willing to deal with it upon reasonable terms. However, such contract may be upheld by the corporation if all of the following conditions are present: (1) The presence of the self-dealing director or trustee in the board meeting for which the contract was approved was not necessary to constitute a quorum for such meeting; (2) The vote of such self-dealing director or trustee was not necessary for the approval of the contract; (3) The contract is fair and reasonable under the circumstances; (4) In the case of an officer, the contract has been previously authorized by the Board of Directors. In the event that either of or both conditions (1) and (2) are absent ( i.e., the presence of the director/trustee was necessary for a quorum and/or his vote was necessary for the approval of the contract), the contract may be ratified by a 2/3 vote of the OCS or all of the members, in a meeting called for the purpose. Full disclosure of the adverse interest of the directors or trustees involved must be made at such meeting. DOCTRINE: A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are committed to seek the maximum amount of profits for the corporation. This trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders." (Prime White Cement Corp. v. IAC, 220 SCRA 103; 1993)
PALTING V. SAN JOSE PETROLEUM (Dec. 17, 1966) The articles of inc. of respondent included a provision that relieves any director of all responsibility for which he may otherwise be liable by reason of any contract entered into with the corp., whether it be for his benefit or for the benefit of any other person, firm, association or partnership in which he may be interested, except in case of fraud. SC: This is in direct contravention of the Corp Law, of the traditional fiduciary relationship between directors and the SH. The implication is that they can do anything short of fraud, even to their benefit, and with immunity.
Note: This case was decided in 1966 under the Corporation Law, which had no provisions on self-dealing directors.
MEAD V. MCCULLOUGH (21 Phil. 95; 1911) Issue: validity of sale of corp. property and assets to the directors who approved the same.
116
Gen Rule: When purely private corporations remain solvent, its directors are agents or trustees for the SH. Exception: when the corp. becomes insolvent, its directors are trustees of all the creditors, whether they are members of the corp. or not, and must manage its property and assets with strict regard to their interest; and if they are themselves creditors while the insolvent corp is under their management, they will not be permitted to secure to themselves by purchasing the corp property or otherwise any personal advantage over the other creditors. Exception to Exception: A director or officer may in good faith and or an adequate consideration purchase from a majority of the directors or SH the property even of an insolvent corp, and a sale thus made to him is valid and binding upon the minority. In the case at bar, the sale was held to be valid and binding. Company was losing. 4 directors present during meeting all voted for the sale. They likewise constitute majority of SH. Contract was found to be fair and reasonable. PRIME WHITE CEMENT CORP. V. IAC (220 SCRA 103; 1993) Prime White Cement Corp. (through the President and Chairman of the Board) and Alejandro Te, a director and auditor of the corporation, entered into a dealership agreement whereby Te was obligated to act as the corporation's exclusive dealer and/or distributor of its cement products in the entire Mindanao area for 5 years. Among the conditions in the dealership agreement were that the corporation would sell to and supply Te with 20,000 bags of white cement per month, and that Te would purchase the cement from the corporation at a price of P 9.70 per bag. Relying on the conditions contained in the dealership agreement, Te entered into written agreements with several hardware stores which would enable him to sell his allocation of 20,000 bags per month. However, the Board of Directors subsequently imposed new conditions, including the condition that only 8,000 bags of cement would be delivered per month. Te made several demands on the corporation to comply with the dealership agreement. However, when the corporation refused to comply with the same, Te was constrained to cancel his agreements with the hardware stores. Notwithstanding the dealership agreement with Te, the corporation entered into an exclusive dealership agreement with a certain Napoleon Co for marketing of corporation's products in Mindanao. The lower court held that Prime White was liable to Te for actual and moral damages for having been in breach of the agreement which had been validly entered into. On appeal, the Supreme Court held that the dealership agreement is not valid and enforceable, for not having been fair and reasonable: the agreement protected Te from any market increases in the price of cement, to the prejudice of the corporation. The dealership agreement was an attempt on the part of Te to enrich himself at the expense of the corporation. Absent any showing that the stockholders had ratified the dealership agreement or that they were fully aware of its provisions, the contract was not valid and Te could not be allowed to reap the fruits of his disloyalty.
Using inside information

USE OF INSIDE INFORMATION: Do directors and officers of a company owe any duty at all to stockholders in relation to transactions whereby the officers and directors buy for themselves shares of stock from the stockholders? MINORITY RULE: to collectively. YES. Directors and officers have an obligation the stockholders individually as well as
EDWIN PADILLO BAR 2013 MAJORITY RULE: NO. duty at them at arms facts known to the exists. Nondisclosure cannot constitute constructive fraud. Directors and officers owe no fiduciary all to stockholders, but may deal with length. No duty of disclosure of director or officer
117
SPECIAL FACTS DOCTRINE: IT circumstances make in inequitable to from the stockholder, the duty arises, and concealment is fraud.
DEPENDS. Where special or facts are present which withhold information to disclose
In the case of Gokongwei v. SEC (89 SCRA 336; 1979), the Supreme Court, quoting from the US case of Pepper v. Litton (308 U.S. 295-313; 1939) stated that a director cannot, "by the intervention of a corporate entity violate the ancient precept against serving two masters He cannot utilize his inside information and his strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis."
Seizing Corporate Opportunity (Sec. 34)

If a director acquires for himself, by virtue of his office, a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of the corporation, he must account to the corporation for all such profits by refunding the same. However, if his act was ratified by 2/3 stockholders' vote, he need not refund said profits. This provision applies even though the director may have risked his own funds in the venture. Note: This provision is to be distinguished from Sec. 32 on contracts of selfdealing directors: contracts of self-dealing directors are voidable at the option of the corporation even if it has not suffered any injury; on the other hand, Sec. 34 applies only if the corporation has been prejudiced by the contract.
SINGER VS. CARLISLE (27 N.Y.S. 2d 190; 1941) In this case, it was held that the general allegations in the complaint of conspiracy of the directors to obtain corporate opportunity were deficient. The complaint should state specific transactions. Directorship in 2 competing corporations does not in and of itself constitute a wrong. It is only when a business opportunity arises which places the director in a position of serving two masters, and when, dominated by one, he neglects his duty to the other, that a wrong has been done. IRVING TRUST CO. VS. DEUTSCH (79 L. Ed. 1243; 1935) Fiduciary duty applies even if the corporation is unable to enter into transactions itself. LITWIN V ALLEN (25 N.Y.S. 2d 667; 1940) In this case, it was held that the common stock purchased by the defendants wasnt a business opportunity for the corporation. Having fulfilled their duty to the corporation in accordance with their best judgment, the defendant directors were not precluded from a transaction for their own account and risk.
118
Interlocking directors
WHAT IS AN INTERLOCKING DIRECTOR? An interlocking director is one who occupies a position in 2 companies dealing with each other. WHAT IS THE DIRECTORS? RULE ON CONTRACTS INVOLVING INTERLOCKING
Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between 2 or more corporations having interlocking directors shall not be invalidated on that ground alone. This practice is tolerated by the Courts because such an arrangement oftentimes presents definite advantages to the corporations involved. However, if the interest of the interlocking director in one corporation is substantial (i.e., stockholdings exceed20% of the OCS) and his interest in the other corporation or corporations is merely nominal, he shall be subject to the conditions stated in Sec. 32, i.e., for the contract not to be voidable, the following conditions must be present: (1) The presence of the self-dealing director or trustee in the board meeting for which the contract was approved was not necessary to constitute a quorum for such meeting; (2) The vote of such self-dealing director or trustee was not necessary for the approval of the contract; (3) The contract is fair and reasonable under the circumstances; (4) In the case of an officer, the contract has been previously authorized by the Board of Directors. In the event that either of or both conditions (1) and (2) are absent ( i.e., the presence of the director/trustee was necessary for a quorum and/or his vote was necessary for the approval of the contract), the contract may be ratified by a 2/3 vote of the OCS or all of the members, in a meeting called for the purpose. Full disclosure of the adverse interest of the directors or trustees involved must be made at such meeting. Note: The Investment House Law prohibits a director or officer of an investment house to be concurrently a director or officer of a bank, except as otherwise authorized by the Monetary Board. In no event can a person be authorized to be concurrently an officer of an investment house and of a bank except where the majority or all of the equity of the former is owned by the bank. (P.D. 129, Sec. 6, as amended) The Insurance Code likewise prohibits a person from being a director and/or officer of an insurance company and an adjustment company. (Sec. 187)
GLOBE WOOLEN CO. V. UTICA GAS & ELECTRIC (121 N.E. 378; 1918) Maynard, president and chief stockholder of Globe but nominal SH in Utica Gas, obtained a cheap, 10-year contract for Utica to supply power. Maynard did not vote during the meeting for the approval of the contract. Can Globe seek to enforce contract? The Supreme Court held that Globe could not enforce the contract and that said contract was voidable at the election of Utica. It was found that based on the facts of the case, the contract was clearly one-sided. Maynard, although he did not vote, exerted a dominating influence to obtain the contract from beginning to end. The director-trustee has a constant duty not to seek harsh advantage in violation of his trust.
119
Watered stocks (Sec. 65)

Any director or officer of the corporation: (1) consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or (2) who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporation secretary shall be solidarily liable with the stockholders concerned to the corporation and its creditors for the difference between the fair value received at the time of the issuance of the stock and the par or issued value of the same.
Fixing compensation of directors and officers

GENERAL RULE: Directors as such are not entitled to compensation for performing services ordinarily attached to their office. (1) If the articles of incorporation or the by-laws so provide; (2) If a contract is expressly made in advance. The stockholders only (majority of the
EXCEPTIONS: expressly
WHO FIXES THE COMPENSATION? OCS) EXCEPTION: themselves
Per diems, which can be fixed by the directors
APPLICABILITY OF COMPENSATION: Only to future and NOT past services. MAXIMUM AMOUNT ALLOWED BY LAW: Total yearly income of the directors shall not exceed 10% of the net income before income tax of the corporation during the preceding year (Sec. 30)
GOV'T OF THE PHILIPPINES VS. EL HOGAR FILIPINO (50 Phil. 399; 1927) The compensation provided in sec. 92 of the by-laws of El Hogar Filipino which stipulated that 5% of the net profit shown by the annual balance sheet shall be distributed to the directors in proportion to the attendance at board meetings is valid. The Corporation Law does not prescribe the rate of compensation for the directors of a corporation. The power to fix it , if any is left to the corporation to be determined in its by-laws. In the case at bar, the provision in question even resulted in extraordinarily good attendance. BARRETO VS. LA PREVISORA FILIPINA This action was brought by the directors of defendant corporation to recover 1% from each of the plaintiffs of the profits of the corporation for 1929 pursuant to a by-law provision which grants the directors the right to receive a life gratuity or pension in such amount for the corporation. The SC held that the by-law provision is not valid. Such provision is ultra vires for a mutual loan and building association to make. It is not merely a provision for the compensation of directors. The authority conferred upon corporations refers only to providing compensation for the future services of directors, officers, and employees after the adoption of the by-law in relation thereto. The by-law can't be held to authorize the giving of continuous compensation to particular directors after their employment has terminated for past services rendered gratuitously by them to the corporation. CENTRAL COOPERATIVE EXCHANGE INC VS. TIBE (33 SCRA 596; 1970)
120
The questioned resolutions which appropriated the funds of the corporation for different expenses of the directors are contrary to the by-laws of the corporation; thus they are not within the board's power to enact. Sec. 8 of the by-laws explicitly reserved to the stockholders the power to determine the compensation of members of the board and they did restrict such compensation to actual transportation expenses plus an additional P30 per diems and actual expenses while waiting. Hence, all other expenses are excluded. Even without the express reservation, directors presumptively serve without pay and in the absence of any agreement in relation thereto, no claim can be asserted therefore. FOGELSON VS. AMERICAN WOOLEN CO. (170 F. 2d. 660; 1948) A retirement plan which provides a very large pension to an officer who has served to within one year of the retirement age without any expectation of receiving a pension would seem analogous to a gift or bonus. The size of such bonus may raise a justifiable inquiry as to whether it amounts to wasting of the corporate property. The disparity also between the president's pension plan and that of even the nearest of the other officers and employees may also be inquired upon by the courts. KERBS VS. CALIFORNIA EASTERN AIRWAYS (90 A. 2d 652; 1952) This is an appeal filed to enjoin the California Eastern Airways from putting into effect a stock option plan and a profit-sharing plan. The SC held that the stock option plan was deficient as it was not reasonably created to insure that the corporation would receive contemplated benefits. A validity of a stock option plan depends upon the existence of consideration and the inclusion of circumstances which may insure that the consideration would pass to the corporation. The options provided may be exercised in toto immediately upon their issuance within a 6 month period after the termination of employment. In short, such plan did not insure that any optionee would remain with the corporation. With regard to the profit-sharing plan, it was held valid because it was reasonable and was ratified by the stockholders pending the action.
Close Corporations
Sec. 97 provides that the AOI of a close corp. may specify that it shall be managed by the stockholders rather than the BoD. So long as this provision continues in effect: No stockholders meeting need be called to elect directors; Generally, stockholders deemed to be directors for purposes of this Code, unless the context clearly requires otherwise; Stockholders shall be subject to all liabilities of directors. The AOI may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders instead of by the BoD.
Further, Sec. 100 provides that for stockholders managing corp. affairs: They shall be personally liable for corporate torts (unlike ordinary directors liable only upon finding of negligence) If however there is reasonable adequate liability insurance, injured party has no right of action v. stockholders-managers
Duty of Controlling Interest

A SH/director is still entitled to vote in a stockholders meeting even if his interest is adverse to a corporation. But a stockholder able to control a corp. is still subject to the duty of good faith to the corp. and the minority.
121
Persons with management control of corporation hold it in behalf of SHs and can not regard such as their own personal property to dispose at their whim. The ff. acts are legal: Transfer of managerial control through BoD resignation & seriatim election of successors if concomitant with the sale and actual transfer of majority interest or that which constitutes voting control; Disposal by controlling SH of his stock at any time & at such price he chooses
The ff. are illegal: Selling corp. office or management control by itself, that is NOT accompanied by stocks or stocks are insufficient to carry voting control; Transferring office to persons who are known or should be known as intending to raid the corporate treasury or otherwise improperly benefit themselves at the expense of the corp. (Insuranshares Corp. V. Northern Fiscal); Receiving a bonus or premium specifically in consideration of their agreement to resign & install the nominees of the purchaser of their stock, above and beyond the price premium normally attributable to the control stock being sold;
INSURANSHARES CORP. V. NORTHERN FISCAL CORP. (35 F. Supp. 22; 1940) The corp. is suing its former directors to recover damages as a result of the sale of its control to a group (corporate raiders) who proceeded to rob it of most of its assets mainly marketable securities. Are previous directors who sold corp. control liable? Yes, they are under duty not to sell to raiders. Owners of corp. control are liable if under the circumstances, the proposed transfer are such as to awaken a suspicion or put a prudent man on his guard. As in this case, control was bought for so much aside from being warned of selling to parties they knew little about, and also from fair notice that such outsiders indeed intended to raid the corp.
Duty to Creditors
General rule: Corporate creditors can run after the corp. itself only, and not the directors for mismanagement of a solvent corp. If corp. becomes insolvent, directors are deemed trustees of the creditors and should therefore manage its assets with due consideration to the creditors interest. If directors are also creditors themselves, they are prohibited from gaining undue advantage over other creditors.
Personal Liability of Directors

In what instances does personal liability of a corporate director, trustee or officer validly attach together with corporate liability? When the director / trustee / officer: I. (1) assents to a patently unlawful act of the corporation;
EDWIN PADILLO BAR 2013 (2) is in bad faith or gross negligence in directing the affairs of the corporation; (3) creates a conflict of interest, resulting in damages to the corporation, its stockholders or other persons II. Consents to the issuance of watered stocks, or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; Agrees to hold himself personally and solidarily liable with the corporation; Is made, by a specific provision of law, to personally answer for his corporate action.
122
III. IV.
(Tramat Mercantile v. CA, 238 SCRA 14)
UICHICO v. NLRC (G.R. No. 121434, June 2, 1997) In labor cases, particularly, corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. In the instant case, there was a showing of bad faith: the Board Resolution retrenching the respondents on the feigned ground of serious business losses had no basis apart from an unsigned and unaudited Profit and Loss Statement which had no evidentiary value whatsoever.
CORPORATE BOOKS AND RECORDS AND THE RIGHT OF INSPECTION Corporate Books and Records
WHAT BOOKS AND RECORDS MUST A CORPORATION KEEP? ( Sec. 74) (1) (2) (3) (4) Record of all business transactions; Minutes of all meetings of stockholders or members; Minutes of all meetings of Board of Directors or Trustees; Stock and Transfer book
WHAT IS A STOCK AND TRANSFER BOOK? (Sec. 75) A stock and transfer book is a record of all stocks in the names of the stockholders alphabetically arranged. It likewise contains the following information: Installments paid and unpaid on all stock for which subscription has been made, and the date of any installment; A statement of every alienation, sale or transfer of stock made, the date thereof, and by whom and to whom made; Such other entries as the by-laws may prescribe
The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent, and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. WHAT IS A STOCK TRANSFER AGENT? (Sec. 75) A stock transfer agent is one who is engaged principally in the business of registering transfers of stocks in behalf of a stock corporation. He or she must be
EDWIN PADILLO BAR 2013 licensed by the SEC; however, a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee, shall be applicable. WHO IS THE CUSTODIAN OF CORPORATE RECORDS? In the absence of any provision to the contrary, the corporate secretary is the custodian of corporate records. Corollarily, he keeps the stock and transfer book and makes the proper and necessary entries. ( Torres, et al. vs. CA, 278 SCRA 793; 1997)
123
Basis of the Right of Inspection

Ordinary stockholders, the beneficial owners of the corporation, usually have no say on how business affairs of the corp. are run by the directors. The law therefore gives them the right to know not only the financial health of the corp. but also how its affairs are managed so that if they find it unsatisfactory, they can seek the proper remedy to protect their investment. WHAT IS THE NATURE OF THE RIGHT TO INSPECT? PREVENTIVE : deterrent to an ill-intentioned management knowing its acts are subject to scrutiny; and A dissatisfied SH may avail of this right as a preliminary step towards seeking more direct and appropriate remedies against mismanagement.
REMEDIAL:
What Records Covered

1. Records of ALL business transactions This includes book of inventories and balances, journal, ledger, book for copies of letters and telegrams, financial statements, income tax returns, vouchers, receipts, contracts, papers pertaining to such contracts, voting trust agreements (sec. 59) 2. By-laws These are expressly required to be open to inspection by SH/members during office hours (Sec. 46). Note: There is no similar provision as to AOI, but these are filed with the SEC anyway. 3. Minutes of directors meetings This is to inform stockholders of Board policies. Such right arises only upon approval of the minutes, however. 4. Minutes of stockholders' meetings 5. Stock and transfer books These are records of all stocks in the names of the stockholders alphabetically arranged. contain all names of the stockholders of record. Useful for proxy solicitation for elections. SEC has however ruled that a SH cannot demand that he be furnished such a list but he is free to examine corp. books . 6. Most recent financial statement Sec. 75 of the Code provides that within 10 days from the corporation's receipt of a written request from any stockholder or member, the corporation must furnish the requesting party with a copy of its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year.
EDWIN PADILLO BAR 2013 Note: Under the Secrecy of Bank Deposits Act, records of bank deposits of the corporation are NOT open to inspection, EXCEPT under the following circumstances: (1) Upon written consent of concerned depositor (presumably the corporation); (2) In cases of impeachment; (3) Upon court order in cases of bribery or dereliction of duty of a public official; and (4) In cases where the money deposited / invested is the subject matter of litigation (5) Upon order of a competent court in cases of unexplained wealth under RA 3019 or the Anti-Graft and Corrupt Practices Act (6) Upon order of the Ombudsman
124
Extent and Limitations on Right to examine or inspection

1. The exercise of this right is subject to reasonable limitations similar to a citizens exercise of the right to information. Otherwise, the corp. might be impaired, its efficiency in operations hindered, to the prejudice of SHs. 2. Such limitations to be valid must be reasonable and not inconsistent with law ( Sec. 36[5] and 46). 3. A corp. may regulate time and manner of inspection but provisions in its by-law which gives directors absolute discretion to allow or disallow inspection are prohibited. Limitations as to time and place: Exercise of righ of inspectiont only at REASONABLE HOURS on BUSINESS DAYS. Such business days should be THROUGHOUT THE YEAR. BoD cannot limit such to merely a few days within the year. (Pardo v. Hercules Lumber) 4. By-laws cannot prescribe that authority of president must first be obtained. 5. Inspection should be made in such a manner as not to impede the efficient operations 6. Place of inspection: Principal office of the corp. SH cannot demand that such records be taken out of the principal office. 7. As to purpose: PRESUMPTION: that SHs purpose is proper. Corp. cannot refuse on the mere belief that his motive is improper (sec 74). BURDEN OF PROOF: lies with corp. which should show that purpose was illegal. To be legitimate, the purpose for inspection must be GERMANE to the INTEREST of the stockholder as such, and it is not contrary to the interests of the corporation. Legitimate: Not legitimate: inquiry about failure to declare dividends for mere satisfaction or speculation.
Belief in good faith that a corp. is being mismanaged may be given due course even if later, this is proven unfounded. If motive can be clearly shown as inimical to corp., right may be denied.
Who May Exercise Right

Every director, trustee, stockholder, member may exercise right personally or through an agent who can better understand and interpret records (impartial source, expert accountant, lawyer).
EDWIN PADILLO BAR 2013 As to VTA: both voting trustee and transferor SH of parent corp. over subsidiary: If the two are operated as SEPARATE entities : NO right of inspection
125
If they are ONE AND THE SAME with respect to management and control, and inspection is demanded due to mismanagement of subsidiary by the parents directors who are also directors of the subsidiary : With right of inspection If the subsidiary is wholly-owned by the parent, and its books & records are in the possession and control of the parent corporation : With right of inspection (Gokongwei v. SEC)
Remedies available if Inspection Refused

