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Atty. CESAR L. VILLANUEVA

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OUTLINE IN PHILIPPINE CORPORATE LAW
2ND SEMESTER, SY 2004-2005

I. HISTORICAL BACKGROUND
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1. Philippine Corporate Law :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 "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

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. It clarified the
obligations of corporate directors and officers, expressed in statutory language established principles and
doctrines, and provided for a chapter on close corporations.

4. Proper Treatment of Philippine Corporate Law

Philippine Corporate Law comes from the common law system of the United States. Therefore,
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 this development
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.

A public corporation can only exist when a legislative grant is conferred. A corporation will be formed only
when 5 individual persons, as incorporators, agree to form a corporation.

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Unless otherwise indicated, all references to sections pertain to The Corporation Code of the Philippines.

2
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.
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II. CONCEPTS

See opening paragraphs of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No. 2, June
1994)

1. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code)

Sec. 2 Corporation defined A corporation is an artificial being created by operation of law, having
the rights of succession and the powers attributes and properties, expressly authorized by law
or incident to its existence.

Art. 44(3) The following are juridical persons Corporations, partnerships and associations for
private interest or purpose to which the law grants a juridical personality, separate and distinct from
that of each shareholder, partner or member.

Art. 45 Juridical persons mentioned in Nos.1 and 2 of the preceding article are governed by laws creating
or recognizing them.

Private corporations are regulated by laws of general application on the subject.

Partnerships and associations for private interest or purpose are governed by the provisions of this Code
concerning partnerships.

Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and regulations of their
organization.

Art. 1775 Association and societies, whose articles are kept secret among the members, and wherein
any pone of the members may contract in his own name with third persons, shall have no juridical
personality, and shall be governed by the provisions relating to co-ownership

A corporation is an artificial being created by operation of law. It has 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).

- an artificial being - a person created by law or by state; legal fiction

- created by law its existence is dependent upon the onset or grant of the state
EXCEPT corporation by estoppel and de facto corporation

- the definition of a corporation is merely a guide and does not really provide for the basis of a
corporation

A corporation upon coming to existence, 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 related. (Construction
Dev. Corp of the Phils v. Cuenca 466 SCRA 714, 2005)

Corporation is a creature of Limited Powers- Except for those powers which are expressly conferred
on it by the Corporation Code and those that are implied by or are incidental to its existence, a
corporation has no powers. It exercises its powers through its board of directors and/or its duly authorized
officers and agents. (Pascual and Santos v. The Members of the Tramo Wakas Neighborhood
Association, INC., 442 SCRA 438, 2004)
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CLV: We should note that there must be an underlying contract between and among the people forming the
corporation for it is upon such contract that the state grant is offered. A corporation will be formed only when
5 individual persons, as incorporators agree to form a corporation and the state gives its consent. Being only a
creature of law, it only has powers, attributes and properties which the law wishes to grant.

Q. Why is it important to know that the corporation is a juridical person?

A. To be able to know that the corporation is able to contract with others.

Q. Why does the definition of a corporation involve a statement creature of the law?
A. To reiterate the fact that the corporations can only do acts given to it by the law. It is of limited
existence. Outside its powers, it does not exist.

2. Four Corporate Attributes Based on Section 2

(a) A corporation is an artificial being (Ability to contract and Transact)

- a person created by law or by state; a legal fiction.

(b) Created by operation of law (Creature of the Law)

- its existence is dependent upon the consent or grant of the state except corporation by estoppel
and de facto corporation.

(c) With the right of succession (strong juridical personality)

- the corporation exists despite the death of a member as a corporation has a personality
separate and distinct from that of its individual Stockholders. The separate juridical personality
remains even if there has been a change in the members and stockholders of the corporation.

(d) 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 physical assets of the corporation; the
tangibles (Ex. in a grocery, the goods being sold)

(b) BUSINESS ENTERPRISE OR ECONOMIC UNIT the commercial venture; this includes not only
the tangible assets but also the intangibles like goodwill created by the business

(C) JURIDICAL ENTITY juridical existence as a person; the primary franchise granted by the state

Q. Why is the distinction between the three levels important?

A. Each is important in its own way as there are consequences for each. The distinctions become
important and come into play when it comes to dealing with corporation law. What are you selling or
buying (and their worth) will depend upon the particular level you choose.

EXAMPLE: If you merely want to purchase the assets and not the business, a simple deed of sale would
suffice and you will not be liable for contingent liabilities. It will be different if you buy the business as an
economic concept. SEC Regulations or Bulk sales Law may be applied.
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4. Relationships Involved in a Corporate Setting

A) JURIDICAL ENTITY LEVEL, which views the State-corporation relationship

- The state cannot destroy a corporation without observing due process of law.

B) INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a contractual
relationship on four (4) levels:

1. Between the corporation and its agents or representatives to act in the real world, such as its
directors and its officers, which is governed also by the Law on Agency

2. Between the corporation and its shareholders or members

3. 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.

- Most important level, highest form of law in this level is contract law.

4. Theories on the Formation of Corporation:

Theory of Corporate Enterprise or Economic unit - the SC has looked upon the corporation not merely
as an artificial being but more as an AGGRUPATION OF PERSONS DOING BUSINESS or AN
UNDERLYING ECONOMIC UNIT.

- The corporation is emerging as an enterprise bounded by economics rather than an artificial

personality bounded by forms of words in a charter, minute books & books of accounts.

- The proposition that a corporation has existence separate and distinct from its membership has
its limitations. (Separate existence is for a particular purpose.) There can be no corporate
existence w/o persons to compose it & there can be no association w/o associates.

(a) Theory of Concession (Tayag v. Benguet Consolidated, 26 SCRA 242 [1968]).

- corporation creature of the state

- limited no other privilege may be exercised beyond grant

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 procedure
and conditions provided under the law for the acquisition of such juridical personality must be
complied with. Although the statutory grant to an association of the powers to purchase, sell, lease and
encumber property can only be construed the grant of a juridical personality to such an association . .
. nevertheless, the failure to comply with the statutory procedure and conditions does not warrant a
finding that such association acquired a separate juridical personality, even when it adopts sets
of constitution and by-laws. International Express Travel & Tour Services, Inc. v. Court of Appeals, 343
SCRA 674 (2000).
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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).

TAYAG V. BENGUET CONSOLIDATED, 26 SCRA 242 (1968)

FACTS:

Idonah Slade Perkins died in 1960 with County Trust & Co. of New York as her domiciliary
administrator. She left, among others, 2 stock certificates covering 33, 002 shares of stock of appellant
Benguet Consolidated, Inc.

Renato Tayag, as ancilliary administrator in the Philippines, requested County Trust to surrender to
ancilliary administrator the stock certificates to satisfy the legitimate claims of local creditors. However,
County Trust refused.

The lower court then presided by Judge Santos ruled that :

1. Stock certificates are considered lost for all purposes of admin. & liquidation of the Philippine estate
of Perkins

2. Said certificates are cancelled

3. Directs said corporation to issue new certificates in lieu thereof, the same to be delivered by aid
corp. to either Tayag or the Probate division of this court.

An appeal was taken not by County Trust, as domiciliary admin., but by Benguet on the ground that the
certificates of stock are existing and in possession of County Trust. They also assert that there was a
failure to observe certain requirements of its by-laws before new stock certificates could be issued.

ISSUE: Whether or not Benguet properly pursued the appeal?

HELD: The Court held that the appeal cannot prosper. Judgment affirmed. Benguet bound by order.

The challenged order represents a response & expresses a policy arising out of a specific problem,
addressed to the attainent of specific ends by the use of specific remedies, w/ full & ample support from
legal doctrines of weight and significance.

A disagreement ensued between the ancillary and the domicillary administrator as to who was entitled to
the certificate of stocks

- The CFI ordered County Trust to produce and deposit the stocks with the court which was not
complied with. Thus the order of the CFI.

- Benguet did not dispute Tayags authority to gain control and possession of all the assets of the
dependent within the Philippines. The corporation, like every Juan and Maria given life by God acts on it

- Corporation is an artificial being created by operation of law. It owes it life to the state its birth
being purely dependent on its will.

- Flether: A corp. is not in fact and in reality a person, but the law treats it as though it were a
person by process of fiction, or by regarding it as an artificial person distinct and separate from its
individual stockholders.

- There is thus a rejection of Gierkes genossenchaft theory. A corporation, as known to Phil.

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Jurisprudence is a creature w/o any existence until it has received the imprimatur of the state acting
according to law. It is logically inconceivable therefore that it will have rights and privileges of a higher
priority than that of its creator. More than that it cannot legitimately refuse to yield obedience to acts
of its state organs, certainly not excluding the judiciary, whenever called upon to do so.

- Corporate by-laws must yield to judicial order

TAYAG DOCTRINES: Formally adopts the concession theory; corp. w/o imprimatur outside the state grant:

1. Even if it has its own set of by laws etc., the corp would still have to obey the order of the state.
2. Repudiated the application of EET- corp as reality of the group as a social and legal entity independent of state
recognition.
- As a matter of fact, a corp. once it comes into being comes more often w/n the ken of the judiciary
than the other two coordinate branches. It institutes the appropriate court action to enforce its right.
Correlatively, it is not immune from judicial control in those instances, where a duty under the law as
ascertained in an appropriate legal proceeding is cast upon it.

c) Theory of Enterprise Entity (BERLE, Theory of Enterprise Entity, 47 COL. L. REV. 343 [1947])

- juridical personality

- contractual relation between 5 or more individuals

- recognize existence of an aggregation of individuals (enterprise entity)

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
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).
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CLV: Fiction cannot be created unless there is an enterprise or group of persons upon whom it would be conferred.
But in spite of the underlying contract among the persons wanting to form a corp., the grant is only by virtue of a
primary franchise given by the state. And it is within the power of the state to grant it or not. But once granted
corporate life of its own tells it to go and multiply profitably. Once juridical personality is acquired, however, this
doesnt mean that the group becomes a creature of the state, but actually becomes a creature of its own volition
and remains as a distinct personality.

5. Four Corporate Attributes Based on Section 2:

A) A CORPORATION IS AN ARTIFICIAL BEING (Ability to Contract and Transact)

- a person created by law or by state; a legal fiction

B) CREATED BY OPERATION OF LAW (Creature of the Law)

- its existence is dependent upon the consent or grant of the state EXCEPT corporation by
estoppel and de facto corporation

C) WITH RIGHT OF SUCCESSION (Strong Juridical Personality)

- the corporation exist despite the death of its members as a corporation has a personality
separate and distinct from that of its individual stockholders. The separate personality remains even if
there has been a change in the members and stockholders of the corporation.

D) HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY

LAW OR INCIDENT TO ITS EXISTENCE (Creature of Limited Powers)

6. Advantages and Disadvantages of Corporate Form:

(a) Four Basic Advantageous Characteristics of Corporate Organization:

(i) STRONG LEGAL 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 separate 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. a Stockholders of F. Guanzon and Sons, Inc. v. Register of
Deeds of Manila, 6 SCRA 373 (1962).

Execution pending appeal was allowed in Borja v. Court of Appeals, 196 SCRA 847 (1991) only
because the prevailing party is already of advanced age and in danger of extinction but not in this case
because the winning party is a corporation. A juridical entitys existence cannot be likened to a natural
person- its 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 executor
judgment (Manacop v. Equitable PCI Bank, 468 SCRA 256, 2005).
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STOCKHOLDERS OF F. GUANZON & SONS Inc. v REGISTER OF DEEDS

Facts: In 1960, five stockholders of F. Guanzon & Sons, Inc. executed a certificate of liquidation of
the assets of the corporation which provided that due to the resolution of the stockholders dissolving the
corporation, they have distributed among themselves in proportion to their shareholdings, as
liquidating dividends, the assets of said corporation including real properties located in Manila. The
certificate of liquidation was denied registration by the Register of Deeds and one of the grounds is
that the judgment of the corporation in approving dissolution and directing opposition of assets of the
corporation need to be presented aside from the following: (1) the number of parcels which were not
certified in the acknowledgement (2) P430.50 registration fees have to be paid (3) P90.45
documentary stamps need to be attached. Stockholders contend that it was not conveyance but a mere
distribution of corporate assets after the corporation ceased to exist upon dissolution.

Issue: WON the certificate merely involves a distribution of the corporate assets or should be
considered a transfer or conveyance.

Held: The Supreme Court agrees with the Register of Deeds and the Land Registration Commission.
A corporation is a juridical person distinct from the members composing it. Properties registered in the
name of the corporation are owned by it as an entity separate and distinct from its members. While
shares of stock constitute personal property, they do not represent property of the corporation. The
corporation has property of its own which consist mainly of real estates. A share of stock only typifies an
aliquot part of the corporations property or the right to share in the proceeds to that extent when
distributed according to law and equity. But its holder is not the owner of any part of the capital nor is he
entitled to the possession of any definite portion of its property or assets. The stockholder is not a co-
owner or tenant in common of the corporate property. Thus, the act of liquidation made by the
stockholders of the corporations assets cannot be considered as a partition of the community
property but rather a transference or conveyance of the title of its assets to the individual
stockholders in proportion to their stockholdings. Therefore, said transfer cannot be effected without the
corresponding deed of conveyance from the corporation to the stockholders.

(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

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).
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(iv) FREE TRANSFERABILITY OF UNITS OF OWNERSHIP FOR INVESTORS

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:

(i) Abuse of corporate management

(ii) Abuse of limited liability feature

(iii) High cost of maintenance

(iv) 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, Profit and Control

a) Sole Proprietorships

Sole Proprietorship Corporation

Free from many requirements and Heavily regulated; a lot of requirements
regulations in its operation imposed for registration and incorporation

Owner has full control of his business Control of business is done by the BOD

Owner stands to lose more than what he put Investors have limited liability
into the venture

(b) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code)

Art. 1768 The partnership has a juridical capacity separate and distinct from that of each of the
partners, even in case of failure to comply with requirements of Art. 1772 first paragraph.

Art. 1775 Association and societies, whose articles are kept secret among the members, and wherein any
pone of the members may contract in his own name with third persons, shall have no juridical
personality, and shall be governed by the provisions relating to co- ownership.
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Corporation Partnership
Separate legal personality Separate legal personality

Investors limited liability Contractual limited liability ( when a limited

partnership is created)

Free transfer of shares Transfer with consent of partner

Centralized management Every partner is agent

Q. How does the contractual management of a corporation compare with the management of
a partnership?

A. Every partner, in the absence of a stipulation in the articles of partnership, binds the partnership
as every partner is an agent of the others (delectus personarum). In a corporation, only the BoD
and not the stockholders can bind the corporation.
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Four Basic Advantageous Characteristics of Corporate Disadvantages

Organization
(i) Strong Legal Personality (i) Abuse of corporate
management
- entity attributable powers;
-There is severance of control and
- continuity of existence; ownership. Control will be vested
with the BOD, thus investors have
- having the right of succession, the death of an individual no say over the use of their
stockholder does not affect corporate existence investment and have little voice in
the conduct of the business
- not a natural occurrence, exists mainly because the law provides
for it. This is what distinguishes the separate juridical personality of a (ii) Abuse of limited liability
corporation from a partnership. The legal personality of a feature
corporation is strong because the law provides for the right of
succession, surviving even w/o those who incorporated it, while in a - This feature has often been
partnership the separate juridical personality is extinguished upon abused and may hurt innocent
the death of a partner creditors.

- no delectus personarum (iii) Cost of maintenance

(ii) Limited Liability of Investors (provided for by -The formation and incorporation of
jurisprudence only) a corp. entails a lot of difficulties and
costs, particularly the requirements
- The liability of an investor is limited; their investments and investors made by the law so as to qualify
cannot be held accountable for more than what they invested. for incorporation.