WHAT REMEDIES ARE AVAILABLE IF INSPECTION IS REFUSED BY THE CORPORATION? (1) Writ of mandamus. NOTE: purpose is corporation. Writ shall not issue where it is shown that the petitioners improper and inimical to the interests of the
and (2) Injunction
Writ should be directed against the corporation. The secretary the president may be joined as party defendants.
(3) Action for damages against the officer or agent refusing inspection. Also, penal sanctions such as fines and / or imprisonment (Sec. 74; Sec. 144) (4.) criminal case What defenses are available to the officer or agent? (1) The person demanding has improperly used any information secured through any prior examination; or (2) Was not acting in good faith; or (3) The demand was not for a legitimate purpose.
PARDO V. HERCULES LUMBER (47 Phil. 965; 1924) BOD/Officers may deny inspection when sought at unusual hours or under improper conditions. But they cannot deprive the stockholders of the right altogether. In CAB, by-law provided that the inspection be made available only for a few days in a year, chosen by the directors. This is void.
GONZALES V. PNB (122 SCRA 490; 1983) G acquired 1 share of stock purposely to be able to exercise right to inspection with respect to transactions before he became a SH. G not in good faith. His obvious purpose was to arm himself with materials which he can use against the bank for acts done by the latter when G was a total stranger to the same. Right not available here.
126
VERAGUTH V. ISABELA SUGAR CO. (57 Phil. 266; 1932) There was nothing improper in the secretarys refusal since the minutes of these prior meetings have to be verified, confirmed and signed by the directors then present. Hence, Veraguth has to wait until after the next meeting.
GOKONGWEI V. SEC (April 11, 1979) The law takes from the SH the burden of showing impropriety of purpose and places upon the corporation the burden of showing impropriety of purpose and motive. Considering that the foreign subsidiary is wholly owned by SMC and therefore under its control, it would be more in accord with equity, good faith and fair dealing to construe the statutory right of Gokongwei as petitioner as SH to inspect the books and records of such wholly subsidiary which are in SMCs possession and control.
XII. RIGHTS OF STOCKHOLDERS
1. What Does Share Represent? While shares of stock constitute personal property, they do not represent property of the corporation [i.e., they are properties of the stockholders who own them]. A share of stock only typifies an aliquot part of the corporations property, or the right to share in its proceeds to that extent when distributed according to law and equity, but the holder is not the owner of any part of the capital [properties] of the corporation, nor is he entitled to the possession of any definite portion of its assets. The stockholder is not a co-owner of corporate property. Stockholders of F. Guanson and Sons, Inc. v. Register of Deeds of Manila , 6 SCRA 373 (1962). The registration of shares in a stockholders name, the issuance of stock certificates, and the right to receive dividends which pertain to the shares are all rights that flow from ownership. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998); TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001). As early as the case of Fisher v. Trinidad, the Court already declared that [t]he distinction between the title of a corporation, and the interest of its members or stockholders in the property of the corporation, is familiar and well-settled. The ownership of that property is in the corporation , and not in the holders of shares of its stock. The interest of each stockholder consists in the right to a proportionate part of the profits whenever dividends are declared by the corporation, during its existence, under its charter, and to a like proportion of the property remaining, upon the termination or dissolution of the corporation, after payment of its debts. Mobilia Products, Inc. v. Umezawa, 452 SCRA 736 (2005). 2. Right to Certificate of Stock for Fully Paid Shares: Sec. 64; Tan v. SEC, 206 SCRA 740 (1992). 3. Preemptive Rights: Sec. 39; Datu Tagoranao Benito v. SEC, 123 SCRA 722 (1983); Dee v. SEC, 199 SCRA 238 (1991). 4. Right to Transfer or Dispose of Shareholdings (Sec. 63) (a) Restriction on Transfers: Lambert v. Fox, 26 Phil. 588 (1914). (i) Right of Refusal: Padgett v. Babcock & Templeton, Inc., 59 Phil. 232 (1933). Section 63 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 them in favor of whomever he pleases, without limitation in this respect, than the general provisions of law. Fleishcher v. Botica Nolasco, 47 Phil. 583 (1925). The only limitation imposed by Sec. 63 is when the corporation holds any unpaid claim against the shares intended to be transferred. A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers, because Restrictions in the traffic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. Bylaws are intended merely for the protection of the corporation, and prescribe relation, not restriction; they are always subject to the charter of the corporation. Rural Bank of Salinas v. CA, 210 SCRA 510 (1992). The right of first refusal is primarily an attribute of ownership. Conversely, 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 Jun3 1988 (unrep.)
127
The agreement of co-shareholders to mutually grant the right of first refusal to each other, by itself, does not constitute a violation of the provisions of the Constitution limiting land ownership to Filipinos and Filipino corporations; if the foreign shareholdings of a landholding corporation exceed 40%, it is not the foreign stockholders o wnership of the shares which is adversely affected by the capacity of the corporation to own landthat is, the corporation becomes disqualified to own land. This finds support under the basic corporate law principle that the corporation and its stockholders are separate juridical entities. In this vein, the right of first refusal over shares pertains to the shareholders whereas the capacity to own land pertains to the corporation. J.G. Summit Holdings, Inc. v. Court of Appeals, 450 SCRA 169 (2005). In a landholding corporation which by constitutional mandate is limited to 40% foreign equity, and where there exists a right of first refusal agreement between the co-shareholders, the fact that the corporations owns land cannot deprive stockholders 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, Inc. v. Court of Appeals, 450 SCRA 169 (2005). (ii)Restraint of Trade: An agreement by which a person obliges himself not to engage in competitive trade for five years is valid and reasonable and not an undue or unreasonable restraint of trade and is obligatory on the parties who voluntarily enter into such agreement. xOllendorf v. Abrahamson, 38 Phil. 585 (1918). (b) Remedy If Registration Refused:Ponce v. Alsons Cement Corp., 393 SCRA 602. 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 stockholder nor does he hold a power of attorney from the latter. This is under the general rule that as between the corporation on one hand and its shareholders on other, the corporation looks only to its books for the purpose of determining who its shareholders are, so that a mere indorsee of a certificate of stock, claiming to be the owner, will not necessarily be recognized as such by the corporation and its officers, in absence of express instructions of the registered owner to make such transfer to the indorsee, or a power of attorney authorizing such transfer. Hager v. Bryan, 19 Phil. 138 (1911); Rivera v. Florendo, 144 SCRA 643, 657 (1986). The claim for damages of what the shares could have sold had the demand been complied with is deemed to be speculative damage and non-recoverable Batong Buhay Gold Mines v. CA, 147 SCRA 4 (1987) Period to Enforce: Considering that 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). 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 by-laws 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). 5. Rights to Dividends (Sec. 43) Although stock certificates grant the stockholder the right to receive quarterly dividends of 1%, cumulative and participating, the stockholders do not become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividends. Sec. 43 of Corporation Code prohibits the issuance of any stock dividend without the approval of stockholders, representing not less than twothirds (2/3) of the outstanding capital stock, which underscores the fact that payment of dividends to a stockholder 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 stockholders, 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). In the liquidating of a corporation, after the payment of all corporate debts and liabilities, the remaining assets, if any, must be distributed to the stockholders in proportion to their interests in the corporation. The share of each stockholder in the assets upon liquidation is what is known as liquidating dividend. President of PDIC v. Reyes, 460 SCRA 473 (2005). The term dividend in its technical sense and ordinary acceptation is that part of portion of the profits of the enterprise which the corporation, by its governing agents, sets apart for ratable division among the holders of it capital stockit is a payment, and the right thereto is an incident of ownership of stock. Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009). When the Court directed that a total of 111,415 shares of PLDT be reconveyed to the Republic by way of declaring the Republic to be the rightful owner of said shares, that necessarily included the reconveyance to the Republic of the dividends and interest accruing thereto. Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009). 6. Right to Vote and to Attend Meetings (Secs. 6 and 89)
128
The right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled that unissued stocks may not be voted or considered in determining whether a quorum is present in a stockholders meeting, or whether a requisite proportion of the stock of the corporation is voted to adopt a certain measure or act. Only stock actually issued and outstanding may be voted. Under Section 6 of the Corporation Code, each share of stock is entitled to vote, unless otherwise provided in the articles of incorporation or declared delinquent under Section 67 of the Code. Neither the stockholders nor the corporation can vote or represent shares that have never passed to the ownership of stockholders, or, having so passed, have again been purchased by the corporation. These shares are not to be taken into consideration in determining majorities. When the law speaks of a given proportion of the stock, it must be construed to mean shares that have passed from the corporation, and that may be voted. Tan v. Sycip, 499 SCRA 216 (2006). One of the rights of a stockholder is the right to participate in the control and management of the corporation that is exercised through his vote. The right to vote is a right inherent in and incidental to the ownership of corporate stock, and as such is a property right. Castillo v. Balinghasay, 440 SCRA 442 (2004). Until challenged successfully in proper proceedings, a registered stockholder has a right to participate in any meeting, and in the absence of fraud the action of the stockholders meeting cannot be collaterally attacked on account of such participation, even if it be shown later on that the shares had been previously sold (but not recorded). Price and Sulu Dev. Co. v. Martin, 58 Phil. 707 (1933). The sequestration of shares does not entitle the government to exercise acts of ownership over the shares; even sequestered shares may be voted upon by the registered stockholder. Cojuangco Jr. v. Roxas, 195 SCRA 797 (1991). The right to vote sequestered shares of stock registered in the names of private individuals or entities and alleged to have been acquired with ill-gotten wealth shall, as a rule, be exercised by the registered owner. The PCGG may, however, be granted such voting right provided it can (1) show prima facie evidence that the wealth and/or the shares are indeed ill-gotten; and (2) demonstrate imminent danger of dissipation of the assets, thus necessitating their continued sequestration and voting by the government until a decision, ruling with finality on their ownership, is promulgated by the proper court. Nevertheless, the foregoing "two-tiered" test does not apply when the funds that are prima facie public in character or, at least, are affected with public interest. Inasmuch as the subject UCPB shares in the present case were undisputably acquired with coco levy funds which are public in character, then the right to vote them shall be exercised by the PCGG. In sum, the "public character" test, not the "twotiered" one, applies. Republic v. COCOFED, 372 SCRA 462 (2001). Also Trans Middle East (Phils) v. Sandiganbayan, 490 SCRA 455 (2006). Treasury shares cannot be voted upon. Tan v. Sycip, 499 SCRA 216 (2006). (a) Instances When Stockholders Entitled to Vote:
Election of directors and trustees (Sec. 24). Amendment of articles of incorporation (Sec. 16). Investment in another business or corporation (Secs. 36 and 42). Merger and consolidation (Sec. 72). Increase and Decrease of capital stock (Sec. 38). Adoption, amendment and repeal of by-laws (Sec. 48). Declaration of stock dividends (Sec. 43). Management contracts (Sec. 44). Fixing of consideration of no par value shares (Sec. 62).
(b) Joint Ownership (Sec. 56) (c) Treasury Share No Voting Rights (Sec. 57) (d) Pledgor, Mortgagors and Administrators (Sec. 55) When shares are pledged by means of endorsement in blank and delivery of the covering certificates to a loan, the pledgee does not become the owner thereof simply by the failure of the registered stockholder to pay his loan. Consequently, without proper foreclosure, the lender cannot demand that the shares be registered in his name. Lim Tay v. Court of Appeals, 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 Rights of Members In stock corporation, shareholders may generally transfer their shares. Thus, on the death of a shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or executor. On the other hand, membership in and all rights arising from a nonstick corporation are personal and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide otherwise. In other words, the determination of
129
whether or not dead members are entitled to exercise their voting rights (through their executor or administrator), depends on those articles of incorporation or bylaws. Tan v. Sycip, 499 SCRA 216 (2006). Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the member. Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a member of the corporation, unless otherwise provided in the articles of the incorporation or the bylaws. Applying Section 91 to the present case, we hold that dead members who are dropped from the membership roster in the manner for the cause provided for in the By-Law of GCHS are not to be counted in determining the requisite vote in corporate matters or the requisite quorum for the annual members meeting. With 11 remaining members, the quorum in the present case should be 6. therefore, there being a quorum, the annual members meeting, c onducted with six members present, was valid. Tan v. Sycip, 499 SCRA 216 (2006). (f) Conduct of Stockholders' Meetings: (i) Kinds and Requirements of Meetings (Secs. 49 and 50); (ii) Place and Time of Meeting (Secs. 51 and 93); (iii) Quorum (Sec. 52) Quorum is based on the totality of the shares which have been subscribed and issued whether it be founders shares or common shares. To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and transfer book, and completely disregarding the issued and outstanding shares indicated in the articles of incorporation would work injustice to the owners and/or successors in interest of the said shares. The stock and transfer book cannot be used as the sole basis for determining the quorum as it does not reflect the totality of shares which have been subscribed, more so when the articles of incorporation show a significantly larger amount of shares issued and outstanding as compared to that listed in the stock and transfer book. Lanuza v. Court of Appeals, 454 SCRA 54 (2005). 7. Contracts and Agreement Affecting Shareholdings (a) Proxy (Sec. 58) Proxy solicitation involves the securing and submission of proxies, while proxy validation concerns the validation of such secured and submitted proxies. Government Service Insurance System v. Court of Appeals, 585 SCRA 679 (2009). It is possible that an intra-corporate controversy may animate a disgruntled shareholder to complain to the Securities and Exchange Commission (SEC) a corporations violations of SEC rules and regulations, but that motive alone should not be sufficient to deprive the SEC of its investigatory and regulatory powers, especially so since such powers are exercisable on a motu proprio basis. Government Service Insurance System v. Court of Appeals, 585 SCRA 679 (2009). The Securities and Exchange Commissions (SECs) power to pass upon the validity of proxies in relation to election controversies has effectively been withdrawn, tied as it is to its abrogated jurisdictional powers. Government Service Insurance System v. Court of Appeals, 585 SCRA 679 (2009). The fact that the jurisdiction of the regular courts under Section 5(c) is confined to the voting on election of officers, and not on all matters which may be voted upon by stockholders, elucidates that the power of the Securities and Exchange Commission (SEC) to regulate proxies remains extant and could very well be exercised when stockholders vote on matters other than the election of directors. Government Service Insurance System v. Court of Appeals, 585 SCRA 679 (2009). (b) Voting Trust Agreements (Sec. 59; Lee v. CA, 205 SCRA 752 [1992]). The trustor has a right to terminate the VTA 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). (c) Pooling Agreements or Shareholders Agreements (Sec. 100) 8. Rights to Inspect and Copy Corporate Records (a) Basis of Right (Gokongwei, Jr. v. SEC, 89 SCRA 336 [1979]).
The stockholders right of inspection of the corporations books and records is based upon his ownership of shares in the corporation and the necessity for self-protection. Puno v. Puno Enterprises, 599 SCRA 585 (2009).
(b) Limitations on Right The only express limitations on the right of inspection under Sec. 74 of Corporation Code are: (a) it should be exercised at reasonable hours on business days; (b) the person demanding the right to examine and copy excerpts from the corporate records and minutes has not improperly used any information secured through any previous examination of records; and (c) the demand is made in good faith or for a legitimate purpose. Africa v. PCGG, 205 SCRA 39 (1992).
EDWIN PADILLO BAR 2013 Summary of Rulings: The right to inspect corporate books and records:
130
Is exercisable through agents and representatives, otherwise it would often be useless to the stockholder who does not know corporate intricacies. W.G. Philpotts v. Philippine Manufacturing Co., 40 Phil. 471 (1919). Cannot be denied on the ground that the director is on unfriendly terms with the officers of the corporation whose records are sought to be inspected. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932). Although it includes the right to make copies, does not authorize bringing the books or records outside of corporate premises. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932). Does not include the right of access to minutes until such minutes have been written up and approved by the directors. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932). Cannot be limited to a period of ten days shortly prior to the annual stockholders meeting, as such would be an unreasonable restriction and violates the legal provision granting the exercise of such right at reasonable hours. Pardo v. Hercules Lumber Co., 47 Phil. 964 (1924). (c) Specified Records (Secs. 74, 75 and 141) (d) Remedies If Denied: Mandamus Gonzales v. PNB, 122 SCRA 489 (1983). Burden of proof to show that examination is for improper purpose is on the part of the corporation. Republic v. Sandiganbayan, 199 SCRA 39 (1999). In a criminal complaint for violation of Section 74 of the Corporation Code, the defense of improper use or motive is in the nature of a justifying circumstance that would exonerate those who raise and are able to prove the samewhere the corporation denies inspection on the ground of improper motive or purpose, the burden of proof is taken from the shareholder and placed on the corporation. Sy Tiong Shiou v. Sy Chim, 582 SCRA 517 (2009). (e) Criminal Sanction under Section 144 In the recent case of Ang-Abaya v. Ang, 573 SCRA 129 (2008), the Court had the occasion to enumerate the requisites before the penal provision under Section 144 of the Corporation Code may be applied in a case of violation of a stockholder or members right to inspect the corporate books/records as provided for under Section 74 of the Corporation Code. Sy Tiong Shiou v. Sy Chim, 582 SCRA 517 (2009). In a criminal complaint for violation of Section 74 of the Corporation Code, the defense of improper use or motive is in the nature of a justifying circumstance that would exonerate those who raise and are able to prove the samewhere the corporation denies inspection on the ground of improper motive or purpose, the burden of proof is taken from the shareholder and placed on the corporation. Sy Tiong Shiou v. Sy Chim, 582 SCRA 517 (2009). (f) Confidential Nature of SEC Examinations (Sec. 142) 9. Appraisal Right (Secs. 81 to 86 and 105) READ 10. DERIVATIVE SUITS (Interim Rules of Procedure Governing Intra-Corporate Controversies) Derivative suits are governed by a special set of rules under A.M. No. 01-2-04-SC (which took effect on 01 April 2001), otherwise known as the Interim Rules of Procedure Governing IntraCorporate Controversies under Republic Act No. 8799. Section 1, Rule 1 thereof expressly lists derivative suits among the cases covered by it. RTC HAS JURISDICTION Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009). (a) Derivative Suit Must Be Effected When Board Cannot Properly Exercise Business Judgment Where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. An individual stockholder may be permitted to institute a derivative suit in behalf of the corporation to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or when a demand upon them to file the necessary action would be futile because they are the ones to be sued, or because they hold control of the corporation. In such actions, the corporation is the real party-in-interest while the suing stockholder, in behalf of the corporation, is only a nominal party. Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007); Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 555-556 (2009); Yu v. Yukayguan, 589 SCRA 588 (2009). Under Section 36 of the Corporation Code, read in relation to Section 23, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks 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 stockholder is regarded as a nominal party, with the corporation as the real party in interest. Chua v. Court of Appeals, 443 SCRA 259 (2004). In the absence of a special authority from the Board of Directors to institute a derivative suit for and in behalf of the corporation, the president or managing director is disqualified by law to sue in her own name. The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the
131
Board that exercises its corporate powers and not in the president or officer thereof. Bitong v. Court of Appeals, 292 SCRA 503 (1998). (b) Nature of the Power to File Derivative Suit 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 discretionand intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation. However, the corporation is the real party in interest in a derivative suit and the suing stockholder is only a nominal party. Cua, Jr. v. Tan, 607 SCRA 645 (2009). A stockholders right to institute a derivative suit is not based on any express provision of the 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 stockholders for violation of their fiduciary duties. Yu v. Yukayguan, 589 SCRA 588 (2009). The whole purpose of the law authorizing a derivative suit is to allow the stockholders/member to enforce rights which are derivative (secondary) in nature, i.e., to enforce a corporate cause of action. R.N. Symaco Trading Corp v. Santos, 467 SCRA 312 (2005); Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009); Strategic Alliance Dev. Corp. v. Radstock Securities Ltd ., 607 SCRA 413 (2009). 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 stockholder may intervene and defend on behalf of the corporation . Chua v. Court of Appeals, 443 SCRA 259 (2004). A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs committed against the corporation, for which the directors refuse to sue. It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority ( corporate officers). Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997). (c) Requisites of Derivative Suit (San Miguel Corp. v. Kahn, 176 SCRA 447 [1989]) In the case of Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007), we enumerated the foregoing requisites before a stockholder 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 stockholder bringing the suit. Reyes v. Regional Trial Court of Makati, Br. 142, 561 SCRA 593 (2008); Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009). Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies lays down the following requirements which a stockholder must comply with in filing a derivative suit: A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided, that: (1) He was a stockholder or 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, by-laws, 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); Hi-Yield Realty, Inc. v. Court of Appeals, 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). The fact that Winchester, Inc. is a family corporation does not in any way exempt a stockholder from complying with the clear requirements and formalities of the rules for filing derivative suit there is nothing in the pertinent laws or rules supporting the distinction between, and the difference in the requirements for, family corporations vis-a-vis other types of corporations, in the institution by a stockholder of a derivative suit. Yu v. Yukayguan, 589 SCRA 588 (2009). (d) Who May Bring the Suit (Chua v. Court of Appeals, 443 SCRA 259 [2004]) Even then, not every suit filed on behalf of the corporation is a derivative suit. For a derivative suit to prosper, the minority stockholder 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 stockholders similarly situated who may wish to join him in the suit. [ citing Chua v. Court of Appeals, 443 SCRA259, 268 (2004)]. Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009). Since the ones to be sued are the directors/officers of the corporation itself, a stockholder, like petitioner Cruz, may validly institute a derivative suit to vindicate the alleged corporate injury, in which case Cruz is only a nominal party while Filport is the real party-in-interest. Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007).
132
A minority stockholder and member of the board has no power or authority to sue on the corporations behalf. Nor can we uphold this as a derivative suit, since it is required that the minority stockholder 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 stockholders 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). The relators must be stockholders both at time of occurrence of the events constituting the cause of action and at the time of the filing of the derivative suit. Gochan v. Young, 354 SCRA 207 (2001); Pascual v. Orozco, 19 Phil. 83 (1911). A minority stockholder 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 the same corporatio ns 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). The status of heirs as co-owners of shares of stocks prior to the partition of the decedents estate does not immediately and necessarily make them stockholders of the corporation -unless and until there is compliance with the Section 63 of the Corporation Code on the manner of transferring shares, the heirs do not become registered stockholders of the corporation. Reyes v. Regional Trial Court of Makati, Br. 142, 561 SCRA 593 (2008); Puno and Puno Enterprises, Inc., 599 SCRA 585 (2009). (e) Exhaustion of Intra-Corporate Remedies: Everett v. Asia Banking Corp., 49 Phil. 512 (1927); Angeles v. Santos, 64 Phil. 697 (1937). A derivative suit to question the validity of the 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). Further, while it is true that the complaining stockholder must satisfactorily show that he has exhausted all means to redress his grievances within the corporation; 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. Court of Appeals, 590 SCRA 548, 557 (2009). The obvious intent behind the rule requiring the stockholder 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 or partnership to obtain relief he desires is to make the derivative suit the final recourse of the stockholders, after all other remedies to obtain the relief sought had failed. Yu v. Yukayguan, 589 SCRA 588 (2009). (f) Nature of Relief or Remedies Prayed For: Evangelista v. Santos, 86 Phil. 387 [1950]; Republic Bank v. Cuaderno, 19 SCRA 671 (1967); Reyes v. Tan, 3 SCRA 198 (1961). In a derivative suit, any monetary benefits under the decision of the court shall pertain to the corporation and not to the stockholders or members. R.N. Symaco Trading Corp. v. Santos, 467 SCRA 312 (2005). The allegations of injury to the relators can co-exist with those pertaining to the corporation, and does not disqualify them from filing a derivative suit on behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring directors. Gochan v. Young, 354 SCRA 207 (2001). In a derivative action, the real party in interest is the corporation itself, not the shareholders who actually instituted it. 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). Appointment of receiver can be an ancillary remedy in a derivative suit. Chase v. CFI of Manila, 18 SCRA 602 (1966). Where corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a stockholder may sue on behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to the stockholders. This is what is known as a derivative suit, and settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the stockholder filing suit for the corporations behalf is only nominal party. The corporation should be included as a party in the suit. Hornilla v. Salunat, 405 SCRA 220 (2003). (g) Venue for Derivative Suit
133
Venue of 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. Right to Proportionate Share of Remaining Assets Upon Dissolution (Sec. 122) (a) Different Rules for Non-stock Corporations and Foundations (Secs. 94 and 95; Section 34(H)(2)(c), 1997 NIRC).
DERIVATIVE SUITS
Nature and Basis of derivative suit

Suits of stockholders/ members based on wrongful or fraudulent acts of directors or other persons: a. Individual suits - wrong done to stockholder personally and not to other stockholders (ex. When right of inspection is denied to a stockholder) b. Class suit - wrong done to a group of stockholders (ex. Preferred stockholders' rights are violated) c. Derivative suit - wrong done to the corporation itself Cause of action belongs to the corp. and not the stockholder But since the directors who are charged with mismanagement are also the ones who will decide WON the corp. will sue, the corp. may be left without redress; thus, the stockholder is given the right to sue on behalf of the corporation. An effective remedy of the minority against the abuses of management An individual stockholder is permitted to bring a derivative suit to protect or vindicate corporate rights, whenever the officials of the corp. refuse to sue or are the ones to be sued or hold the control of the corp. Suing stockholder is merely the nominal party and the corp. is actually the real party in interest. A SH can only bring suit for an act that took place when he was a stockholder; not before. (Bitong v. CA, 292 SCRA 503)
Requirements Relating to Derivative Suits

WHAT ARE THE LEGAL PRINCIPLES CONCERNING DERIVATIVE SUITS? 1) Stockholder/ member must have exhausted all remedies within the corp. 2) Stockholder/ member must be a stockholder/ member at the time of acts or transactions complained of or in case of a stockholder, the shares must have devolved upon him since by operation of law, unless such transaction or act continues and is injurious to the stockholder. 3) Any benefit recovered by the stockholder as a result of bringing derivative suit must be accounted for to the corp. who is the real party in interest. 4) If suit is successful, plaintiff entitled to reimbursement from corp. for reasonable expenses including attorneys' fees.
134
EVANGELISTA VS. SANTOS (86 Phil. 387; 1950) The injury complained of is against the corporation and thus the action properly belongs to the corporation rather than the stockholders. It is a derivative suit brought by the stockholder as a nominal party plaintiff for the benefit of the corporation, which is the real party in interest. In this case, plaintiffs brought the suit not for the benefit of the corporation's interest, but for their own. Plaintiffs here asked that the defendant make good the losses occasioned by his mismanagement and to pay them the value of their respective participation in the corporate assets on the basis of their respective holdings. Petition dismissed for venue improperly laid.
REPUBLIC BANK VS. CUADERNO (19 SCRA 671; 1967) In a derivative suit, the corporation is the real party in interest, and the stockholder merely a nominal party. Normally, it is the corp. through the board of directors which should bring the suit. But as in this case, the members of the board of directors of the bank were the nominees and creatures of respondent Roman and thus, any demand for an intracorporate remedy would be futile, the stockholder is permitted to bring a derivative suit. Should the corporation be made a party? The English practice is to make the corp. a party plaintiff while the US practice is to make it a party defendant. What is important though is that the corporation should be made a party in order to make the court's ruling binding upon it and thus bar any future re-litigation of the issues. Misjoinder of parties is not a ground to dismiss the action.
REYES VS. TAN (3 SCRA 198; 1961) The importation of textiles instead of raw materials, as well as the failure of the board of directors to take actions against those directly responsible for the misuse of the dollar allocations constitute fraud, or consent thereto on the part of the directors. Therefore, a breach of trust was committed which justified the suit by a minority stockholder of the corporation. The claim that plaintiff Justiniani did not take steps to remedy the illegal importation for a period of two years is also without merit. During that period of time plaintiff had the right to assume and expect that the directors would remedy the anomalous situation of the corporation brought about by their wrong-doing. Only after such period of time had elapsed could plaintiff conclude that the directors were remiss in their duty to protect the corporation property and business.
BITONG v. CA (292 SCRA 503) The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the Board of Directors that exercises its corporate powers and not in the president or officer thereof. It was JAKA's Board of Directors, not Senator Enrile, which had the power to grant Bitong authority to institute a derivative suit for and in its behalf. The basis of a stockholder's suit is always one in equity. However, it cannot prosper without first complying with the legal requisites for its institution. The most important of these is the bona fide ownership by a stockholder of a stock in his own right at the time of the transaction complained of which invests him with standing to institute a derivative action for the benefit of the corporation.
135
FINANCING THE CORPORATION
Sources of Financing
WHERE CAN CAPITAL TO FINANCE THE CORPORATION BE SOURCED? 1) Contributions (stockholders); also known as stockholder equity/equity investment 2) Loans or advances (creditors) 3) Profits (corporation itself)
Capital Structure
WHAT IS MEANT BY CAPITAL STRUCTURE? This refers to the aggregate of the securities -- instruments which represent relatively long-term investment -- issued by the corporation. There are basically 2 kinds of securities: shares of stock and debt securities.
XIII. CAPITAL STRUCTURE: SHARES OF STOCK

1. Concept of Capital Stock (Central Textile Mills v. National Wage and Productivity Commission, 260 SCRA 368 [1996]). By express provision of Sec. 13 of Corporation Code, paid-up capital is that portion of the authorized capital stock which has been both subscribed and paid. . . Not all funds or assets received by the corporation can be considered paid-up capital, for this term has a technical signification in Corporation Law. Such must form part of the authorized capital stock of the corporation, subscribed and then actually paid up. MSCI-NACUSIP Local Chapter v. National Wages and Productivity Commission, 269 SCRA 173 (1997). The term capital and other terms used to describe the capital structure of a corporation are of universal acceptance, and their usages have long been established in jurisprudence. Briefly, capital refers to the value of the property or assets of a corporation. The capital subscribed is the total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily be, and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives, inclusive of the premium if any, in consideration of the original issuance of the shares. NTC v. Court of Appeals, 311 SCRA 508 (1999). The outstanding capital stock is defined under Section 137 of the Corporation Code as the total shares of stock issued to subscribers or stockholders whether or not fully or partially paid (as long as there is binding subscription agreement) except treasury shares. Thus, quorum is based on the totality of the shares which have been subscribed and issued, whether it be founders shares or common shares. Lanuza v. Court of Appeals, 454 SCRA 54 (2005). An investment is an expenditure to acquire property or other assets in order to produce revenue. It is the placing of capital or laying out of money in a way intended to secure income or profit from its employment. To invest is to purchase securities of a more or le ss permanent nature, or to place money or property in business ventures or real estate, or otherwise lay it out, so that it may produce a revenue or income. President of PDIC v. Reyes, 460 SCRA 473 (2005). An investment, being in the nature of equity, and unlike a deposit of money or a loan that earns interest, cannot be assured of a dividend or an interest on the amount invested, for dividends on investments are granted only after profits or gains are generated. President of PDIC v. Reyes, 460 SCRA 473 (2005). When a person pays to the corporation a deposit for future subscription, no subscription agreement has been constituted, and consequently there is no liability for the payment of the documentary stamp tax on such deposit for future subscription for the reason that there is yet no subscription that creates rights and obligations between the subscriber and the corporation. Commissioner of Internal Revenue v. First Express Pawnshop Company, Inc., 589 SCRA 253 (2009). 2. Classification of Shares (Sec. 6)
136
It is not correct to say that holders of the preferred shares lose all their voting rights. Section 6 of the Corporation Code provides for the situations where non-voting shares like preferred shares are granted voting rights. Philippine Coconut Producers Federation, Inc. v. Republic, 600 SCRA 102 (2009). Section 6 of the Corporation Code which prohibits the classification of shares as non-voting, except when they are expressly classified as preferred or redeemable shares, will apply to corporation organized under the old Corporation Law. Section 148 of the Corporation Code expressly provides that it shall apply to corporations in existence at the time of the effectivity of the Code. Castillo v. Balinghasay, 440 SCRA 442 (2004). (a) Common Shares A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999). (b) Preferred Shares (Republic Planters Bank v. Agana, 269 SCRA 1 [1997]). Participating and Non-participating Cumulative and Non-cumulative Par Value and No Par Value Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution. Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999). (b) Redeemable Shares (Sec. 8;Republic Planters Bank v. Agana, 269 SCRA 1) Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock in exchange for property, whether or not the acquired stock is cancelled, retired or held in 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. Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999). (c) Founder Shares (Sec. 7)27 (d) Treasury Shares (Sec. 9; Commissioner v. Manning, 66 SCRA 14 [1975]). A treasury share, which may be 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 i n the companys treasury, the stock earns no dividends and has no vote in company affairs. Philippine Coconut Producers Federation, Inc. v. Republic, 600 SCRA 102 (2009). (e) Stock Warrants (f) Stock Options (g) Re-Classification of Shares Reclassification of shares does not always bring any substantial alteration in the subscribers proportional interest. But the exchange is differentthere 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 subscribe rs rights and privilegeswhich 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. Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999). The conversion of common shares into preferred shares, pursued to the amendment of the SMC articles of incorporation, is a legitimate exercise of corporate powers under the Corporation Code. The 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. Philippine Coconut Producers Federation, Inc. v. Republic, 600 SCRA 102 (2009). 3. Hybrid Securities (Government v. Phil. Sugar Estates, 38 Phil. 15 [1918]). 4. Quasi-Reorganization (a) Reduction of Capital Stock (Sec. 38) Reduction of capital stock cannot be employed to avoid the corporations obligations under the Labor Code. xMadrigal & Co. v. Zamora, 151 SCRA 355 (1987). (b) Stock Splits
27 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 founders share was raised but not resolved by the Court. Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto. Includes ATTY DY AND VILLANUEVA OUTLINE ATENEO 2011
EDWIN PADILLO BAR 2013 (c) Stock Consolidations
137
Capital and Capital Stock Distinguished

CAPITAL STOCK DEFINITION the amount fixed, usually by the corporate charter, to be subscribed and paid in or secured to be paid in by the SHS of a corporation, and upon which the corporation is to conduct its operation CONSTANT, unless amended by the AOI CAPITAL actual property of the corporation, including cash, real, and personal property. Includes all corporate assets, less any loss which may have been incurred in the business. FLUCTUATING
CONSTANCY
138
Shares of Stock: Kinds

COMMON DEFINITION Stock which entitles the owner of such stocks to an equal pro rata division of profits PREFERRED Stock which entitles the holder to some preference either in the dividends or distribution of assets upon liquidation, or in both PAR NO PAR* TREASURY Shares that have been issued and fully paid but subsequently reacquired by the issuing corporation by lawful means. REDEEMABLE Shares issued by the corporation that may be taken up by the corporation upon expiration of a fixed period. regardless of the existence of unrestricted retained earnings FOUNDERS Special shares whose exclusive rights and privileges are determined by the AOI. PROMOTERS AND ORGANIZERS OF CORP.
VALUE
Depends if its par or no par
Stated par value
Fixed in the AOI, and indicated in the stock certificate. May be sold at a value higher, but not lower, than that fixed in the AOI. Depends if its common or preferred.
Value not fixed in the AOI, and therefore not indicated in the stock certificate. Price may be set by BOD, SHs or fixed in the AOI eventually. Depends if its common or preferred.
VOTING RIGHTS
Usually vested with the exclusive right to vote
Can vote only under certain circumstances MA2I3DS
No voting rights for as long as such stock remains in the treasury (Sec. 57)
Usually denied voting rights. MA2I3DS
PREFERENCE UPON LIQUIDATION
No advantage, priority, or preference over any other SH in the same class
First crack at dividends / profits / distribution of assets
NOTE: Only preferred and redeemable shares may be deprived of the right to vote. (Sec. 6, Corporation Code) EXCEPTION: As otherwise provided in the Corporation Code. * No-par value shares may not be issued by the following entities: banks, trust companies, insurance companies, public utilities, building & loan association (Sec. 6)
139
Nature of Subscription Contract

WHAT IS A SUBSCRIPTION CONTRACT? It is any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed. This is notwithstanding the fact that the parties refer to it as a purchase or some other contract. (Sec. 60)
WHAT IS THE NATURE OF A SUBSCRIPTION CONTRACT? Subscriptions constitute a fund to which the creditors have a right to look for satisfaction of their claims. The assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. A subscription contract is INDIVISIBLE (Sec. 64). A subscription contract subsists as a liability from the time that the subscription is made until such time that the subscription is fully paid.
GARCIA V. LIM CHU SING (59 Phil. 562; 1934) A share of stock or the certificate thereof is not an indebtedness to the owner nor evidence of indebtedness and therefore, it is not a credit. Stockholders as such are not creditors of the corporation. The capital stock of a corporation is a trust fund to be used more particularly for the security of the creditors of the corporation who presumably deal with it on the credit of its capital.
Pre-incorporation subscription
RULE: When a group of persons sign a subscription contract, they are deemed not only to make a continuing offer to the corporation, but also to have contracted with each other as well. Thus, no one may revoke the contract even prior to incorporation without the consent of all the others. WHEN IS A PRE-INCORPORATION SUBSCRIPTION IRREVOCABLE? 1) For a period of at least 6 months from the date of subscription; EXCEPTIONS: (1) unless all of the other subscribers consent to the revocation; or (2) unless the incorporation of said corporation fails to materialize within the said period or within a longer period as may be stipulated in the contract of subscription 2) After the AOI have been submitted to the SEC (Sec. 61)
UTAH HOTEL CO V. MADSEN (43 Utah 285, 134 Pac. 557; 1913) Sec 332 in express terms confers powers upon the stockholders to regulate the mode of making subscriptions to its capital stock and calling in the same by-laws or by express contract.
140
Since it may be done by express contract, this shows that it was intended that a contract to that effect may be entered into even before the corporation is organized, and the contract agreement is enforced if the corporation is in fact organized.
WALLACE V. ECLIPSE POCAHONTAS COAL CO (98 S.E. 293; 1919) One who has paid his subscription to the capital stock of the corporation may compel the issuance of proper certificates therefor.
Post-incorporation subscription
NOTE: Under the Corporation Code, there is no longer any distinction between a subscription and a purchase. Thus, a subscriber is liable to pay for the shares even if the corporation has become insolvent.
The Preemptive Right to Shares

WHAT IS THE PRE-EMPTIVE RIGHT? It is the option privilege of an existing stockholder to subscribe to a proportionate part of shares subsequently issued by the corporation, before the same can be disposed of in favor others. WHY A PRE-EMPTIVE RIGHT? To protect existing stockholder equity. If the right is not recognized, the SHs interest in the corporation will be diluted by the subsequent issuance of shares.
Basis of Right; Common Law Rule

Under the prevailing view in common law, the preemptive right is limited to shares issued in pursuance of an increase in the authorized capital stock and does not apply to additional issues of originally authorized shares which form part of the existing capital stock. This common law principle which was generally understood to be applicable in this jurisdiction has now to give way to the express provisions of the Corporation Code on the matter.
Extent and Limitations of Preemptive Right under the Code

WHAT IS THE EXTENT OF THE PRE-EMPTIVE RIGHT? All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or dispositions of shares of any class, in proportion to their respective shareholdings. Exception: When such right is denied by the AOI or an amendment thereto. LIMITATIONS: The pre-emptive right does not extend to: (Sec. 39) 1) Initial Public Offerings (IPOs); 2) Issuance of shares in exchange for property needed for corporate purposes, including cases wherein an absorbing corporation issues new stocks to the SHs in pursuance to the merger agreement (Sec. 39)
141
Why?
(a)
Because it is beneficial for the corporation to save its cash; (b) A swap is more expedient than determining the monetary equivalent of the property.
3) Issuance of shares in payment of a previously contracted debt (Sec. 39) Why? (a) The obligation is extinguished outright; (b) Corporation does not have to shell out money to fulfill its obligations; (c) Money that would have otherwise been used for interest payments can be channelled to more productive corporate activities.
Note: In Nos. (2) and (3), such acts require approval of 2/3 of the OCS or 2/3 of total members.
In Close Corporations
In close corporations, the preemptive rights extends to ALL stock to be issued, including reissuance of treasury shares, EXCEPT if provided otherwise by the AOI. ( Sec. 102). Note that the limitations in Sec. 39 do not apply.
Waiver of Preemptive Right

The waiver of the preemptive right must appear in the Articles of Incorporation or an amendment thereto in order to be binding on ALL stockholders, particularly future stockholders. (Sec. 39) If it appears merely in a waiver agreement and NOT in the AOI, and was unanimously agreed to by all existing stockholders: * The existing stockholders cannot later complain since they are all bound to their private agreement. However, future stockholders will NOT be bound to such an agreement.
Any stockholder who has not exercised his preemptive right within a reasonable time will be deemed to have waived it.
When the issue is in breach of trust

The issue of shares may still be objectionable if the Directors have acted in breach of trust and their primary purpose is to perpetuate or shift control of the corporation, or to freeze out the minority interest.
Remedies when right violated/denied

WHAT ARE THE REMEDIES UNLAWFULLY DENIED? WHEN THE PRE-EMPTIVE RIGHT IS
(1) Injunction; (2) Mandamus; (3) Cancellation of the shares (NOTE: but only if no innocent 3rd parties are prejudiced) (4) In certain cases, a derivative suit
STOKES V. CONTINENTAL TRUST CO. (78 N.E. 1090; 1906) The directors were under the legal obligation to give the SH-plaintiff an opportunity to purchase at the price fixed before they could sell his property to a third party. By selling
142
to strangers without first offering to sell to him, the defendant wrongfully deprived him of his property and is liable for such damages as he actually sustained. THOM V. BALTIMORE TRUST (148 Atl. 234; 1930) Independently of the charters, the SHs of a corporation have a preferential right to purchase new issues of shares, to the proportional extent of their respective interests in the capital stock then outstanding, when the privilege can be exercised consistently with the object which the disposition of the additional stock is legally designed to accomplish. In the present case, every SH of the bank, for each of the shares, was to receive 1 1/2 shares of the stock co. (share in exchange for property). It would not be feasible to consummate a transfer based upon such consideration if the preemptive right were to be held enforceable with respect to every new issue of stock regardless of the object of the disposition. FULLER V. KROGH (113 N.W. 2d 25; 1962) Preemptive right is not to be denied when the property is to be taken as consideration for the stock except in those peculiar circumstances when the corporation has great need for the particular property, and the issuance of stock is the only practical and feasible method by which the corp. can acquire it for the best interest of the SHs. Ground: practical necessity. [cf. Sec. 39] DUNLAY V. M. GARAGE AND REPAIR (170 N.E. 917; 1930) If the issue of shares is reasonably necessary to raise money to be issued in the business of the corporation rather than the expansion of such business beyond original limits, the original SHs have no right to count on obtaining and keeping their proportional part of original stock. But even if preemptive right does not exist, the issue of shares may still be objectionable if the directors have acted in breach of trust and their primary purpose is to perpetuate or shift control of the corporation, or to freeze out minority interest. ROSS TRANSPORT V. CROTHERS (45 A. 2d 267; 1946) The doctrine of preemptive right is not affected by the identity of the purchasers. What it is concerned with is who did not get it. But when officers and directors sell to themselves and thereby gain an advantage, both in value and in voting power, another situation arises. In the case at bar, the directors were not able to prove good faith in the purchase and equity of transaction, since the corp. was a financial success. There was constructive fraud upon the other SHs.
Debt Securities Borrowings

Borrowings are usually represented by promissory notes, bonds or debentures. Oftentimes, a financial institution will be willing to lend large amounts to private corporations only on the condition that such institution will have some representation on the Board of Directors. The role of such representative is to see to it that his institution's investment is protected from mismanagement or unfavorable corporate policies.
Bonds and Debentures

BONDS(BONDED INDEBTEDNESS): corporate property secured by a mortgage or pledge of
143
must be registered with the SEC, as provided by Sec. 38 of the

Corporation Code DEBENTURES: issued on the general credit of the corporation not secured by any collateral; THEREFORE, are not bonded indebtedness in the true sense, and stockholder approval is NOT required (although it would generally be a good idea to obtain it)
Convertible securities; stock options

NOTE: Under the SEC rules, stock option must first be approved by the SEC. Also, if the stock option is granted to non-stockholders, or to directors, officers, or managing groups, there must first be SH approval of 2/3 of the OCS before the matter is submitted to the SEC for approval. Of course it goes without saying that the corporation must set aside enough of the junior securities in case the holders of the option decide to exercise such option.
MERRITT-CHAPMAN & SCOTT CORP. VS. NEW YORK TRUST CO. (184 F. 2d 954; 1950) If the corporation is allowed to declare stock dividends without taking account of the warrant holders (who have not yet exercised their warrant), the percentage of interest in the common stock capital of the corporation which the warrant holders would acquire, should they choose to do so, could be substantially reduced/diluted. Thus, the corporation is wrong in contending that a warrant holder must first exercise his warrant before they may be issued stock dividend.
Hybrid securities
Because preferred shares and bonds are created by contract, it is possible to create stock which approximates the characteristics of debt securities. Hybrid securities, as the name implies, therefore combine the features of preferred shares and bonds. Determining the true nature of the security is crucial for tax purposes. The American courts use the following criteria:
(1) Is the corporation liable to pay back the investor at a fixed maturity date? (2) Is interest payable unconditionally at definite intervals, or is it dependent on earnings? (3) Does the security rank at least equally with the claims of other creditors, or is it
subordinate to them?
WHAT IS THE NATURE OF THE SECURITY AND THE PAYMENT MADE? BONDS WHAT IS PAID? TO WHOM PAID? WHEN PAID? Interest Creditor-investor Whether the corporation has profits or not Dividends Stockholder Only if there are profits STOCK
144
NATURE TAXABILITY
Expense Can be deducted for tax purposes Yes Ranked together with other corporate creditors
Not an expense CANNOT be deducted
MATURITY DATE? RANK ON DISSOLUTION
No Superior to stockholders, inferior to corporate creditors
JOHN KELLY VS. CIR TALBOT MILLS VS. CIR (326 U.S. 521; 1946) In the Kelly case, the annual payments made were interest on indebtedness (therefore, a bond is held) because there were sales of the debentures as well as exchanges of preferred stock for debentures, a promise to pay a certain annual amount if earned, a priority for the debentures over common stock and a definite maturity date in the reasonable future. In the Talbot Mills case, the annual payments made were dividends and not interest (therefore, shares are held), because of the presence of fluctuating annual payments with a 2% minimum, and the limitation of the issue of notes to stockholders in exchange only for stock. Besides, it is the Tax Court which has final determination of all tax issues which are not clearly delineated by law. JORDAN CO. VS. ALLEN (85 F. Supp. 437; 1949) The payments made, regardless of what they are called, are in fact dividends (on stocks) because of the absence of a maturity date and the right to enforce payment of the principal sum by legal action, among other factors. The following criteria should be used in determining whether a payment is for interest or dividends: (1) maturity date and the right to enforce collection; (2) treatment by the parties; (3) rank on dissolution; (4) uniform rate of interest payable or income payable only out of profits; (5) participation in management and the right to vote. It must be noted that these criteria are not of equal importance and cannot be relied upon individually. E.g. treatment accorded the issuance by the parties cannot be sufficient as this would allow taxpayers to avoid taxes by merely naming payments as interest.
The trust indenture

Here, the bond issue usually involves 3 parties:
(1) debtor-corporation (2) creditor-bondholder (3) trustee: representative of all the bondholders ALADDIN HOTEL CO. VS. BLOOM (200 F. 2d 627; 1953) The rights of bondholders are to be determined by their contract and courts will not make or remake a contract merely because one of the parties may become dissatisfied with its provisions. If the contract is legal, the courts will interpret and enforce it.
145
In the deed of trust and bonds in this case, there are provisions empowering bondholders of 2/3 of the principal amount or more, by agreement with the company, to modify and extend the date of payment of the bonds provided such extension affected all bonds alike. When this was done, the bondholders only followed such provisions in good faith. The company benefited because of such move, and the bondholders were not necessarily prejudiced, as defendants Joneses in this case were themselves owners of 72% of the bond issue.
CONSIDERATION FOR ISSUANCE OF SHARES Form of Consideration

WHAT FORMS OF CONSIDERATION ARE ACCEPTABLE FOR ISSUANCE OF SHARES? cash; property actually received by the corporation: must be necessary or convenient for its use and lawful purposes; labor performed for or services actually rendered to the corporation (NOTE: Future services are NOT acceptable!); previously incurred indebtedness by the corporation; amounts transferred from unrestricted retained earnings to stated capital; outstanding shares exchange for stocks in the event of reclassification or conversion
WHAT FORMS ARE UNACCEPTABLE? future services promissory notes value less than the stated par value
HOW IS THE ISSUED PRICE OF NO-PAR SHARES FIXED? It may be fixed as follows: (1) In the AOI; or (2) By the BOD pursuant to authority conferred upon it by the AOI or the bylaws; or (3) In the absence of the foregoing, by the SHs representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose (Sec. 62)
IF THE CONSIDERATION FOR SHARES IS OTHER THAN CASH, HOW IS THE VALUE THEREOF DETERMINED? It is initially determined by the incorporators or the Board of Directors, subject to approval by the SEC. (Sec. 62)
Watered Stocks
WHAT IS WATERED STOCK? Stocks issued as fully paid up in consideration of property at an overvaluation. Oftentimes, the consideration received is less than the par value of the share.
146
NOTE: No-par shares CAN be watered stock: when they are issued for less than their issued value as fixed by the corp. in accordance with law.
WHAT ARE THE WAYS BY WHICH WATERED STOCK CAN BE ISSUED? (1) Gratuitously, under an agreement that nothing shall be paid to the corporation; (2) Upon payment of less than its par value in money or for cost at a discount; (3) Upon payment with property, labor or services, whose value is less than the par value of the shares; and (4) In the guise of stock dividends representing surplus profits or an increase in the value of property, when there are no sufficient profits or sufficient increases in value to justify it. WHAT IS THE LIABILITY OF DIRECTORS FOR THE ISSUANCE OF WATERED STOCK? Directors and officers who consented to the issuance of watered stocks are solidarily liable with the holder of such stocks to the corp. and its creditors for the difference between the fair value received at the time of the issuance and the par or issued value of the share. The liability will be to all creditors, whether they became such prior or subsequent to the issuance of the watered stock. Reliance by the creditors on the alleged valuation of corporate capital is immaterial and fraud is not made an element of liability. NOTE: In the Philippines, it is the statutory obligation theory that is controlling (cf. Sec. 65).
TRIPLEX SHOE V. RICE & HUTCHINS (72 A.L.R. 932; 1930) In this case, the stocks issued to the Dillman faction were no par value shares, the consideration for which were never fixed as required by law. Hence, their issuance was void. Moreover, the stocks were issued to the Dillmans for services rendered and to be rendered. Future services are not lawful consideration for the issuance of stock. MCCARTY V. LANGDEAU (337 S.W. 2d 407; 1960) McCarty agreed to purchase shares of a corp. with a downpayment of only $20, with the balance due to be evidenced by a note. McCarty failed to pay a big portion of the balance. The Court affirmed the judgement against McCarty for the balance due on the contract. McCarty contends that the contract is void. But the law only prohibits the issuance of stock. If it is understood that the stock will not be issued to the subscriber until the note is paid, the contract is valid and not illegal. If a security such as a note, which is not a valid consideration, is accepted, the law does not say that such note, or the stock issued for it, shall be void. What is void by express provision of law is the fictitious increase of stock or indebtedness. The law was designed for the protection of the corporation and its creditors. It emphasizes the stockholders obligations to make full and lawful payment in accord with its mandate, rather than furnish him with a defense when he has failed in that obligation. Its purpose is to give integrity to the corporations capital. None of these objects would be promoted by declaring a note given by a subscriber for stock uncollectible in the hands of a bona fide stockholder.
147
RHODE V. DOCK-HOP CO. (12 A.L.R. 437; 1920) This case involves an action to collect unpaid balances on par value of shares. It was held that innocent transferees of watered stock cannot be held to answer for the deficiency of the stocks even at the suit of the creditor of the company. The creditors remedy is against the original owner of the watered stock.
BING CROSBY V. EATON (297 P. 2d 5; 1956) A subscriber to shares who pays only part of what he agreed to pay is liable to creditors for the balance. Holders of watered stock are generally held liable to the corporations creditors for the difference between the par value of the stock and the amount paid in. Under the misrepresentation theory, the creditors who rely on the misrepresentation of the corporations capital stock are entitled to recover the water from holders of the watered stock. Reliance of creditors on the misrepresentation is material. However, under the statutory obligation theory, reliance of creditors on the capital stock of the corporation is irrelevant. (It must be noted that here in the Philippines, it is the statutory obligation theory which is
prevailing.)
Issuance of Certificate Certificate of stock

CONDITION FOR ISSUANCE: payment of full amount of subscription price plus interest, if any is due (Sec. 64) CERTIFICATION THAT: person named therein is a holder or owner of a stated number of shares in the corporation. 1. kind of shares 2. date of issuance 3. par value, if par value shares Signatures of the proper officers, usually president or secretary, as well as the corporate seal For no more than the number of shares authorized in articles of incorporation; excess would be void
INDICATES:
BEARS:
AMOUNT ISSUED:
Nature and function of a certificate of stock

A certificate of stock is not necessary to render one a stockholder in a corporation. Nevertheless, a certificate of stock is the paper representation or tangible evidence of the stock itself and of the various interests therein. The certificate is not stock in the corporation but is merely evidence of the holder's interest and status in the corporation, his ownership of the shares represented thereby, but is not in law the equivalent of such ownership. It expresses the contract between the corporation and the SH, but it is not essential to the existence of a share in stock or the creation of the relation of shareholder to the corporation. ( Tan v. SEC, 206 SCRA 740)
148
Requisites for valid issuance of formal certificate of stock (Sec. 63)

(1) The certificates must be signed by the President / Vice-President, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation. A mere typewritten statement advising a SH of the extent of his ownership in a corporation without qualification and/or authentication cannot be considered as a formal certificate of stock. (Bitong v. CA, 292 SCRA 503) (2) Delivery of the certificate There is no issuance of a stock certificate where it is never detached from the stock books although blanks therein are properly filled up if the person whose name is inserted therein has no control over the books of the company. ( Bitong v. CA, 292 SCRA 503) (3) Par value of par value shares / Full subscription of no par value shares must be fully paid. (4) Surrender of the original certificate if the person requesting the issuance of a certificate is a transferee from a SH. . Certificate of Stock (Sec. 63) (a) Nature of Certificate:Tan v. SEC, 206 SCRA 740 (1992);De los Santos v. Republic, 96 Phil. 577 (1955);Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002); Nautica Canning Corp. v. Yumul, 473 SCRA 415 (2005); C.N. Hodges v. Lezama, 14 SCRA 1030 (1965). A certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests therein. The certificate is not a stock in the corporation but is merely evidence of the holders interest and status in the corporation, his ownership of the share represented thereby. It is not in law the equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but is not essential to the existence of a share of stock or the nature of the relation of shareholder to the corporation. Makati Sports Club, Inc. v. Cheng, G.R. No. 178523, 16 June (2010). A certificate of stock is the evidence of a holders interest and status in a corporationit is prima facie evidence that the holder is a shareholder of a corporation. Lao v. Lao, 567 SCRA 558 (2008). A stock certificate is merely evidence of a share of stock and not the share itself. Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998); Lao v. Lao, 567 SCRA 558 (2008). The fact that the stock certificates registered in the name of one person are found in the possession of another stockholder does not prove that the possessor is the owner of the covered shares. A stock certificate is merely a tangible evidence of ownership of shares of stock. Its presence or absence does not affect the right of the registered owner to dispose of the shares covered by the stock certificate. Republic v. Estate of Hans Menzi, 475 SCRA 20 (2005). A certificate of stock could not be considered issued in contemplation of law unless signed by the president or vice-president and countersigned by the secretary or assistance secretary. Bitong v. Court of Appeals, 292 SCRA 503 (1998). (b) Quasi-negotiable Character of Certificate of Stock:Bachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681 (1937). In order for a transfer of stock certificate to be effective, it must be properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. Indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. Razon v. IAC, 207 SCRA 234 (1992). The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or any other person legally authorized to make the transfer shall be sufficient to effect the transfer of shares only if the same is coupled with delivery. The delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new transferee. But to be valid against third parties, the transfer must be recorded in the books of the corporation. Bitong v. Court of Appeals, 292 SCRA 503 (1998); Raquel-Santos v. Court of Appeals, 592 SCRA 169 (2009). Even when a formal Deed of Assignment covering the shares was duly executed, without the endorsement and delivery of the covering certificates of stocks, the covered shares cannot be deemed to transferred and registered in the names of the assignees. Rural Bank of Lipa City v. Court of Appeals, 366 SCRA 188 (2001); Rivera V. Florendo, 144 SCRA 643 (1986).
149
(c) Right to Issuance (Sec. 64; Baltazar v. Lingayen Gulf Elect. Power Co., Inc., 14 SCRA 522 [1965]). (d) Lost or Destroyed Certificates (Sec. 63 and 73) While Sec. 73 of Corporation Code appears to be mandatory, the same admits exceptions, such that a corporation may voluntarily issue a new certificate in lieu of the original certificate of stock which has been lost without complying with the requirements under said section. It would be an internal matter for the corporation to find measures in ascertaining who are the real owners of stock for purposes of liquidation. It is well-settled that unless proven otherwise, the stock and transfer book is the best evidence to establish stock ownership. (SEC Opinion, dated 28 January 1999, addressed to Ms. Ma. Cecilia Salazar-Santos). (e) Forged and Unauthorized Transfers. J. Santamaria v. HongKong and Shanghai Banking Corp., 89 Phil. 780 (1951); Neugene Marketing, Inc. v. Court of Appeals, 303 SCRA 295 (1999).
BITONG V. CA (292 SCRA 503) Stock issued without authority and in violation of law is void and confers no rights on the person to whom it is issued and subjects him to no liabilities. Where there is an inherent lack of power in the corporation to issue the stock, neither the corporation nor the person to whom the stock is issued is estopped to question its validity since an estoppel cannot operate to create stock which under the law cannot have existence.
Unpaid Subscriptions
Unpaid subscriptions are not due and payable until a call is made by the corporation for payment. (Sec. 67) An obligation arising from non-payment of stock subscriptions to a corporation cannot be offset against a money claim of an employee against the employer. (Apodaca v. NLRC, 172 SCRA 442) Interest on all unpaid subscriptions shall be at the rate of interest fixed in the bylaws. If there is none, it shall be the legal rate. (Sec. 66)
5. Payment of Balance of Subscription (Secs. 66 and 67; Lingayen Gulf Electric Power Co. v. Baltazar, 93 Phil. 404 [1953]). A stockholder who is employed with the company, cannot offset his unpaid subscription against his awarded claims for wages, where there has been no call for the payment of such subscription. Apodaca v. NLRC, 172 SCRA 442 (1989). 6. Delinquency on Subscription (Secs. 68, 69, 70 and 71; Philippine Trust Co. v. Rivera, 44 Phil. 469 [1923]; Miranda v. Tarlac Rice Mill Co., 57 Phil. 619 [1932]) The prescriptive period to recover on unpaid subscription does not commence from the time of subscription but from the time of demand by Board of Directors to pay the balance of subscription. Garcia v. Suarez, 67 Phil. 441 (1939).
How Payment of Shares Enforced

HOW ARE UNPAID SUBSCRIPTIONS COLLECTED? (1) Call for payment as necessary, i.e. the BOD declares the unpaid subscriptions due and payable (Sec. 67); (2) Delinquency sale (Sec. 68; to be discussed in the next section) (3) Court action for collection (Sec. 70)
VELASCO VS POIZAT (37 Phil. 802; 1918)
150
Poizat subscribed to 20 shares but only paid for 5. Board made a call for payment through a resolution. Poizat refused to pay. Corporation became insolvent. Assignee in insolvency sued Poizat whose defense was that the call was invalid for lack of publication. It was held that the Board call became immaterial in insolvency which automatically causes all unpaid subscriptions to become due and demandable.
LINGAYEN GULF ELECTRIC VS BALTAZAR (93 Phil. 404; 1953) Companys president subscribed to shares and paid partially. The Board made a call for payment through a resolution. However, the president refused to pay, prompting the corporation to sue. The defense was that the call was invalid for lack of publication. It was held that the call was void for lack of publication required by law. Such publication is a condition precedent for the filing of the action. The ruling in Poizat does not apply since the company here is solvent.
DA SILVA VS ABOITIZ (44 Phil. 755; 1923) Da Silva subscribed to 650 shares and paid for 200. The company notified him that his shares will be declared delinquent and sold in a public auction if he does not pay the balance. Da Silva did not pay. The company advertised a notice of delinquency sale. Da Silva sought an injunction because the by-laws allegedly provide that unpaid subscriptions will be paid from the dividends allotted to stockholders. The Court held that by-laws provide that unpaid subscriptions may be paid from such dividends. Company has other remedies provided for by law such as a delinquency sale or specific performance.
NATIONAL EXCHANGE VS DEXTER (51 Phil. 601; 1928) Dexter subscribed to 300 shares. The subscription contract provided that the shares will be paid solely from the dividends. Company became insolvent. Assignee in insolvency sued Dexter for the balance. Dexter's defense was that under the contract, payment would come from the dividends. Without dividends, he cannot be obligated to pay. The Court held that the subscription contract was void since it works a fraud on creditors who rely on the theoretical capital of the company (subscribed shares). Under the contract, this theoretical value will never be realized since if there are no dividends, stockholders will not be compelled to pay the balance of their subscriptions. LUMANLAN VS CURA (59 Phil. 746; 1934) Lumanlan had unpaid subscriptions. Companys receiver sued him for the balance and won. While the case was on appeal, the company and Lumanlan entered into a compromise whereby Lumanlan would directly pay a creditor of the company. In exchange, the company would forego whatever balance remained on the unpaid subscription. Lumanlan agreed since he would be paying less than his unpaid subscription. Afterwards, the corporation still sued him for the balance because the company still had unpaid creditors. Lumanlans defense was the compromise agreement. The Court held that the agreement cannot prejudice creditors. The subscriptions constitute a fund to which they have a right to look to for satisfaction of their claims. Therefore, the corporation has a right to collect all unpaid stock subscriptions and any other amounts which may be due it, notwithstanding the compromise agreement.
151
Rights and Obligations of Holders of Unpaid but Non-delinquent Stock

WHAT ARE THE RIGHTS OF UNPAID SHARES? Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. (Sec. 72)
FUA CUN V. SUMMERS (44 Phil. 704; 1923) Chua Soco bought 500 shares of China Banking Corp. at par value of P100.00, paying the sum of P25,000.00, 50% of the subscription price. Chua mortgaged the said shares in favor of plaintiff Fua Cun to secure a promissory note for the sum of P25,000.00. In the meantime, Chua Soco's interest in the 500 shares were attached and levied upon to satisfy his debt with China Banking Corp. Fua Cun brought an action to have himself declared to hold priority over the claim of China Bank, to have the receipt for the shares delivered to him, and to be awarded damages for wrongful attachment, on the ground that he was owner of 250 shares by virtue of Chua Soco's payment of half of the subscription price. The Court held that payment of half the subscription price does not make the holder of stock the owner of half the subscribed shares. Plaintiff's rights consist in an equity in 500 shares and upon payment of the unpaid portion of the subscription price he becomes entitled to the issuance of certificate for the said 500 shares in his favor. BALTAZAR V. LINGAYEN GULF ELECTRIC POWER (14 SCRA 522; 1965) Baltazar, et al. subscribed to a certain number of shares of Lingayen Gulf Electric Power. They had made only partial payment of the subscription but the corporation issued them certificates corresponding to shares covered by the partial payments. Corporation wanted to deny voting rights to all subscribed shares until total subscription is paid. The Court held that shares of stock covered by fully paid capital stock shares certificates are entitled to vote. Corporation may choose to apply payments to subscription either as: (a) full payment for corresponding number of stock the par value of which is covered by such payment; or (b) as payment pro-rata to each subscribed share. The corporation chose the first option, and, having done so, it cannot unilaterally nullify the certificates issued. Note: The Camposes are of the opinion that 64 of Corporation Code makes the Lingayen Gulf inapplicable at present. NAVA V. PEERS MARKETING (74 SCRA 65; 1976) Teofilo Co subscribed to 80 shares of Peers Marketing Corp. at P100.00 a share for a total of P8,000.00. He, however, paid only P2,000.00 corresponding to 20 shares or 25% of total subscription. Nava bought 20 shares from Co and sought its transfer in the books of the corporation. The corporation refused to transfer said shares in its books. It was held that the transfer is effective only between Co and Nava and does not affect the corporation. The Fua Cun ruling applies. Lingayen Gulf does not apply because, unlike in Lingayen Gulf, no certificate of stock was issued to Co.
Effect of delinquency
WHAT IS DELINQUENT STOCK? (Sec. 67)
152
Stock that remains unpaid 30 days after the date specified in the subscription contract or the date stated in the call made by the Board. WHAT ARE THE EFFECTS OF DELINQUENCY? 1. The holder thereof loses all his rights as a stockholder except only the rights to dividends; 2. Dividends will not be paid to the stockholder but will be applied to the unpaid balance of his subscription plus costs and expenses. Also, stock dividends will be withheld until full payment is made. 3. Such stockholder cannot vote at the election of directors or at any meeting on any matter proper for stockholder action. 4. Stockholder cannot be counted as part of the required quorum. 5. Stockholder cannot be voted for as director of the corporation. WHAT IS THE PROCEDURE FOR THE CONDUCT OF A DELINQUENCY SALE? (Sec. 68) (1) Issuance of Board resolution The BOD issues a resolution ordering the sale of delinquent stock, specifically stating the amount due on each subscription plus all accrued interest, and the date, time and place of the sale. Note: The sale shall not be less than 30 days nor more than 60 days from the date the stocks become delinquent. (2) Notice of sale and publication Notice of the date of delinquency sale and a copy of the resolution is sent to every delinquent stockholder either personally or by registered mail. The notice is likewise published once a week for 2 consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. (3) Sale at public auction If the delinquent stockholder fails to pay the corporation on or before the date specified for the delinquency sale, the delinquent stock is sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. (4) Transfer and issuance of certificate of stock The stock so purchased is transferred to such purchaser in the books of the corporation and a certificate of stock covering such shares is issued. If there is no bidder at the public auction who offers to pay the full amount of the balance on the subscription and its attendant costs, the corporation may bid for the shares, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the Code. Note that this is subject to the restrictions imposed by the Code on corporations as regards the acquisition of their own shares. (See the discussion under Dividends and Purchase by Corporation of its Own Shares.) CAN A DELINQUENCY SALE BE QUESTIONED? (Sec. 69) Yes. This is done by filing a complaint within 6 months from the date of sale, and paying or tendering to the party holding the stock the sum for which said stock was sold, with interest at the legal rate from the date of sale. No action to
153
recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock unless these requirements are complied with.
Lost or Destroyed Certificate