- CLV: However there are a lot of ways to circumvent the law (iv) Double taxation
and make the shareholders liable for more than his actual
investment (ex. A creditor requiring the chairman or president of the Dividends received by individuals
company as a joint debtor of the loan) from domestic corporations are
subject to final 10% tax for income
- A trade-off to the abdication made by the investor of his right to earned on or after 1 January
manage the property he had invested in the company. Under 1998 (Sec. 24(B) (2), 1997 NIRC)
property law, a person exercises full ownership over his property but
when he invests it in a corporation, the owner abdicates the six jus Inter-corporate dividends between
of ownership. domestic corporations, however, are
not subject to any income tax
(Sec. 27(D)(4), 1997 NIRC)

In addition, there is the re-

imposition of the 10% improperly
accumulated earnings tax for
holding companies (Sec. 29, 1997
NIRC)

(iii) Free Transferability of shares

- A legal relationship is created which is more stable for there are laws
which govern, and the corporation and the stockholders are
bound by the law.

(iv) Centralized Management

- One of the advantages of a corp. is the limitation of an investors
liability, this flows from the legal theory that a corp. entity is
separate and distinct from its stockholders
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Q. Is a corp. in our jurisdiction given the feature of limited liability?

A. No. The feature of limited liability is given to the stockholder and not to the corporation.

Q. Is limited liability a normal run of things?

A. No. It is only there because in this case, it comes with the separate juridical personality.

Q. If limited liability as shown in a corporation setting good for the investors, does it mean that
delectus personarum is a bad thing?
A. No. It is good in one way, since persons are bound by the contracts they enter into.

CLV: The principle in constitutional law that delegated power cannot be further delegated has no application in a
corporate setting because a corp. is not a product of political context- it is a product of business. A corporate
setting is best described as hierarchical and flat. Just because the BoD are to be elected by the stockholders does
not mean that the former derives its power from the latter. The powers of the BoD is original, said powers are
not delegated by the stockholder. The powers are vested by law (and by the AoI). The BoD sit on the board not as
representatives of the stockholders but because they are directors.

Q. What are the 2 types of partnerships?

A. Regular (General and Limited) and Joint venture

Q. Can a corporation be a partner in a regular partnership?

A. No. Because a partner must be a natural person. It is against public policy for corporation to be a
partner in a regular partnership.

Q. If limited liability is something that can be contracted in a partnership, why did the legislature
put such limited liability as an attribute of a corporation? If the feature of limited liability
costs money then why not take it out? Why not leave it up to the investors who can decide if
they want limited liability or not?
A. Even though limited liability will cost a lot of money, borrowing makes a lot more sense. If I have
P100M, it would be foolish to put all my eggs in one basket (if the basket falls, all eggs break). So, I
merely put P10M in one corporation and then borrow the P90M while the rest of my money I put
somewhere else. If the corporation fails, I do not lose all my P100M, I lose only my P10M. But if the
corp. succeeds and I get to pay my creditor, I retain the P10M plus the profits acquired from the
P90M paid up loan. This is the concept of LEVERAGING, using other peoples money to make a profit
for yourself. This is why borrowing is an integral part of corporate life and it is up to the creditors to make
a diligent appraisal of the credit standing of the corp.

Q. What is the main distinction between a corporation and a partnership?

A. A corporation is the intermingling of corporation law and contract law. On the other hand, a
partnership is purely a contractual relationship and so every time a partner dies, the contract is
actually extinguished.

Q. What is Corporation Law all about?

A. It is all about jurisprudence actually built around the 4 attributes of a corporation

Q. Can a defective attempt to form a corporation result at least in a partnership?

A. Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989); Lim Tong Lim v. Philippine Fishing
Gear Industries, Inc., 317 SCRA 728 (1999).
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Pioneer insurance & Surety corp. vs. CA ( 175 SCRA 668)

Facts:
- In 1965, Jacob S. Lim was engaged in the airline business as owner of Southern
Airlines, a single proprietorship.

- On May 17, 1965, he bought from Japan Domestic Airlines for the sale of 2 aircrafts and one set f
necessary spare parts for the total price of $109,00. Both arrived in Manila

- On May, 22 1965, Pioneer Insurance Corp, as surety executed and issued its surety bond in behalf
of Lim, principal, for the balance price for the aircrafts and spare parts.

- Border Machinery and Heavy Equipment (BORMAHECO), the Cervanteses and Constancia
Maglana contributed some funds in the purchase of the above aircrafts and spare parts. The funds
were supposed to be their contributions to anew corporation proposed by Lim to expand his
airline business.They executed indemnity agreements in favor of Pioneer, one signed by Maglana
and the other jointly signed SAL, BORMAHECO and Cervantes: where they principally agree and
bind themselves jointly and severally to indemnify pioneer.

- On June 10, 1965 Lim for SAL executed in favor of Pioneer a deed of chattel mortgage
as security for the suretyship in favor of Pioneer. The deed was duly registered with the Manila RoD
and with the Civil Aeronautics Administration.

- Lim defaulted on his subsequent installments prompting JDA to request payment from the
surety. Pioneer paid about P298,000

- Pioneer filed for an extra-judicial foreclosure of the mortgage but the Cervanteses and Maglana
filed a third party complaint claiming that they are co-owners of the aircraft. Pioneer later filed a
petition for judicial foreclosure and an application for a writ of preliminary attachment against Lim,
the Cervanteses, BORMAHECO and Maglana.

- In their answer, the Cervanteses, BORMAHECO and Maglana alleged they were not privy to the
contracts signed by Lim.

- The RTC ruled in favor of Pioneer, holding Lim liable but dismissing the case as to the other
defendants. On appeal, the CA affirmed.

ISSUE: whether or not the Cervanteses, BORMAHECO and Maglana are entitled to reimbursement of
amounts given by Lim?

HELD: Lims assertions: For failure of respondents to incorporate, a de facto partnership among
them was created, and that as a consequence of such relationship all must share in the losses and/or
gains of the venture in proportion to their contribution.

PRINCIPLES: Persons who attempt, but fail, to form a corporation and who carry on business under
the corporate name occupy the position of PARTNERS INTER SE. Thus, where persons associate
themselves together under articles to purchase property to carry on a business, and their
organization is so defective as to come short of creating a corp. w/n the statute, they become in legal
effect partners inter se, and their rights as members of the company to the property acquired by the
company will be recognized.

However, such a relationship does not exist, for ordinary persons cannot be made to assume the
relation of partners, as between themselves, when their purpose is that no partnership shall exist and
should be implied only when necessary to do justice between the parties: thus, one who takes no
part except to subscribe for stock in a proposed corporation which is never legally formed does not
become a partner with other subscribers who engage in business under the name of the
 14

pretended corp., so as to be liable as such in an action for settlement of the alleged partnership and
contribution.

- the records show that Lim received the amount of P151,000 representing the participation
of BORMAHECO and Maglana

- it was clear that Lim never intended to form a corp with them but they were duped into giving their
money

- no de facto corp. was created

Q. In cases where there is a defective attempt to form a corp. which is the prevailing rule, a
partnership inter se is created or a corporation by estoppel?
A. It depends wholly on the extent of the participation of the party on who a claim is being mind. In the
case at bar, there was no intent on the other parties to enter into a partnership but a corporation. As to
the Cervanteses & BORMAHECO, they cannot be considered to have entered even into a partnership
inter se, since there was no intention to do so and to be held liable as such.

But if it were the Cervanteses or BORMAHECO, who entered into the contracts using the corporate
name and actively participated in the activities of the corporation, then they are to be held liable as
partners.

Q. Why are we taking up Pioneer? Why were they not liable?

A. Because Pioneer shows us that for a person to be liable as a partner, he should have actively
participated in the conduct of the business, the SC held in this case that to be able to be held liable the
person should possess powers of management.

Q. What is the difference between Pioneer and Lim Tong Lim?

A. In the case of Pioneer, the SC stopped when it declared that to be liable, you have to possess
powers of management. In Lim tong Lim, it continues its pronouncement, by saying that if you have
beneficial ownership over the business, then you are also liable as a partner.

LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES

Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. entered into a contract with
Phil. Fishing Gear Industries Inc. for the purchase of fishing nets and floats. They claimed that they
were a fishing venture with Lim Tong Lim who was however not a signatory to the contract. They failed
to pay and so PFGI filed a collection case with a prayed for a writ of preliminary attachment. The case
was filed against Chua, Yao and Lim because it was found that Ocean Quest was a non- existent
corporation as shown by the certification from SEC. Chua admitted liability and Yao waived his right to
cross-examine and present evidence because he failed to appear while Lim filed a counterclaim
and a cross-claim. Court granted the writ of attachment and ordered the Auction Sale of the F/B
Lourdes which was previously attached. Trial court ruled that PFGI was entitled to the Writ and Chua,
Yao and Lim were jointly liable as general partners.
 15

Held:
1.) Lim was contesting that the CA ruled that there was a partnership in the Compromise
Agreement and alleges that he had no direct participation in the negotiations and was merely leasing F/B

formed by the three of them. They initially purchased two boats through a loan from Lims brother and
as security, was placed in the name of Lim Tong Lim. The repairs and supplies were shouldered by Chua
and Yao. A civil case was filed by Chua and Yao against Lim for nullity of commercial documents,
reformation of contracts and declaration of ownership of fishing boatswhich was settled amicably. In
the Compromise Agreement, it was revealed that they intended to pay the loan from Jesus Lim by
selling the boats and to divide among them the excess or loss. Therefore it was clear that a partnership
existed which was not solely based on the agreement. It was merely an embodiment of the relationship
among parties.

2.) Lim alleges that he was merely a LESSOR by showing the Contract of Lease and registration

courts, the boats were registered to Lim only as security for the loan that was granted to the
partnership by the brother of Lim, which was not an uncommon practice. Aside from the fact that it was
absurd for Lim to sell the boats to pay the debt he did not incur, if needed he was merely leasing the
boats to Chua and Yao.

3.) Lim contests his liability by saying that only those who dealt in the name of the ostensible
corporation should be held liable. His name was not in any of the contracts and never dealt with PFGI:
Sec. 21 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 debts, liabilities and damages incurred or arising as a result
thereof; Provided however that when any such ostensible corporation is sued, on any transaction
entered by it as a corporation or ant tort committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality. Even if the ostensible corporate entity is proven to be non-
existent, a party may be estopped from denying its corporate existence because an unincorporated
association has no personality and would be incompetent to act and appropriate for itself the power
and attributes of a corporation as provided by law. It cannot create agents or confer authority on
another to act on its behalf. Thus, those who act or purport to act as its representatives do so without
authority and at their own risk. Clearly, Lim benefited from the use of the nets found inside F/B
Lourdes which was proved to be an asset of the partnership. He in fact questioned the attachment
because it has effectively interfered with the use of the vessel. Though technically, he did not
directly act on behalf of the corporation, however, by reaping the benefits of the contract entered into
by persons he previously had an existing relationship with, he is deemed part of said association and
is covered by the doctrine of corporation by estoppel.

CLV: Pioneer case - actors who knew of corporations non-existence are liable as general partners
while actors who did not know are liable as limited partners, passive investors are not liable; Lim
teaches us that even passive investors should be held liable provided they benefited from such
transactions.

(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).

Q. What is the difference between a joint venture and a partnership?

A. A joint venture is by law a partnership because it follows the same definition as having two or more
persons binding themselves together under a common fund with the intention of dividing the profits
between themselves. Therefore, every joint venture is a partnership. The distinction between the two
 16

is that a joint venture is for a limited purpose only while a partnership involves an arrangement
or an on-going concern.

Q. Is it possible for a joint venture not to be a partnership?

A. Yes. When the joint venture forms a corporation, it then becomes a joint venture corporation.

Q. Does the requirement of registration needed in a partnership also required in a joint venture?
A. No. Only in a partnership is registration required (Art. 1772, Civil Code)

(d) Cooperatives (Art. 3, R.A. No. 6938)

A cooperative is a duly registered association of persons, with a common bond of interest, who have
voluntarily joined together to achieve a lawful common social or economic end, making equitable
contributions to the capital required and accepting a fair share of the risks and benefits of the
undertaking in accordance with universally accepted cooperative principles.

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).

Cooperative Corporation
Separate Juridical Personality
Governed by principles of SH vote their percentage share of
democratic control where the the stocks subscribed by them
members have equal voting rights on a
one-member-one vote principle
BoD manage the affairs of the coop. But it BoD is the repository of all powers EXCEPT
is the GA of full membership that for acts where the Corp. Code requires
exercises all the rights and performs all concurrence or ratification by the SH.
of the obligations of the coop.
Under the supervision of the coop. Under the Supervision of the SEC
Development Authority

Organized for the purpose of Stock Corp. for profit; Non-Stock

providing goods and services to its Corp eleemosynary (charitable,
members and thus to enable them to attain philantrophic) purpose
increased income and
saving, etc.

e) Business Trusts (Article 1442, Civil Code) Art. 1442

Q. What is the difference between a business trust and a corporation?

A. The relationship in a business trust is essentially a trust relationship. The business trust does not
have a personality which is apart from the trustor or the trustee/beneficiary.

The concept of a separate juridical personality is absent from a business trust.

(f) Sociedades Annimas

 17

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
sueda 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 persona
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 as a sort of an accidental partnership constituted in such 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 rights to them. Bourns v. Carman, 7 Phil 117 (1906).
 18

III. NATURE AND ATTRIBUTES OF A CORPORATION

1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitution)

The Congress shall not except by general law, provide for the formation, organization or regulation
of private corporations, Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good and subject to the test of economic
viability.

P.D. 1717, which created New Agrix, Inc. violates the Constitution which prohibits the formation of
a private corporation by special legislative act which is neither owned nor controlled by the
government, 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).

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 corporations are government-owned
or controlled. Feliciano v. Commission on Audit, 419 SCRA 363 (2004)

Q: What distinguishes a public corporation from a private corporation owned by the

government?
A: It is not ownership which distinguishes a public corporation from a private corporation. It is the civil
service eligibility of its employees and if the financial records are subject to the examination of the
Commission on Audit. A public corporation is created by its charter whereas a private corporation is
created under the Corporation Code.

2. CORPORATION AS A PERSON:

(a) Entitled to Due Process and Equal Protection Clause

The due process clause is universal in its application to all persons without regard to any
differences of race, color, or nationality. Private corporations, likewise, are persons 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, and whatever the
offices they hold therein may be, 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.

Q: Why is a corporation entitled to the rights of due process and equal protection?
CLV: A corporation enjoys constitutional rights. In that manner, it enjoys the same protection the law
grants to an individual. A corporation is entitled to due process and equal protection by virtue of the
juridical personality given by the State through the primary franchise of the corporation. The constitution
did not distinguish whether the term person in Sec. 1 Art. III of the Constitution refers to an individual or
a juridical entity, which therefore extends to private corporations within the scope of the guaranty.
 19

Q: Why is the corporation entitled to the protection against unreasonable searches and
seizures?
A: The corporation being entitled to due process and equal protection is the consequence of the States
grant of a primary franchise to a corporation. It emanates from the Theory of Concession, whereby the
government recognizes not only the separate juridical personality of the corporation but also grants
unto it all the rights and protections that a natural individual would possess which includes the right to
due process and equal protection.

However, a corporation is also entitled to protection against unreasonable searches and seizures.
This right however does not emanate from the grant of the State by way of primary franchise but is
sourced through the Theory of Enterprise Entity which recognizes that regardless of Section 2 of the
Corporation Code, a corporation is still for all intents and purposes an association of individuals
under an assumed name and with a distinct legal personality. In organizing itself as a collective body,
it waives no constitutional immunities for such body. (1) Its properties cannot be taken without just
compensation (2) it can only be proceeded against by due process of law (3) it is protected against
unlawful discrimination.

In the same line of reasoning, although a corporation is a legal fiction, a search and seizure involves
physical intrusion into the premises of the corporation, and therefore also intrudes into the personal
and business privacy of the stockholders or members who compose it. It can be seen that the right of the
individual against unreasonable searches and seizures is extended to corporations upon whom they are
members.

(c) But 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).

Q: Why is a corporation entitled to equal protection but not the right against self-
incrimination?
A: Any individual is entitled to equal protection whether they be juridical or natural. The corporation being
in the same class should be treated equally. However, the right to self-incrimation is not extended to
corporation because:

1. The right is meant to prevent individuals from having to lie under oath in order to protect his interest.
It is to protect the individual from having to commit perjury just to keep himself from going to jail.
However, if a corporation lies under oath, who would you bring to jail when in fact, a corporation is just a
legal fiction.