WHAT IS THE PROCEDURE FOR THE ISSUANCE OF NEW CERTIFICATES TO REPLACE THOSE STOLEN, LOST OR DESTROYED? (Sec. 73)
(1) File an affidavit in triplicate with the corporation. The affidavit must state the
following:
(a) (b) (c) (d)
Circumstances as to how the certificates were SLD; Number of shares represented; and Serial number of the certificate Name of issuing corporation
(2) The corporation will publish notice after the affidavit and other information
and evidence have been verified with the books of the corporation, ( Note however that this is not mandatory. The corporation has the discretion to decide whether to publish or not.) The notice will contain the following information: (a) (b) (c) (d) (e) Name of the corporation Name of the registered owner; Serial number of the certificate; Number of shares represented by the certificate; Effect of expiration of 1 year period from publication and failure to present contest within that period.
(3) SLD certificate is removed from the books if after one year from date of last
publication, no contest is presented. NOTE: One-year period will not be required if the applicant files a bond good for 1 year. (4) The corporation will then issue new certificates. However, if a contest has been presented to the corporation, or if an action is pending court regarding the ownership of the SLD certificate, the issuance of the new certificate shall be suspended until the final decision by the court. NOTE: Should corporation issue new certificates without the conditions being fulfilled and a third party proves that he is the rightful owner of the shares, the corporation may be held liable to the latter EVEN IF it acted in good faith. NOTE: Even if the above procedure was followed, if there was fraud, bad faith, or negligence on the part of the corporation and its officers, the corporation may be held liable.
TRANSFER OF SHARES
HOW ARE SHARES OF STOCK TRANSFERRED? By delivery of the certificate/s indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. ( Sec. 63)
WHAT ARE THE REQUISITES FOR A VALID TRANSFER? (1) Delivery;
154
(2) Indorsement by the owner or his attorney-in-fact or other persons legally authorized to make the transfer Indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. (Razon v. CA, 207 SCRA 234) (3) Recording of the transfer in the books of the corporation (so as to make the transfer valid as against third parties) Until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. Thus, the unrecorded transferee cannot enjoy the status of a SH: he cannot vote nor be voted for, and he will not be entitled to dividends.
RURAL BANK OF SALINAS, INC. V. CA (210 SCRA 510) A corporation, either by its board, its by-laws or the act of its officers, cannot create restrictions in stock transfers.
TAN V. SEC (206 SCRA 740) A by-law which prohibits a transfer of stock without the consent or approval of all the SHs or of the President or Board of Directors is illegal as constituting undue limitation on the right of ownership and in restraint of trade (citing Fleisher v. Botica Nolasco Co., Inc., 47 Phil. 583) While Sec. 47 (9) of the Corporation Code grants to stock corporations the authority to determine in the by-laws the "manner of issuing certificates" of shares of stock, however, the power to regulate is not the power to prohibit, or to impose unreasonable restrictions of the right of SHs to transfer their shares. To uphold the cancellation of a stock certification as null and void for lack of delivery of the cancelled "mother" certificate whose endorsement was deliberately withheld by petitioner, is to prescribe certain restrictions on the transfer of stock in violation of the Corporation Code as the only law governing transfer of stocks. USON V. DIOSOMITO (61 Phil. 535; 1935) Toribia Uson filed a civil action for debt against Vicente Dioisomito. Upon institution of said action, an attachment was duly issued and D's property was levied upon, including 75 shares of the North Electric Co., which stood in his name on the books of the company when the attachment was levied on 18 January 1932. The sheriff sold said shares at a public auction with Uson being the highest bidder. Jollye claims to be the owner of said certificate of sock issued to him by the co. on 13 February 1933. There is no dispute that Diosomito was the original owner of said shares, which he sold to Barcelon. However, Barcelon did not present these certificates to the corporation for registration until 19 months after the delivery thereof by Barcelon, and 9 months after the attachment and levy on said shares. The transfer to Jollye was made 5 months after the issuance of a certificate of stock in Barcelon's name. Is a bona fide transfer of the shares of corp., not registered or noted on the books of the corp., valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not. NO, it is not valid. The transfer of the 75 shares in the North Electric Co., Inc made by the defendant Diosomito as to the defendant Barcelon was not valid as to the plaintiff. Toribia Uson, on 18 Jan. 1932, the date on which she obtained her attachment lien on said shares of stock which still stood in the name of Diosomito on the books of the corp. Sec. 35
155
says that No transfer, however, is valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred. All transfers of shares not so entered are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to subsequent purchasers in good faith, and indeed, as to all persons interested, except the parties to such transfers.
No registration of transfer of unpaid shares

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. (Sec. 63)
Remedy if registration refused

The proper remedy is a petition for a writ of mandamus to compel the corporation to record the transfer or issue a new certificate in favor of the transferee, as the case may be. The writ will be granted provided it is shown that he transferee has no other plain, speedy and adequate remedy and that there are no unpaid claims against the stocks whose transfer is sought to be recorded. It must be noted that unless the latter fact is alleged, mandamus will be denied due to failure to state a cause of action. (Campos & Campos)
RURAL BANK OF SALINAS, INC. V. CA (210 SCRA 510) The right of a transferee/assignee to have stocks transferred to his name is an inherent right flowing from his ownership of the stocks. Thus, whenever a corporation refuses to transfer and register stock, mandamus will lie to compel the officers of the corporation to transfer said stock in the books of the corporation. This is because the corporation's obligation to register is ministerial. (Note, however, that in such cases, the person requesting the registration must be the prima facie owner of the shares. Cf. Lim Tay v. CA, 293 SCRA 634) TORRES V. CA (278 SCRA 793) It is the corporate secretary's duty and obligation to register valid transfers of stocks and if said corporate officer refuses to comply, the transferor SH may rightfully bring suit to compel performance. Note: In this case, Judge Torres had no right to enter the assignments (conveyances) of his shares himself in the corporation's stock and transfer book since he was not corporate secretary. RIVERA V. FLORENDO (144 SCRA 647; 1986) Isamu Akasako, a Japanese national who was allegedly the real owner of the shares of stock in the name of one Aquilino Rivera, a registered SH of Fujuyama Hotel and Restaurant, Inc., sold 2550 shares of the same to Milagros Tsuchiya along with the assurance that Tsuchiya would be made President of the corporation after the purchase. Rivera assured her that he would sign the stock certificates because Akasako was the real owner. However, after the sale was consummated and the consideration paid, Rivera refused to make the indorsement unless he is also paid. Tsuchiya, et al. attempted several times to have the shares registered but were refused compliance by the corp. They filed a special action for mandamus and damages.
156
The Supreme Court held that mandamus was improper in this case since the shares of stock were not even indorsed by the registered owner who was specifically resisting the registration thereof in the books of the corporation. The rights of the parties would have to be threshed out in an ordinary action.
Restrictions on Transfer; Close Corporations

General rule: Exception: Shares of stock are freely transferable, without restriction. In close corporations, restrictions may be placed on the transfer of shares. Such restrictions must appear in the AOI and in the bylaws, as well as in the certificate of stock. Otherwise, the restriction shall not be binding on any purchaser thereof in good faith. The restrictions imposed shall be no more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If this option is not exercised upon the expiration of the period, the transferring stockholder may sell his shares to any third person. (Sec. 98)
WHAT IS THE EFFECT OF ISSUANCE OR TRANSFER OF STOCK IN BREACH OF THE RESTRICTIONS? The corporation may, at its option, refuse to register the transfer of stock in the name of the transferee. (Sec. 99.4) However, this shall not be applicable if the transfer, though otherwise contrary to subsections (1), (2) and (3) of Sec. 99, has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its AOI in accordance with Title XII of the Code. For his part, the transferee may rescind the transfer or recover from the transferor under any applicable warranty, whether express or implied.
UNAUTHORIZED TRANSFERS Certificates indorsed in blank; when quasi-negotiable

A possessor, even without authority, may transfer good title to a bona fide purchaser if: the real owner endorses the certificate in blank the conveyance is for purposes other than transfer that relying on the stock certificate, the purchaser believes the possessor to be the owner thereof or has authority to transfer the same. This proceeds from the theory of quasi-negotiability which provides that in endorsing a certificate in blank, the real owner clothes the possessor with apparent authority, thus, estopping him later from asserting his rights over the shares of stock against a bona fide purchaser. Quasi-negotiability does not apply in cases where the real owner: a. did not entrust the certificate to anyone; and b. is not otherwise guilty of estoppel For example, in case the transfer is made by a finder or a thief.
157
Forged Transfers
A corporation does not incur any misrepresentation in the issuance of a certificate made pursuant to a forged transfer. It can always recall from the person the certificate issued, for cancellation. In case where the certificate so issued comes into the hands of a bona fide purchaser for value from the original purchaser, the corporation is estopped from denying its liability. It must recognize both the original and the new certificate. But if recognition results to an over-issuance of shares, only the original certificate may be recognized, without prejudice to the right of the bona fide purchaser to sue the corporation for damages.
SANTAMARIA VS. HONGKONG (89 Phil. 780; 1951) Santamaria secured her order for a number of shares with Campos Co. with her stock certificate representing her shares with Batangas Minerals. The said certificate was originally issued in the name of her broker and endorsed in blank by the latter. As Campos failed to make good on the order, Santamaria demanded the return of the certificate. However, she was informed that Hongkong Bank had acquired possession of it inasmuch as it was covered by the pledge made by Campos with the bank. Thereafter, she instituted an action against Hongkong Bank for the recovery of the certificate. Trial court decided in her favor. The bank appealed. Issues: 1) WON Santamaria was chargeable with negligence which gave rise to the case 2) WON the Bank was obligated to inquire into the ownership of the certificate (1) The facts of the case justify the conclusion that she was negligent. She delivered the certificate, which was endorsed in blank, to Campos without having taken any precaution. She did not ask the Batangas Minerals to cancel it and instead, issue another in her name. In failing to do so, she clothed Campos with apparent title to the shares represented by the certificate. By her misplaced confidence in Campos, she made possible the wrong done. She was therefore estopped from asserting title thereto for it is well-settled that where one of the innocent parties must suffer by reason of a wrongful or unauthorized act, the loss must fall on the one who first trusted the wrongdoer. (2) The subject certificate is what is known as a street certificate. Upon its face, the holder is entitled to demand its transfer into his name from the issuing corporation. The bank is not obligated to look beyond the certificate to ascertain the ownership of the stock. A certificate of stock, endorsed in blank, is deemed quasi-negotiable, and as such, the transferee thereof is justified in believing that it belongs to the transferor.
DE LOS SANTOS VS. MCGRATH (96 Phil. 577; 1955) De los Santos filed a claim with the Alien Property Custodian for a number of shares of the Lepanto corporation. He contended that said shares were bought from one Campos and Hess, both of them dead. The Philippine Alien Property Administrator rejected the claim. He instituted the present action to establish title to the aforementioned shares of stock. The US Attorney General, the successor of the Alien Property Administrator, opposed the action on the ground that the said shares of stock were bought by one Madrigal, in trust for the true owner, Matsui, and then delivered to the latter indorsed in blank. Issue: Had de los Santos in fact purchased the shares of stock?
158
De los Santos sole evidence that he purchased the said shares was his own unverified testimony. The alleged vendors of the stocks who could have verified the allegation, were already dead. Further, the receipt that might have proven the sale, was said to have been lost in a fire. On the other hand, it was shown that the shares of stock were registered in the records of Lepanto in the name of Madrigal, the trustee of Matsui; that Matsui was subsequently given possession of the corresponding stock certificates, though endorsed in blank; and, that Matsui had neither sold, conveyed nor alienated these to anybody. It is the rule that if the owner of the certificate has endorsed it in blank, and is stolen, no title is acquired by an innocent purchaser of value. This is so because even though a stock certificate is regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled with delivery, the holder thereof takes it without prejudice to such rights or defenses as the registered owner or credit may have under the law, except in so far as such rights or defenses are subject to the limitations imposed by the principles governing estoppel.
Collateral Transfers
Shares of stock are personal property. Thus, they can either be pledged or mortgaged. However, such pledge or mortgage cannot have any legal effect if it is registered only in the corporate books. Where a certificate is delivered to the creditor as a security, the contract is considered a pledge, and the Civil Code will apply. If the certificate of stock is not delivered to the creditor, it must be registered in the registry of deeds of the province where the principal office of the corporation is located, and in case where the domicile of the stockholder is in a different province, then registration must also be made there. In a situation where, the chattel mortgage having been registered, the stock certificate was not delivered to the creditor but transferred to a bona fide purchaser for value, it is the rule that the bona fide purchaser for value is bound by the registration in the chattel mortgage registry. It is said that such a rule tends to impair the commercial value of stock certificates.
CHUA GUAN VS. SAMAHANG MAGSASAKA (62 Phil. 473; 1935) To guarantee payment of a debt, Co mortgaged his shares of Samahang Magsasaka stock to Chiu. The said mortgage was duly registered in the City of Manila. Chiu later assigned his rights in the mortgage to Guan who soon foreclosed the same after Co failed to pay. Guan won in the public bidding. He requested the corporation that new certificates be issued in his name. The corporation refused because apparently prior to Guans demand, several attachments against the shares covered by the certificates had been recorded in its books. Did the chattel mortgage in the registry of deeds of Manila gave constructive notice to the attaching creditors? The Chattel Mortgage Law provides two ways of executing a valid chattel mortgage: 1) the possession of mortgaged property is delivered and retained by the mortgagee; and, 2) without delivery, the mortgage is recorded in the register of deeds. But if chattel mortgage of shares may be made validly, the next question then becomes: where should such mortgage be properly registered? It is the general rule that the situs of shares is the domicile of the owner. It is also generally held that for the purpose of execution, attachment, and garnishment, it is the domicile of the corporation that is decisive. Going by these principles, it is deemed
159
reasonable that chattel mortgage of shares be registered both at the owners domicile and in the province where the corporation has its principal office. It should be understood that the property mortgaged is not the certificate but the participation and share of the owner in the assets of the corporation. It is recognized that this method of hypothecating shares of stock in a chattel mortgage is rather tedious and cumbersome. But the remedy lies in the legislature. Note: The provision of the Chattel Mortgage Law (Act No. 1508) providing for delivery of mortgaged property to the mortgagee as a mode of constituting a chattel mortgage is no longer valid in view of the Civil Code provision defining such as a pledge.
NON-TRANSFERABILITY IN NON-STOCK CORPORATIONS

Although shares of stock are as a rule freely transferable, membership in a non-stock corporation is personal and non-transferable, unless the articles of incorporation or by-laws provide otherwise. The court may not strip him of his membership without cause. (Sec. 90)
DIVIDENDS AND PURCHASE BY CORPORATION OF ITS OWN SHARES
Form of Dividends
IN WHAT FORMS CAN DIVIDENDS BE ISSUED? 1. Cash 2. Property scrip - certificate issued to SHs instead of cash dividends which entitles them to a certain amount in the future
3. Stock dividends Stock dividends are distribution to the SHs of the companys own stock. Stock dividends cannot be declared without first increasing the capital stock unless unissued shares are available. New shares are issued to the SHs in proportion to their interest. No new income unless sold for cash. Civil fruits belong to the usufructuary and not to the naked owner. Can only be issued to SHs. Whenever fractional shares result, corp may pay in cash or issue fractional share warrants.
DIFFERENTIATE BETWEEN CASH DIVIDENDS AND STOCK DIVIDENDS. Cash Dividend Voting requirements for issuance Effect on delinquent stock Board of Directors Stock Dividend Board of Directors + 2/3 OCS Shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid. No, since this requires SH approval. (Sec. 35)
Shall be applied to the unpaid balance on the subscription plus costs and expenses. No. (Sec. 35)
Can this be issued by Executive
160
Committee?
NIELSON v LEPANTO (26 SCRA 540; 1968) Stock dividends are issued only to SHs This is so because only stockholders are entitled to dividends. A stock dividend really adds nothing to the interest of each stockholder; the proportional interest of each stockholder remains the same. If a stockholder is deprived of his stock dividends - and this happens if the shares of stock forming part of the stock dividends are issued to a non-stockholder - then the proportion of the stockholder's interest changes radically. Stock dividends are civil fruits of the original investment, and to the owners of the shares belong the civil fruits.
FROM WHERE CAN DIVIDENDS BE SOURCED? Dividends can be sourced only out of the unrestricted retained earnings of the corporation. Unrestricted retained earnings is defined as "the undistributed earnings of the corporation which have not been allocated for any managerial, contractual or legal purposes and which are free for distribution to the stockholders as dividends." ( SEC Rules Governing Redeemable and Treasury Shares, 1982) Retained earnings has been defined as "net accumulated earnings of the corporation out of transactions with individuals or firms outside the corporation." (Simmons, Smith, Kimmel, Intermediate Accounting, 1977, ed. P. 635) The term implies the limitation that no corporation can declare dividends unless its legal or stated capital is maintained. It does not include: premium on par stock i.e. difference between par value and selling price of stock by corp since this is regarded as paid-in capital; but SEC allowed declaration of stock dividends out of such premiums transactions involving treasury stocks which are considered expansions and contractions of paid-in capital; donations as additional paid- in capital; increase in value of existing assets, being merely unrealized capital element
If subscribed shares have not been fully paid, the unpaid portion of subscribed capital stock is an asset, and as long as the net capital asset (after payment of liabilities) including this unpaid portion is at least equal to the total par value of the subscribed shares, any excess would be surplus or earnings from which dividends may be declared. However, if a deficit exists, subsequent profits must first be applied to cover the deficit. Restrictions on dividend distribution include: BODs appropriation purposes; of certain earnings for certain
Agreements with creditors, bondholders and preferred SHs requiring retention of certain percent of corporate earnings to protect their interest and to secure redemption of their securities upon maturity; SEC-imposed restrictions pursuant to law, like those imposed on banks and insurance companies; Restriction on the retained earnings equivalent to the cost of treasury shares held by the corporation, which is lifted only after such shares are reissued or retired (Sec. 195, PD 612)
161
BERKS BROADCASTING v CRAUMER (52 A.2d 571; 1947) Dividends can only be declared only from the surplus, i.e. the excess in the value of the assets over the liabilities and the issued capital stock. To do otherwise would be illegal The object of the prohibition is to protect the creditors in view of the limited liability of the SHs and also to protect the SHs by preserving the capital so that the purposes of the corp. may be performed. Surplus must be bona fide i.e. founded upon actual earnings or profits and not to be dependent for its existence upon a theoretical estimate of an appreciation in the value of the companys assets. The prohibition does not apply, however, to stock dividends because creditors and SHs will not be affected by their declaration since they do not decrease the companys assets.
LICH V UNITED STATES RUBBER (39 F. Supp. 675; 1941) Dividends on non-cumulative preferred stock are payable only out of net profits and for the years in which said net profits are actually earned. The right to dividends is conditional upon: (1) accrual of net profits, and (2) retention in the business. If the annual net earnings of a corp. are justifiably applied to legitimate corp. purposes, such as payment of debts, reduction of deficits and restoration of impaired capital, the right of non-cumulative preferred stockholders to the payments of dividends is lost. If they are applied against prior losses and thereby completely absorbed, there are no net profits from which dividends may be lawfully paid.
SOME RULES ON DIVIDEND DECLARATION: 1. BOD has discretion whether or not to declare dividends and in what form. Exception: necessary. Stock dividends, in which case a 2/3 vote of OCS is
However, such discretion cannot be abused and the BOD cannot accumulate surplus profits unreasonably on the excuse that it is needed for expansion or reserves. 2. BOD should declare dividends when surplus profits of the corporation exceed 100% of the corporation's paid-in capital stock. Exceptions: (a) When justified by definite corporate expansion projects or programs approved by the Board; (b) When creditors prohibit dividend declaration without their consent as a condition for the loan, and such consent has not yet been secured; (c) When retention is necessary under special circumstances obtaining in the corporation, e.g. when there is a need for special reserve for probable contingencies. (Sec. 43) 4. The corporation may be subjected to additional tax when it fails to declare dividends, thereby unreasonably accumulating profits. ( See Sec. 25, NIRC) 5. The dividends received are based on stock held whether or not paid. However, if the stocks are delinquent, the amount will first be applied to the payment of the
162
delinquency plus costs and expenses; stock dividends will not be given to a delinquent SH.
KEOGH v ST. PAUL MILK (285 N.W. 809; 1939) The mere fact that a large corporate surplus exists is not enough to warrant equitable intervention; the test is good faith and reasonableness of the policy of retaining the profits. However, where dividends are withheld for an unlawful purpose to deprive a SH of his right to a just proportion of the corporation's profit, the court may compel the corporation to declare dividends.
DODGE v FORD MOTOR CO (170 N.W. 668; 1919) This case involves an action against the Ford Motor Company to compel declaration of dividends. At the time this complaint was made, Ford had concluded its most prosperous year of business, and the demand for its cars at the price of the previous year continued. While it had been the practice, under similar circumstances, to declare larger dividends, the corporation refused to declare any special dividends. The Board justified its refusal to declare larger dividends on the expansion plans of the company by erecting a smelting plant, but maintaining the selling price of its cars (instead of reducing it as had been the practice in previous years). The plaintiffs contend that such a proposal would be tantamount to the business being conducted as a semi-eleemosynary (or charitable) institution instead of a business institution. The court pointed out that a business corporation is organized and carried on primarily for the profit of SHs. The discretion of the directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself reduction of profits or to devote profits to another purpose. While the Court noted the capable management of the affairs of the corporation and therefore was not convinced that the motives of the directors were prejudicial to the company's interests, it likewise noted that the annual dividends paid were very small in relation to the profits that the company had been making. It therefore affirmed the amount fixed by the lower court to be distributed to the stockholders. Note: Prof. Jacinto is of the opinion that what happened in this case is possible under the present Code, even without changing the AOI.
Preference as to Dividends
Review discussion under kinds of stock.
WABASH RAILWAY CO. V. BARCLAY (67 A.L.R. 762; 1930) In the AOI and the certificate of stock of Stock A, it was stated that the holders of said stocks are entitled to receive to receive preferential dividends of 5% per fiscal year, non-cumulative, before dividends are paid to other stocks. From 1915 to 1926, no dividends were declared. The net earnings were instead used for the improvements and additions to property and equipment. Due to this, the corporation became prosperous and proposed to pay dividends to A & B common stock. Plaintiffs filed this case in order to collect the dividends for fiscal years 1915-1926 before the other classes of stock are paid. Were the Class A stockholders entitled to dividends for FY 1915 to 1926? No, they were not. By the plain meaning of the words in the AOI and the certificates of stock, the holders are not entitled to dividends unless directors declare so. It is likewise generally understood that in cases where the company's net earnings are applied for
163
improvements and no dividend is declared, the claim for such year is gone in case of noncumulative stock, and cannot be later asserted. BURK V. OTTAWA GAS & ELECTRIC CO. (123 Pac. 875; 1912) An action was brought by the preferred SHs of Ottawa against the directors of Ottawa to (1) require the directors to account for all the property and assets of the corporation, (2) declare such dividends from the net profits of the business of such co. as should have been declared since 1 Jan. 1906, and (3) restrain the officers and directors during the pendency of the action from paying out any of the money or disposing of the assets of the company except such amounts as should be necessary to pay the actual necessary current expenses of conducting the business of the corporation. The BOD maintained that the corporation's funds were exhausted by expenditures for the extension of the cos plant, hence it was unable to declare dividends. Expenditures were said to be necessary and for the betterment of the plant. Were the corp funds were wrongfully diverted, and were preferred SHs entitled to dividends? The case was remanded to the trial court, with instructions to make further findings to protect the preferred SHs in their rights. The fair interpretation of the contract between Ottawa and its SHS is that if in any year net profits are earned, a dividend is to be declared. To hold otherwise, meaning if the BOD had absolute discretion when to declare dividends and when not to, when the corporation has funds for such dividends, would result in temptation to unfair dealing, giving one party the option to pay the other or not. In the case at bar, the accumulated profits would be lost forever since the dividends were non-cumulative. Preferred SHs, however, are not generally creditors until dividends are declared. In the case at bar, if dividends should have been declared to such SHs, they are considered creditors from that time.
When Right to Dividends Vests; Rights of Transferee

WHEN DOES THE RIGHT TO DIVIDENDS VEST? As soon as the BoD has declared dividends. From this time, it becomes a debt owed by the corporation, and therefore can no longer be revoked (McLaran v. Crescent Planning). EXCEPTION: If the declaration has not yet been announced or communicated to the stockholders. NOTE: When no dividends are declared for 3 consecutive years, preferred SHs are given the right to vote for directors until dividends are declared. NOTE: The extent of the SHs share in the dividends will depend on the capital contribution; NOT the number of shares he has.
MCLARAN V. CRESCENT PLANNING MILL CO. (93 S.W. 819; 1906) CPM Corp., having a surplus of $29,000, declared a 6% cash dividend payable in four installments. The first installment was paid by the Board after which an error was discovered in the computation of the assets: from the initial recognized surplus of $29,000 to $6,000. Mainly for this reason, the Board adopted a resolution rescinding the dividends
164
payable on the three other installments despite the solvency of the corp and the existence of ample funds to pay said dividends. The original P was Humber, a SH, and was substituted by McLaran, the administrator of his estate when he died. The defendant corp maintained that there was no valid declaration of dividends because the corporation failed to set aside funds to pay for the same. A cash dividend, properly declared, cannot be revoked by the subsequent action of the corp. for by its declaration, the corp had become the debtor of the SH and it goes without saying that the debtor cannot revoke, recall or rescind the debt or otherwise absolve itself from its payment by a unilateral action or without the consent of the creditor. Thus, the rescission by the BOD of the subsequent installments was of no force. Dividends are defined as portions of profits/surplus funds of the corp. which have been actually set apart by a valid board resolution or by the SH at a corp. mtg. for distribution among SH according to their respective interests. The mere declaration of the dividend, without more, by competent authority under proper circumstances, creates a debt against the corporation in favor of the stockholders the same as any other general creditor of the corporation. By the mere declaration, the dividend becomes immediately fixed and absolute in the stockholder and from henceforth the right of each individual stockholder is changed by the act of declaration from that of partner and part owner of the corporate property to a status absolutely, adverse to every other stockholder and to the corporation itself, insofar as his pro rata proportion of the dividend is concerned.
Liability for Illegal Dividends

WHAT ARE ILLEGAL DIVIDENDS? Illegal dividends are dividends declared in violation of law. WHAT ARE THE EFFECTS OF THE ILLEGAL DECLARATION OF DIVIDENDS? (1) If the directors acted wilfully, or with negligence or in bad faith, they will be liable to the corporation. If the corporation has become insolvent, they are liable to the corporation's creditors for the amount of dividends based out of capital. (Based on Sec. 31) (2) If the directors cannot be held liable because they acted with due diligence and in good faith, in the absence of an express provision of law, an innocent stockholder is not liable to return the dividends received by him out of capital, unless the corporation was insolvent at the time of payment. (Majority view; Campos)
Purchase by Corporation of its own shares

WHAT ARE THE REQUISITES FOR ACQUISITION BY THE CORPORATION OF ITS OWN SHARES? (Sec. 41) 1. unrestricted retained earnings to cover the shares to be acquired; 2. legitimate corporate purpose FOR WHAT PURPOSES CAN A CORPORATION ACQUIRE ITS OWN SHARES? (Sec. 41) 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale;
165
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the Corporation Code (Appraisal Right). READ MORE MEMO AID.....
Appraisal Right (Sec. 81)