2. The corporation is subject to the reportorial requirements of the law. The corporation being a mere
creature of the State is subject to the whims of its Creator. The corporation powers are limited by law.

CLV: Beats me! Perhaps such right is attributable to the moral dimension of an individual, and since the
corporation is of an amoral personality, such right may not be attributable to it.

3. Practice of Profession
 20

Corporations cannot engage in the practice of a profession since they lack the moral and technical
competence required by the PRC.

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).

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. a PNB v. Court of
Appeals, 83 SCRA 237 (1978).

Our jurisprudence is wanting as to the definite scope of corporate tort. Essentially, 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).

PNB v COURT OF APPEALS

Facts:
Rita Gueco Tapnio had an export sugar quota of 1,000 piculs for the agricultural year 1956-
1957. Since, she did not need it, she agreed to allow Mr. Jacobo Tuazon to use the said quota for
consideration of 2,500. Her sugar cannot be exported without sugar quota allotments. Sometimes,
however a planter harvests less sugar than her quota so her excess quota is used by her mother who
pays for it. This is her arrangement with Mr. Tuazon. At the time of the agreement, she was indebted
to PNB of San Fernando, Pampanga. Her indebtedness was known as a crop loan and was secured
by her sugar crop, and since her quota was mortgaged to PNB, her arrangement with Mr. Tuazon had to
be approved by the bank. Upon presentment of the lease arrangement, the PNB branch manager revised
it by increasing the lease amount to P2.80 per picul for a total of P2,800. Such increase was agreed to
by both Rita and Jacobo. However, when it was presented to the Board of Directors for approval, they
further increased the amount to P3.00 per picul. Jacobo asked for the reconsideration but he was
denied the same. The matter stood as it was until Jacobo informed Rita and PNB that he had lost interest
in pursuing the deal. In the meantime, the debt of Rita with the PNB matured. Since she had a surety
agreement with the Philippine American General Insurance Co. Inc. (Philamgen), the latter paid her
outstanding debt. Philamgen in turn demanded from Rita the amount which they paid the bank.
Instead of paying the bank, Rita claimed that she told Philamgen that she did not consider herself
indebted to the bank since she had an agreement with Jacobo Tuazon. When such was discontinued,
she failed to realized the income with which she could have paid her creditors. Philamgen filed a
complaint for the collection of sum of money against Rita. Rita implicated PNB as a third party
defendant claiming that her failure to pay was due to the fault or negligence of PNB.
 21

Issue: WON PNB is liable for the damage caused to Rita.

Held:
There is no question that Ritas failure to utilize her sugar quota was due to the
disapproval of the lease by the Board of Directors of the petitioner, thus PNB should be held liable.

The Board justified the increase to P 3.00 per picul by saying that it was the prevalent rate at that
time. However, there was no proof that any other person was willing to lease the sugar quota allotment
of Rita for a price higher than P2.80 per picul. Just because there are isolated transactions where the
lease price was P3.00 per picul does not mean that there are always ready takers.

While PNB had the ultimate authority of approving or disapproving the proposed lease since the
quota was mortgaged to the bank, the latter certainly cannot escape its responsibility of observing
precaution and vigilance which the circumstances of the case justly demanded in approving or
disapproving the lease of said sugar quota.

According to Art. 19 of the Civil Code, [e]very person must in the exercise of his rights and
the performance of his duties, act with justice, give everyone his due and observe honesty and good
faith. This the petitioner failed to do. As a consequence, Art. 21 states, [a]ny person who willfully causes
loss or injury to another in a manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.

On the liability of the corporation, the court ruled that, [a] corporation is civilly liable in the same
manner as natural persons for torts, because generally speaking, the rules governing the liability of a
principal or master for a tort committed by an agent or servant are the same whether the principal or
master be a natural person or artificial person. All of the authorities agree that a principal or master is
liable for every tort which he expressly directs or authorizes, and this is just as true of a corporation as
of a natural person. A corporation, is liable therefore, whenever a tortuous act is committed by an
officer or agent under express direction or authority from the stockholders or members acting as a
body, or generally, from the directors as the governing body.

NOTE: CLV tells us that it is clear from the ruling of the Court in this case that not every tortuous act
committed by an officer can be ascribed to the corporation as its liability, for it is reasonable to presume
that in the granting of authority by the corporation to its agent, such a grant did not include a direction to
commit tortuous acts against third parties. Only when the corporation has expressly directed the
commission of such tortuous act, would the damages resulting therefrom be ascribable to the
corporation. And such a direction by the corporation, is manifested either by its board adopting a
resolution to such effect, as in this case, or having taken advantage of such a tortuous act the
corporation, through its board, expressly or impliedly ratifies such an act or is estopped from impugning
such an act.

Q: When is a corporation liable for tort?

A: A corporation is liable for tort when: (a) the act is committed by an officer or agent (2) under express
direction of authority from the stockholders or members acting as a body or through the Board of
Directors.

Q: How can authority given to the agent of the corporation be determined?

A: Either by: (a) such direction by the corporation is manifested, by its board adopting a
resolution to such effect (b) by having takien advantage of such a tortious act, the corporation through
its board, has expressly or impliedly ratified such an act or estopped from impugning the same.

Q: What is a derivative suit?

 22

A: Since, the act of the board is essentially that of the corporation and therefore corporate assets cannot
escape enforcement of the award of damage to the tort victim. As a remedy, the stockholders
may institute a derivative suit against the responsible board members and officers for the damages
suffered by the corporation as a result of the tort suit.

5. Corporate Criminal Liability (a West Coast Life Ins. Co. v. Hurd, 27 Phil. 401 (1914); a People v.
Tan Boon Kong, 54 Phil. 607 [1930]; a Sia v. Court of Appeals, 121 SCRA 655 [1983]; Articles
102 and 103, Revised Penal Code).

WEST COAST LIFE INS. CO. v HURD

Facts:
The petitioner (West Coast) is a life-insurance corporation, organized under the laws of California, doing
business regularly and legally in the Philippines. An information was filed against the plaintiff
corporation as well as John Northcott and Manue Grey charging the said corporation and said
individuals with the crime of libel. The controversy started when Northcott, as general manager for
the Philippines of said company and John Grey who was an agent and employee of the company,
conspired to release certain circulars containing foul statements against Insular Life Company claiming
that the Insular Life was then and there in a dangerous financial condition on the point of going into
insolvency, to the detriment of the policy holders of the said company, and of those with whom said
company have and had business transactions. The plaintiffs then filed a motion to quash summons sent
by the Judge, on the ground that the court had no jurisdiction over said company, there being no
authority in court for the issuance of the processes. Moreover, plaintiffs alleged that under the laws of
the Philippines, the court has no power or authority to proceed against a corporation, criminally, to
bring it into court for the purpose of making it amenable to criminal laws.

Issue: WON corporations can be held criminally liable.

Held: No. While the courts have inherent powers which usually go with courts of general jurisdiction, it
was held that under circumstances of their creation, they have only such authority in criminal
matters as is expressly conferred upon them by statute or which is necessary to imply from such
authority in order to carry out fully and adequately the express authority conferred. The SC did not feel
that Courts have authority to created new procedure and new processes of criminal law. Although,
there are various penal laws in the Philippines which the corporation may violate, still the SC does not
believe that the courts are authorized to go to the extent of creating special procedure and processes
for the purpose of carrying out the penal statutes, when the legislative itself has neglected to do so.
This is true since the courts are creatures of the statute and have only powers conferred upon them by
statute. Philippines courts have no common law jurisdiction or powers.

PEOPLE v TAN BOON KONG

Facts:
During 1924, in Iloilo, Tan Boon Kong as manager of the Visayan General Supply Co. engaged in the
purchase and sale of sugar, bayon, copra, and other native products and as such must pay internal
revenue taxes upon is sales. However, he only declared 2.3 million in sales but in actuality the
sales amounted to 2.5 million, therefore failing to declare for the purpose of taxation about 200,000, not
having paid the government 2,000 in taxes. Upon filing by the defendant of a demurrer, the lower court
judge sustained said motion on the ground that the offense charged must be regarded as committed
by the corporation and not its officials.

Issue: WON the defendant as manager may be held criminally liable. Held: Ruling reversed. Case
remanded.
The court held that the judge erred in sustaining the motion because it is contrary to a great weight
of authority. The court pointed out that, a corporation can act only through its officers and agents where
the business itself involves a violation law, the correct rule is that all who participate in it are
criminally liable. In the present case, Tan Boon Kong allegedly made a false return for purposes of
taxation of the total amount of sales for year 1924. As such, the filing of false returns constitutes a
 23

violation of law. Him being the author of the illegal act must be held liable.

SIA v PEOPLE
Facts:
The facts reveal that in 1963, the accused Jose Sia was the general manager of Metal
Manufacturing Company of the Philippines engaged in the manufacturing of steel office
equipment. When the company was in need of raw materials to be imported from abroad, Sia applied
for a letter of credit to import steel sheets from Tokyo, Japan, the application being directed to
Continental Bank and was opened in the amount of $18,300. According to the Continental Bank,
the delivery of the steel sheets was only permitted upon the execution of the trust receipt. While
according to Sia, the steel sheets were already delivered and were even converted to equipment
before the trust receipt was signed by him. However, there is no question that when the bill of
exchange became due, neither the accused nor his company made payments, despite demands of the
bank. On appeal, Sia contends that he should not be held liable.

Issue: WON petitioner Sia may be liable for the crime charged, having acted only for and in behalf of
his company.

Held:

NO. The Court disputed the reliance of the lower court and the CA on the general principle that for a
crime committed by a corporation, the responsible officers thereof would personally bear the criminal
liability, as enunciated in Tan Boon Kong. The latter provides that: [t]he corporation was directly required
by law to do an act in a given manner and the same law makes the person who fails to perform the act in
the prescribed manner expressly liable criminally. The performance of an act is an obligation directly
imposed by the law on the corporation. Since it is a responsible officer or officers of the corporations
who actually perform the act for the corporation, they must of necessity be the ones to assume the
criminal liability; otherwise this liability as created by the law would be illusory, and the deterrent effect of
the law, negated.

The Court concluded that the cited case does not fall squarely with the circumstances
surrounding Sia since the act alleged to be a crime is not in the performance of an act directly
ordained by law to be performed by the corporation. The act is imposed by the agreement of the parties
in pursuit of the business. The intention of the parties is therefore a factor determinant of whether a crime
or a civil obligation alone is committed. The absence of a provision of the law even in the RPC
making Sia criminally liable as the president of his company created a doubt that must be ruled in his
favor according to the maxim, that all doubts must be resolved in favor of the accused.

CONTRASTING THE THREE CASES

In the case of West, the court in effect enunciated that for a person to proceed criminally
against a corporation, it was necessary that express provisions of law be enacted, specifically providing
that a corporation may be proceeded against criminally and brought to court.

But since a corporation is a legal fiction that cannot be handcuffed and brought to court, the case
of Tan Boon Kong provided that since a corporation acts through its officers and agents, any violation
of law by any of the actors of the corporation in the conduct of its business involves a violation of
law, the correct rule is that all who participate in it are liable. In making actors liable, the court here said
attaching criminal liability to the fiction cannot be done since: (1) a corporation is only an artificial
person (2) there is a lack of intent imputable to a being since it lacks its own mind.

To apply the doctrine of separate juridical personality would allow criminals to use the
corporation as a shield or cloak to hide their criminal activities behind such.

However, the liability of officers were delineated in case of Sia where the court held that the
responsible officer is personally liable is personally liable for crimes committed by the corporation
 24

only in a situation where the corporation was directly required by law to do an act in a given manner, and
the same law makes the person who fails to perform the act in the prescribed manner expressly liable
criminally.

NOTE: While the law only defines individuals as offenders of criminal acts or as criminal actors, the
law is currently undergoing changes such that juridical persons are also defined as offenders of criminal
acts, as with the case of the Anti-Money Laundering Act.

Art. 102 of the RPC: Subsidiary civil liability of innkeepers, tavern-keepers and proprietors of
establishments In default of the persons criminally liable, innkeepers, tavern-keepers and any
other person or corporations shall be civilly liable for crimes committed in their
establishments, in all cases where a violation of municipal ordinances or some general or special
police regulation shall have been committed by them or their employees.

Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery or theft within
their houses from guests lodging therein, or for the payment of the value therefore, provided
that such guests shall have notified in advance the innkeeper himself, or the person representing
him, of the deposit of such goods within the inn; and shall furthermore have followed the
directions which such innkeeper or his representative may have given them with respect to the care
of and vigilance over such goods. No liability shall attach in case of robbery with violence against or
intimidation of persons unless committed by the innkeepers employees.

Art. 103 of the RPC: Subsidiary civil liability of other persons The subsidiary liability
established in the next preceding article shall also apply to employers, teachers, persons and
corporations engaged in any kind of industry for felonies committed by their servants, pupils,
workmen, apprentices, or employees in the discharge of duties.

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).

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).

Q. Why can the corporation be held liable for tortuous acts done by its agent but not for criminal
acts done outside its authority?
A: Crime is not within the corporate contemplation while negligence is. Negligence could be
part of every transaction. It is an integral part of corporate transactions. For as long as people comprise
the corporation, it is within the contemplation of every corporate act.
 25

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 lifeall 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).

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).

7. CORPORATE NATIONALITY: UNDER WHOSE LAWS INCORPORATED(Sec. 123)

Section 123: Definition and rights of foreign corporations For the purposes of this Code, a
foreign corporation is one formed, organized or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporations to do business in the Philippines
after it shall have obtained a license to transact business in this country in accordance with this
Code and a certificate of authority from the appropriate government agency.

There are three tests to determine the nationality of the corporation, namely:

1.) Place of incorporation that a corporation is of the nationality of the country under whose laws it
has been organized and registered, embodied in Sec. 123 of the Corporation Code.

2.) Control test nationality determined by the nationality of the majority stockholders, wherein control is
vested.

Situation #1: 51% Filipino 49% Japanese: Under the control test, the nationality cannot be
determined because for a group of stockholders to exercise control over a corporation it is required by
the Corporation Code that they at least control 60% of the corporation.

Why 60%? Because under the Corporation Code for a group of persons to incorporate a
corporation, at least 5 persons are required by law. A majority of the 5 is 3 and converting it into
percent, one gets 60%. We can say that in fact 51% is majority but in a group of 5 people 51% is 2 &
1/5, there really is no 1/5 of a person.

Situat
corporation

3.) Principal place of business applied to determine whether a State has jurisdiction over the existence
and legal character of a corporation, its capacity or powers, internal organizations, capital structure,
rights and liabilities of directors.
Q: Do all three tests apply in the Philippines?
 26

A: Yes. The first test is considered the primary test, the second one is used to determine whether a
corporation can engage in nationalized activities in the country, and the third one is used to determine the
jurisdiction of the State to enforce for instance taxation laws.

Q: What is the importance of determining the nationality of the corporation?

A: It is necessary so as to determine whether or not a corporation can enter into various transactions or
engage in different industries. And also, the legal fiction supporting a corporation is valid only within
Philippine territory.

Q: It was said that the place of incorporation is the primary test to determine the nationality of the
corporation, why then are there other tests used?
A: There are certain aspects of the Philippine economy that require that the controlling test in
corporations engaging in said type of business be that of Filipinos. The nationalized economic sectors are
primarily focused at making Filipino interests benefit directly from the bounties of this country. The place
of incorporation test need not have been expressly provided by the Constitution since it is an integral part
of our law specifically the power of Congress to grant primary franchise to corporations. The place of
incorporation test is deemed the primary test. It is a true test of nationality. Being a creature of law of the
place where it was incorporated, the corporation cannot escape said law. By providing for the control
test, the Constitution is providing for a secondary test to determine which corporations are entitled to
entry in nationalized sectors.

Q: What is the implication of having a primary test and a secondary test?

A: Simply put, if a corporation does not pass the first test, which the place of incorporation test,
automatically it is deemed to be a foreign corporation. However, having passed the first test, the
nationality of the corporation may have been established but this does not mean that the corporation is
entitled to enter every single economic sector of the Philippines. The control test determines now whether
the corporation fulfills the equity requirements of the Constitution. In doing this, the other tests are made
such as: war-time test, investment test and grandfather rule.