WHAT IS THE APPRAISAL RIGHT? MAG BAYAD SA IYANG SHARE KAY W KAOYON The appraisal right refers to the right of a stockholder who dissented and voted against a proposed fundamental corporate action to get out of the corporation by demanding payment of the fair value of his shares. IN WHAT INSTANCES CAN THE APPRAISAL RIGHT BE EXERCISED? The Corporation Code lists 4 instances: (1) In case any amendment to the AOI has the effect of changing or restricting the rights of any SH or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence (Sec. 81); (2) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in this Code (Sec. 81; Sec. 40); (3) In case of merger or consolidation (Sec. 81); (4) In case the corporation invests its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized (Sec. 42)
WHAT ARE THE REQUISITES FOR THE EXERCISE OF THE APPRAISAL RIGHT? (Sec. 82) (1) SH must have voted against he proposed corporate action; (2) Written demand on the corporation for payment of the fair value of his shares; (3) Such demand must have been made within 30 days after the date on which the vote was taken; (4) Surrender of the stock certificate/s representing his shares; (5) Unrestricted retained earnings in the books of the corporation to cover such payment.
WHAT IS THE EFFECT OF DEMAND FOR PAYMENT IN ACCORDANCE WITH THE APPRAISAL RIGHT? (Sec. 83) All rights accruing to the shares, including voting and dividend rights, are suspended in accordance with the Corporation Code, except for the right of the SH to receive payment of the fair value thereof. Such suspension shall be from the time of demand until either: (1) abandonment of the corporate action involved; or (2) the purchase of the said shares by the corporation. However, if said dissenting SH is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored.
WHAT ARE THE DUTIES OF THE DISSENTING STOCKHOLDER IN RELATION TO THE EXERCISE OF THE APPRAISAL RIGHT?
166
The dissenting SH must submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares within 10 days after demanding payment for his shares. Failure to do so shall, at the option of the corporation, terminate his rights under Title X of the Corporation Code. (Sec. 86) WHAT ARE THE EFFECTS OF TRANSFER OF THE CERTIFICATES BEARING THE NOTATION THAT THEY REPRESENT DISSENTING SHARES? If the certificates are consequently cancelled, the rights of the transferor as a dissenting SH cease and the transferee has all the rights of a regular stockholder. All dividend contributions which would have accrued on the shares will be paid to the transferee. (Sec. 86)
AMENDMENTS OF CHARTER
The charter of a private corporation consists of its articles of incorporation as well as the Corporation Code and such other law under which it is organized.
Amendment by Legislature
Subject to the limitation that no accrued rights or liabilities be impaired, the legislature has the power to make changes in existing corporations through an amendment to the Corporation Code.
Amendment by Stockholders
One of the powers expressly granted by law to all corporations is the power to amend its articles of incorporation. This, in effect, is a grant of power to owners of 2/3 of the outstanding stocks to change the basic agreement between the corporation and its stockholders, making such change binding on all the stockholders, subject only to the right of appraisal, if proper.
WHAT ARE THE LIMITATIONS ON THE POWER TO AMEND? PURPOSE: VOTE: (1) must be legitimate 2/3 of OCS / membership
The appraisal right must be recognized in case the amendment has the effect of changing rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or extending or shortening the term of corporate existence. Extension of corporate term cannot exceed 50 yrs. in any one instance A copy of the amended articles should be filed with the SEC, and with the proper governmental agencies, as appropriate (e.g., in the case of banks, public utilities, etc.) Original and amended articles should contain all matters required by law to be set out in said articles. An amendment to increase/decrease capital stock as well as to extend/shorten corporate term cannot be made under Sec. 16, but must be made under Sec. 37-38, respectively, both of which require a meeting; and Amendment must be in the form prescribed by the Code
(2) (3)
(4)
(5)
(6)
167
ON WHAT GROUNDS CAN THE SEC DISAPPROVE THE PROPOSED AMENDMENTS? The same grounds as for the disapproval of the original articles ( Sec. 17): Not substantially in accordance with the form prescribed by the Code; Purpose(s) patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; Treasurers Affidavit concerning amount of capital stock subscribed/paid is false; Required percentage of ownership of capital stock to be owned by citizens of the Phils. has not been complied with as required by the Constitution or existing laws; Absence of a favorable recommendation from the appropriate government agency.
Amendment changing stockholders rights

The law expressly allows amendments which would change or restrict existing rights of stockholders or any class of shares. ( Sec. 81)
MARCUS V. RH MACY (74 N.E. 2d 228; 1947) The Board of Directors gave notice to SH that among the matters to be acted upon in its annual meeting would be a proposal to amend certificate of incorporation to add to the rights of preferred stockholders, voting rights equal to those of common stockholders. Marcus, objected and demanded payment for the common stock owned by her. The Court held that Marcus may invoke her appraisal right. The aggregate number of shares having voting rights equal to those of common shares was substantially increased and thereby the voting power of each common share outstanding prior to the meeting was altered or limited by the resulting pro rata diminution of its potential worth as a factor in the management of the corporate affairs. Considering that she held diminished voting power; that she notified the corpo of her objection; that her shares were voted against the amendmentthese were sufficient to qualify her to invoke her statutory appraisal right.
Effectivity of amendment
Amendments take effect only from the approval by the SEC. However, such approval or rejection must be made within six months of filing of amendment; otherwise it shall take effect even w/o such approval (as of the date of filing), unless cause of delay is attributable to the corporation. ( Sec. 16)
Special amendments
Increase of capital stock
After the authorized capital stock has been fully subscribed and the corporation needs to increase its capital, it will have to amend its articles to increase its capital stock. A corporation does not have the implied power to increase capital stock; such a power can only be granted by law. The power to increase or decrease capital stock must be exercised in accordance with the provisions of Sec. 38 of the Code.
168
Reduction of capital stock

Reduction of capital stock is not allowed if it will prejudice the rights of corporate creditors.
PHILIPPINE TRUST CO. V. RIVERA (44 Phil. 469; 1923) It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or charter or the articles of incorporation.
Change in corporate term The Code allows a corporation not only to extend but also to shorten its term of existence. As in the case of increase/decrease of capital stock, change must be approved at a members/stockholders meeting by 2/3 of the members/outstanding capital stock.
Amendments in close corporations

To recall, the provisions required to be contained in the AOI of a close corporation:
(1) All issued stock of all classes should be held by not more than 20; (2) All issued stock shall be subject to one or more specified restrictions on
transfer permitted by law;
(3) Corporation should not be listed in the stock exchange or make any
public offering of its stock. If any of these are deleted, then the corporation will cease to be a close corporation and will lose the special privileges of such corporations. Thereafter, it will be governed by the general provisions of the Code. Since such amendment involves a change in the nature of the corporation, even non-voting stocks are given a voice in the decision. A stockholders meeting is required and a 2/3 vote must approve the amendment, unless otherwise provided by the articles of incorporation.
DISSOLUTION
Modes of Dissolution
HOW MAY A CORPORATION BE DISSOLVED?
(1) Failure to organize and commence business (Sec. 22); (2) Cessation of business for 5 years (Continuous inoperation; Sec. 22); (3) Expiration of original, extended, or shortened term;
169
(4) Voluntary dissolution (Sec. 118-119);

(a) Where no creditors are affected (Sec. 118) This is effected by majority vote of the BOD and a 2/3 vote of the OCS or members. (Note the special notice requirements.) The copy of the resolution authorizing the dissolution shall be certified by a majority of the BOD and countersigned by the secretary of the corporation. THE SEC shall thereupon issue the certificate of dissolution. (b) Where creditors are affected (Sec. 119) (1) Filing of petition for dissolution with SEC A petition for dissolution must be filed with the SEC after having been signed by a majority of the BOD, verified by the president or secretary or one of the directors, and resolved upon by the affirmative vote of 2/3 of the OCS or members. The petition must set forth all claims and demands against the corporation, and the fact that the dissolution was approved by the SHs with the requisite 2/3 vote. (2) Fixing of date by SEC for filing of objections to petition If the petition is sufficient in form and substance, the SEC shall fix a date on or before which objections thereto may be filed by any person. Date: the not less than 30 days nor more than 60 days after entry of the order (3) Publication of order Before the date fixed by the SEC, the SEC order shall be published and posted accordingly. Newspaper: Once a week for 3 weeks in a newspaper of general circulation published in the municipality or city where the corporation's principal office is situated, or there be no such newspaper, in a newspaper of general circulation in the Philippines For 3 consecutive weeks in 3 public places in the city or municipality where the corporation's principal office is situated
Posting:
(4) Hearing of the petition for dissolution Upon 5 days notice, given after the date on which the right to file objections to the order has expired, the SEC shall proceed to hear the petition and try any issue made by the objections filed. If no objection is sufficient, and the material allegations are true, the SEC shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires. Note: such The SEC may appoint a receiver to collect and pay the debts of the
assets corporation.
170
(3) Involuntary dissolution (Sec. 121):
(a) Revocation of Certificate of Registration by SEC (Sec. 121)

A corporation may be dissolved by the SEC upon filing of a verified complaint and after proper notice and hearing on grounds provided by existing laws, rules and regulations.
(b) Quo Warranto proceedings (See Sec. 5b, PD 902-A and Rule 66, Rules
of Court. Previously, the SEC had exclusive jurisdiction over quo warranto proceedings involving corporation. Under the Securities Regulation Code or RA 8799, however, the jurisdiction of the SEC over all cases enumerated under Sec. 5 of PD 902-A have been transferred to the Regional Trial Courts. The grounds for involuntary dissolution of a corporation under quo warranto proceedings are: (1) When the corporation has offended against a provision of an act for its creation or renewal; (2) When it has forfeited franchises by non-user; its privileges and
(3) When it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges or franchises; (4) When it misused a right, privilege or franchise conferred upon it by law, or when it has exercised a right, privilege or franchise in contravention of law (PNB v. CFI, 209 SCRA 294; 1992)
(4) Shortening of corporate term (Sec. 120) NOTE: The simplest and most expedient way of effecting dissolution is by shortening the corporate term and waiting for such term to expire.
CORPORATE DISSOLUTION AND LIQUIDATION

1. No Vested Rights to Corporate Fiction. Gonzales v. SRA, 174 SCRA 377 (1989). 2. Voluntary Dissolution (Sec. 117) (a) No Creditors Affected (Sec. 118) (b) There Are Creditors Affected (Secs. 119 and 122). When a corporation is contemplating dissolution, it must submit tax return on the income earned by it from the beginning of the year up to the date of its dissolution and pay the corresponding tax due. BPI v. Court of Appeals, 363 SCRA 840 (2001). 3. Involuntary Dissolution (Sec. 121; Sec. 6(l), P.D. 902-A; Sec. 2, Rule 66, Rules of Court) (a) Quo Warranto (Republic v. Bisaya Land Transportation Co. , 81 SCRA 9 [1978]; Republic v. Security Credit & Acceptance Corp., 19 SCRA 58 [1967]; Government v. El Hogar Filipino, 50 Phil. 399 [1927]). (b) Expiration of Term (c) Shortening of Corporate Term (Sec. 120) (d) Non-user of Charter and Continuous Inoperation (Sec. 22) Organize involves the election of officers, providing for the subscription and payment of the capital stock, the adoption of by-laws, and such other steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which the corporation was created.
171
Organization relates merely to the systematization and or derly arrangement of the internal and managerial affairs and organs of the corporation. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711. The failure to file the by-laws does not automatically operate to dissolve a corporation but is now considered only a ground for such dissolution. Chung Ka Bio v. IAC, 163 SCRA 534 (1988). (e) Demand of Minority Stockholders for Dissolution. Financing Corp. of the Phil. v. Teodoro , 93 Phil. 404 (1953). Corporate dissolution due to mismanagement of majority stockholder is too drastic a remedy, especially when the situation can be remedied such as giving minority stockholders a veto power to any decision. Chase v. Buencamino, 136 SCRA 365 (1985). 4. Legal Effects of Dissolution The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liability of such entity, since it is allowed to continue as a juridical entity for 3 years for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property, and to distribute its assets. Republic v. Tancinco, 394 SCRA 386 (2002). A board resolution to dissolve the corporation does not operate to so dissolve the juridical entity. For dissolution to be effective [t]he requirements mandated by the Corporation Code should have been strictly complied with. Vesagas v. Court of Appeals, 371 SCRA 509, 516 (2002). A corporation cannot extend its life by amendment of its articles of incorporation effected during the three-year statutory period for liquidation when its original term of existence had already expired, as the same would constitute new business. Alhambra Cigar & Cigarette Manufacturing Company, Inc. v. SEC, 24 SCRA 269 (1968). When the period of corporate life expires, the corporation ceases to be a body corporate for the purpose of continuing the business for which it was organized. PNB v. Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294 (1992). Following the voluntary or involuntary dissolution of a corporation, liquidation is the process of settling the affairs of said corporation, which consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts. Yu v. Yukayguan, 589 SCRA 588 (2009). A derivative suit is fundamentally distinct and independent from liquidation proceedings they are neither part of each other nor the necessary consequence of the other. There is therefore no basis from one action to result in the other. Yu v. Yukayguan, 589 SCRA 588 (2009). Dissolution or even the expiration of the three-year liquidation period should not be a bar to a corporations enforcement of its rights as a corporation. Paramount Insurance Corp. v. A.C. Ordoez Corp., 561 SCRA 327 (2008). 5. Methods of Liquidation (Sec. 122; Board of Liquidators v. Kalaw, 20 SCRA 987 [1967]; Sumera v. Valencia, 67 Phil. 721 [1939]; Buenaflor v. Camarines Industry, 108 Phil. 472 [1960]). Liquidation, in corporation law, connotes a winding up or settling with creditors and debtors. It is the winding up of a corporation so that assets are distributed to those entitled to receive them. It is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss. PVB Employees Union-N.U.B.E. v. Vega, 360 SCRA 33 (2001). There can be no doubt that under Secs. 77 and 78 of Corporation Law, the Legislature intended to let the shareholders have the control of the assets of the corporation upon dissolution in winding up its affairs. The normal method of procedure is for the directors and executive officers to have charge of the winding up operations, though there is the alternative method of assigning the property of the corporation to the trustees for the benefit of its creditors and shareholders. While th e appointment of a receiver rests within the sound judicial discretion of the court, such discretion must, however, always be exercised with caution and governed by legal and equitable principles, the violation of which will amount to its abuse, and in making such appointment the court should take into consideration all the facts and weigh the relative advantages and disadvantages of appointing a receiver to wind up the corporate business. China Banking Corp. v. M. Michelin & Cie, 58 Phil. 261 (1933) There is nothing in Sec. 122 which bars an action for the recovery of the debts of the corporation against the liquidator thereof, after the lapse of the said three-year period. It immaterial that the present action was filed after the expiration of the three years . . . for at the very least, and assuming that judicial enforcement of taxes may not be initiated after said three years despite the fact that actual liquidation has not terminated and the one in charge thereof is still holding the assets of the corporation, obviously for the benefit of all the creditors thereof, the assessment aforementioned, made within the three years, definitely established the Government as a creditor of the corporation for whom the liquidator is supposed to hold assets of the corporation. Republic v. Marsman Dev. Co., 44 SCRA 418 (1972).
172
Under Section 11 of the Corporation Code, a corporation whose corporate existence is terminated in any manner continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and to enable it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. If the three-year extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period, the board of directors (or trustee) itself, may be permitted to continue as trustees by legal implication to complete the corporation liquidation. Pepsi-Cola Products Phils., Inc. v. Court of Appeals, 443 SCRA 571 (2004). 6. Who Are Liable After Dissolution and Winding-Up? (National Abaca Corp. v. Pore, 2 SCRA 989 [1961]; Tan Tiong Bio v. Commissioner, 100 Phil. 86 [1956]; Gelano v. Court of Appeals, 103 SCRA 90 [1981]). Although a corporate officer is not liable for corporate obligations, such as claims for wages, however, when such corporate officer ceases corporate property to apply to his own claims against the corporation, he shall be liable to the extent thereof to corporate liabilities, since knowing fully well that certain creditors had similarly valid claims, he took advantage of his position as general manager and applied the corporation's assets in payment exclusively to his own claims. De Guzman v. NLRC, 211 SCRA 723 (1992). 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). In Gelano case, the counsel of the dissolved corporation was considered a trustee. In the later case of Clemente v. Court of Appeals, the Board of Directors was permitted to complete the corporate liquidation by continuing as trustees. Under Sec. 145 No right of remedy in favor or against any corporation . . . shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof. This provision safeguards the rights of a corporation which is dissolved pending litigation. Reburiano v. Court of Appeals, 301 SCRA 342 (1999); Knecht v. United Cigarette Corp., 384 SCRA 48 (2002). 7. Reincorporation: Chung Ka Bio v. IAC, 163 SCRA 534 (1988). NOT ALLOWED DURING DISSOLUTION
Dissolution of close corporations

In close corporations, any stockholder may, by written petition to the SEC, compel the dissolution of such corporation when: (1) Any of the acts of the directors, officers, or those in control of the corporation is: Illegal; Fraudulent; Dishonest; Oppressive or unfairly prejudicial to the corporation or any other SH;
(2) Corporate assets are being misapplied or wasted. ( Sec. 105)
Effects of Dissolution
WHAT ARE THE EFFECTS OF DISSOLUTION? Corporation ceases to be a juridical person and consequently can no longer continue transacting its business. Corporate existence continues for 3 years following dissolution for the ff. purposes only: (a) winding up of affairs; and (b) liquidation of corporate assets.
173
Corporation can no longer continue its business, except for winding up. Corporation CANNOT even be a de facto corporation. Corporate existence may be subject to COLLATERAL attack.
NOTE that the subsequent dissolution of a corporation may not remove or impair any right or remedy in favor of or against, nor any liability incurred by, any corporation, its stockholders, members, directors, trustees or officers. ( Sec. 145)
Loss of juridical personality NATIONAL ABACA V. PORE (2 SCRA 989; 1961) Plaintiff National Abaca Corporation filed a complaint against Pore for the recovery of a sum of money advanced to her for the purchase of hemp. She moved to dismiss the complaint by citing the fact that National Abaca had been abolished by EO 372 dated Nov. 24, 1950. Plaintiff objected to such by saying that it shall nevertheless be continued as a corporate body for a period of 3 years from the effective date of said order for the purpose of prosecuting and defending suits by or against it and to enable the Board of Liquidators to close its affairs. Can an action commenced within 3 years after the abolition of plaintiff corporation be continued by the same after the expiration of said period? The Corp. Law allows a corporation to continue as a body for 3 years after the time when it would have been dissolved for the purposes of prosecuting and defending suits by or against it. But at any time during the 3 years, the corporation should convey all its property to trustees so that the latter may be the ones to continue on with such prosecution, with no time limit on its hands. Since the case against Pore was strong, the corp.'s amended complaint was admitted and the case was remanded to the lower court.
CLEMENTE V. CA (242 SCRA 717) The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the right and liabilities of such entity nor those of its owners and creditors. If the 3-year extended life has expired without a trustee or receiver having been expressly designated by the corporation itself within that period, the board of directors or trustees itself may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation. In the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make proper representations with the SEC, which has primary and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns. Executory contracts The prevailing view is that executory contracts are not extinguished by dissolution. Sec. 145 of the Code states that "No right or remedy in favor of or against any corporation.nor any liability incurredshall be removed or impaired either by the subsequent dissolution of said corp. or by any subsequent amendment or repeal of this Code or of any part thereof." Liquidation WHAT IS LIQUIDATION? (Sec. 122) Liquidation, or winding up, refers to the collection of all assets of the corporation, payment of all its creditors, and the distribution of the remaining assets, if any, among the stockholders thereof in accordance with their contracts, or if there be no special contract, on the basis of their respective interests.
WHAT ARE THE METHODS OF LIQUIDATING A CORPORATION? AND WHO MAY UNDERTAKE THE LIQUIDATION OF A CORPORATION? 1. Liquidation by the corporation itself through its board of directors
174
Although there is no express provision authorizing this method, neither is there any provision in the Code prohibiting it. TRUSTEE 2. Conveyance of all corporate assets to trustees who will take charge of liquidation. If this method is used, the 3-year limitation will not apply provided the designation of the trustees is made within said period. There is no time limit within which the trustee must finish liquidation, and he may sue and be sued as such even beyond the 3-year period unless the trusteeship is limited in its duration by the deed of trust. ( See Nat'l Abaca Corp. v. Pore, supra) 3. Liquidation is conducted by the receiver who may be appointed by the SEC upon its decreeing the dissolution of the corp. As with the previous method, the three-year rule shall not apply. However, the mere appointment of a receiver, without anything more, does not result in the dissolution of the corporation nor bar it from the exercise of its corporation rights.
FOR HOW LONG MAY THE LIQUIDATION OF A CORPORATION BE UNDERTAKEN? Generally, a corporation may be continued as a body corporate for the purpose of liquidation for 3 years after the time when it would have so dissolved. ( Sec. 122) However, it was held in the case of Clemente v. CA (supra) that if the 3-year period has expired without a trustee or receiver having been expressly designated by the corporation itself within that period, the BOD itself may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation.
WHAT CAN AND SHOULD BE DONE DURING THE PERIOD OF LIQUIDATION? (Sec. 122) (1) (2) Collection of corporate assets and property; Conveyance of all corporate property to trustees for the benefit of SHs, members, creditors, and other persons in interest; Payment of corporation's debts and liabilities; Distribution of assets and property
(3) (4)
Distribution of assets after payment of debts

GENERAL RULE: No corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. (Sec. 122) In cases of decrease of capital stock, and as otherwise allowed by the Corporation Code
EXCEPTION:
WHAT HAPPENS IF AN ASSET CANNOT BE DISTRIBUTED TO THE PERSON ENTITLED TO IT? Any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. (Sec. 122)
CHINA BANKING V. MICHELIN & CIE. (58 Phil. 261; 1933) The appointment of a receiver by the court to wind up the affairs of the corporation upon petition of voluntary dissolution does not empower the court to hear and pass on the claims of the creditors of the corporation at first hand. In such cases, the receiver does not act as a receiver of an insolvent corporation.
175
Since "liquidation" as applied to the settlement of the affairs of a corporation consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts, all claims must be presented for allowance to the receiver or trustees or other proper persons during the winding-up proceedings within the 3 years provided by the Corporation Law as the term for the corporate existence of the corporation, and if a claim is disputed so that the receiver cannot safely allow the same, it should be transferred to the proper court for trial and allowance, and the amount so allowed then presented to the receiver or trustee for payment. The rulings of the receiver on the validity of claims submitted are subject to review by the court appointing such receiver though no appeal is taken to the latter ruling, and during the winding-up proceedings after dissolution, no creditor will be permitted by legal process or otherwise to acquire priority, or to enforce his claim against the property held for distribution as against the rights of other creditors. Note: Under the Corporation Code, it is the SEC which may appoint the receiver.
RP V. MARSMAN DEVELOPMENT COMPANY (44 SCRA 418; 1972) Defendant corp. was a timber license holder with concessions in Camarines Norte. Investigations led to the discovery that certain taxes were due on it. BIR assessed Marsman 3 times for unpaid taxes. Atty. Moya, in behalf of the corp., received the first 2 assessments. He requested for reinvestigations. As a result, corp. failed to pay within the prescribed period. Numerous BIR warnings were given. After 3 years of futile notifications, BIR sued the corp. Although Marsman was extrajudicially dissolved, with the 3-year rule, nothing however bars an action for recovery of corporate debts against the liquidators. In fact, the 1st assessment was given before dissolution, while the 2nd and 3rd assessments were given just 6 months after dissolution (within the 3-year rule). Such facts definitely established that the Government was a creditor of the corp. for whom the liquidator was supposed to hold assets of the corp.
TAN TIONG BIO V. CIR (G.R. No. L-15778; April 23, 1962) The creditor of a dissolved corp. may follow its assets, as in the nature of a trust fund, once they pass into the hands of the stockholders. The dissolution of a corp. does not extinguish the debts due or owing to it. An indebtedness of a corp. to the government for income and excess profit taxes is not extinguished by the dissolution of the corp. The hands of government cannot, of course, collect taxes from a defunct corporation, it loses thereby none of its rights to assess taxes which had been due from the corporation, and to collect them from persons, who by reason of transactions with the corporation hold property against which the tax can be enforced and that the legal death of the corporation no more prevents such action than would the physical death of an individual prevent the government from assessing taxes against him and collecting them from his administrator, who holds the property which the decedent had formerly possessed. Thus, petitioners can be held personally liable for the corporation's taxes, being successors-in-interest of the defunct corporation.
Distribution of assets of non-stock corporations WHAT ARE THE RULES FOR DISTRIBUTION OF ASSETS OF NON-STOCK CORPORATIONS? (Sec. 94-95) (1) All liabilities and obligations of the corporation shall be paid, satisfied, and discharged, or adequate provision shall be made therefor. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, education or similar purposes, but not subject to condition (2) above, shall be transferred or conveyed to one or more corporations, societies or organization engaged in activities in the Philippines substantially similar to those of the dissolving corp. according to a plan of distribution adopted pursuant to Sec. 95 of the Code. Assets other than those mentioned in preceding paragraphs shall be distributed in accordance with the AOI or by-laws.
(2)
(3)
(4)
176
(5)
In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to Sec. 95.
* The plan of distribution of assets may be adopted by a majority vote of the Board of trustees and approval of 2/3 of the members having voting rights present or represented by proxy at the meeting during which said plan is adopted. It must be noted that the plan of distribution of assets must not be inconsistent with the provisions of Title XI of the Code.
CORPORATE COMBINATIONS
Techniques to achieve corporate combinations

WHAT ARE THE TECHNIQUES TO ACHIEVE A CORPORATE COMBINATION?
(1) Merger (A + B = A) (2) Consolidation (A + B = C) (3) Sale of substantially all corporate assets and purchase thereof by
another corporation;
(4) Acquisition of all / substantially all of the stock of one corporation from
its SHs in exchange for the stock of the acquiring corporation
Merger or Consolidation
WHAT IS THE PROCEDURE FOR MERGER OR CONSOLIDATION? (1) Board of Directors of the constituent corporations must prepare and approve a plan of merger or consolidation. (2) 2/3 vote of OCS of the constituent corporations. (3) Execution of the Articles of Merger/Consolidation, to be signed by the Pres/VP and certified by the secretary / assistant secretary. (4) Submission to the SEC for approval.
WHAT ARE THE EFFECTS OF MERGER OR CONSOLIDATION? (Sec. 80) (1) The constituent corporation shall become a single corporation: If merger: the surviving corporation designated in the plan of merger
If consolidation: the consolidated corporation designated in the plan of Consolidation. (2) The separate existence of the constituent corporations shall cease, except that of the surviving or consolidated corporation.
177
(3) The surviving or consolidated corporation shall possess all rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under the Corporation Code. (4) The surviving or consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; (5) All property (real or personal) and all receivables due on whatever account (including subscriptions to shares and other choses in action) , and all and every other interest of, or belong to, or due to each constituent corporation, shall be deemed transferred and vested in such surviving or consolidated corporation without further act or deed. (6) The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. (Note: The merger or consolidation does not impair the rights of creditors or liens upon the property of any such constituent corporations.)
XIV. ACQUISITIONS, MERGERS AND CONSOLIDATIONS
A. ACQUISITIONS AND TRANSFERS

1. Concept of Enterprise or Economic unit or Going concern 2. Types of Acquisitions\Transfers (Edward J. Nell Co. v. Pacific, 15 SCRA 415; PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 [2002]) 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 transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the selling corporation fraudulently enters into the transactions to escape liability for those debts. McLeod v. NLRC, 512 SCRA 222 (2007), reiterating Philippine National Bank v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002). When a corporation transferred all its assets to another corporation to settle its obligations that would not amount to a fraudulent transfer. McLeod v. NLRC, 512 SCRA 222 (2007). 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). Power Sector Assets and Liabilities Management Corp. (PSALM) took ownership over most of National Power Corporations (NPCs) assets by operation of lawthese properties may be used to satisfy the Courts judgment, and such being the case, the employees may go after such pro perties. NPC Drivers and Mechanics Association (NPC DAMA) v. National Power Corp. , 606 SCRA 409 (2009). 3. Business Enterprise Transfers:A.D. Santos v. Vasquez, 22 SCRA 1156 (1968);Laguna Trans. Co., Inc. v. SSS, 107 Phil. 833 (1960);McLeod v. NLRC, 512 SCRA 222 (2007) The general rule is that a corporation has a personality separate and distinct from those of its stockholders and other corporations to which it may be connected, a fiction created by law for convenience and to prevent injustice. Settled is the rule that where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor. Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009). Although the business enterprise was operated under a partnership scheme and later transferred to a corporation, the business enterprise is deemed to have been in operation for the required two-year period as to come under the coverage of the SSS Law. San Teodoro Dev. v. SSS, 8 SCRA 96 (1963); and since the corporation assumed all the assets and liabilities of the partnership, then the corporation cannot be regarded, for purposes of the SSS Law, as having come into being only on the date of its incorporation but from the date the partnership started the business. Oromeca Lumber Co. v. SSS, 4 SCRA 1188 (1962).
178
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). It should be rather clear that, as between the estate and the corporation, the intention of incorporation was to make the corporation liable for past and pending obligations of the estate as the transportation business itself was being transferred to and placed in the name of the corporation. That liability on the part of the corporation, vis--vis the estate, should continue to remain with it even after the percentage of the estates shares of stock in the corporation should be diluted. Buan v. Alcantara, 127 SCRA 845 (1984). 4. Equity Transfers (Phividec v. Court of Appeals, 181 SCRA 669 [1990]). B. MERGER AND CONSOLIDATION 1. Concepts (McLeod v. NLRC, 512 SCRA 222 [2007]). A consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger, on the other hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives and continues the combined business. Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express provision of law authorizing them. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002). 2. Procedure: (a) Plan of Merger or Consolidation (Sec. 76) (b) Stockholders' or Members' Approval (Sec. 77) (c) Articles of Merger or Consolidation (Sec. 78) (d) Approval by SEC (Sec. 79) As specifically provided under Section 79 of the Corporation Code, the merger shall only be effective upon the issuance of a certificate of merger by the Securities and Exchange Commission (SEC), subject to its prior determination that the merger is not inconsistent with the Code or existing laws. Where a party to the merger is a special corporation governed by its own charter, the Code particularly mandates that a favorable recommendation of the appropriate government agency should first be obtained. The issuance of the certificate of merger is crucial because not only does it bear out SECs 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). Submission of Financial Statements Requirements: For applications of merger, the audited financial statements of the constituent corporations (surviving and absorbed) as of the date not earlier than 120 days prior to the date of filing of the application and the long-form audit report for absorbed corporation(s) are always required. Long form audit report for the surviving corporation is required if it is insolvent. (SEC Opinion 14, s. of 2002, 15 November 2002). 3. Effects of Merger or Consolidation (Sec. 80; Associated Bank v. Court of Appeals, 291 SCRA 511 [1998]) Ordinarily, in the merger of two or more existing corporations, one of the combining corporations survives and continues the combined business, while the rest are dissolved and all their rights, properties and liabilities are acquired by the surviving corporation. Poliand Industrial Ltd. V. NDC, 467 SCRA 500 (2005); McLeod v. NLRC, 512 SCRA 222 (2007). When the procedure for merger/consolidation prescribed under the Corporation Code are not followed, there can be no merger or consolidation, and corporate separateness between the constituent corporations remains, and the liabilities of one entity cannot be enforced against another entity. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002). It is settled that in the merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation. The surviving corporation therefore has a right to institute a collection suit on accounts of one of one of the constituent corporations. Babst v. Court of Appeals, 350 SCRA 341 (2001). C. EFFECTS ON EMPLOYEES OF CORPORATION 1. Assets Only Transfers (Sundowner Dev. Corp. v. Drilon, 180 SCRA 14 [1989])
179
There is no law requiring that the purchaser of MDIIs 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 Asso. v. Pres. Assistance on Legal Affairs , 79 SCRA 40. 2. Business-Enterprise Transfers (Central Azucarera del Danao v. CA, 137 SCRA 295 [1985]; Complex Electronics Employees Assn. v. NLRC, 310 SCRA 403 (1999); Yu v. NLRC, 245 SCRA 134 [1995]; Sunio v. NLRC, 127 SCRA 390 [1984]; San Felipe Neri School of Mandaluyong, Inc. v. NLRC, 201 SCRA 478 (1991). Furthermore, under the principle of absorption, a bona fide buyer or transferee of all, or substantially all, the properties of the seller or transferor is not obliged to absorb the latters 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 companys qualified separated employees, who in its judgment are necessary to the continued operation of the business establishment. Barayoga v. Asset Privation Trust, 473 SCRA 690 (2005), citing Manlimos v. NLRC, The New Valley Rimes Press v. NLRC. 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. Asset Privation Trust, 473 SCRA 690 (2005). 3. Equity Transfers (Pepsi Cola Distributors v. NLRC, 247 SCRA 386 (1995); Manlimos v. NLRC, 242 SCRA 145 [1995]; Robledo v. NLRC, 238 SCRA 52 [1994]; Pepsi-Cola Bottling Co. v. NLRC, 210 SCRA 277 (1992); DBP v. NLRC, 186 SCRA 841 [1990]; Coral v. NLRC, 258 SCRA 704 [1996]; Avon Dale Garments, Inc. v. NLRC, 246 SCRA 733 [1995]). 4. Mergers and Consolidations (Filipinas Port Services v. NLRC, 177 SCRA 203 [1989]; Filipinas Port Services v. NLRC, 200 SCRA 773 [1991]; National Union Bank Employees v. Lazaro, 156 SCRA 123 [1988]); First Gen. Marketing Corp. v. NLRC, 223 SCRA 337 (1993). 5. Spin-Offs (SMC Employees Union-PTGWO v. Confessor, 262 SCRA 81 [1996]).
LOZANO V. DE LOS SANTOS (274 SCRA 452) Consolidation becomes effective not upon mere agreement of the members but only upon issuance of the certificate of consolidation by the SEC. There can be no intracorporate nor partnership relation between 2 jeepney drivers' and operators' associations whose plans to consolidate into a single common association is still a proposal.
WHAT ARE THE RULES GOVERNING MERGER OR CONSOLIDATION INVOLVING A FOREIGN CORPORATION LICENSED IN THE PHILIPPINES? (Sec. 132) A foreign corporation authorized to transact business in the Philippines may merge or consolidate with any domestic corporation if such is permitted under Philippine law and by the law of its incorporation. The requirements on merger or consolidation as provided in the Corporation Code must be complied with. Whenever a foreign corporation authorized to transact business in the Philippines is a party to a merger or consolidation in its home country or state, such foreign corporation shall file a copy of the articles or merger or consolidation with the SEC and the appropriate government agencies within 60 days after such merger or consolidation becomes effective. Such copy of the articles must be duly authenticated by the proper officials of the country or state under the laws of which merger or consolidation was effected. If the absorbed corporation in such a merger / consolidation happens to be the foreign corporation doing business in the Philippines, it shall file a petition for withdrawal of its license in accordance with Sec. 136.
Sale of substantially all corporate assets
180
WHEN IS A SALE OR OTHER DISPOSITION DEEMED TO SUBSTANTIALLY ALL THE CORPORATE PROPERTY AND ASSETS?
COVER
If by the sale the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. ( Sec. 40)
WHAT ARE THE REQUIREMENTS? (Sec. 40) (1) Majority vote of BOD + 2/3 vote of OCS or members at a meeting duly called for the purpose; (2) Compliance with the laws on illegal combinations and monopolies Note, however, that after such approval by the SHs, the BOD may nevertheless, in its discretion, abandon such sale or other disposition without further action or approval by the SHs. This, of course, is subject to the rights of third parties under any contract relating thereto.
WHEN IS SH APPROVAL NOT NECESSARY FOR THE ABOVE DISPOSITION?
(1) If the disposition is necessary in the usual and regular course of

business; or
(2) If the proceeds of the disposition be appropriated for the conduct of its
remaining business (Sec. 40)
IS THE APPRAISAL RIGHT AVAILABLE TO DISSENTING STOCKHOLDERS? Yes. However, it must be stressed that this right is generally available only to dissenting stockholders of the selling corporation, not the purchasing corporation. (It can be argued, though, that in instances wherein the purchase constitutes an investment in a purpose other than its primary purpose, stockholders' approval of such investment is necessary, and anyone who objects thereto will have the appraisal right under Sec. 42.)
Exchange of stocks
In this method, all or substantially all the stockholders of the "acquired" corporation are made stockholders of the acquiring corporation. With the exchange, the acquired corporation becomes a subsidiary of the acquiring corporation. Although this method does not combine the 2 businesses under a single corporation as in merger and sale of assets, from the point of view of the acquiring (parent) corporation, there is hardly any difference between owing the acquired corporation's business directly and operating it through a controlled subsidiary. In fact, the parent corporation would have the power to buy all the subsidiary's assets and dissolve it, achieving the same result as in the other methods of combination. (Campos & Campos)
XV. xREHABILITATION AND INSOLVENCY

1. Corporate Bankruptcy Laws in General (a) Governing Laws (Insolvency Act, PD 902-A, Securities Regulation Code [RA 8799]) The pertinent law concerning the suspension of actions for claims against corporation is Presidential Decree No. 902-A, as amended, particularly, section 5(d), and likewise Section 6(c) thereof. Philippine Airlines Inc. v. PAL Employees Association, 525 SCRA 29 (2007); Castillo v. Uniwide Warehouse Club, Inc., 619 SCRA 641 (2010). (b) Types of Bankruptcy Proceedings in the Philippines (c) Resolution on Jurisdiction Issues in Bankruptcy Proceedings: Ching v. Land Bank of the Philippines, 201 SCRA 190 (1991).
181
2. Suspension of Payments (a) Insolvency Law (Secs. 2 to 13) - Situation of the corporate debtor - Nature of petition - Required vote of creditors - Consequences of approval/non-approval (b) P.D. 902-A (Sec. 5[d]), Sec. 5.10 of Securities Regulation Code The law governing corporate rehabilitation and suspension of actions for claims against corporations is Presidential Decree (P.D.) No. 902-A, as amended. Republic Act No. 8799, which took effect on August 8, 2000, transferred SECs jurisdiction over all cases enumerated under Section 5 of P.D. 902-A, as amended, to the courts of general jurisdiction or the appropriate Regional Trial Court. Abrera v. Barza, 599 SCRA 534 (2009). (c) Interim Rules on Corporation Rehabilitation (supplanted SEC Rules on Petition, SEC Memo, dated 7 October 1997) The Interim Rules of Procedure for Corporate Rehabilitation of 2000 has been amended by the Rules of Procedure on Corporate Rehabilitation of 2009, which took effect on January 16, 2009. Abrera v. Barza, 599 SCRA 534 (2009). 3. Corporate Rehabilitation (a) Nature of Rehabilitation Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency. The purpose of rehabilitation proceedings is to enable the company to gain a new lease on life and thereby allow creditors to be paid their claims from its earnings. The rehabilitation of a financially distressed corporation benefits its employees, creditors, stockholders and, in a larger sense, the general public. Pacific Wide Realty and Dev. Corp. v. Puerto Azul Land, Inc. , 605 SCRA 503 (2009). Under the Rules of Procedure on Corporate Rehabilitation, rehabilitation is defined as the restoration of the debtor to a position of successful operation and solvency, it if is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan, more if the corporation continues as a going concern than if it is immediately liquidated. Pacific Wide Realty and Dev. Corp. v. Puerto Azul Land, Inc., 605 SCRA 503 (2009); Castillo v. Uniwide Warehouse Club, Inc., 619 SCRA 641 (2010). Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency. Ruby Industrial Corp. v. CA, 284 SCRA 445 (1998); New Frontier Sugar Corp. v. RTC, Branch 39, Iloilo City, 513 SCRA 605 (2007). The purpose of rehabilitation proceedings is to enable the company to gain new lease on life and thereby allows creditors to be paid their claims from its earnings. Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the financially distressed corporation to its former position of successful operation and solvency. This is in consonance with the States objective to promote a wider and more meaningful equitable distribution of wealth to protect investments and the public. Metropolitan Bank & Trust Co. v. ASB Holdings, Inc. , 517 SCRA 1 (2007). (b) Basis of RTC Power to Undertake Corporate Rehabilitation (Secs. 5[d] and 6, PD 902A, Sec. 5.10, Securities Regulation Code) Presently, the applicable law on rehabilitation petitions filed by corporations, partnerships or associations, including rehabilitation cases transferred from the Securities and Exchange Commission to the RTCs pursuant to Republic Act No. 8799 or the Securities Regulations Code, is the Interim Rules of Procedure on Corporation Rehabilitation (2000). New Frontier Sugar Corp. v. RTC, Branch 39, Iloilo City, 513 SCRA 605 (2007). On 15 December 2000, the Supreme Court, in A.M. No. 00-8-10-SC, adopted the Interim Rules of Procedure on Corporate Rehabilitation and directed to be transferred from the SEC to Regional Trial Courts, all petitions for rehabilitation filed by corporations, partnerships, and association under P.D. 902-A in accordance with the amendatory provisions of Republic Act No. 8799. The rules require trial courts to issue, among other things, a stay order in the enforcement of all claims, whether for money or otherwise, and whether such enforcement is by court action or otherwise, against the corporation under rehabilitation , its guarantors and sureties not solidarily liable with it. Philippine Airlines v. Kurangking, 389 SCRA 588 (2002). (c) SC Interim Rules on Corporate Rehabilitation: It should be stressed that the Interim Rules was enacted to provide for a summary and non-adversarial rehabilitation proceedings. This is in consonance with the commercial nature of a rehabilitation case, which is aimed to be resolved expeditiously for the benefit of all the parties concerned and
182
the economy in general. New Frontier Sugar Corp. v. RTC, Branch 39, Iloilo City, 513 SCRA 601 (2007). (d) Requirements of Petition: The contents of the petition for corporate rehabilitation are provided under Rule 4, Section 2(k) of the Interim Rules on Corporate Rehabilitation, which among other things, prescribe that the petition needs for a certification. Chas Realty and Dev. Corp. v. Talavera, 397 SCRA 84 (2004). If extraordinary corporate action mentioned in Rule 4, Section 2(k), of the Interim Rules are to be done under the proposed rehabilitation plan, the petitioner would be bound to make it known that it has received the approval of a majority of the directors and the affirmative votes of stockholders representing at least two-thirds (2/3) of the outstanding capital stock. Where no such extraordinary corporate acts, or one that under the law would call for a two-thirds (2/3) vote are contemplated to be done in carrying out the proposed rehabilitation plan, then the approval of stockholders would only be by a majority, not necessarily a two-thirds (2/3), vote, as long as, of course, there is a quorum . Chas Realty and Dev. Corp. v. Talavera, 397 SCRA 84 (2004). When a petition for corporate rehabilitation is filed under the Interim Rules of Procedure Governing Corporate Rehabilitation, the first duty of a court is to determine whether the petition is sufficient as to form and substance. Once it is satisfied as to form and substance, it issues an order staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor. Sobrejuanite v. ASB Dev. Corp., 471 SCRA 763 (2005). Summary of Procedure under the Interim Rules. New Frontier Sugar Corp. v. RTC, Branch 39, Iloilo City, 513 SCRA 601 (2007). (e) Stay Order; Purpose: The avowed objective of suspending all actions against the distressed corporation when a management committee or rehabilitation receiver is appointed is to enable such management committee or rehabilitation receiver to effectively exercise its powers free from any judicial or extra-judicial interference that might unduly hinder or prevent the rescue of the distressed company. However, this purpose can no longer be effectively met in the present case as the proceedings herein have already been pending for almost ten years and have already reached this Court. The management committee has been unduly burdened enough, its time and resources wasted by the proceedings that took place before the RTC and the appellate court. Hence, the decree of annulment of the previous proceedings in the lower courts will only result in further delay. The greater interest of justice demands that we now dispose of the issues raised in the present petition. Tysons Super Concrete, Inc. v. Court of Appeals, 461 SCRA 469 (2005); Sobrejuanite v. ASB Dev. Corp., 471 SCRA 763 (2005); Philippine Airlines Inc. v. PAL Employees Association , 525 SCRA 29 (2007); Philippine Airlines, Inc. v. Zamora, 514 SCRA 584 (2007). The automatic suspension of an action for claims against a corporation under a rehabilitation receive or management committee embraces all phases of the suit, that is, the entire proceedings of an action or suit and not just the payment of claims. Castillo v. Uniwide Warehouse Club, Inc., 619 SCRA 641 (2010). The justification for the suspension of actions or claims pending rehabilitation proceedings is to enable the management committee or rehabilitation receiver to effectively exercise its/his powers free from any judicial or extrajudicial interference that might unduly hinder or prevent the rescue of the debtor company. To allow such other action to continue would only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted in defending claims against the corporation instead of being directed toward its restructuring and rehabilitation. Pacific Wide Realty and Dev. Corp. v. Puerto Azul Land, Inc. , 605 SCRA 503 (2009). Besides, the other object of suspending all actions against a distressed corporation, which is to treat all of its creditors on equal footing, is defeated by the fact that the assailed judgment of the MeTC has already been implemented through a writ of execution issued by the court a quo as early as July 22, 1996. Tysons Super Concrete, Inc. v. Court of Appeals, 461 SCRA 469 (2005). Under the Interim Rules, the RTC, within five (5) days from the filing of the petition for rehabilitation and after finding that the petition is sufficient in for and substance, shall issue a Stay Order appointing a Rehabilitation Receiver, suspending enforcement of all claims, prohibiting transfers or encumbrances of the debtors properties, prohibiting payment of outstanding liabilities, and prohibiting the withholding of supply of goods and services from the debtor. Any transfer of property or any other conveyance, sale payment, or agreement made in violation of the Stay Order or in violation of the Rules may be declared void by the court upon motion or motu proprio. New Frontier Sugar Corp. v. RTC, Branch 39, Iloilo City , 513 SCRA 601 (2007). When It Becomes Effective: The appointment of a management committee or rehabilitation receiver may only take place after the filing with the SEC of an appropriate petition for suspension of payments. The conclusion is inevitable that pursuant to Section 6(c), taken together with Sections 5(d) and (d), a court action is ipso jure suspended only upon the appointment of a management committee or
183
a rehabilitation receiver. Barotac Sugar Mills, Inc. v. CA, 275 SCRA 497 (1997); Union Bank v. CA, 290 SCRA 198 (1998). Duration: B.F. Homes, Inc. v. Court of Appeals, 190 SCRA 262 (1990). The stay order is effective from the date of its issuance until the dismissal of the petition or the termination of the rehabilitation proceedings. PAL v. Kurangking, 389 SCRA 588 (2002).
Parties Covered/Benefited: Union Bank of the Philippines v. CA, 290 SCRA 198 (1998); Modern Paper Products, Inc. v. CA, 286 SCRA 749 (1998); Traders Royal Bank v. CA, 177 SCRA 788 (1989); Chung Ka Bio v. IAC, 163 SCRA 534 (1988).
Claims Covered: The stay order is effective both against secure and unsecured creditors. This is in harmony with the principle of equality is equity. Alemars Sibal & Sons, Inc. v. Elbinias, 186 SCRA 94 (1990); RCBC v. IAC, 213 SCRA 830 (1992); BPI v. CA, 229 SCRA 223 (1994); PCIB v. CA, 172 SCRA 436 (1989); New Frontier Sugar Corp. v. RTC, Branch 39, Iloilo City, 513 SCRA 601 (2007). As long as the corporation is under a management committee or a rehabilitation receiver, all actions for claims against it, whether for money or otherwise, must yield to the greater imperative of corporate revival, excepting only, as already mentioned, claims for payment of obligations incurred by the corporation in the ordinary course of business. Castillo v. Uniwide Warehouse Club, Inc., 619 SCRA 641 (2010). Interim Rules must be read and applied along with Section 6(c) of P.D. 902-A, directing that upon the appointment of a management committee, rehabilitation receiver, board or body pursuant to the decree, all actions for claims against the distressed corporation pending before any court, tribunal, board or body shall be suspended accordingly. PAL v. Kurangking, 389 SCRA 588 (2002). Strictly speaking, an action for ejectment filed against the corporation should be suspended on the ground that the SEC has already created a management committee under Pres. Decree No. 902-A pursuant to a petition for corporate rehabilitation. It must be noted that the constitution of a management committee under Pres. Decree No. 902-A, does not divest a court of its jurisdiction over the pending case but merely provides for the suspension of the proceedings in the civil action. Tysons Super Concrete, Inc. v. Court of Appeals, 461 SCRA 469 (2005). The effects of the stay order under the Sec. 6(b), Rule 4 of the Interim Rules of Procedure for Corporate Rehabilitation which enjoins the enforcement of all claims against guarantors and sureties who are not solidarily liable with the debtor, cannot apply to the letter of credit issued in behalf of the debtor-applicant since the obligation of the issuing banks under the letter of credit is primary and solidary. Metropolitan Waterworks v. Daway, 432 SCRA 559 (2004). The suspension of proceedings referred to in Section 6(c) of Presidential Decree No. 902-A, which pertinently provides uniformly applies to all actions for claims filed a gainst a corporation, partnership or association under management or receivership, without distinction. Malayan Insurance Company, Inc. v. Victorias Milling Company, Inc., 586 SCRA 45 (2009). The suspension of action for claims against a corporation under rehabilitation receiver or management committee embraces all phases of the suit, be it before this Court. Otherwise stated, what are automatically stayed or suspended are the proceedings of an action or suit and not just the payment of claims. Furthermore, the actions that are suspended cover all claims against a distressed corporation whether for damages founded on a breach of contract of carriage, labor cases, collection suits or any other claims of a pecuniary nature. Malayan Insurance Company, Inc. v. Victorias Milling Company, Inc., 586 SCRA 45, 59-60 (2009). The indiscriminate suspension of actions for claims is intended to expedite the rehabilitation of the distressed corporation. As this Court held in Rubberworld, the automatic stay of actions is designed to enable the management committee or the rehabilitation receiver to effectively exercise its/his powers free from any judicial or extrajudicial interference that might unduly hinder or prevent the rescue of the debtor company. To allow such other actions to continue would only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted in defending claims against the corporation instead of being directed toward its restructuring and rehabilitation. Malayan Insurance Company, Inc. v. Victorias Milling Company, Inc. , 586 SCRA 45, 60 (2009). The date when the claim arose, or when the action is filed, is of no moment as long as the corporation is under a management committee or a rehabilitation receiver, all actions for claims against it must yield to the greater imperative of corporate rehabilitation, excepting only claims for payment of obligations incurred by the corporation in the ordinary course of business. Enforcement of writs of execution issued by judicial or quasi-judicial tribunals, since such writs emanate from actions for claims, must, likewise, be suspended. Malayan Insurance Company, Inc. v. Victorias Milling Company, Inc., 586 SCRA 45 (2009).
184
Types of Claims Covered: Even if the relationship is one of trust, there is no provision in the Interim Rules that a claim arising from a trust relationship is excluded from the stay order the stay order is effective on all creditors of the corporation without distinction, whether secured or unsecured. Abrera v. Barza, 599 SCRA 534 (2009). In Finasia Investments and Finance Corp. v. Court of Appeals, 237 SCRA 446 (1994), the Court construed claim to refer to debts or demands of a pecuniary nature. It means the assertion of a right to have money paid. Also in Arranza v. B.F. Homes, Inc., 333 SCRA 799 (2000), we referred to it as an action involving monetary considerations. And in Philippine Airlines v. Kurangking, 389 SCRA 588 (2002), we said it is a right to payment, whether or not it is reduced to judgment, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, legal or equitable, and secured or unsecured. More importantly, the Interim Rules of Procedure on Corporate Rehabilitation provides an all-encompassing definition of the term and thus includes all claims or demands of whatever nature or character against a debtor or its property, whether for money or otherwise. Malayan Insurance Company, Inc. v. Victorias Milling Company, Inc. , 586 SCRA 45, 57 (2009). The limitation of covered claims to those that are pecuniary in nature is applicable only to SEC corporation rehabilitation proceedings. Finasia Investments v. CA, 237 SCRA 446 (1994); Philippine Airlines Inc. v. PAL Employees Association , 525 SCRA 29 (2007); Cordova v. Reyes Daway Lim Bernardo Lindo Rosales Law Officers, 526 SCRA 300 (2007). A claim is said to be a right to payment, whether or not it is reduced to judgment, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, legal or equitable, and secured or unsecured. Verily, the claim against an airline company is a money claim for the missing luggages, a financial demand, that the law requires to be suspended pending the rehabilitation proceedings. PAL v. Kurangking, 389 SCRA 588 (2002). The justification for the automatic stay of all pending actions for claims is to enable the management committee or the rehabilitation receiver to effectively exercise its/his powers free from any judicial or extra-judicial interference that might unduly hinder or prevent the rescue of the debtor company. To allow labor claims to continue would only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted defending claims against the corporation instead of being directed toward its restructuring and rehabilitation. Rubberworld [Phils.], Inc. v. NLRC, 305 SCRA 721 (1999); 336 SCRA 433 (2000). Also Rubberworld (Phils.), Inc. and Julie Ong v. NLRC, 336 SCRA 433 (2000); Lingkod Maggagawa sa Rubberworld, Adidas-Anglo v. Rubberworld (Phil.s), Inc. , 513 SCRA 208 (2007). Stay Order on Claims of Reimbursement of Surety from the Debtor Company: When a surety company pays on the judgment debt of a company that has been placed under rehabilitation proceedings with the appointment of the rehabilitation receiver, such surety cannot claim reimbursement from the debtor company or seek the application of its bank accounts because of the effect of the stay order. If we allow the reimbursement action to proceed, and it petitioners claim is granted, it would be in a position to assert a preference over other creditors. Worse, respondent would be compelled to dispose of its properties in order to satisfy the claim of petitioner. It would in effect be a clear defiance of the proscription set forth in the Interim Rules on selling, encumbering, transferring, or disposing in any manner any of its (respondents) properties except in the ordinary course of business. Certainly, petitioners claim for reimbursement did not arise from the usual operations of respondents business. Neither can we consider it as an ordinary expense for the conduct of its operations. Malayan Insurance Co. v. Victorias Milling Co., 586 SCRA 45, 61-62 (2009). Stay Order on Bouncing Checks Cases: [Involving SEC rehabilitation proceedings:] The filing of the case for violation of the Bouncing Checks Law (B. P. Blg. 22) is not a claim that can be enjoined within the purview of P.D. 902-A: True, although conviction of the accused for the alleged crime could result in the restitution, reparation or indemnification of the private offended party for the damage or injury he sustained by reason of the felonious act of the accused, nevertheless, prosecution for violation of B.P. Blg. 22 is a criminal action. Rosario v. Co, 563 SCRA 239 (2008). It must be emphasized at this point that as far as the criminal aspect of the cases is concerned, the provisions of Sec. 6 (c) of P.D. No. 902-A should not interfere with the prosecution of a case for violation of B.P. Blg. 22, even if restitution, reparation or indemnification could be ordered, because an absurdity would result, i.e., one who has engaged in criminal conduct could escape punishment by the mere filing of a petition for rehabilitation by the corporation of which he is an officer. At any rate, should the court deem it fit to award indemnification, such award would not fall under the category of a claim under Sec. 6 (c) of P.D. No. 902-A, considering that it is already one for monetary or pecuniary consideration. Only to this extent can the order of suspension be considered obligatory upon any court, tribunal, branch or body where there are pending actions for claims against the distressed corporation. The petitioner in a Petition for Rehabilitation must comply with the jurisdictional requirements under Rule IV of the Rules of Procedure on Corporate Recovery, particularly Section 4-1 which provides that any of the following-(1) an actually insolvent debtor, (2) a technically insolvent debtor, or (3) a creditor or stockholder of the debtor can file a petition for rehabilitation. Union Bank of the Philippines v. ASB Development Corp., 560 SCRA 587 (2008).
185
The very definition of technical insolvency is the inability of the petitioning corporation to pay, although temporarily, for a period longer than one year from the filing of the petition; A technically insolvent corporation can seek recourse from the Securities and Exchange Commission for Rehabilitation. Union Bank of the Philippines v. ASB Development Corp. , 560 SCRA 587 (2008). There is a question of law in a given case when the doubt or difference arises as to what the law is pertaining to a certain state of facts, and there is a question of fact when the doubt arises as to the truth or the falsity of alleged facts; The determination of technical insolvency of a corporation is a question of fact since it will require a review of sufficiency and weight of evidence presented by the parties; The factual findings of quasi-judicial agencies, which have acquired expertise die to their jurisdiction being confined to special matters, are generally accorded great respect and even finality, absent any showing that they disregarded evidence or misapprehended evidence to such an extent as to compel a contrary conclusion if such evidence has been properly appreciated. Union Bank of the Philippines v. ASB Development Corp., 560 SCRA 587 (2008). Res judicata is a rule that precludes parties from relitigating issues actually litigated and determined by a prior and final judgment; Even if a party may not be precluded from questioning the validity of a Suspension Order on the basis of res judicata, it may, however, be barred from doing so by the principle of law of the case; Law of the case has been defined as the opinion delivered on a former appeal-more specifically, it means that whatever is once irrevocably established as the controlling legal rule of decision between the same parties in the same case continues to be the law of the case, whether correct on general principles or not, so long as the facts on which such decision was predicated continue to be the facts of the case before the court. Union Bank of the Philippines v. ASB Development Corp., 560 SCRA 587 (2008). (f) Powers of Management Committee or the Rehabilitation Receiver (Sec. 6, PD 902-A; Interim Rules on Corporate Rehabilitation) A management committee is tasked to manage, take custody of and control all existing assets, funds and records of the corporation, and to determine the best way to protect the interest of its stockholders and creditors. Punongbayan v. Punongbayan, Jr., 491 SCRA 477 (2006). In exercising the discretion to appoint a management committee, the officer or tribunal before whom the application was made must take into account all the circumstances and facts of the case, the presence of conditions and grounds justifying the relief, the ends of justice, the rights of all the parties interests in the controversy and the adequacy and effectiveness of other available remedies. The discretion must be exercised with great caution and circumspection and only for a reason strongly appearing to the tribunal or officer exercising jurisdiction. Once the discretion has been exercised, the presumption to be considered is that the officer or tribunal has fairly weighed and appraised the evidence submitted by the parties. Jacinto v. First Womens Credit Corp., 410 SCRA 140 (2003). Summons may validly be served upon any member of the management committee. There is nothing in the Interim Rules of Procedure for Corporate Rehabilitation that provides that service of summons on the corporation under rehabilitation can only be made on the chairman of the management committee. Tysons Super Concrete, Inc. v. Court of Appeals, 461 SCRA 469 (2005). (g) RTC Orders Immediately Executory: Finally, it bears stressing that under Section 4, Rule 1 of the Interim Rules of Procedure Governing Intra-Corporate Controversies under Republic Act No. 8799, the prevailing party has the right to file a motion for the immediate execution of a decision of judgment. Lao v. King, 500 SCRA 599 (2006). (h) Appeal from the Decision of the RTC Special Commercial Courts The Omnibus Order dated January 13, 2003 issues by the RTC is a final order since it terminated the proceedings and dismissed the case before the trial court; it leaves nothing more to be done. As such, petitioners recourse is to file an appeal from the O mnibus Order. New Frontier Sugar Corp. v. RTC, Branch 39, Iloilo City, 513 SCRA 601 (2007) In this regard, A.M. 00-8-10-SC promulgated by the Court on September 4, 2001 provides that a petition for rehabilitation is considered a special proceeding given that it seeks to establish the status of a party or a particular fact. Accordingly, the period of appeal provided in paragraph (b) of the Interim Rules Relative to the Implementation of Batas Pambansa Blg. 129 for special proceedings shall apply. Under said paragraph 19 (b), the period of appeal shall be thirty (3) days, a record of appeal being required. New Frontier Sugar Corp. v. RTC, Branch 39, Iloilo City, 513 SCRA 601 (2007) However, it should be noted that the Court issued A.M. No. 04-9-07-SC on September 14, 2004, clarifying the proper mode of appeal in cases involving corporate rehabilitation and intracorporate controversies. It is provided therein that all decisions and final orders in cases falling under the Interim Rules of Procedure Governing Intra-Corporate Controversies under Republic Act No. 8799 shall be appealed to the CA through petition for review under Rule 43 of the Rules of Court to be filed within fifteen (15) days from notice of the decision or final order of the RTC. New Frontier Sugar Corp. v. RTC, Branch 39, Iloilo City, 513 SCRA 601 (2007).
186
(i) SEC Power to Liquidate Corporation: Albeit jurisdiction over a petition to declare a corporation in a state of insolvency strictly lies with regular courts, the SEC possessed ample power under P.D. 902-A to declare a corporation insolvent as an incident of and in continuation of its already acquired jurisdiction over the petition to be declared in the state of suspension of payments in the two instances provided in Section 5(d) thereof. Union Bank of the Philippines v. Concepcion , 525 SCRA 672 (2007) (j) Basic Differences Between Suspension of Payments Proceedings under the Insolvency Law and Under PD 902-A 4. Insolvency Proceedings Liquidation proceeding is one in rem so that all other interested persons whether known to the parties or not may be bound by such proceedings. Chua v. NLRC, 190 SCRA 558 (1990). (a) Governing Law and Jurisdiction (b) General Effect of Corporate Insolvency Proceedings (c) VOLUNTARY INSOLVENCY (d) Filing of Petition (Sec. 14, Insolvency Law) (e) Effect of Order of Insolvency (Sec. 18, Insolvency Law; De Amuzategui v. Macleod, 33 Phil. 80 [1915]). Section 18 on the automatic stay is no self-executory; applications for suspension of proceedings must be made in the various courts where actions in pending. Unson v. Abeto, 47 Phil. 42 (1924). (f) INVOLUNTARY INSOLVENCY (Sec. 20 to 33) (g) Qualifications of Petitioning Creditors A foreign corporation which shows that it is a resident of the Philippines has legal standing to petition for involuntary insolvency of a corporate debtor. State Investment House, Inc. v. Citibank, N.A., 203 SCRA 9 (1991). (h) Order to Show Cause (Sec. 21); Hearing of petition (Sec. 24) (i) Acts of Insolvency and Order of Adjudication (Sec. 20) (j) Meeting of Creditors to Elect Assignee (Secs. 29 and 30) (k) Effects of Order of Insolvency and Appointment of Receiver (Secs. 32, 34 and 35; RadiolaToshiba Phil. v. IAC, 199 SCRA 373 [1991]) (l) Liquidation of Assets and Payment of Debts (Sec. 33) (m) Remedies of Secured Creditors (Sec. 29, 43 and 59) (n) Composition (Sec. 63) (o) Discharge (Secs. 52, 64, and 66) (p) Appeal in certain cases (Sec. 82)
XVII. CLOSE CORPORATIONS