EXCEPTIONS: TEST OF CONTROLLING OWNERSHIP also applies in:

(a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Constitution; a Roman
Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the Register of Deeds of Davao, 102
Phil. 596 [1957]).

Sec. 140 Stock ownership in certain corporations Pursuant to the duties specified by Article XIV
of the Constitution, the National Economic Development Authority shall, from time to time, make a
determination of whether the corporate vehicle has been used by any corporation of by business or
industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang
Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their
prevention or correction.

Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations
declared by it to be vested with a public interest pursuant to the provisions of this section,
belonging to the individuals or groups of individuals related to each other by consanguinity or affinity or
by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal
monopolies or combinations in restrain or trade, to implement national economic policies declared in
laws, rules and regulations designed to promote the general welfare and foster economic
development.

In recommending to the Batasang Pambansa corporations, business or industries to be declared vested

with a public interest and in formulating proposals for limitations on stock ownership, the National
Economic and Development Authority shall consider the type and nature of the industry, the size of the
 27

enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor
intensity of the activity, the export potential, as well as the other factors which are germane to the
realization and promotion of business and industry.

Sec. 2 Art. XII

All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of
potential energy, fisheries, forests or timber, wildlife, flora and fauna and other natural resources are
owned by the State. With the exception of agricultural lands, all other national resources shall under the
full control and supervision of the State. The State may directly undertake such activities or it may enter
into co- production, joint venture, or production-sharing agreements with Filipino citizens, or corporations
or associations at least sixty percentum of whose capital is owned by such citizens. Such agreements
may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and
under such terms and conditions as may be provided by law. In cases of water rights for irrigation, water
supply, fisheries, or industrial uses other than the development of water power, beneficial use may be the
measure and limit of the grant.

The State shall protect the nations marine wealth in its archipelagic waters, territorial sea, and exclusive
economic zone, and reserve its use and enjoyment exclusively to Filipino citizens.

The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens, as well
as cooperative fish farming, with priority to subsistence fishermen and fishworkers in rivers, lakes, bays
and lagoons

The President may enter into agreements with foreign-owned corporations involving either technical or
financial assistance for large-scale exploration, development and utilization of minerals, petroleum and
other mineral oils according to the general terms and conditions provided by law, based on real
contributions to the economic growth and general welfare of the country. In such agreements, the State
shall promote the development and use of local scientific and technical resources.

The President shall notify the Congress of every contract entered into in accordance with this provision
within thirty days from its execution.

ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO v THE LRC

Facts:
Mateo Rodis, a Filipino citizen and resident of Davao, executed a deed of sale of a parcel of land
located in the same city in favor of the Roman Catholic Administrator of Davao, a corporation
sole organized and existing in accordance with Philippine laws. The incumbent administrator is Msgr.
Clovis Thibault, a Canadian citizen. When the deed was presented to the Register of Deeds for
registration, it required them to submit an affidavit stating that the ownership of the corporation is 60%
Filipino citizens as required under the Constitution. Roman Catholic stated that it was a corporation sole
(meaning only one incorporator) and that the totality of the Catholic population in Davao would become
the owner of the property. Register of Deeds doubted this and submitted the case for en
consulta in the Land Registration Commission. LRC ruled that the requirement of the Constitution must
be followed and since the 60% cannot be complied with, the registration should be denied. Hence,
this appeal.

Issue: WON the Roman Catholic Apostolic Church, being a corporation sole, can lawfully acquire
lands in the Philippines.

Held: YES.

Corporation sole a special form of corporation usually associated with the clergy designed to
facilitate the exercise of the functions of ownership of the church which was registered as property
owner. It is created not only to administer the temporalities of the church or religious society where the
corporator belongs, but also to hold and transmit the same to his successor in said officer.
 28

The incumbent administrator is not the actual owner of the land but the constituents or those that
make up the church, thus it is their nationality that has to be taken into consideration. The corporation
sole only holds the property in trust for the benefit of the Roman Catholic faithful.

60% of their capital owned by Filipino citizens, the constitution manifestly disregarded the corporate
fiction i.e. the juridical personality of such corporation or associations. It went behind the
corporate entity and looked at the natural persons that composed it, and demanded that a clear
majority in interest (60%) should be Filipino. Since under the rules governing corporation sole, the
members of the religious association cannot overrule or override the decisions of the sole
corporator, then it would be wrong to conclude that the control of the corporation sole would be in the
members of the religious association.

NOTE: The Roman Catholic Church is a corporation by prescription, with acknowledged juridical
personality inasmuch as it is an institution which antedated almost a thousand years any other
personality in Europe, and which existed when Grecian eloquence still flourished in Antioch and when
idiots were still worshipped in the temple of Mecca. Since it is a corporation by prescription, it has no
nationality, and hence, the nationality test does not apply. (But refer to below.)

Q: Why is this case relevant to us?

A: It is relevant because while it tells us that a corporation sole is not subject to the nationality test, it must
be further qualified to mean that this is the case only insofar as the control test is concerned. Nationality is
irrelevant insofar as this test is concerned. However, it becomes relevant when the place of incorporation
comes into play since the case never sought to touch the place of incorporation test.

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 religious 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).

(b) Public Utilities (Sec. 11, Art. XII, Constitution; a People v. Quasha, 93 Phil. 333)

Sec. 11 Art. XII

No franchise, certificate or any other form of authorization for the operation of public utility shall be
granted except to citizens of the Philippines or to corporations or associations organized under the laws
of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such
franchise, certificate or authorization be exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except under the condition that it shall be subject to
amendment, alteration or repeal by the Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general public. The participation of foreign
investors in the governing body of any public utility enterprise shall be limited to their proportionate share
in its capital, and all the executive and managing officers of such corporation or association must be
citizens of the Philippines.

NOTE: Stock ownership must at least be 60% Filipino but management must be 100% Filipino for such
corporation to operate in industries concerning public utilities.

PEOPLE v QUASHA
Facts:
William Quasha, a member of the Philippine Bar was charged with falsification of public and
 29

commercial documents in the CFI. He was entrusted with the preparation and registration of the articles
of incorporation of Pacific Airways Corporation but he caused it to appear that Arsenio Baylon, a
Filipino had subscribed to and was the owner of 60% of subscribed capital stock. Such was not case
because the real owners of said portions were really American citizens. The purpose of such false
statement was to circumvent the Constitutional mandate that no corporation shall be authorized to
operate as a public utility in the Philippines unless
60% of its capital is owned by Filipinos.

Held:

The falsification imputed to Quasha consists in not disclosing in the Articles of Incorporation that
Baylon was a mere trustee of the Americans, thus giving the impression that Baylon subscribed to
60% of the capital stock. But contrary to the lower courts assumption, the Constitution does not
prohibit the mere formation of a public utility corporation without the required proportion of Filipino
capital. What it does prohibit is the granting of a franchise or other form of authorization for the
operation of a public utility to a corporation already in existence but without the requisite proportion
of Filipino capital. From the language of the text, the terms franchise, certificate, and other form of
authorization are qualified by the phrase for the operation of public utility. As such, these terms cannot
and do not refer to the corporations primary franchise, which vests a body of men with corporate
existence, but to its secondary franchise, or the privilege to operate as public utility after the
corporation has already gone into being.

Primary franchise refers to that franchise which invests a body of men with corporate existence,
while the secondary franchise is the privilege to operate as a public utility after the corporation has
already come into being.

For the mere formation of the corporation, such revelation was not essential and the corporation
law does not require it. Therefore, Quasha was under no obligation to make it. In the absence of such
obligation and of the alleged wrongful intent, Quasha cannot be legally convicted of the crime with
which he is charged. A corporation formed with capital that is entirely alien may subsequently change
the nationality of its capital through transfer of shares to Filipino citizens. The converse may also
happen. Thus for a corporation to be entitled to operate a public utility, it is not necessary that it be
organized with 60% of its capital owned by Filipinos from the start. Said condition, may at any time be
attained through the necessary transfer of stocks. The moment for determining whether a corporation is
entitled to operate as public utility is when it applies for a franchise, certificate or any other form of
authorization for that purpose and that can only be done after the corporation has already come into
being not while being formed.

Q: Why are we studying Quasha?

A: This case makes a distinction with the grant by the government of primary and secondary franchise. As
far as doctrinal pronouncements are concerned, any and all type of corporations may be incorporated, so
long as the requirements for incorporation are fulfilled and that its purpose is lawful and not contrary to
law or public policy. The violation of equity requirements with regard to entry into nationalized sectors as
provided by the Constitution come only into play when the secondary franchise is granted. In granting the
secondary franchise considerations of equity are now made.

CLV: Note that while Quasha makes such doctrinal pronouncements, in practice, this is not the case.
SEC will refuse to register the Articles of Incorporation if it is not 60% owned by Filipinos. In fact, Quasha
lied in order to have the articles registered.

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.
 30

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. a Tatad v.Garcia, Jr., 243
SCRA 436 (1995).

TATAD v GARCIA
Facts:
In 1989, DOTC planned to construct a light railway transit along EDSA. Initially, Eli Levin Enterprise
Inc. was supposed to construct the LRT III on a Build-Operate-Transfer (BOT) basis. Subsequently, RA
6957 was enacted which provides for two schemes for the financing, construction and operation of
government projects through private initiative and investment: Build-Operate-Transfer (BOT) or Build-
Transfer (BT). DOTC issued a Department Orders creating the Pre-qualification Bids and Awards
Committee. EDSA LRT Consortium composed of
10 foreign and domestic corporations, was one of the five groups who responded to the invitation.
And being the sole complying bidder, it was awarded the contract. DOTC and EDSA LRT Corp., Ltd. in
substitution of the EDSA LRT Consortium entered into an Agreement to Build, Lease and Transfer
an LRT system for EDSA under the terms of the BOT Law. Agreement was subsequently
revised and another Supplemental Agreement was also contracted.

According to the agreements, the EDSA LRT III (MRT) will use light rail vehicles from abroad (Czech
and Slovak Federal Republics) and will have a maximum carrying capacity of 450,000 passengers a
day. It will have its own power facility and will have 13 passenger stations. The private respondent will
finance the entire project required for a complete operational LRT system. Upon full or partial
completion and viability, private respondent shall deliver the use and possession of the completed
portion to DOTC which shall operate the same. DOTC shall pay respondent monthly rentals, which
is to be determined by an independent and internationally accredited inspection firm. As agreed
upon, private respondents capital shall be recovered from the rentals to be paid by DOTC, which in
turn, shall come from the earnings of the MRT. After 25 years and after the DOTC shall have completed
payment of the rentals, ownership of the project shall be transferred to the latter.

Petitioners argue that the Agreements, insofar as it grants EDSA LRT Corp. Ltd., a foreign
corporation the ownership of MRT, a public utility, violate the Constitution. They claim that since the
MRT is a public utility, its ownership and operation is limited by the Constitution to Filipino citizens and
domestic corporation, not foreign corporations, like private respondent.

DOTC Secretary and private respondent on the other hand, contend that the nationality requirement
for public utilities mandated by the Constitution does not apply to private respondent. Also, these
Agreements were already approved by President Ramos.

Issue: WON the Agreements violated the Constitution (re: ownership/operation of a public utility by a
foreign corporation).

Held: No.

It is to be noted that what the private respondents own are the rail tracks, rolling stocks like the
coaches, rail stations, terminals and power plant, which do not fall under public utility. While a
franchise is needed to operate these facilities to serve the public, they do not by themselves
constitute a public utility. What constitutes a public utility is not their ownership but their use to the
public. While the Constitution requires a franchise for the operation of public utility, it does not however
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 must be a clear distinction between the operation of a
public utility and the ownership of the facilities and equipments used to serve the public. The right to
operate a public utility may exist independently and separately from the ownership of the facilities
 31

without operating them as a public utility, or conversely, one may operate a public utility without
owning the facilities used to serve the public.

In the case, while private respondent is the owner of the facilities necessary to operate the MRT, it
admits that it is not enfranchised to operate a public utility. In view of the incapacity, private respondent
EDSA Corp. and DOTC agreed that on completion date, private respondent will deliver possession of
the LRT system by way of lease of 25 years, during which period DOTC shall operate the same as
common carrier and private respondent shall provide the technical maintenance and repair services to
DOTC.

In sum, private respondent will not run the light rail vehicles and collect fees from the riding public. It
will have no dealings with the public and the public will have no right to demand any services from it. A
mere owner and lessor of the facilities used by a public utility is not a public utility. Even the mere
formation of a public utility corporation does not ipso facto characterize the corporation as one
operating a public utility. The moment for determining the requisite Filipino nationality is when the entity
applies for a franchise certificate or any other form of authorization for that purpose.

Q: How does the case of Quasha differ from the case of Tatad?
A: Quasha tells us that we have to look at the secondary franchise, i.e. to whom such is given while
Tatad tells us that it does not matter to whom the franchise is given but what matters is who actually
operates the utility. The latter case tells us that restrictions are not on the assets of the corporations but
on the enterprise itself, thus control determines nationality and not
the beneficiaries. CLV: The Constitution restricts the juridical person as it controls the
enterprise. Note, that assets are different from the juridical person and from the business enterprise itself.

(c) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution)

Sec. 11(1) Art. XVI

The ownership and management of mass media shall be limited to citizens of the Philippines, or
to corporations, cooperatives or associations, wholly-owned and managed by such citizens.

The Congress shall regulate or prohibit monopolies in commercial mass media when the public
interest so requires. No combination in restraint of trade or unfair competition shall be allowed.

Mass media includes the gathering, transmission of news, information, messages, signals
and forms of written, oral and all visual communication and shall embrace the print medium, radio,
television, films, movies, advertising in all its phases and their business managerial. It does not
include commercial telecommunications because such is a public utility.

The Constitutional requirements are much stricter for it requires that socks are 100% Filipino
owned and managed.

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. 4December, 1991), at p. 31.

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).
 32

The National Telecommunications Commission which regulates and supervises the cable
television industry in the Philippines under Sec. 2 of EO 436 series of 1997 has provided under the
NTC Memorandum Circular No. 8-9-95 under item 920(a) thereof provides that [c]able TV operations
shall be governed by E.L. No. 205 series of 1987. If CATV operators offer public telecommunications
services, they shall be treated just like public telecommunications industry.

Under DOJ opinion No. 95 series of 1999, the Secretary of Justice taking its cue from Allied
Broadcasting Inc. v. Federal Communications Commission 435 F.2d 70 considered CATV as
a form of mass media, which must therefore be owned and managed by Filipinos, or corporations,
cooperatives or associations, wholly-owned and managed by Filipino citizens pursuant to the mandate of
the Constitution.

(d) Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution)

Sec. 11(2) Art. XVI

The advertising industry is impressed with public interest and shall be regulated by law for the protection
of consumers and promotion of the general welfare.

Only Filipino citizens or corporations or associations at least seventy percentum of the capital of
which is owned by such citizens shall be allowed to engage in the advertising industry.

The participation of foreign investors in the governing body of entities in such industry shall be limited
to their proportionate share in the capital thereof, and all the executive and managing officers of such
entities must be citizens of the Philippines.

Only Filipino citizens or corporations or associations at least seventy percent of the capital shall be
allowed to engage in the advertising industry. It also provides that the participation of
foreign investors in the governing body shall be limited to their proportionate share in the
capital thereof, and all the executive and managing officers of such entities must be citizens of the
Philippines.

(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]).

In Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., the Court held that in times of
war, the nationality of a private corporation is determined by the character or citizenship of its controlling
stockholders The court considered the juridical entity as an enemy based on the fact that the
majority of the stockholders of the respondent corporation were German subjects. It ruled that
the control test was applicable only in war-time. It refused the sole application of the place of
incorporation test during the war- time to determine the nationality of an enemy corporation.

(f) Investment Test as to Philippine Nationals (Sec. 3(a) & (b), R.A. 7042, Foreign
Investments Act of 1991)

Under Sec. 3a of the FIA of 1991, the term Philippine national as it refers to a corporate entity shall
mean a corporation organized under the laws of the Philippines of which at least 60% percent of the
capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines. NOTE: In
this aspect, FIA is more liberal than the Constitution which did not specify as to what type of share the
60% Filipino-ownership requirement pertained to. FIA, in this aspect, only referred to voting shares.

However, it provides that were a corporation and its non-Filipino stockholders own stocks in a
SEC-registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by citizens of the Philippines and at least 60% of the members of
 33

the Board of Directors of both corporations must be citizens of the Philippines, in order that a corporation
shall be considered a Philippine national. The law therefore limits the test to voting shares, but however
makes it more stringent when it comes to actual control by making a double 60% rule requirement as to
both holding and held company, as well as their Board of Directors.

Q: Why should not we infer that the 60% Filipino ownership requirement of the Constitution as
pertaining to voting shares?
A: Elementary rule of Statutory Construction that when the law does not distinguish, neither
should we. Moreover, the right to vote is not the only right granted to stockholders, as the right to file suits
against the Board of Directors is granted to them.

Q: Given these facts: ABC Company is comprised of 60% Filipino and 20% Foreign investors with
respect to voting stocks and 40% Foreign investors with respect to non-voting stocks, under the
FIA, is it a Philippine national?
A: Yes, since FIA limits its scope to voting stocks.

Q: Given these facts: ABC Company with 20 voting stocks is comprised of 80% Filipino (16) and
20% Foreign (4), is it a Philippine national? Can it therefore own land under the Constitution?
A: Yes, under FIA, it is a Philippine national but it cannot own land. As to the aspects that FIA runs
contrary to the Constitution, which is the supreme law of the land, the former shall not apply.

(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)

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned
by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. Example: partnership
between ABC and X companies. ABC owns 60% with
40% foreign and 60% Filipino-owned shares while X companie own 40% with 100%
Filipino-owned shares. Under the SEC DOJ Rule, such partnership is Filipino-owned. Moreover,
under this rule once the 60% requirement is reached, there is no more need for tierring.

It must be stressed however that the aforequoted SEC rule applies only for purposes of
resolving issues on investments. The SEC was quick to add: [h]owever, while a corporation
with 60% Filipino and 40% foreign equity ownership is considered a Philippine national for purposes of
investment, it is not qualified to invest in or enter into a joint venture agreement with corporations or
partnerships, the capital or ownership of which under the constitution of other special laws are
limited to Filipino citizens only. A joint venture arrangement would mean that such corporation has
become a partner and isdeemed then to be acting or involving itself in the operations of a nationalized
activity by the acts of the local partners by virtue of the principle of mutual agency applicable to
partnerships.

There seems to be a conflict as to the applicability of the SEC Rule and to that of the Foreign
Investments Act but each in itself has advantages and disadvantages, since both require stringent
requisites for a corporation to avail of its privileges. But under the present scenario, the FIA is
believed to be the default rule having been enacted more recently that the SEC Rule.

GRANDFATHER RULE a method by which the percentage of Filipino equity in corporations

engaged in nationalized or partly nationalized areas of activity provided for under the Constitution
and other national laws is accurately computed, in cases where corporate shareholders are part of
the ownership structure by considering the nationality of the second or even subsequent tier of
ownership to determine the nationality of the corporate shareholder.

Q: When is the GFR applied?

 34

A: The GFR is applied in cases where the corporation has corporate stockholders with alien
stockholdings, otherwise, if the rule is not applied, the presence of such corporate srockholders could
diminish the effective control of Filipinos.

SITUATION #1 Silahis International Hotel, the capital stock of which is 69% owned by another
corporation Hotel Properties Inc. and 31% owned by Filipinos. Hotel Properties in turn is 53% alien-
owned and 47% Filipino-owned. The SEC through the GFR stated that Silahis International Hotel can
engage in partly nationalized business because the Filipino equity in said corporation is 63.43% while the
foreign equity in said corporation is 36.57%.

SILAHIS INTERNATIONAL HOTEL

Hotel Properties Inc. 69% 1.) 53% Foreign

47% Filipino
Filipino stockholdings 31%

47/100 (Hotel Properties) x 69 = 32.43 + 31 (remaining Filipino

stockholdings in Silahis) TOTAL: 63.43%

SITUATION #2 Whether or not there may be an investment made by Pinoy Inc. in Mass Media
which requires 100% Filipino ownership. Pinoy Inc. is 40% owned by Pedro, a Filipino, while 60%
is owned by ABC, Inc. ABC on the other hand, is a corporation registered in the Philippines 60%
of which is owned by Maria, a Filipino, while 40% is owned by George, a German.

Q: Can Pinoy, Inc. enter into the operation of a television station?

A: In this situation, is the GFR is applied straight; Pinoy, Inc. would be disqualified since 24% of Pinoy is
owned by George. But under the present investment regime of the Philippines, the FIA provides that
corporations which are 60% owned by Filipino citizens shall be considered of Philippine nationality. It is
defined under said law that for the purposes of investment such a corporation of 60% Filipino and 40%
foreign equity is allowed to invest in a corporation engaged in a nationalized sector.

Q: Does this not contradict the very provisions of the Constitution?

A: It does not because the main purpose of such provision of the law is to spur investments into the
Philippine economy. What it specifically prohibits is for a corporation with a foreign equity to engage in
nationalized industries. Note the difference in the use of terms, namely to engage as opposed to to
invest. Engaging in nationalized industries involve direct participation in the exploitation or use of natural
resources or entry into protected industries vested with public interest. This is what is prohibited from
being entered into by non- nationals.

Q: When should the GFR be applied?

A: It should be applied when two requisites are met: (1) when there is involved a nationalized or partly
nationalized sector of Philippine economy and (2) when there is tierring, meaning the corporation is
partly-owned by another corporation.

Up to what level do you apply the grandfather rule? (Palting v. San Jose Petroleum Inc., 18
SCRA 924 [1966])

PALTING v. SAN JOSE PETROLEUM

Facts:
San Jose Petroleum filed with the SEC a sworn registration statement for the registration and
 35

licensing for sale in he Philippine voting trust certificate representing 2 million shares of its capital
stock of a par value of $0.35/share at P1/share. It was alleged that the proceeds thereof will be used
to finance the operations of San Jose Oil Co. which has 14 petroleum exploration concessions in
various provinces. It was expressly conditioned that instead of stock certificates, registered or
bearer-voting trust certificates from voting trustees (Americans) will be given. San Jose Petroleum
amended the application from P2M to P5M a reduced offering at P0.70/share.
Palting, et.al filed with the SEC an opposition to said registration on the following grounds: (1) the tie-up
between SJP, a Panamanian corporation and SJO, a domestic corporation violates the Constitution,
the Corp. Law and the Petroleum Act of 1949 (2) the issuer is not licensed to transact business in the
Philippines (3) the sale of shares is fraudulent (4) the issuer is based on unsound business principles
(sic).

SJP claimed that it was a business enterprise enjoying parity rights, with respect to mineral resources
in the Philippines, which may be exercised pursuant to the Laurel-Langley Agreement, through a
medium, the SJO. It contends that giving SJO financial assistance did constitute transaction of
business in the Philippines.

SJO is a domestic corporation 90% of which is owned by SJP, a Panamanian Corp. the majority interest
of which is owned by Oil Investments, Inc. another Panamanian Corp. The latter is in turn owned by
Pantepec Oil Co. & PanCoastal Petroleum, both organized and existing under the laws of Venezuela.

Under the Constitution, the exploitation of natural resources shall be limited to citizens of the Philippines
or to corporations or associations at least 60% of the capital of which is owned by such citizens.
However, this right was earlier extended to US citizens by virtue of the Parity Agreement. Said US
citizens can either directly or indirectly own or control the business enterprise.

Held:

San Jose Petroleum is not entitled to Parity Rights: (1) It is not owned or controlled directly by US citizens
because it is owned and controlled by Panamanian corporation; (2) Neither can it be said that it is
indirectly owned and controlled by US citizens because the controlling corporation is in turn owned
by two Venezuelan corporations; (3) Although the two Venezuelan corporations claim to be owned
by stockholders residing in the US, there is no showing that said stockholders were US citizens; (4)
Even granting that these stockholders are US citizens, it is still necessary to establish that their
different states allow Filipino corporations and citizens to engage in the exploitation of natural
resources. However, there is no such proof to this; (5) The word indirectly should not be unduly stretched
in application.

Q: Why are we studying Palting?

A: It is because Palting enunciated the doctrine that for a corporation to comply to the nationalization
requirements of the Constitution, the equity requirements establishing the nationality of the controlling
interest in the corporation should not be stretched to absurdity. The application of the GFR to determine
the nationality of the ultimate controller of a subject corporation cannot go beyond the level of what is
reasonable.

(h) Special Classifications (Sec. 140)

Sec. 140 Stock ownership in certain corporations Pursuant to the duties specified by Article XIV
of the Constitution, the National Economic Development Authority shall, from time to time, make a
determination of whether the corporate vehicle has been used by any corporation of by business or
industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang
Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their
prevention or correction.

Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations
 36

declared by it to be vested with a public interest pursuant to the provisions of this section,
belonging to the individuals or groups of individuals related to each other by consanguinity or affinity or
by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal
monopolies or combinations in restrain or trade, to implement national economic policies declared in
laws, rules and regulations designed to promote the general welfare and foster economic
development.

In recommending to the Batasang Pambansa corporations, business or industries to be declared vested

with a public interest and in formulating proposals for limitations on stock ownership, the National
Economic and Development Authority shall consider the type and nature of the industry, the size of the
enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor
intensity of the activity, the export potential, as well as the other factors which are germane to the
realization and promotion of business and industry.

IV. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF

CORPORATE FICTION
See relevant portions of VILLANUEVA, Restatement of the Doctrine of Piercing The Veil of Corporate
Fiction, 37 ATENEO L.J. 19 (No. 2, June 1993).

IV. A. MAIN DOCTRINE: A CORPORATION HAS A PERSONALITY SEPARATE AND DISTINCT

FROM ITS STOCKHOLDERS OR MEMBERS

1. Sources: Sec. 2; Article 44, Civil Code

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

Article 44 The following are juridical persons:

(2) other corporations, institutions and entities for public interest or purpose, created by law, their
personality begins as soon as they have been constituted according to law;

(3) corporations, partnerships and associations for private interest or purpose to which the law
grants a juridical personality, separate and distinct from that of each shareholder, partner or member.

2. Importance of Protecting Main Doctrine:

The separate juridical personality includes the right of succession, limited liability,
centralized management, and generally free transferability of shares of stock. Therefore, an
undermining of the separate juridical personality of the corporation such as the application of the
piercing doctrine, necessarily dilutes any or all of those attributes.

FROM WHICH ATTRIBUTE OF THE CORPORATION DOES THE DOCTRINE OF PIERCING THE
VEIL OF CORPORATE FICTION FOCUS ON?

1) Centralized management Centralized management is not a natural occurrence. It is a creation of

statute under Sec. 23 of the Corporation Code Compared to partnerships, partnerships have mutual
agency under delectus personarum. Mutual agency is more of a natural occurrence since here the
partner is a co-owner of the assets of the partnership, maintaining his control over his property. In
property law, there is what is called the seven juses of ownership. In partnership however, a partner
retains all this seven juses, albeit as a co-owner, through mutual agency. However, in a corporation, a
stockholder abdicates his jus dispossidendi, jus abutendi, etc. as to the property he is placing
inside a corporation retaining only to himself his jus fruendi, as to the dividends of his stocks. This is
unnatural since a person is entitled to full use, enjoyment or dispossession of his property. But
 37

since under the Corporation Code, centralized management is provided therefore it is the means by
which a corporation acts and conducts it business. As such, the piercing doctrine is not directed at the
attribute of centralized management, because in most instances, investors in a corporation hand the
management of the business of the corporation to professionals. To do away with the central
management would place the investors who had taken no active part in the conduct of the corporation
to be liable as partners with mutual agency.

2) Free transferability of assets Shares of stock represent (1) right to profits/dividends (2) voting
right (3) contingent right which recognizes a proprietary right of a mere aliquot share in the proceeds
after dissolution and distribution of corporate assets. Therefore a stockholder is neither owner nor co-
owner of assets of a corporation. The assets of a stockholder are distinct from the assets of a
corporation. The stockholders have no control in the dispossession or acquisition of assets (only as
to their voting capacity in the management of the corporation). The stockholders however have
the right to freely dispose of his shares of stock to any and all person who may purchase it.
There the corporation has no control. Applying the piercing doctrine as to the free transferability of his
assets cannot be done since jurisprudence points out that the piercing doctrine is a remedy of last
resort. If a third party claimant has a claim as to the assets to be disposed of or acquired by a
corporation can be afforded in other remedies whether it be intra or inter corporate.

3) Limited Liability and Separate Legal Personality Therefore it can be concluded that the piercing
doctrine is directed at the limited liability attribute of the corporation (in consonance with the
separate juridical personality attribute).The piercing doctrine in a way undermines the separate juridical
personality of a corporation allowing a party to look behind the veil of corporate fiction to remedy a claim
or fraud. In looking behind the veil, a plaintiff seeks to make somebody liable for a claim either
based on tort, breach of contract, etc. Since a corporation can only act through its agents; it is the
same agents that are to be held liable. Therefore the attribute of limited liability cannot be availed of in a
piercing case since it is this attribute that is undermined so as a wrong can be remedied.

CLV: In viewing the main doctrine of separate juridical personality as to the piercing doctrine, the main
doctrine actually pertains to equity. Equity refers to the part of the rights or interest an individual has in
a corporation. Equity is comprised of two main parts which is (1) enterprise and (2)assets. It is the
enterprise or the conduct of the business which in effect undermines equity. Assets are those brought
in by the stockholders during the formation of the corporation or may have been acquired during its
existence. They are inanimate objects that require human intervention to move or be used. Thus, it
can be said that it is not the assets that undermine equity which bring about piercing. When an
enterprise is conducted in fraud or in perpetuation of a wrong the equity of the corporation is
undermined. Since, a corporation must act through its agents, so the corporation being the principal,
commissions these agents to act under that special commission. If an agent acts beyond the commission
of the principal (as provided under its by-laws) it is the actor that should be held liable not the
corporation, since the corporation for all of its juridical existence is still abstract and a corporeal
actor acts for it. Also a corporation cannot undermine equity, only the actors. So when these actors
undermine equity, they lose limited liability and may be held liable. Therefore, the basis of piercing
is on the enterprise not on equity or its assets. Piercing regulates the enterprise of the corporation.
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).

One of the advantages of a corporate form of business organization is the limitation of an

investors liability to the amount of the investment. This feature flows from the legal theory that a
corporate entity is separate and distinct from its stockholders. However, the statutorily granted privilege
of a corporate veil may be used only for legitimate purposes. On equitable considerations, the veil
can be disregarded when it is utilized as a shield to commit fraud, illegality or inequity; defeat public
convenience; confuse legitimate issues; or serve as a mere alter ego or business conduit of a person or
an instrumentality, agency or adjunct of another corporation. San Juan Structural v. Court of Appeals,
296 SCRA 631 (1998).
 38

SAN JUAN STRUCTURAL AND STEEL FABRICATORS v. CA

Facts: San Juan entered into an agreement with Motorich for the transfer of a parcel of land. San
Juan paid a down payment of 100,000, balance to be paid on or before March 2, 1989. San Juan
requested for the recomputation of the balance, Motorichs broker Linda Aduca wrote the computation.
San Juan and Motorich were supposed to meet in the office of San Juan but Motorich treasurer Mrs.
Gruenberg did not appear. Despite repeated demands and in utter disregard of its commitments
had refused toe execute the Transfer of Rights/Deed of Assignment which is necessary to transfer
the certificate of title (title was transferred to spouses Gruenberg from ACL Corporation) Defendants,
president and chairman of Motorich did not sign the agreement. Mrs. Gruenbergs signature as
treasurer is insufficient. San Juan knew of this infirmity that is why it did not pay on time. The RTC
and CA held that Mrs. Gruenberg did not have the authority as she did not obtain the signatures of
president and chairman, as such it was not ratified by the corporation.

Issue: WON the doctrine of piercing the corporate veil may be applied.