1. Definition (Sec. 96; Manuel R. Dulay Enterprises v. Court of Appeals, 225 SCRA 678 [1993]; San Juan Structural v. Court of Appeals, 296 SCRA 631 [1998]). The concept of a close corporation organized for the purpose of running a family business or managing family property has formed the backbone of Philippine commerce and industry. Through this device, Filipino families have been able to turn their humble, hard-earned life savings into going concerns capable of providing them and their families with a modicum of material comfort and financial security as a reward for years of hard work. A family corporation should serve as a reward for years of hard work. A family corporation should serve as a rallying point for family unity and prosperity, not as a flashpoint for familial strife. It is hoped that people reacquaint themselves with the concepts of mutual aid and security that are the original driving forces behind the formation of family corporations and use these tenets in order to facilitate more civil, if not more amicable, settlements of family corporate disputes. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003). 2. Articles of Incorporation Requirements (Sec. 97) (a) Pre-Emptive Rights (Sec. 102) (b) Amendment (Sec. 103) 3. Restriction on Transfer of Shares (Secs. 98 and 99) 4. Agreements by Stockholder (Sec. 100) 5. No Necessity of Board (Sec. 101; Sergio F. Naguiat v. NLRC, 269 SCRA 564 [1997]). 6. Deadlocks (Sec. 104) 7. Withdrawal and Dissolution (Sec. 105)
187
Even prior to the passage of Corporation Code which recognized close corporations, the Supreme Court had on limited instances recognized the common law rights of minority stockholders to seek dissolution of the corporation. Financing Corp. of the Phil. v. Teodoro, 93 Phil. 404 (1953).
FOREIGN CORPORATIONS
WHAT IS A FOREIGN CORPORATION? (Sec. 123) A corporation formed and organized under laws other than those of the Philippines, regardless of the citizenship of the incorporators and stockholders. Such corporation must have been organized and must operate in a country which allows Filipino citizens and corporations to do business there. In times of war: For purposes of security of the state, the citizenship of the controlling stockholders determines the corporations nationality.
IN WHAT WAYS CAN A FOREIGN CORPORATION DO BUSINESS IN THE PHILS.? (1) Wholly-owned subsidiary; or (2) Branch office; or (3) Joint venture with a local partner.
Permitted areas of investment

100% EQUITY: Mass media, except recording The practice of a profession (law, medicine, etc.) Operation of rural banks Cooperatives Private security agencies Small-scale mining Utilization of marine resources Ownership, operation, and management of cockpits; Manufacture, repair, stockpiling of nuclear, biological, chemical, and radiological weapons;
Note: Retail trade is no longer required to be 100% Filipino-owned on account of the Retail Trade Liberalization Act. 75%-25% EQUITY: Inter-island shipping (R.A. 1937, Sec. 8) Private recruitment Contracts for construction and repair of locally-funded public works Except: Public works that would fall under the BuildOperate-Transfer Law, as well as those that are foreign-funded 70%-30% EQUITY: 60%-40% EQUITY: Advertising Other industries.
WHAT IS THE SO-CALLED "GRANDFATHER RULE"? Where a domestic corporation which has both Philippine and foreign stockholders is an investor in another domestic corporation which has also both Philippine and foreign stockholders, the so-called "grandfather rule" is used to determine whether or not the latter corporation is qualified to
188
engage in a partially nationalized business, i.e. by determining the extent of Philippine equity therein. Under present SEC rules, if the percentage of Filipino ownership in the first corporation is at least 60%, then said corporation will be considered as a Philippine national(100%) and all of its investment in the second corporation would be treated as Filipino equity. On the other hand, if the Philippine equity in the first corporation is less than 60%, then only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. (See SEC Rule promulgated on 28 Feb. 1967, cited in Opinion # 18, Series of 1989, Department of Justice, dated 19 January 1989.) NOTE: The reader would be well-advised to cross-reference this definition of the "grandfather rule" with a trusted commentary. A 50 FILIPINO B 50 FOREIGN X 60 FLIPINO Y 40 FOREIGN
XIX. FOREIGN CORPORATIONS

1. Definition (Sec. 123) A foreign corporation is one which owes its existence to the laws of another state, and generally, has no legal existence within the state in which it is foreign. Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997) A fundamental rule of international jurisdiction is that no state can by its laws, and no court which is only a creature of the state, can by its judgments and decrees, directly bind or affect property or persons beyond the limits of that state. Times, Inc. v. Reyes, 39 SCRA 303 (1971). (a) Concept of residence: State Investment House v. Citibank, 203 SCRA 9 (1991). 2. License to Do Business in the Philippines (a) Rationale for Requiring License to Do Business The purpose of the law in requiring that foreign corporations doing business in the country be licensed to do so, it to subject the foreign corporations doing business in the Philippines to the jurisdiction of the courts. Otherwise, a foreign corporation illegally doing business here because of its refusal or neglect to obtain the required license and authority to do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts. Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997). The same danger does not exist among foreign corporations that are indubitably (UNQUESTIONABLE) not doing business in the Philippines. Indeed, if a foreign corporation does not do business here, there would be no reason for it to be subject to the States regulation. As we observed, in so far as the State is concerned, such foreign corporation has no legal existence. Therefore, to subject such foreign corporation to the courts jurisdiction would violate the essence of sovereignty. Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997). (b) Application for License (Secs. 124 and 125; Art. 48, Omnibus Investment Code) (c) Resident Agent (Sec. 127 and 128) Being a resident agent of a foreign corporation does not mean that he is authorized to execute the requisite certification against forum shopping while a resident agent may be aware of actions filed against his principal (a foreign corporation doing business in the Philippines), he may not be aware of actions initiated by its principal, whether in the Philippines against a domestic corporation or private individual, or in the country where such corporation was organized and registered, against a Philippine registered corporation or a Filipino citizen. Expertravel & Tours, Inc. v. Court of Appeals, 459 SCRA 147 (2005). A complaint filed by a foreign corporation is fatally defective for failing to allege its duly authorized representative or resident agent in Philippine jurisdiction. New York Marine Managers, Inv. c. Court of Appeals, 249 SCRA 416 (1995). When a corporation has designated a person to receive service of summon pursuant to the Corporation Code, the designation is exclusive and service of summons on any other person is inefficacious. H.B. Zachry Company Intl v. CA, 232 SCRA 329 (1994) (d) Issuance of License (Sec. 126; Art. 49, Omnibus Investment Code)
189
A foreign corporation licensed to do business should be subjected to no harsher rules that is required of domestic corporation and should not generally be subject to attachment on the pretense that such foreign corporation is not residing in the Philippines. Claude Neon Lights v. Phil. Advertising Corp., 57 Phil. 607 (1932). (e) Amendment of License (Sec. 131) 3. Concepts of Doing Business in the Philippines; Effects of Not Obtaining the Licesnse (a) Statutory Concept of Doing Business(Art. 44, Executive Order No. 226, Omnibus Investment Code; Sec. 3(d), R.A. No. 7042, Foreign Investment Act of 1991 ). Under Sec. 123 of the Corporation Code, a foreign corporation must first obtain a license and a certificate from the appropriate government agency before it can transact business in the Philippines. Where a foreign corporation does business in the Philippines without the proper license, it cannot maintain any action or proceeding before Philippine courts as provided in Section 133 of the Corporation Code. Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010). Republic Act No. 7042, otherwise known as the Foreign Investments Act of 1991, repealed Articles 44-56 of Book II of the Omnibus Investments Code of 1987, enumerated in Section 3(d) not only the acts or activities which constitute doing business but also those activities which are not deemed doing business. Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010).
An unlicensed foreign corporation doing business in the Philippines cannot sue before Philippine courts; an unlicensed foreign corporation not doing business in the Philippines can sue before Philippine courts. B. Van Zuiden Bros., Ltd v. GTVL Manufacturing Industries, Inc., 523 SCRA 233 (2007).
A foreign corporation without a license is not ipso facto incapacitated from bringing an action in Philippine courts. A license is necessary only if a foreign corporation is transacting or doing business in the country. Agilent Technologies Singapore (PTE) Ltd. v. Integrated Silicon Tech. , 427 SCRA 593 (2004). (b) Jurisprudential Concepts of Doing Business Doing Business 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 purpose or object of its organization. Mentholatum v. Mangaliman, 72 Phil. 525 (1941. Transactions Seeking Profit Although each case must be judged in light of its attendant circumstances, jurisprudence has evolved several guiding principles for the application of these tests. By and large, to constitute doing business, the acti vity to be undertaken in the Philippines is one that is for profit-making. Agilent Technolgies 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 C.VILLANUEVA, PHILIPPINE CORPORATE LAW 801-802 (2001). Participating in a bidding process constitutes doing business because it shows the foreign corporations intention to engage in business in the Philippines. In this regard, it is the performance by a foreign corporation of the acts for which it was created, regardless of volume of business, that determines whether a foreign corporation needs a license or not. European Resources and Technologies, Inc. v. Ingenieuburo Birkhanh + Nolte , 435 SCRA 246 (2004). On Insurance Business A foreign corporation with a settling agent in the Philippines which issues twelve marine policies covering different shipments to the Philippines is doing business in the Philippines. 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). Air Carriers Off-line air carriers having general sales agents in the Philippines are engaged in or doing business in the Philippines and that their income from sales of passage documents here is income from within the Philippines. In other words, as long as the uplifts of passengers and cargo occur to or from the Philippines, income is included in Gross Philippine Billings (GPB). South African Airways v. Commissioner of Internal Revenue, 612 SCRA 665 (2010).
190
Single Transaction Where a single act or transaction, however, is not merely incidental or casual but indicates the foreign corporation's intention to do other business in the Philippines, said single act or transaction constitutes doing business. Far East Int'l. v. Nankai Kogyo, 6 SCRA 725 (1962). It is not really the fact that there is only a single act done that is material for determining whether a corporation is engaged in business in the Philippines, since other circumstances must be considered. Where a single act or transaction of a foreign corporation is not merely incidental or casual but is of such character as distinctly to indicate a purpose on the part of the foreign corporation to do other business in the state, such act will be considered as constituting business. Litton Mills, Inc. v. Court of Appeals, 256 SCRA 696 (1996). Territoriality Rule To be doing or transaction business in the Philippines for purposes of Section 133 of the Corporation Code, 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). Contract Test Pacific Vegetable Oil Corp. v. Singson, Advanced Decision Supreme Court, April 1955 Vol., p. 100-A; Aetna Casualty & Surety Co. v. Pacific Star Line, 80 SCRA 635 (1977); Universal Shipping Lines, Inc. v. IAC, 188 SCRA 170 (1990). Acts of Soliciations Solicitation of business contracts constitutes doing business in the Philippines. Marubeni Nederland B.V. v. Tensuan, 190 SCRA 105. Transactions with Agents and Brokers Granger Associates v. Microwave Systems, Inc., 189 SCRA 631 (1990); La Chemise Lacoste, S.A. v. Fernandez, 129 SCRA 373 (1984); Schmid & Oberly v. RJL, 166 SCRA 493 [1988]; Wang Laboratories, Inc. v. Mendoza, 156 SCRA 44 (1974). (c) Different Rules on Trademark and Tradenames (Western Equipment & Supply Co. v. Reyes, 51 Phil. 115 [1927]; Leviton Industries v. Salvador, 114 SCRA 420 [1982]; Converse Rubber v. Universal Rubber, 147 SCRA 154 [1987]; Converse Rubber Corp. v. Jacinto Rubber & Plastic Co., 97 SCRA 158 [1980]; Universal Rubber Products, Inc. v. CA, 130 SCRA 104 [1984]; Puma Sportschunhfabriken Rudolf Dassler, K.G. v. IAC, 158 SCRA 233 [1988]; Philips Export B.V. v. CA, 206 SCRA 457 [1992]). (d) Doctrine on Unrelated or Isolated Transactions. Eastboard Navigation, Ltd. v. Juan Ysmael and Co., Inc., 102 Phil. 1 (1957);Antam Consolidated v. CA, 143 SCRA 288 (1986). Single or isolated acts, contracts, or transactions of foreign corporations are not regarded as a doing or carrying on of business. Typical examples of these are the making of a single contract, sale, 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. In these instances, there is no purpose to do any other business within the country. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002). Section 133 of the Corporation is clear in depriving foreign corporations which are doing business in the Philippines without a license from bringing or maintaining actions before, or intervening in Philippines courts. The law does not prohibit foreign corporations from performing single acts of business. A foreign corporation needs no license to sue before Philippine courts on an isolated transactions. Lorenzo Shipping v. Chubb and Sons, Inc. , 431 SCRA 266 (2004). 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). Case-Law Examples of Isolated Transactions:
Collision of two vessels at the Manila Harbor. Dampfschieffs Rhederei Union v. La Campaia 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). Infringement of trade name. General Garments Corp. v. Director of Patens, 41 SCRA 50 (1971); Universal Rubber Products, Inc. v. Court of Appeals, 130 SCRA 104 (1988). Recovery of damages sustained by cargo shipped to the Philippines. Bulakhidas v. Navarro, 142 SCRA 1 (1986). Sale construction equipment to the Government with no intent of continuity of transaction. Gonzales v. Raquiza, 180 SCRA 254 (1989). Recovery on a Hongkong judgment against a Manila resident. Hang Lung Bak v. Saulog, 201 SCRA 137 (1991). rights over their movies in the Philippines, to protect such rights for piracy: We fail to see how exercising one's legal and property rights and taking steps for the vigilant protection of said rights,
Appointment of local lawyer by foreign movie companies who have registered intellectual property
191
particularly the appointment of an attorney-in-fact, can be deemed by and of themselves to be doing business here. Columbia Pictures Inc. v. Court of Appeals, 261 SCRA 144 (1996).
4. Effects of Failure to Obtain License: (a) On the Contract Entered Into: Home Insurance Co. v. Eastern Shipping Lines, 123 SCRA 424 (1983). Sec. 69 of old Corporation Law was intended to subject the foreign corporation doing business in the Philippines to the jurisdiction of our courts and not to prevent the foreign corporation from performing single acts, but to prevent it from acquiring domicile for the purpose of business without taking the necessary steps to render it amenable to suit in the local courts. Marshall-Wells Co., v. Elser, 46 Phil. 70 (1924). (b) Standing to Sue (Sec. 133; Marshall-Wells v. Elser, 46 Phil. 71 [1924]) Summary of Doing Business: The principles regarding the right of a foreign corporation to bring suit in Philippine courts may thus be condensed in four statements: (1) if a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts; (2) if a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction; (3) if a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporations corporate personality in a suit brought before the Philippine courts; and (4) if a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002); Agilent Technolgies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp. , G.R No. 154618, 14 April (2004). Need to Allege: The fact that a foreign corporation is not doing business in the Philippines must be alleged if a foreign corporation desires to sue in Philippines courts un der the isolated transactions rule. Atlantic Mutual Inc. Co. v. Cebu Stevedoring Co., 17 SCRA 1037 (1966); Commissioner of Customs v. K.M.K. Gani, 182 SCRA 591 (1990).28 (c) Criminal Liability under Sec. 144: Home Insurance Co. v. Eastern Shipping Lines, 123 SCRA 424 (1983). (d) Pari Delicto Doctrine: The local party to a contract with a foreign corporation that does business in the Philippines without license cannot maintain suit against the foreign corporation just as the foreign corporation cannot maintain suit, under the principle of pari delicto. Top-Weld Mfg. v. ECED, 119 SCRA 118 (1985). But See:Communication Materials v. Court of Appeals, 260 SCRA 673 (1996). (e) Estoppel Doctrine: A UNLICENSED foreign corporation doing business in the Philippines ( T CANNOT SUE AS A GENERAL RULE) may sue in Philippine courts although it is without license to do business here against a Philippine citizen who had contracted with and been benefited by said corporation and knew it to be without the necessary license to do business, under the principle of estoppel. Merrill Lynch Futures, Inc. v. CA, 211 SCRA 824 (1992); Georg Grotjahn GMBH & C. v. Isnani, 235 SCRA 216 (1994); Agilent Technolgies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp., G.R No. 154618, 14 April (2004). A foreign corporation not licensed to do business in the Philippines is not absolutely incapacitated from filing a suit in local court. Aboitiz Shipping Corp. v. Insurance Company of North America, 561 SCRA 262 (2008). (f) Proper Doctrine: Eriks Ltd. v. Court of Appeals, 267 SCRA 567 (1997). 5. Suits Against Foreign Corporations: (a) Jurisdiction Over Foreign Corporations (Sec. 14, Rule 14, Rules of Court; General Corp. of the Phil. v. Union Insurance Society of Canton, Ltd., 87 Phil. 313 [1950]; Johnlo Trading Co., v Flores, 88 Phil. 741 [1951]; Johnlo Trading Co. v. Zulueta , 88 Phil. 750 [1951]; Pacific Micronisian Line, Inc. v. Del rosario, 96 Phil. 23 [1954]; Far East Intl Import and Export Corp. v. Nankai Kogyo Co., Ltd., 6 SCRA 725 [1962]). For purpose serving summons a foreign corporation in accordance with Rule 14, Section 14, it is sufficient that it be alleged in the complaint that it is doing business in the Philippines. Hahn v. Court of Appeals, 266 SCRA 537 (1997). When it is shown that a foreign corporation is doing business in the Philippines, summons may be served on (a) its resident agent designated in accordance with law; (b) if there is no resident agent, the government official designated by law to that effect; or (c) any of its officers or agent
28 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.
192
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 principal foreign corporation and its alleged agent with respect to the transaction in question. French Oil Mills Machinery Co.v. CA, 295 SCRA 462 (1998). (b) Objection to Jurisdiction: Appearance of a foreign corporation to a suit precisely to question the tribunals jurisdiction over its person is not equivalent to service of summons, nor does it constitute an acquiescence to the courts jurisdiction. Avon Insurance PLC v. Court of Appeals, 278 SCRA 312, 327 (1997). (c) Odd Doctrine: Facilities Management Corp. v. De la Osa, 89 SCRA 131 (1979); FBA Aircraft v. Zosa, 110 SCRA 1 (1981); Royal Crown Intl v. NLRC, 178 SCRA 569 (1989); Wang Laboratories, Inc. v. Mendoza, 156 SCRA 44 (1987). Contra: The 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. Hyopsung Maritime Co., Ltd. v. CA, 165 SCRA 258 1988); Signetics Corp. v. CA, 225 SCRA 737 (1993). But Now See: 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). 6. Laws Applicable to Foreign Corps. (Sec. 129; Grey v. Insular Lumber Co., 67 Phil. 139 (1938) 7. Amendment of Articles of Incorporation (Sec. 130) 8. Merger and Consolidation (Sec. 132; Art. 51, Omnibus Code) 9. Revocation of License (Secs. 134 and 135; Art. 50, Omnibus Investment Code) 10. Withdrawal of Foreign Corporation (Sec. 136)
Legal Requirements Prior to Transaction of Business Documentary Requirements (Sec. 125)

(1) BOI certificate The BOI certificate is issued upon a finding of the Board of Investments that the business operations of the foreign corp. will contribute to the sound and balanced development of the national economy on a self-sustaining basis. (See Omnibus Investments Code, Sec. 48-49) NOTE: Applications, if not acted upon within 10 days from official acceptance thereof, shall be considered automatically approved! (Art. 53, Omnibus Investments Code) (2) SEC license to do business (Sec. 125) Application under oath setting forth the information specified in Sec. 125; Additional information as may be necessary or appropriate to enable the SEC to determine whether the corporation is entitled to a license to transact business in the Philippines, and to determine and assess the fees payable; Duly executed certificate under oath by authorized official/s of the jurisdiction of the company's incorporation, attesting to the fact that the laws of the country of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing; Statement under oath of the president or any other person authorized by the corporation showing that the applicant is solvent and in good financial condition, and setting forth the assets and liabilities of the corporation within 1 year immediately prior to the application.
(3) Certificate from appropriate government agency
193
NOTE: Certain sectors such as banking, insurance, etc. require prior approval from the government agencies concerned. (Sec. 17)
Deposit requirement (Sec. 126)

Within 60 days after the issuance of the license, the licensee shall deposit with the SEC securities with an actual market value of at least P 100,000.00. These securities are for the benefit of present and future creditors, and shall consist of any of the following: Bonds or other evidence of indebtedness of the Government or its instrumentalities, etc.; Shares of stock in "registered enterprises" as defined in R.A. 5186; Shares of stock in domestic corporations registered in the stock exchange; Shares of stock in domestic insurance companies and banks.
Once the licensee ceases to do business in the Philippines, these deposited securities shall be returned, upon the licensee's application and proof to the satisfaction of the SEC that the licensee has no liability to Philippine residents or the Philippine government. Note: Foreign banking and insurance corporations are the exceptions to this requirement.
Designation of a resident agent (Sec. 128)

The designation of a resident agent is a condition precedent to the issuance of the license to transact business in the Philippines. WHO: PURPOSE: A resident of the Philippines. To be served any summons and other legal processes which may be served in all actions or other legal proceedings against such corporation. Service upon such resident shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office.
Laws applicable to foreign corporations

Foreign corporations lawfully doing business in the Philippines are bound by all laws, rules and regulations OF THE philippines --- applicable to domestic corporations of the same class. Exceptions: dissolution (1) As regards the creation, formation, organization or
of the corporation FOREIGN LAW; (2) As regards the fixing of relations, liabilities, responsibilities, or duties of stockholders, members, or officers or corporations to each other or to the corporation ( Sec. 129)
Effects of Failure to Secure SEC License

WHAT ARE THE EFFECTS OF FAILURE TO SECURE A LICENSE?
(1) The corporation will not be permitted to maintain agency in the Philippines; (2) The corporation will be subject to penalties and fines; (3) The corporation will not be permitted to maintain or intervene in any action
before Philippine courts or administrative agencies; it can be SUED.
194
Isolated transactions
MARSHALL WELLS V. ELSER (46 Phil. 71; 1924) Marshall Wells, a corporation organized under the State of Oregon, sued a domestic corp. for the unpaid balance on a bill of goods. Defendant demurred to the complaint on the ground that it did not show that plaintiff had complied with the law regarding corp. desiring to do business in the Phil., nor that the plaintiff was authorized to do business in the Phil. The Supreme Court, in ruling for Marshall Wells, stated that the object of the statute was to subject the foreign corp. doing business in the Phil. to the jurisdiction of its courts. The object of the statute was not to prevent it from performing single acts but to prevent it from acquiring a domicile for the purpose without taking the steps necessary to render it amenable to suit in the local courts. The implication of the law is that it was never the purpose of the Legislature to exclude a foreign corp. which happens to obtain an isolated order for business from the Phil., from securing redress in Phil. Courts, and thus, in effect to permit persons to avoid their contract made with such foreign corporation.
ATLANTIC MUTUAL V. CEBU STEVEDORING (G.R. No. 18961; Aug. 31, 1966) A foreign corp. engaged in business in the Phil. can maintain suit in this jurisdiction if it is duly licensed. If a(unlicensed) foreign corp. is not engaged in business in the Phil., it can maintain such suit if the transaction sued upon is singular and isolated, in which no license is required. In either case, the fact of compliance with the requirement of license, or the fact that the suing corp. is exempt therefrom, as the case may be, cannot be inferred from the mere fact that the party suing is a foreign corp. The qualifying circumstance, being an essential part of the element of the plaintiffs capacity to sue, must be affirmatively pleaded. In short, facts showing foreign corporations capacity to sue should be pleaded.
Curing of defect
HOME INSURANCE V. EASTERN SHIPPING (123 SCRA 424; 1983) A contract entered into by a foreign insurance corp. not licensed to do business in the Phil. is not necessarily void and the lack of capacity to sue at the time of execution of the contract is cured by its subsequent registration.
Protection of intellectual property rights

GENERAL GARMENTS CORP. V. DIR. OF PATENTS (41 SCRA 50; 1971) Domestic corporation General Garments registered Puritan trademark for its mens wear. US corporation Puritan Sportswear petitioned the Phil. Patent Office for cancellation of said trademark, alleging its ownership and prior use in the Phil. The Supreme Court held that a foreign corp. which does not do business in the Phil. and is unlicensed ( CAN SUE)but is widely known in the Phil. through the use of its products here has legal right to maintain an action to protect its reputation, corporate name and goodwill. The right to use the corporate name is a property right which the corp. may assert and protect in any of the courts of the world.
LE CHEMISE LACOSTE V. FERNANDEZ (129 SCRA 377; 1984)
195
A foreign corporation not doing business in the Phil. needs no license to sue in the Phil. for trademark violations. Where a violation of our unfair trade laws which provide a penal sanction is alleged, lack of capacity to sue of injured foreign corp. becomes immaterial (because a criminal offence is essentially an act against the State).
NOTE: Sec. 160 of R.A. 8293 (Intellectual Property Code) provides that any foreign national or juridical person who meets the requirements of Sec. 3 of the Act (i.e., is a national or is domiciled in a country party to any convention, treaty or agreement relating to intellectual property rights or the repression of unfair competition, to which the Philippines is also a party, or extends reciprocal rights to Philippine nationals by law) and does not engage in business in the Philippines may bring a civil or administrative action for opposition, cancellation, infringement, unfair competition, or false designation of origin and false description, whether or not it is licensed to do business in the Philippines under existing laws.
What Constitutes Transacting Business

WHAT IS CONSIDERED AS NOT DOING BUSINESS, AND THEREFORE NOT SUBJECT TO THE LICENSING REQUIREMENT? Mere investment as a shareholder and the exercise of the rights as such investor; Having a nominee director or officer represent the foreign investors interests; Appointing a representative or distributor in the Philippines who transacts business in his own name and for his own account Example: Rustans exclusive distributorship of Lacoste t-shirts
Publication of a general advertisement; NOTE: Under the Code of Commerce, the publication of an ad is prima facie evidence (or at least creates a presumption) of doing business in the Philippines.
Maintaining stock of goods for processing by another entity in the Philippines; Consignment of equipment to be used in processing products for export; Collecting information in the Philippines; Performing services incidental to an isolated contract of sale Example: Installing machinery sold by a foreign corporation to a Philippine buyer
WHAT IS THE TEST OF DOING BUSINESS IN THE PHILIPPINES? Whether or not there is continuity of transactions which are in pursuance of the normal business of the corporation. (Metholatum v. Mangaliman)
MENTHOLATUM V. MANGALIMAN (72 Phil. 525; 1941)
196
The true test as to whether a foreign corporation is doing business in the Philippines seems to be whether the foreign corp. is continuing the body or substance of the business for which it was organized or whether it has substantially retired from it and turned it over to another. The term implies a continuity of dealings and arrangements and contemplates performance of acts/works or the exercise of the functions normally incident to and in progressive prosecution of the purpose and object of its organization.
FACILITIES MANAGEMENT CORP. V. DE LA OSA (89 SCRA 131; 1979) The Court of Industrial Relations ordered Facilities Management Corporation (FMC) to pay Dela Osa his overtime compensation, swing shift and graveyard shift premiums. FMC filed a petition for review on certiorari on the issue of whether the CIR can validly affirm a judgment against persons domiciled outside and not doing business in the Phil. and over whom it did not acquire jurisdiction. The Supreme Court held that the petitioner may be considered as doing business in the Philippines within the scope of Sec. 14, Rule 14 of the Rules of Court:
Sec. 14. Service upon private foreign corp. - If the defendant is a foreign corp., or a non-resident joint stock corporation or association, doing business in the Phil., service may be made on its resident agent, on the government official designated by law to the effect, or to an y of its officers or agents within the Philippines.
FMC had appointed Jaime Catuira as its agent with authority to execute Employment Contracts and receive, on behalf of the corp., legal services from, and be bound by processes of the Phil. Courts, for as long as he remains an employee of FMS. If a foreign corp. not engaged in business in the Phil., through an Agent, is not barred from seeking redress from courts in the Phil., that same corp. cannot claim exemption done against a person or persons in the Phil..
NOTE: Under Sec. 12, Rule 14 of the 1997 Rules of Civil Procedure , the term "doing business" has been replaced with the phrase "has transacted business," thereby allowing suits based on isolated transactions.
MERRILL LYNCH FUTURES INC. V. CA (211 SCRA 824) Merrill Lynch Futures, Inc. (MLF) filed a complaint against the spouses Lara for the recovery of a debt. MLF is a non-resident foreign corp. not doing business in the Phil., organized under the laws of Delaware, USA. It is a futures commission merchant duly licensed to act as such in the futures markets and exchanges in the US, essentially functioning as a broker executing orders to buy and sell futures contract received from its customers on US futures exchanges. (Futures contract is a contractual commitment to buy and sell a standardized quantity of a particular item at a specified future settlement date and at a price agreed upon with the purchase or sale being executed on a regulated futures exchange.) The spouses refused to pay and moved to dismiss the case alleging that plaintiff had no legal capacity to sue because (1) MLF is doing business in the country without a license; and (2) the transactions were made with Merrill Lynch Pierce, Fenner and Smith and not with plaintiff MLF. Issue: Can MLF sue in Philippine courts to establish and enforce its rights against spouses in light of the undeniable fact that it had transacted business without a license?
197
Legal capacity to sue may be understood in two senses: (1) That the plaintiff is prohibited or otherwise incapacitated by law to institute suit in the Phil. Courts, or (2) although not otherwise incapacitated in the sense just stated, that it is not a real party in interest. The Court finds that the Laras were transacting with MLF fully aware of its lack of license to do business in the Phils., and in relation to those transactions had made payments and the spouses are estopped to impugn MLF's capacity to sue them. The rule is that a party is estopped to challenge the personality of a corp after having acknowledged the same by entering into a contract with it. The principle is applied to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes, chiefly in cases where such person has received the benefits of the contract.
PACIFIC VEGETABLE OIL V. SINGSON (G.R. No. 7917; April 29, 1955) This is an action instituted by the plaintiff, a foreign corporation, against the defendant to recover a sum of money for damages suffered by the plaintiff as a consequence of the failure of the defendant to deliver copra which he sold and bound himself to deliver to the plaintiff. Defendant filed a motion to dismiss on the ground that the plaintiff failed to obtain a license to transact business in the Phil and, consequently, it had no personality to file an action. Has appellant transacted business in the Philippines in contemplation of law? Contrary to the findings of the trial court, the copra in question was actually sold by the defendant to the plaintiff in the US, the agreed price to be covered by an irrevocable letter of credit to be opened at the Bank of California, and delivery to be made at the port of destination. It follows that the appellant corporation has not transacted business in the Phil in contemplation of Sec. 68 and 69 which require any foreign corporation to obtain a license before it could transact business, or before it could have personality to file a suit in the Phil.. It was never the purpose of the Legislature to exclude a foreign corporation which happens to obtain an isolated order of business from the Phil., from securing redress in the Phil. Courts, and thus, in effect, to permit persons to avoid their contracts made with such foreign corp.. The lower court erred in holding that the appellant corporation has no personality to maintain the present action. AETNA CASUALTY & SURETY CO. VS. PACIFIC STAR LINE (80 SCRA 635; 1977) Aetna as subrogee of I. Shalom sued Pacific Star Line (PSL), the common carrier for the loss of Linen & Cotton piece goods due to pilferage and damage amounting to US$2,300.00. PSL contends that Aetna has no license to transact insurance business in the Philippines as gathered from the Insurance Commission and SEC . It also argues that since said company has filed 13 other civil suits, they should be considered as doing business here and not merely having entered into an isolated transaction. Based on rulings in Mentholatum and Eastboard Navigation, the Supreme Court held that Aetna is not transacting business in the Philippines for which it needs to have a license. The contract was entered into in New York and payment was made to the consignee in the New York branch. Moreover, Aetna was not engaged in the business of insurance in the Philippines but was merely collecting a claim assigned to it by consignee. Because it was not doing business in the Philippines, it was not subject to Sec. 68-69 of the Corporation Law and therefore was not barred from filing the instant case although it had not secured a license to transact insurance business in the Philippines.
TOPWELD MANUEL VS. ECED (138 SCRA 120; 1985)
198
Topweld entered into 2 separate contracts with foreign entities: a license and technical assistance agreement with IRTI, and a distributor agreement with ECED, SA. When Topweld found out that the foreign corporations were looking into replacing Topweld as licensee and distributor, the latter went to court to ask for a writ of preliminary injunction to restrain the foreign corporations from negotiating with 3rd parties as violative of RA 5445 (4). Although IRTI and ECED were doing business in the Philippines, since they had not secured a license from BOI, the foreign corporations were not bound by the requirement on termination and Topweld could not invoke the same against the former. Moreover, it was incumbent upon Topweld to know whether or not IRTI and ECED were properly authorized to engage in such agreements. The Supreme Court held that both parties were guilty of violating RA 5445. Being in pari delicto, Topweld was not entitled to the relief prayed for.
ANTAM CONSOLIDATED VS. CA (143 SCRA 289; 1986) Stokely Van Camp Inc. filed a complaint against Banahaw, Antam, Tambunting and Unicorn for the collection of a sum of money for failure to deliver 500 tons of crude coconut oil. Antam et al asked for dismissal of case on ground that Stokely was a foreign corporation not licensed to do business in the Philippines and therefore had no personality to maintain the suit. The SC held that the transactions entered into by Stokely with Antam et al (3 transactions, either as buyer or seller) were not a series of commercial dealings which signify an intent on the part of the respondent to do business in Philippines but constitute an isolated transaction. The records show that the 2nd and 3rd transactions were entered into because Antam wanted to recover the loss it sustained from the failure of the petitioners to deliver the crude oil under the first transaction and in order to give the latter a chance to make good on their obligation. There was only one agreement between the parties, and that was the delivery of the 500 tons of crude coconut oil.
How Courts Acquire Jurisdiction over Foreign Corporations

As a rule, jurisdiction over a foreign corporation is acquired by the courts through service of summons on its resident agent. If there is no assigned resident agent, the government official designated by law can receive the summons on their behalf and transmit the same to them by registered mail within 10 days. This will complete the service of the summons. Summons can also be served on any of the corporation's officers or agents within the Philippines. (See Sec. 128; Rule 14, Sec. 12, Rules of Court. Note that while Sec. 128 presupposes that the foreign corporation has a license, Rule 14 does not make such an assumption.) Note that if there is a designated agent, summons served upon the government official is not deemed a valid process. Johnlo Trading case holds that the service on the attorney of an FC who was also charged with the duty of settling claims against it is valid since no other agent was duly appointed. Service on Officers or Agents of an foreign corporations domestic subsidiary will only vest jurisdiction if there is sufficient ground to disregard the separate personalities.
GENERAL CORPORATION OF THE PHILIPPINES VS UNION INSURANCE (87 Phil. 313; 1950)
199
General Corporation and Mayon investment sued Union Insurance and Firemens Fund Insurance (FFI) for the payment of 12 marine insurance policies. The summons was served on Union which was then acting as FFIs settling agent in the country. At that time, it was not yet registered and authorized to transact business in the Philippines. Issue: Did the trial court acquire valid jurisdiction over FFI? Yes. The service of summons for FFI on its settling agent was legal and gave the court jurisdiction upon FFI. Section 14, Rule 7 of ROC embraces Union in the phrase, or agents within the Philippines. The law does not make distinctions as to corporations with or without authority to do business in the Philippines. The test is whether a foreign corporation was actually doing business here. Otherwise, a foreign corporation doing business illegally because of its refusal or neglect to obtain the corresponding authority to do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the courts.
Withdrawal of Foreign Corporation (Sec. 136)

HOW: By filing a petition for withdrawal of license REQUISITES FOR ISSUANCE OF CERTIFICATE OF WITHDRAWAL: (1) All claims which have accrued in the Philippines have been paid, compromised and settled; (2) All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions have been paid; and (3) The petition for withdrawal of license has been published once a week for 3 consecutive weeks in a newspaper of general circulation in the Philippines.
Revocation and Suspension of License (Sec. 134)

WHAT ARE THE GROUNDS FOR REVOCATION OR SUSPENSION OF A LICENSE OF A FOREIGN CORPORATION? (1) Failure to file its annual report or pay any fees as required by the Corporation Code; Failure to appoint and maintain a resident agent in the Philippines as required; Failure, after change of resident agent or of his address, to submit to the SEC a statement of such change; Failure to submit to the SEC an authenticated copy of any amendment to its AOI or by-laws or of any articles of merger or consolidation within the time prescribed by the Code; A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to Title XV; Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine government or any of its agencies or political subdivisions; Transacting business in the Philippines outside of the purpose/s for which such corporation is authorized under its license; Transacting business in the Philippine as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or
(2)
(3)
(4)
(5)
(6)
(7)
(8)
200
(9)
Any other ground as would render it unfit to transact business in the Philippines.
SPECIAL AND MISCELLANEOUS PROVISIONS
Educational corporations (Sec. 106-108)

Educational corporations other than government-run institutions are governed first by special laws, second, by the special provisions of the Corporation Code, and lastly, by the general provisions of the Corporation Code. ( Sec. 106) At least 60% of the authorized capital stock of educational corporations must be owned by Filipino citizens, and Congress may require increased Filipino equity participation therein. (With the exception of educational institutions established by religious groups and mission boards, which are not subject to this equity requirement.) However, control and administration of educational institutions must be vested exclusively in citizens of the Philippines. ( Art. XIV, Sec. 4 (2), 1987 Constitution) This means that no alien may be elected as a member of the BOD nor appointed as Principal or officer thereof. Once a school, college or university has been granted government recognition by the DECS, it must incorporate within 90 days from the date of such recognition, unless it is expressly exempt by DECS for special reasons. (Act 2706, Sec. 5) In addition, it must file a copy of its AOI and by-laws with the DECS. Without the favorable recommendation of the DECS Secretary, the SEC will not accept or approve such articles. (Sec. 107, Corporation Code)
Religious corporations
(Sec. 109-116)
Religious corporations are governed by Title XIII, Chapter II of the Corporation Code and by the general provisions of the Code on non-stock corporations insofar as they may be applicable. (Sec. 109)
Corporation sole (Sec. 110-115)

A corporation sole is an incorporated office, composed of a single individual who may be a bishop, priest, minister or presiding officer of a religious sect, denomination or church. Its purpose is to administer and manage as trustee the property and affairs of such religious sect, denomination or church, within the territorial jurisdiction of such office. ( Sec. 110; Sec. 111 (3)) In case of death, resignation, transfer or removal of the person in office, his successor replaces him and continues the corporation sole. The property is not owned but is merely administered by the corporation sole, and ownership pertains to the church or congregation he represents. On the other hand, he is the person authorized by law as the administrator thereof and the court may take judicial notice of such fact and of the fact that the parish priests have no control over such property. In determining whether the constitutional provision requiring 60% Filipino capital for corporation ownership of private agricultural lands, the Supreme Court has held that it is the nationality of the constituents of the diocese, and not the nationality of the actual incumbent of the office, which must be taken into consideration. Thus, where at least 60% of the constituents are Filipinos, land may be registered in the name of the corporation sole, although the holder of the office is an alien. This ruling is based on the fact that the corporation sole is not the owner but merely the administrator of the property, and that he holds it in trust for the faithful of the diocese concerned. ( See Gana v. Roman Catholic Archbishop of Manila, 43 O.G. No. 8, 3225; 1947)
Religious societies (Sec. 116)
201
In contrast to a corporation sole, religious societies are composed of more than one person. The requirements for incorporation of such societies are set forth in Sec. 116 of the Code.
Close Corporations
(Sec. 96-105)
WHAT ARE THE REQUISITES OF A CLOSE CORPORATION? (Sec. 96) A close corporation, within the meaning of the Corporation Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons not exceeding 20; (2) All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by Title XII of the Code; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notes: A narrow distribution of ownership does not, by itself, make a close corporation. (San Juan Structural and Steel Fabricators v. CA, 296 SCRA 631) A corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation.
CAN A CORPORATION THAT IS NOT A CLOSE CORPORATION BE A STOCKHOLDER IN A CLOSE CORPORATION? YES, provided that said corporation owns less than 2/3 of voting stock or voting rights.
WHAT (Sec. 96) mosbipec
ENTITIES MAY NOT BE ORGANIZED AS CLOSE CORPORATIONS?
Mining Oil Stock Exchange Bank Insurance Public Utilities Educational Institutions Corporations declared vested with public interest
DISTINGUISH CLOSE CORPORATIONS FROM REGULAR CORPORATIONS. Close Corporation No. of stockholders Management Not more than 20 (Sec. 96) Can be managed by the stockholders (Sec. 97) May be dispensed with (Sec. 101) "Regular" Corporation No limit Managed by Board of Directors Actual meetings are required.
Meetings
Quorum and Voting
Greater quorum and voting requirements allowed. (Sec. 97)
202
Pre-emptive right
Extends to all stock, including treasury shares (Sec. 102) Must be > par value (Sec. 105) SEC has the power to arbitrate disputes in case of deadlocks, upon written petition by any stockholder. (Sec. 104) This includes the power to appoint a provisional director, as well as to dissolve the corporation.
Does not extend to treasury shares. May be < par value
Buy-back of shares Resolution of deadlocks
Dissolution
May be petitioned by any stockholder whenever any of the acts of the directors or officers or those in control of the corporation is illegal, fraudulent, dishonest, oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted. (Sec. 105)
Generally requires a 2/3 vote of the stockholders and a majority vote of the BOD. (Note however that in case of involuntary dissolution under Sec. 121, a corporation may be dissolved by the SEC upon filing of a verified complaint and after proper notice and hearing.)
WHAT IS A PROVISIONAL DIRECTOR? (Sec. 104) A provisional director is an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose qualifications, if any, may be determined by the SEC. He is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. However, he has all the rights and powers of a duly-elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the SEC or by all the stockholders . (Sec. 104)
COMPARE APPRAISAL RIGHT AND WITHDRAWAL RIGHT IN CLOSE CORPORATIONS. ( Sec. 105) Withdrawal Right Type of involved corporation Close corporation Appraisal Right "Regular" corporation
When availed of
For any reason (Sec. 105)
Only the grounds enumerated in Sec. 81 and Sec. 42 May be < par or issued value
Fair value of shares
Must be > par or issued value (Sec. 105)
XVII. CLOSE CORPORATIONS

1. Definition (Sec. 96; Manuel R. Dulay Enterprises v. Court of Appeals, 225 SCRA 678 [1993]; San Juan Structural v. Court of Appeals, 296 SCRA 631 [1998]). The concept of a close corporation organized for the purpose of running a family business or managing family property has formed the backbone of Philippine commerce and industry. Through this device, Filipino families have been able to turn their humble, hard-earned life savings into going concerns capable of providing them and their families with a modicum of material comfort and financial security as a reward for years of hard work. A family corporation should serve as a reward for years of hard work. A family corporation should serve as a rallying point for family unity and prosperity, not as a flashpoint for familial strife. It is hoped that people reacquaint themselves with the concepts of mutual aid and security that are the original driving forces behind the formation of family corporations and use
203
these tenets in order to facilitate more civil, if not more amicable, settlements of family corporate disputes. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003). 2. Articles of Incorporation Requirements (Sec. 97) (a) Pre-Emptive Rights (Sec. 102) (b) Amendment (Sec. 103) 3. Restriction on Transfer of Shares (Secs. 98 and 99) 4. Agreements by Stockholder (Sec. 100) 5. No Necessity of Board (Sec. 101; Sergio F. Naguiat v. NLRC, 269 SCRA 564 [1997]). 6. Deadlocks (Sec. 104) 7. Withdrawal and Dissolution (Sec. 105) Even prior to the passage of Corporation Code which recognized close corporations, the Supreme Court had on limited instances recognized the common law rights of minority stockholders to seek dissolution of the corporation. Financing Corp. of the Phil. v. Teodoro , 93 Phil. 404 (1953).
XVIII. NON-STOCK CORPORATIONS AND FOUNDATIONS

1. Theory on Non-Stock Corporation (Secs. 14(2), 43, 87, 88 and 94(5) ; Collector of Internal Revenue v. Club Filipino Inc. de Cebu, 5 SCRA 321 [1962]; Collector of Internal Revenue v. University of Visayas, 1 SCRA 669 [1961]). A non-stock 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 undertakings such as the investment business where profit is the main or underlying purpose. Although the non-stock corporation 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, G.R. 115054-66, 12 September 1999 [unrep.]) The incurring of profit or losses does not determine whether an activity is for profit or non-profit, and the courts will consider whether dividends have been declared or its members or that is property, 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). In a mutual life insurance corporation, organized as a non-stock nonprofit corporation, the so-called dividend that is received by members-policyholders is not a portion of profits set aside for distribution to the stockholders in proportion to their subscription to the capital stock of a corporation. One, a mutual company has no capital stock to which subscription is necessary; there are no stockholders to speak of, but only members. And, two, the amount they receive does not partake of the nature of a profit or income. The quasi-appearance of profit will not change its character; it remains an overpayment, a benefit to which the member-policyholder is equitably entitled. Republic v. Sunlife Assurance Company of Canada, 473 SCRA 129 (2005). 2. Non-Applicability of the Nationalization Laws A foreigner may a member or an officer of a non-stock corporation. Save for the position of the Secretary, who must be a Filipino citizen and a resident of the Philippines, the prohibition of foreign citizens becoming officers in corporations engaged in business does not apply to the activities of a nonstock corporation which do not fall within the coverage of a nationalized industry or area of business reserved by law exclusively to Filipino citizens. (SEC Opinion No. 12, series of 2002, 21 November 2002). 3. Delinquency of Membership Dues Section 69 of the Code refers specifically to unpaid subscriptions to capital stock, the sale of which is governed by Section 68. Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009). There are fundamental differences that defy equivalence or even an analogy between sale of delinquent stock under Section 68 and sale that occurred in this case. Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009). Neither Article 1146 or Article 1149 is applicable but Article 1140 of the Civil Code which provides that an action to recover movables shall prescribe in eight (8) years. Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009). Petitioner failed to duly observe both the spirit and letter of its own by-laws. Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009). The utter bad faith exhibited by Calatagan brings into operation Articles 19, 20 and 21 of the Civil Code under the Chapter on Human Relations; The obligation of a corporation to treat every person honestly and in good faith extends even to its shareholders or members, even if the latter find
204
themselves contractually bound to perfor certain obligations to the corporation. Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009). Respondent was able to duly prove that he had sustained mental anguish, serious anxiety and wounded feelings by reason of Calatagans acts, thereby entitli ng him to moral damages under Article 2217 of the Civil Code. Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009). A non-stock corporation may seize and dispose of the membership share of a fully-paid member on account of its unpaid debts to the corporation (i.e., unpaid monthly dues) when it is authorized to do so under the corporate by-laws (not by the articles of incorporation), and in spite of the fact that Section 67 of the Corporation Code on delinquency sale pertains to payment of shares subscription. The right of a non-stock corporation to expel a member through the forfeiture of such members share may be established in the by-laws alone, and need not be embodied in the articles of incorporation. This is authorized under Sec. 91 of the Corporation Code providing that membership shall be terminated in the manner and for causes provided in the articles of incorporation or the by-laws of a non-stock corporation. Valley Golf & Country Club v. Vda. De Caram , 585 SCRA 218 (2009). 4. Conversion of Non-Stock Corporation to Stock Corporation The conversion of a non-stock educational institution into a stock corporation is not legally feasible, as it violates Sec. 87 of Corporation Code that no part of the income of a non-stock corporation may be distributable as dividends to its members, trustees or officers. Thus, the Commission has previously ruled that a non-stock 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 non-stock corporation be dissolved first under any of the methods specified Title XIV of the Corporation Code. Thereafter, the members may organize as a stock corporation directed to bring profits or pecuniary gains to themselves. (SEC Opinion dated 24 February 2003; SEC Opinion dated 10 December 1992). In the event of dissolution of a non-stock corporation, its assets shall be distributed in accordance with the rules as provided for under Secs. 94 and 95 of Corporation Code. Unless, it is so provided in the Articles of Incorporation or By-Laws, the members are not entitled to any beneficial or vested interest over the assets of the non-stock corporation. In other words, non-stock, non-profit corporations hold their funds in trust for the carrying out of the objectives and purposes expressed in its charter. (SEC Opinion dated 24 February 2003; SEC Opinion dated 13 May 1992). 5. What Is a Foundation? (Secs. 30 and 34(H), NIRC of 1997; Sec. 24, Revenue Regulations No. 2; BIRNEDA Regulations No. 1-81, as amended) Formal requirements of Rev. Reg. No. 2 are not mandatory and an entity may, in the absence of compliance with such requirements, still show that it falls under the provisions of Sec. of NIRC. Collector v. V.G. Sinco Educational Corp., 100 Phil. 127 (1956). 5. Dissolution (Secs. 94 and 95)
Miscellaneous Provisions (Sec. 137-149)

The SEC has the power to issue rules and regulations reasonably necessary to enable it to perform its duties under the Code, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers. (Sec. 143) Whenever the SEC conducts any examination of the operations, books and records of any corporation, the results thereof must be kept strictly confidential, unless the law requires them to be made public or where they are necessary evidence before any court. (Sec. 142) All domestic and foreign corporations doing business in the Philippines must submit an annual report to the SEC of its operations, with a financial statement of its assets and liabilities and such other requirements as the SEC may impose. (Sec. 141) No right or remedy in favor of or against, nor any liability incurred by, any corporation, its stockholders, members, directors, trustees or officers, may be removed or impaired by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of the Code. ( Sec. 145) Violations of the Corporation Code not otherwise specifically penalized therein are punishable by a fine of not less than P 1,000.00 but not more than P 10,000.00 or by imprisonment for not less than 30 days but not more than 5 years, or both, in the discretion of the court. If the violation is committed by a corporation, the same may be dissolved in appropriate proceedings before the SEC. (Sec. 144)
205
XXI. MISCELLANEOUS
1. 2. 3. 4. SEC Power and Supervision (Secs. 108 and 143; PD 902-A) Special Corporations (Sec. 4) New Requirements on Existing Corporations (Sec. 148). Applicability of Other Provision of old Corporation Law (Secs. 145 and 146).

Corpo Law 2001 Reviewer 131 Pages

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Corpo Law 2001 Reviewer 131 Pages

Uploaded by

Copyright:

Available Formats

EDWIN PADILLO BAR 2013

Definition and attributes of a corporation

EDWIN PADILLO BAR 2013

EDWIN PADILLO BAR 2013

COMPARED WITH OTHER BUSINESS MEDIA

III. NATURE AND ATTRIBUTES OF A CORPORATION

EDWIN PADILLO BAR 2013

EDWIN PADILLO BAR 2013

EDWIN PADILLO BAR 2013

EXCEPTION: TEST OF CONTROLLING OWNERSHIP also applies in:

EDWIN PADILLO BAR 2013

EDWIN PADILLO BAR 2013

EDWIN PADILLO BAR 2013

PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION

EDWIN PADILLO BAR 2013

EDWIN PADILLO BAR 2013

PIERCING THE VEIL OF CORPORATE FICTION:

EDWIN PADILLO BAR 2013

EDWIN PADILLO BAR 2013

EDWIN PADILLO BAR 2013

EDWIN PADILLO BAR 2013

EDWIN PADILLO BAR 2013

EDWIN PADILLO BAR 2013

EDWIN PADILLO BAR 2013

EDWIN PADILLO BAR 2013

Stock v. Non-Stock Corporations

Primarily to make profits for its shareholders

Profit is distributed to shareholders

Composition Scope of right to vote

Stockholders Each stockholder votes according to the proportion of

Cannot be denied. (Sec. 58)

Who exercises Corporate Powers 23 Governing Board

Members of the corporation

Board of Directors or Trustees, consisting of 5-15 directors / trustees.

Transferability of interest or membership

Distribution of assets in case of dissolution

EDWIN PADILLO BAR 2013

FORMATION AND ORGANIZATION OF CORPORATION Requirements in the formation of a corporation

not less than 5; not more than 15

VI. CORPORATE CONTRACT LAW

EDWIN PADILLO BAR 2013

EDWIN PADILLO BAR 2013

Steps in the formation of a corporation

STEPS a. Promotional Stage (See SEC. 2. Definitions)

EDWIN PADILLO BAR 2013

(see chart below)

c. Filing of articles; payment of fees.

d. Examination of articles; approval or rejection by SEC.

e. Issuance of certificate of incorporation.

b. Drafting articles of incorporation (See SEC. 14)

EDWIN PADILLO BAR 2013

Incorporators and Directors

VII. ARTICLES OF INCORPORATION

EDWIN PADILLO BAR 2013

De Facto Corporations: Requisites User of Corporate Powers

Formation under apparently valid statute.

EDWIN PADILLO BAR 2013

Colorable compliance with the legal requirements in good faith.

CORPORATION BY ESTOPPEL (Sec. 21)

What are the effects of a Corporation by Estoppel in suits brought:

EDWIN PADILLO BAR 2013

BY-LAWS (Sec. 46 & 47)

(b) Prior to incorporation

EDWIN PADILLO BAR 2013