Held: The Court finds no reason to pierce the corporate veil of Respondent Motorich. Petitioner utterly
failed to establish that said corporation was formed, or that it is operated, for the purpose of
shielding any alleged fraudulent or illegal activities of its officers or stockholders, or that the said veil
was used to conceal fraud, illegality or inequity at the expense of third persons like petitioner. Veil can
only be disregarded when it is utilized as a shield to commit fraud, illegality or inequity, defeat public
convenience, confuse legitimate issues or serve as a mere alter ego or business conduit of a person
or an instrumentality, agency or adjunct of another corporation.

In Dulay, the sale of real property was contracted by the President of a close corporation with the
knowledge and acquiescence of its board of directors. In the present case, Motorich is not a close
corporation as previously discussed and the agreement was entered into by the corporate treasurer
without the knowledge of the Board of Directors. The Court is not unaware that there are
exceptional cases where an action by a director who singly is the controlling stockholder, may be
considered a binding corporate act and a board action is nothing more than a mere formality. The
present case is not of them. Granting arguendo that the corporate veil of Motorich may be pierced, said
parcel of land would then be treated as conjugal property of the spouses Gruenberg, because the
same was acquired during the marriage. There being no indication that said spouses who appear to
have been married before the effectivity of the Family Code have agreed to different property
regime, their property relations would be governed by a conjugal partnership of gains. Neither spouse
can alienate in favor of another his interest in the partnership or in any property belonging to it;
neither spouse can ask for a partition of the properties before the partnership has been legally
dissolved.

3. Applications:
(a) Majority Equity Ownership and Interlocking Directorship:

Ownership of a majority the directors of another corporation creates no employer-employee

relationship with the latter's employees. a DBP v. NLRC, 186 SCRA 841 (1990)

DBP v NLRC

Facts: Philippine Smelter Corporation obtained a loan in 1983 from DBP to finance its iron smelting and
steel manufacturing business. To secure the loan, PSC mortgaged to DBP real properties and chattels
with its President Marcelo as co-obligor. Because of this DBP became the majority stockholder of PSC
with stockholdings of P 31M out of P 60 M subscribed and paid up capital stock and took over PSCs
management. PSC failed to pay and DBP foreclosed on the mortgaged realties and chattels. 40 alleged
 39

unpaid employees filed a petition for involuntary insolvency in the RTC against PSC and DBP. Said
employees were employed by Olecram Mining Corp., Jose Panganiban Ice Plant and Cold
Storage, Inc. all impleaded as co- respondent. They filed another complaint with the DOLE against
PSC for non-payment of salaries, 13th month pay, incentive leave and separation pay. DBP was
impleaded because the employees considered DBP as the parent company of PSC. Since the DBP was
the biggest creditor of PSC, it held majority of stock and involved in management through Board of
Directors, DBP was considered to be by the employees as their employer. DBP was invoked absence of
E-E relationship in its Answer. The labor arbiter held DBP as liable for unpaid wages due to PSCs
foreclosure which it caused as foreclosing creditor. NLRC sustained this, hence, this petition.

Held: DBP as foreclosing creditor could not be held liable for unpaid wages, etc. of the employees of
PSC. The fact that DBP is a majority stockholder of PSC and PSC are from DBP does not
sufficiently indicate the existence of an E-E relationship between the terminated employees of PSC and
DBP. Said workers have no cause of action against DBP and the labor arbiter does not have jurisdiction
to take cognizance of said case.

Hence, ownership of a majority of capital stock and the fact the majority of directors of a corporation
are the directors of another corporation creates no E-E relationship with the latters employees.

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).

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).

(b) Being Corporate Officer: Being an officer or stockholder of a corporation does not by itself
make one's property also of the corporation, and vice-versa, for they are separate entities, and that
shareholders are in no legal sense the owners of corporate property which is owned by the corporation
as a legal person. Good Earth Emporium, Inc. v. CA. 194 SCRA 544 (1991).
 40

The mere fact that one is president of the corporation does not render the property he owns or
possesses 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 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. 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).

(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 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).
[CLV: In past decisions, such situation would generally warrant alter-ego piercing.]

(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).
 41

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).

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:

1. Source of Incantation:
United States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 (1905).

The notion of corporate entity will be pierced or disregarded and the individuals composing it will
be treated as identical if the corporate entity is being used as a cloak or cover for fraud or illegality;
as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit
of the stockholders. Gochan v. Young, 354 SCRA 207 (2001); DBP v. Court of Appeals, 357 SCRA 626,
358 SCRA 501, 363 SCRA 307 (2001).

2. Nature of Doctrine (Traders Royal Bank v. Court of Appeals, 269 SCRA 15 [1997])

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
whose 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 erroneous invocation.
(Francisco Motors Corp. v. CA, 309 SCRA 72, 1999).

The notion of separate personality, however may be disregarded under the doctrinepiercing 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. CA, 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 corporate 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 442,
2004)
 42

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 fraud, confuse legitimate issues, or used as a vehicle
to promote unfair objectives or to shield an otherwise blatant violation of the prohibition against forum
shopping. 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).

TRADERS ROYAL BANK v COURT OF APPEALS

Facts:
Filriters Guaranty Assurance Corporation (Filriters) is the registered owner of Central Bank Certificate
of Indebtedness (CBCI) with a face value of 500,000. Such was then transferred to Philippine
Underwriters Finance Corporation (Philfinance) under a Detached Assignment. Philfinance entered
into a repurchase agreement with Traders Royal Bank over the CBCI whereby TRB buys the
CBCI and Philfinance will repurchase it on April 27, 1981 for
519,361.11 Upon the default of Philfinance TRB sought to register the CBCI in its name. CB refused
to register and transfer the CBCI due to the adverse claim of Filriters. (Filriters interjected the
defense that Alfredo Banaria Senior VP of Filriters without any board resolution, knowledge or
consent of the board of directors executed the detached assignment in favor of Philfinance.
Subsequently, Alberto Fabella, Senior VP Comptroller and Pilar Jacobe Senior VP Treasury, of Filriters
and of Philfinance executed similar forms transferring the CBCI to TRB. As such the transfers were null
and void.)

TRB then went to the RTC of Manila and filed for mandamus to compel CB to register. Petitioner
argued that the CBCI was a negotiable instrument and that it was a holder in due course. It also
contended that Philfinance owned 90% of Filriters equity and the two corporations have identical
officers, this demanding the application of the doctrine of piecing the veil of corporate fiction as to give
validity to the transfer of the CBCI.

Issue: WON the doctrine of piercing the veil of corporate fiction applicable in this case.

Held: The CBCI is not a negotiable instrument because it lacks the words of negotiability. It is
payable only to Filriters and the transfer by a non-owner i.e. Philfinance, to TRB should have put the
latter on guard as to the title of Philfinance to dispose of the CBCI. Also the assignment of
Filriters toPhilfinance was fictitious as the same is without consideration and was contrary to the rules
of CB Circular 70 which provides that any assignment shall not be valid unless made by the registered
owner in person or by a duly authorized representative in writing. Philfinance merely borrowed the CBCI
from Filriters a sister corporation to guarantee financing corporations.

The doctrine of piecing the corporate veil is an equitable remedy which may only be awarded in cases
when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or
defend crime or where a corporation is a mere alter ego or business conduit of a person. It requires
the court to see through the protective shroud which exempts its stockholders from liabilities that
ordinarily, they could be subject to or distinguishes one corporation from a seemingly separate one,
were it not for the existing corporate fiction. The court must be sure that the corporate fiction was
misused.. It is the protection of innocent 3rd parties dealing with corporate entity that the law seeks to
protect by this doctrine. In this case, other than the allegation that Filriters is 90% owned by
Philfinance and the identity of one shall be maintained as to the other, there is nothing else which could
lead the court under the circumstances to disregard their separate corporate personalities. There is no
showing that TRB was defrauded at all when it acquired the subject certificate of indebtedness from
Philfinance.

The fact that Philfinance owns a majority share in Filriters is not by itself a ground to disregard their
independent corporate entities. In Liddel & Co. Inc. v. CIR mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a corporation is not itself a sufficient reason
 43

to disregard the fiction of separate corporate personalities.

TRB being a commercial bank which deals with corporate entities with circumstances showing that
the agents are acting in excess of corporate authority may not hold the corporation liable. This is only
fair as everyone must in the exercise of his rights and in the performance of his duties, act with justice,
give everyone his due and observe honesty and good faith.

When the legal fiction of 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).

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
forum-shopping. 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).

The nature of the piercing doctrine is to disregard the separate juridical personality of a
corporation and to hold the actors or the stockholders of the corporation liable for a wrong
committed or a liability avoided. In our lessons in corporation law, we distinguish the cause of the
piercing because it would explain of piercing is properly done. The Supreme Court does not go into an
explanation or direct attribution as to cause of the piercing which at times cause confusion, so to clarify
matters we classify the piercing case into three namely: (1) fraud (2) alter ego and (3) remedy.

In the cases of fraud, the piercing is done because there is a wrong committed. Therefore, a
person behind the wrong must be held liable which in a corporation are the directors, since the
corporation acts through them. A piercing of the corporate veil in fraud cases is for the purpose of
making the directors directly liable. In fraud cases, the SC looks into the circumstances of the case
searching for
elements of malice or evil motive. An absence of such an evil motive, the courts will not allow
piercing. An example would be the case of TRB v. CA where the Court did not allow piercing because
there was no injury caused. Also in the Umali case, the court did not allow piercing because the main
intent was to annul a real estate mortgage under an allegation of fraud and not to hold the Directors
liable. In both cases, piecing was not the proper remedy, even if fraud was actually alleged because the
fraud committed was not attributed directly to the acts of the agents of the corporation.

In alter ego cases, the allegation does not go into fraud or malicious intent but a disrespect for the
corporate fiction. Here, the corporation is being used as a conduit or front for the activities of a
person, whether natural or juridical, in order to avoid liability or gain advantage over another without
really employing fraud. Here, if piercing is allowed then the corporate existence of the conduit
corporation is disregarded and the person or corporation behind the corporation shall be considered
as one and the liability of one is the liability of the other. The main intent here is not to make the
board of directors of the conduit corporation liable but to make the corporation behind the existence of
the conduit liable. It is the objective of the Corporation Code to foster public convenience in
sanctioning the creation of a corporation not as a means or private convenience where it is to be
used by other corporations or individuals as a means to circumvent liability or cause a disruption of
normal business practice in dealing with corporations.

Equity subdivision is the catch-all subdivision. If not fraud or alter ego, the court may grant piercing as
an equitable remedy, but such is usually resorted to as a reason in consonance with fraud or alter ego
 44

cases. As such it is of purely judicial discretion.

Three Cases may appear together in one application:

FRAUD- to prevent wrong

PIERCING DOCTRINE
ALTER-EGO disrespect for the corp. fiction & to defeat public
convenience

EQUITY- to do
justice
The 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 for which such doctrine was
applied.

(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. a PNB v. Ritratto Group, Inc., 362
SCRA 216 (2001).

(b) Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not available
when other remedies are still available. a Umali v. Court of Appeals, 189 SCRA
529 (1990).

UMALI v. COURT OF APPEALS

Facts:
The Castillo family is the owner of a parcel of land which was given as security for a loan from the
DBP. For failure to pay the amortization, foreclosure of the property was initiated. This was made
known to Santiago Rivera, the nephew of plaintiff Mauricia Meer vda. De Castillo and president of
Slobec Realty Dev. Corp. Rivera proposed to them the conversion into a subdivision lot of the four
parcels of land adjacent to the mortgaged property to raise the money. The Castillos agreed so a
MOA was executed between Slobec represented by Rivera and the Castillos. Rivera obliged himself to
pay the Castillos P70T after the execution of the contract and P400T after the property had been
converted into a subdivision. Rivera armed with the agreement approached Cervantes, president of
Bormaheco and bought a Caterpillar Tractor with P50T down payment and the balance of P180T
payable in installments. Slobec through Rivera executed in favor of Bormaheco a chattel mortgage
over the said equipment as security for the unpaid balance. As further security, Slobec obtained
through the Insurance Corporation of the Philippines a Surety Bond in favor of Counter-Guaranty with
REM executed by Rivera as president of Slobec and the Castillos as mortgagors and ICP as mortagee.
The Caterpillar Tractor was delivered to Slobec.

Meanwhile for violation of the terms and the conditions of the Counter-Guaranty Agreement, the
properties of the Castillos was foreclosed by ICP. As the highest bidder, a Certificate of Sale was
issued in its favor and TCTs over the parcels of land were issued by the Register of Deeds in favor of
ICP. The mortgagors had one year from the registration of the sale to redeem the property but they
failed to do so. ICP consolidated its ownership over the parcels of land. Later on ICP sold to Philippine
Machinery Parts Mfg. Co. the parcels of land and by virtue of said sale, PM transferred unto itself the title
of the lots. PM parts through its President, Cervantes sent a letter to the Castillos to vacate the
property. The Castillos refused to do so. Subsequently, Umali the administratix of the properties of
Castillos filed an action for annulment of titles. They countered that all the transaction starting from
 45

the Agreement of Counter-Guaranty with REM are void for being entered into in fraud. They seek to
pierce the veil of corporate entity of Bormaheco, ICP and PM Parts alleging that these corporations
employed fraud in causing the foreclosure and subsequent sale of their land. The lower court ruled in
favor of Umali. This was reversed by the CA.

Held:
The SC is not convinced that the contract entered into by the parties are fraudulent.

Under the doctrine of piecing the veil of corporate entity, when valid ground exists , the following
effects would be produced: (1) legal fiction that a corporation is an entity with a juridical personality
separate and distinct from its members or stockholders may be disregarded (2) in such cases, the
corporation will be considered as a mere association of person (3) the members or stockholders of
the corporation will be considered as the corporation, making them liable directly. It is only
applicable when corporate fiction is: (1) used to defeat public convenience, justify wrong, protect fraud,
or defend crime (2) made as a shield to confuse legitimate issued (3) where a corporation is the
mere alter ego or business conduit of a person (4) where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality., agency , conduit or
adjunct of another corporation.

The SC is of the opinion that piecing the veil is not the proper remedy in order that the foreclosure
proceedings may be declared a nullity under the circumstances in the case at bar. Petitioners are
merely seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained
without having to disregard the aforesaid corporate fiction attaching to the respondent corporations.
Petitioners also fail to establish by clear and convincing evidence that private respondents were
purposely formed and operated, with the sole intention of defrauding the latter. The facts showed that
the surety of ICP is good only for 12 months therefore the surety had already expired. The failure of
ICP to give notice renders ICP to have no right to foreclosure. In this case, piercing need not be resorted
to.

Q: Why is Umali seeking to pierce the corporate entity?

A: Umali is seeking to have the veil pierced because it would have shown that the contracts entered into
were fictitious and simulated, there being a fraudulent intent on the part of Bormaheco, ICP & PM parts to
acquire the property of Umali through the foreclosure of the mortgage by ICP. However,
the court belied such allegation because the mere fact that the business of two or more corporations are
interrelated is not a justification for disregarding their separate personalities, absent a sufficient showing
that the corporate entity was purposely used as a shield to defraud creditors and third persons of their
rights.

Q: Why are we studying Umali?

A: The allegations made by Umali were based on fraud and yet the main objective of the suit was to annul
the foreclosure of the mortgage. The Court found no reason to pierce since the main objective was not in
consonance with the remedy of piercing in a fraud case would do, which was to hold the Board of
Directors liable. Piercing is not allowed unless the remedy sought is to make the officer or another
corporation pecuniary liable for corporate debts.

Q: What if it was based on alter ego?

A: The probative factor show that no alter ego existed since there was no disrespect of the corporate
fiction, the corporations each having its own way of conducting business. Even if it may be that they
compliment one another in their business conduct, it does not form enough basis for their circumvention
of any liability.

(c) Purpose of Piercing: Piercing is not allowed unless the remedy sought is to make the officer or
another corporation pecuniarily liable for corporate debts (?). Umali v. CA, 189
SCRA 529 (1990); a Indophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697 (1992).
 46

INDOPHIL TEXTILE MILL WORKERS UNION v CALICA

Facts:
Indophil Union is a legitimate labor organization duly registered with the DOLE and the exclusive
bargaining unit of all rank and file employees of Indophil Textile Mills. On April 1987, the Union and
Indophil excecuted a CBA effective April 1, 1987 to March 31, 1990. On November 1987, Indophil
Acrylic was formed and registered with the SEC. In 1998, Acrylic became international and hired
workers according to its criteria and standards. Sometime in July 1989, the workers of Acrylic
unionize and a duly certified CBA was executed. In 1990, the Union claimed that the plant facilities
built and set up by Acyrlic should be considered as an extension or expansion of Indophil pursuant to
Sec. 1(c) of Art.1 of the CBA to wit: This agreement shall apply to all companies, facilities, and
installations and to any extension and expansion thereat. The union sough that Acrylic be considered
part of the bargaining unit.

Their contention is that the articles of incorporation of the two corporation establish that the two
entities are engaged in the same kind of business, which is the manufacture and sale of yarns of
various counts and kinds and of other materials of kindred character or nature. Furthermore, they
emphasize that the two corporations have practically the same incorporators, directors and officers.
Also the two corporation have their facilities in the same compound. That many of Indophils own
machineries such as dyeing machines, reeler, broiler, were transferred to and are now being used by the
Acrylic plant. That services of a number of units, departments or sections of private respondents are
provided by Acrylic and that the employees of Indophil are the same persons manning and servicing
the units of Acrylic. Both parties submitted the issue to LA Calica. Calica ruled for Indophil and stated
that Acrylic is not extension of Indophil an hence their CBA does not extend to the employees of
Acrylic.

Issue: WON Acrylic is a separate and distinct entity from Indophil for purposes of union
representation. WON the operations in Acrylic are an extension or expansion of Indophil.

Held:

Acrylic is not an alter ego or an adjunct or a business conduit of Indophil because it has a separate
legitimate business purpose. Indophil engages in the manufacture of yarns while Acrylic is to
manufacture, buy, sell at wholesale basis, barter, import, export and otherwise deal in various kinds of
yarns. Two corporations cannot be treated as single bargaining unit just because they have related
businesses.

The Union seeks to pierce the veil of Acrylic alleging that the corporation is a device to evade the
application of the CBA. However the CA held that said doctrine is only used on the existence of valid
grounds. In the case at bar, the fact that the business of Indophil and Acrylic are related that
sometimes the employees of Indophil are the same persons manning and providing for auxiliary
services to the units of Acrylic, and that the physical plants, offices, and facilities are situated in the
same compound. It is the SCs considered opinion that these facts are not sufficient to justify the
piercing of the corporation veil of Acrylic. Furthermore, the legal entity is disregarded only if sought to
hold the officers and stockholders liable. In the instant case, the Union does not seek relief from
Indophil.

LA CAMPANA COFFEE FACTORY v KAISAHAN NG MANGGAGAWA

Facts:
Tan Tong since 1932 has been engaged in the buying and selling gawgaw under the trade name La
Campana Gawgaw Packing. In 1950, Tan Tong and members of his family organized the family
 47

corporation. La Campana Coffee Factory with its principal office located in Gawgaw Packing. Prior to said
information, Tan Tong entered into a CBA with the labor union of La Campana Gawgaw. Later on, his
employees formed Kaisahan ng mga Manggagawa ng La Campana with an authorization from the
DOLE to become an affiliate Kaisahan with 66 members presented a demand for higher wages and
more privileges to La Campana Starch and Coffee Factory. The demand was not granted and the DOLE
certified the issue to the CIR. La Campana filed a motion to dismiss alleging that the action was
directed against two different entities with distinct personalities. This was denied, hence this petition.

Held:

La Compana Gawgaw and La Campana Factory are operating under one single management or as
one business though with two trade names. The coffee factory is a corporation and by legal fiction, an
entity separate and apart from the persons composing it namely, Tan Tong and his family.
However, the concept of separate corporate personality cannot be extended to a point beyond
reason and policy when invoked in support of an end subversive of this policy and will be disregarded by
the courts.

A subsidiary company which is created merely as an agent for the latter may sometimes be
regarded as identical with the parent corporation especially if the stockholders or officers of the two
corporations are substantially the same or their systems of operation unified. The facts showed that
they had one management, one payroll prepared by the same person, laborers were interchangeable,
there is only one entity as shown by the signboard ad in trucks, packages and delivery forms and the
same place of business.

The attempt to make the two factories appear as two separate businesses when in reality they are but
one, is but a device to defeat the ends of the law and should not be permitted to prevail.

WHY PIERCE? So that La Campana cannot evade the jurisdiction of CIR since La Campana
Gawgaw has only 14 employees and only 5 are members of Kaisahan.

CONTRASTING THE TWO CASES

Q: Why did the court not also pierce Indophil Acrylic and declare that it is a mere alter ego of
Indophil when in fact the same circumstances in La Campana exist?
A: It may seem that the facts and circumstances are nearly the same between the two cases but the
remedies are different. La Campana sought the protection of separate juridical personality so as it may
not fall under the jurisdiction of the CIR, there being a clear intent to be excused from the coverage of
Labor Laws which conferred the CIRs jurisdiction over the issue at hand. Although there was no intent to
defraud, the creation of La Campana Coffee Factory was meant to excuse itself from CIR jurisdiction.
However, in Indophil the facts of the case show that there was no clear showing that Indophil meant to
use Acrylic as a means of circumventing Labor Laws. Altough the CBA between Indophil and its union
provides that any expansion of Indophils operations would also be covered by the CBA, Acrylic is an
altogether different business. What showed that there was no intent by
Indophil or Acrylic to circumvent labor laws is when Acrylic entered into a CBA with its own
employees. There was clear independence of action between the relation of Indophil and Acrylic as to
their respective employees, each constituting its own bargaining unit.

Q: Could Indophil be considered as have superseded La Campana?

A: CLV pointed out that were no mention of La Campana in the ruling in Indophil whether in support or in
contravention of this doctrine. It can be seen that actually there are no points where Indophil had
substantially changed the ruling in La Campana. La Campana, in fact is being cited in cases decided by
the SC after Indophil, in the same way that Indophil continues to be cited. The criteria that when it is
established that between two corporations which have one set of managers or board of directors; that
there is a common stock ownership of both corporations; similarity of keeping corporate books and in
conducting their businesses are mere probative factors that are to be considered when the corporate
mask may be lifted and the corporate veil pierced. It does not mean that if these factors exist, piercing is
 48

automatically required. There is for one no hard and fast rule that can be laid down. So that in La
Campana, the factors weighed heavily for piercing and in Indophil, against piercing.

Piercing is not available when personal obligations of an individual are to be enforced against the
corporation (?) Robledo v. NLRC, 238 SCRA 52 (1994).

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. a Francisco Motors Corp. v Court of Appeals, 309 SCRA 72 (1999).

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).

(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. Court of Appeals, 363 SCRA 307 (2001).

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).

(e) Not Applicable to Theorizing: Piercing of the veil of corporate fiction is not allowed when it is
resorted under a theory of co-ownership to justify continued use and possession by stockholders
of corporate properties. a Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992).

The piercing doctrine is an equitable remedy available only to persons outside the
 49

corporation. It cannot be availed of stockholders within the corporation forming part of the corporation.
In comparison, CLV uses the Story of the Wall. This wall is the main doctrine, designed both to protect
the stockholders by virtue of the attribute of limited liability and to hide from prying eyes the inner
workings of the corporation. Stockholders are inside these walls. Piercing the veil of corporate fiction is
like a battering ram that creates a hole through this wall to allow third persons to look into the
corporation to see if there is a wrong committed inside those walls. A stockholder being inside the
fort are afforded other remedies, they have intra-corporate remedies to avail of.

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 petitioning 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).

(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).

(h) Consequences and Types of Piercing Cases: (Umali v. CA, 189 SCRA 529 [1990])

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:

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).

(a) Fraud Piercing: When corporate entity used to commit fraud or do a wrong

(b) 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

(c) Equity Cases: When piercing the corporate fiction is necessary to achieve justice or equity.

The three cases may appear together in one application. See R.F. Sugay & Co., v. Reyes, 12
SCRA 700 (1964).

Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law
 50

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 a 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 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. Investment Corp., 513 SCRA 225, 2007). Citing
Villanueva, Commercial Law (2004 ed)., at p. 576

Summary of Probative Factors: a 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).

CONCEPT BUILDERS Inc. v NLRC

Facts:
Concept Builders is engaged in the construction business. Private respondents are employed by the
company as laborers, carpenters and riggers. In November of 1981, private respondents were served
individual notices of termination by the company. It stated that their contract had already expired. The
NLRC discovered that the project for which they were hired was not yet even finished. In addition to this,
Concept had to hire subcontractors whose works are the same as private respondents. A writ of
execution was issued which was partially satisfied through the garnishment of money from MWSS which
is a debtor of Concept and the balance was to be collected from Concept directly. But the sheriff
reported that when the writ was to be served the guard on duty refused it on the ground that Concept no
longer owned the premises and was now occupied by Hydro Pipes, which had the same Board of
Directors as Concept.

Held:

The veil may be pierced when it its just the alter ego of a person of another corporation.

The conditions under which the juridical entity may be disregarded vary according to the peculiar facts
and circumstances of each case. No hard and fast rule can be laid down, but there are some
probative factors of identity that will justify the application of the doctrine.

Summary probative factors: (1) stock membership by one ore common ownership of both (2) identity of
directors and officers (management) (3) manner of keeping corporate books and records
(management) (4) methods of conducting business (management).

While petitioners claimed that it ceased operations in 1986, it filed an Information Sheet with the SEC in
1987 stating that its office address is their old address. Both information sheets were filed by Virgilio
Casino, the same corporate secretary. They had the same President, Board of Directors and
substantially the same subscribers.

4. 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. a Francisco v.
Mejia, 362 SCRA 738 (2001).

In accordance with the foregoing rule, this Court has disregarded the separate personality of
the corporation were the corporate entity was used to escape liability to third parties. In this case,
however, we do not find any fraud on the part of the Marinduque Mining and its transferees to
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
 51

and false representations, such stockholder shall be liable soidarily with co-defendant corporation even
when the contract sued upon was entered into on behalf of the corporation. a Namarco v. Associated
Finance Co., 19 SCRA 962 (1967).

CLV: As a general rule, an agent acting within the scope of his authority cannot be held liable for acts
done in behalf of the principal. However, when a wrong done by a corporation is through a person in
its behalf, piercing makes both of them liable. In fact, an agents who commits a crime or fraud can
be held liable despite the agency relation.

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) Avoidance of Taxes: 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 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).

(c) Avoidance of Contractual or Civil Liabilities: One cannot evade civil liability by incorporating
properties or the business. a Palacio v. Fely Transportation Co., 5 SCRA
1011 (1962).

Q: Why should a case be classified as a fraud case, an alter ego case, etc.?
A: In fraud cases, it is necessary that the petitioners seek to enforce the claim against the stockholders or
corporate officers. Since, in fraud cases only one act of fraud is necessary to hold them liable whereas in
an alter ego case, a series of transaction has to proven before they may be held liable.

When used to avoid a contractual commitment against non-competition. Villa Rey Transit, Inc. v. Ferrer,
25 SCRA 845 (1968).

(d) 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).

(e) Thinly-capitalized corporations: McConnel v. CA, 1 SCRA 722 (1961).

The fact that a corporation has no adequate capital enough basis for piercing. Such
pronouncement limits the advantage of creating a corporation. For example, in cases where leveraging
is undertaken which is considered as a legitimate business practice.

(f) 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]).

Q: Why is there an inordinate showing of the alter ego elements?

A: In cases of parent-subsidiary relations, it is necessary that the factual circumstances be considered in
order to distinguish between a case of fraud or alter ego. There may be an inordinate showing of alter
ego elements but that does not necessarily make it an alter ego case. Therefore, alter ego in fraud cases
 52

must be distinguished from pure alter ego. In fraud cases, the alter ego concept pertains to employing the
corporation even for a single transaction to do evil while in pure alter ego cases, the courts go into
systematic findings of the larger union. utter disregard and disrespect of the separate juridical
personality of the corporation.

(e) Guiding Principles in Fraud Cases:

Why is there inordinate showing of alter-ego elements? 3

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; and

The main action should seek for the enforcement of pecuniary claims pertaining to the corporation
against corporate officers or stockholders.

5. 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); MR Holdings,Ltd. V. Bajar, 380 SCRA 617 (2002); Heirs of Ramon Durano, Sr. v. Uy,
344 SCRA 238 (2000); Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996).

(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. a 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).

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).

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).

(c) Avoidance of taxes: a 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 man the corporation for the benefit of the controlling stockholder.
Marvel Building v. David, 9 Phil. 376 (1951).

YUTIVO & SONS INC. v CTA

Facts:
Yutivo is a domestic corporation engaged in the importation and sale of hardware supplies and
equipment. It bought a number of cars and trucks from General Motors Overseas Corporation. GM
paid sales tax on original sales on the basis of its selling price to Yutivo. Yutivo paid no further tax on its
sales to the public. Southern Motors was then organized to engage in the business of selling cars, trucks,
and spare parts with capital stock of 10,000 shares, 2,500 of which were subscribed in equal proportion
by the children of Yutivos incorporators. Under this set-up, Yutivo would purchase the cars and tucks
 53

from GM then sell the same to SM which in turn sold them to the general public. Then GM withdrew its
operations from the Philippines. Yutivo took over the importation of trucks and cars. It likewise continued
to have the previous arrangement of selling exclusively to SM which in turn paid no such sales tax on its
sales to the general public. The CIR made an assessment upon Yutivo and demanded a sum
representing deficiency sales tax plus surcharges claiming that the taxable sales were the retail
sales should be between SM to the general public and not the sale at wholesale made by Yutivo to SM
since the two were one and the same corporation, SM being a mere subsidiary of Yutivo. CTA
affirmed such a ruling and further stated that there was no legitimate purpose in the organization of SM
apparently organized to evade the payment of taxes and that it was owned and controlled by
Yutivo and is a mere branch, adjunct, conduit, instrumentality or alter ego of Yutivo.

Issue: WON SM is a mere alter ego of Yutivo meant to defraud government of lawful tax revenues? Held:
SM was not organized for the purpose of defrauding the government of lawful tax revenues because:

(1) The intention to minimize taxes as in tax evasion when used in the context of fraud, must be
proven to exist by clear and convincing evidence amounting to more than the mere preponderance of
evidence. The evidence of the collector falls short of such standard.

(2) SM was organized at a time when there was not yet tax to evade, when GM was still the importer and
was the one paying the sales tax.

(3) The transactions between Yutivo and SM were and have always been in the open, embodied in
private and public documents, constantly subject to inspection by tax authorities.

(4) A taxpayer has the legal right to decrease the amount of what otherwise would be his taxes
altogether avoid them by means which the law permits.

(5) However, SM was actually owned and controlled by Yutivo to make it a mere subsidiary or branch of
the latter. SM was organized by the leading stockholders of Yutivo. Yutivo was at all times in
control if the majority stock of SM. The principal officers of both corporations are identical. Thus, the
business, financial and management policies of both corporations could be directed towards common
ends. The funds of SM are directly remitted to Yutivo and subject to withdrawal only of Yutivo, SMs
resources being under Yutivos control. The accounting system maintained by Yutivo shows that it
maintained a high degree of control over SM accounts. All transactions between Yutivo and SM are
recorded and effected by mere debit or credit entries against the reciprocal account maintained in
their respective books of accounts and indicate the dependency of SM as a branch of Yutivo.

(6) Thus, SM being a mere instrumentality of Yutivo, the CTA correctly disregarded the technical
defense of separate corporate entity in order to arrive at the true liability of Yutivo.

Q: Can tax avoidance not be considered as a crime thus perpetuated in fraud rather than an alter
ego case?
A: The Court had in this case ruled as to the legitimacy of a corporation to act as to seek means to
decrease its tax liability. The difference between Yutivo and Tan Boon Kong is that in the latter, the court
found evidence that Tan Boon Kong acted beyond the scope of his authority. In the former, evidence was
seen to be insufficient as to establish a willful desire to evade taxes.

(d) Mixing-up Operations; Disrespect to the Corporate Entity:

Employment of same workers; single place of business, etc., may indicate alter ego situation. a La
Campana Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953); a Shoemart v. NLRC,
225 SCRA 311 (1993).

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
 54

corporations are distinct entities and treat them as identical. Sibagat Timber Corp. v. Garcia, 216 SCRA
70 (1992).

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).

Mixing of personal accounts with corporate bank deposit accounts. Ramirez Telephone Corp. v.
Bank of America, 29 SCRA 191 (1969).

(e) Parent-subsidiary; Affiliated Companies: Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946);
PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990).

The person who invokes the doctrine must always be the injured party.

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).

(h) 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.

(i) Distinction Between Fraud Piercing and Alter-ego Piercing: Lipat v. Pacific
Banking Corp., 402 SCRA 339 (2003).

6. Equity Cases:

(a) When used to confuse legitimate issues. Telephone Engineering and Service Co., Inc. V. WCC,
104 SCRA 354 (1981).

(b) When used to raise technicalities. Emilio Cano Ent. v. CIR, 13 SCRA 291 (1965).

7. Due Process Clause

(a) Need to bring a new case against the officer. a Padilla v. Court of Appeals, 370 SCRA
208 (2001); 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).
 55

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).

(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).

(c) Provided that evidential basis has been adduced during trial to apply the piercing doctrine. a
Jacinto v. Court of Appeals, 198 SCRA 211 (1991); Arcilla v. Court of Appeals, 215 SCRA 120
(1992).

V. CLASSIFICATIONS OF CORPORATIONS

1. In Relation to the State:

a) Public Corporation (Sec. 3, Act No. 1459).

- one formed or organized for the government or a portion of the state
- its purpose is for general good and welfare

b) Quasi-public Corporation. Marilao Water Consumers Associates v. IAC, 201 SCRA 437 (1991);
- marriage of both a public and a private corp.
- it is granted the same powers as a private corp. but they have no incorporators, SHs or
members
(example: A water district, although established as a corporation, it was established for the greater
good and with no stockholders. They are also placed under the jurisdiction of the LWUA not the SEC)

c) Private Corporation (Sec. 3, Act 1459).

- one formed for some private purpose, benefit or end.

Governments majority shares does not make an entity a public corporation. National
Coal Co., v. Collector of Internal Revenue, 46 Phil. 583 (1924).

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 prescription
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).
 56

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 government-
owned 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).

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
- incorporated in the Philippines

(b) Foreign Corporation (Sec. 123)

- Sec. 123 Definition and rights of foreign corporations For the purposes of this Code, a foreign
corporation is one formed, organized or existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall
have the right to do business in its own country or state. It shall have the right to transact business in the
Philippines after it shall have obtained a license to transact business in this country in
accordance with this Code and a certificate of authority from the appropriate government authority.

- incorporated in another country and that country grants the same rights to Filipinos in terms of doing
business there; it shall have the right to transact business in the Philippines after it shall have obtained
 57

a license to transact business in this country in accordance with this code & a certificate of authority
from the appropriate government agency ( SEC license after obtaining BOI certificate )

3. As to Purpose of Incorporation:
(a) Municipal Corporation LGUs
- can sue be sued without their consent ( as provided for by the LGC)
- in certain instances considered as an adjunct to the national government but has been recognized
to have a personality separate and distinct from the national government.
(b) Religious Corporation (Secs. 109 and 116)
Section 109. Classes of religious corporations. - Religious corporations may be incorporated by one
or more persons. Such corporations may be classified into corporations sole and religious societies.

Religious corporations shall be governed by this Chapter and by the general provisions on non-stock
corporations insofar as they may be applicable.
Section 116. Religious societies. - Any religious society or religious order, or any diocese, synod,
or district organization of any religious denomination, sect or church, unless forbidden by the
constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a
part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting
called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration
of its temporalities or for the management of its affairs, properties and estate by filing with the
Securities and Exchange Commission, articles of incorporation verified by the affidavit of the presiding
elder, secretary, or clerk or other member of such religious society or religious order, or diocese,
synod, or district organization of the religious denomination, sect or church, setting forth the following:

1. That the religious society or religious order, or diocese, synod, or district organization is a
religious organization of a religious denomination, sect or church;

2. That at least two-thirds (2/3) of its membership have given their written consent or have voted
to incorporate, at a duly convened meeting of the body;

3. That the incorporation of the religious society or religious order, or diocese, synod, or district
organization desiring to incorporate is not forbidden by competent authority or by the
constitution, rules, regulations or discipline of the religious denomination, sect, or church of which it
forms a part;

4. That the religious society or religious order, or diocese, synod, or district organization desires to
incorporate for the administration of its affairs, properties and estate;

5. The place where the principal office of the corporation is to be established and located, which
place must be within the Philippines; and
The names, nationalities, and residences of the trustees elected by the religious society or religious
order, or the diocese, synod, or district organization to serve for the first year or such other period as
may be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or
district organization, the board of trustees to be not less than five (5) nor more than fifteen (15). (160a)

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 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)

Section 106. Incorporation. - Educational corporations shall be governed by special laws and
by the general provisions of this Code. (n)
 58

Section 107. Pre-requisites to incorporation. - Except upon favorable recommendation of the

Ministry of Education and Culture, the Securities and Exchange Commission shall not accept or
approve the articles of incorporation and by-laws of any educational institution. (168a)

Section 108. Board of trustees. - Trustees of educational institutions organized as non-stock

corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the
number of trustees shall be in multiples of five (5).

Unless otherwise provided in the articles of incorporation on the by- laws, the board of trustees of
incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so
classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year.
Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall
hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by
expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute a
quorum for the transaction of business. The powers and authority of trustees shall be defined in the
by-laws.
For institutions organized as stock corporations, the number and term of directors shall
be governed by the provisions on stock corporations. (169a)

(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]).

Section 110. Corporation sole. - For the purpose of administering and managing, as trustee, the affairs,
property and temporalities of any religious denomination, sect or church, a corporation sole may
be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious
denomination, sect or church. (154a)

Section 111. Articles of incorporation. - In order to become a corporation sole, the chief
archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or
church must file with the Securities and Exchange Commission articles of incorporation setting forth the
following:

1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious
denomination, sect or church and that he desires to become a corporation sole;

2. That the rules, regulations and discipline of his religious denomination, sect or church are not
inconsistent with his becoming a corporation sole and do not forbid it;

3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is
charged with the administration of the temporalities and the management of the affairs, estate and
properties of his religious denomination, sect or church within his territorial jurisdiction, describing
such territorial jurisdiction;

4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest,
minister, rabbi of presiding elder is required to be filled, according to the rules, regulations or
discipline of the religious denomination, sect or church to which he belongs; and

5. The place where the principal office of the corporation sole is to be established and located, which
place must be within the Philippines.
 59

The articles of incorporation may include any other provision not contrary to law for the regulation
of the affairs of the corporation. (n)

Section 112. Submission of the articles of incorporation. - The articles of incorporation must be
verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister,
rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate
of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or
presiding elder, duly certified to be correct by any notary public.

From and after the filing with the Securities and Exchange Commission of the said articles of
incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in
the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder
shall become a corporation sole and all temporalities, estate and properties of the religious
denomination, sect or church theretofore administered or managed by him as such chief archbishop,
bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for
the use, purpose, behalf and sole benefit of his religious denomination, sect or church,
including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries
thereof. (n)

Section 113. Acquisition and alienation of property. - Any corporation sole may purchase and hold real
estate and personal property for its church, charitable, benevolent or educational purposes, and
may receive bequests or gifts for such purposes. Such corporation may sell or mortgage real property
held by it by obtaining an order for that purpose from the Court of First Instance of the province
where the property is situated upon proof made to the satisfaction of the court that notice of the
application for leave to sell or mortgage has been given by publication or otherwise in such manner
and for such time as said court may have directed, and that it is to the interest of the corporation
that leave to sell or mortgage should be granted. The application for leave to sell or mortgage
must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding
elder acting as corporation sole, and may be opposed by any member of the religious denomination,
sect or church represented by the corporation sole: Provided, That in cases where the rules,
regulations and discipline of the religious denomination, sect or church, religious society or order
concerned represented by such corporation sole regulate the method of acquiring, holding, selling and
mortgaging real estate and personal property, such rules, regulations and discipline shall
control, and the intervention of the courts shall not be necessary. (159a)

Section 114. Filling of vacancies. - The successors in office of any chief archbishop, bishop, priest,
minister, rabbi or presiding elder in a corporation sole shall become the corporation sole on their
accession to office and shall be permitted to transact business as such on the filing with the Securities
and Exchange Commission of a copy of their commission, certificate of election, or letters of
appointment, duly certified by any notary public.

During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder
of any religious denomination, sect or church incorporated as a corporation sole, the person or
persons authorized and empowered by the rules, regulations or discipline of the religious denomination,
sect or church represented by the corporation sole to administer the temporalities and manage the
affairs, estate and properties of the corporation sole during the vacancy shall exercise all the powers
and authority of the corporation sole during such vacancy. (158a)

Section 115. Dissolution. - A corporation sole may be dissolved and its affairs settled voluntarily by
submitting to the Securities and Exchange Commission a verified declaration of dissolution.

The declaration of dissolution shall set forth:

1. The name of the corporation;

2. The reason for dissolution and winding up;

 60

3. The authorization for the dissolution of the corporation by the particular religious denomination,
sect or church;

4. The names and addresses of the persons who are to supervise the winding up of the affairs of the
corporation.
Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the
corporation shall cease to carry on its operations except for the purpose of winding up its affairs.

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). (3Overturning affirmed in
Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984); Republic v. IAC, 168
SCRA 165 (1988).)
 61

5. As to Legal Status:

(a) De Jure Corporation

(b) De Facto Corporation (Sec. 20)

Section 20. De facto corporations. - The due incorporation of any corporation claiming in good
faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired
into collaterally in any private suit to which such corporation may be a party. Such inquiry may be
made by the Solicitor General in a quo warranto proceeding.

(c) Corporation by Estoppel (Sec. 21) S

Section 21. Corporation by estoppel. - 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 debts, liabilities and damages
incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is
sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall
not be allowed to use as a defense its lack of corporate personality.

On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof
on the ground that there was in fact no corporation.

Q. Why is there piercing in a de facto corporation?

A. Piercing is allowed because the intention of the law is to protect the contracts entered into by the
corporation.

6. As to Existence of Shares (Secs. 3 and 5):

Sec. 3 Classes of Corporation Corporations formed or organized under this Code may be stock or
non-stock corporations. Corporations which have capital stock divided into shares and are authorized
to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis
of the shares held are stock corporations. All other corporations are non-stock corporations.

Sec. 5 Corporations and incorporators, stockholders and members Corporators are those who
compose a corporation, whether as stockholders or as members. Incorporators are those stockholders
or members mentioned in the articles of incorporation as originally forming and composing the
corporation and who are signatories thereof.

Corporators in a non-stock corporation are called stockholders or shareholders. Corporators in a non-

stock corporation are called members.
(a) Stock Corporation
(b) Non-Stock Corporation

VI. CORPORATE CONTRACT LAW

See relevant portion of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No. 2, June
1994)

INTRODUCTION: Corporate Contract Law: contracts shaped by corporate law.

Form v. substance: substance prevails

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In the levels of the legal relationship, corporate contract law is used to resolve issues between the
different levels between the juridical entity level, the contract relationship level and the business entity
level.

Q: Why is there a need to distinguish corporate contract law from contract law?
A: There is a need to distinguish between the two because there are certain instances where an
application of corporate contract law principles are in direct conflict with contract law principles. An
example would be in the situation where a corporation is being incorporated, the corporation code in
certain instances recognize the binding effect of contracts entered into in the pre-incorporation
stage. But if contract law was strictly applied such a contract would be void since it lacks one vital
element which is consent of the contracting parties. How does a corporation that does not exist yet give
consent? This is where corporate contract law find its relevance. The conflict between the juridical entity
level is reconciled with the contractual relationship level. (DOCTRINE: to validate the contract
entered into by the supposed corporation)

PROMOTERS CONTRACT C. BY ESTOPPEL DE FACTO or DE JURE DISSOLUTION

Q: In order to reach the level of corporation by estoppel, what is the essential ingredient of such
doctrine?
A: When there is a representation that a corporation exists when in fact there is none and at least one
party thought that there was a corporation.

Q: Distinguish promoters contract principles from the corporation by estoppel doctrine?

A: In both the corporation does not exist. But in promoters contracts there is no misrepresentation that
the corporation does not yet exist. When the contracts are entered into by persons who in behalf of the
corporation, acknowledging that the corporation does not yet exist and is still in the process of
incorporation, you do not apply the doctrine of corporation by estoppel. It is still what one may call as
the promoters contract. (The moment there is no corporation and contracts are entered into under the
representation that the corporation does exist then that is the only time you apply the doctrine of
corporation by estoppel.)

1. Pre-Incorporation Contracts

(a) Who Are Promoters?

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])

CLV: The definition of promoter is important to determine the liability for promoters contract. Before
you can make a promoter liable, you must be able to determine who is the promoter. He must be the one
who takes initiative on the founding and organization of the business venture which eventually ends up
as the corporation being organized.

Q: At the promoters stage there is no juridical personality until the SEC issues the certificate of
incorporation. Until the certificate is issued, the stage of the de facto corporation has not yet been
reached. Prior to the de facto corporation stage what then is the status of the contract entered
into by a promoter for and in behalf of the person or agent who had undertaken the transaction?
A: Unenforceable. It is not binding upon the corporation because it has not given consent to the authority
of the person or agent who had undertaken the transaction.
 63

Q: How can ratification be done?

A: Ratification can be done in two ways: (1) express ratification a mere board resolution making the
corporation liable by accepting the contract and (2) implied ratification by accepting of benefits

(b) Nature of Pre-incorporation Agreements (Secs. 60 and 61; Bayla v. Silang Traffic
Co., Inc., 73 Phil. 557 [1942]).

Sec. 60 Subscription contract Any contract for the acquisition of unissued stocks in an existing
corporation or a corporation still to be formed shall be deemed as subscription within the meaning of this
Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract.

Sec. 61 Pre-incorporation subscription A subscription f or shares of stock of a corporation still

to be formed shall be irrevocable for a period of at least six months from the date of subscription
unless all the other subscribers consent to the revocation, or unless the incorporation of said
corporation fails to materialize within said period or within a longer period as may be stipulated
in the contract of subscription: Provided, that no pre- incorporation subscription may be
revoked after the submission of the articles of incorporation to the SEC.

CLV: Sec. 61 of the Corp. Code governs a pre-incorporation subscription agreement. Sec. 61 says that a
pre-incorporation subscription agreement is irrevocable. The only manner by which you can revoke it
is if ALL of the other subscribing stockholders consent to the revocation. Sec. 61 is a clear demonstration
of the fact that a promoters contract can be valid and even irrevocable. In the case of a pre-
incorporation subscription agreement that contract is valid because there are in fact two parties. The
party subscribed and all of the other parties who have subscribed to the other incorporators and all of
them bind themselves together to form the corporation. That is why it is irrevocable unless the other party
which is all of the other subscribers, agree.

(c) Theories on Liabilities for Promoter's Contracts (a Cagayan Fishing Dev. Co., Inc. v.
Teodoro Sandiko, 65 Phil. 223 [1937]; a Rizal Light & Ice Co., Inc. v. Public Service Comm., 25 SCRA
285 [1968]; a Caram, Jr. v. CA, 151 SCRA 372 [1987]).

CAGAYAN FISHING DEVELOPMENT CO. INC. v. TEODORO SANDIKO

Facts: Manuel Tabora , as owner of four parcels of land in Cagayan mortgaged the said properties to
secure his loan 1st mortgage to PNB: P8000; 2nd mortgage to PNB: P7000; and 3rd mortgage
to Bauzon: P2900 which was registered and annotated on the titles of the property. In 1930 Tabora sold
said parcels to Cagayan Fishing Development Co., said to be under process of incorporation, subject
to the mortgages and with the condition that title will not be transferred until the corporation has paid
Taboras indebtedness. Cagayan Fishing filed its Articles of Incorporation with the Bureau of
Commerce. The Board of Directors adopted a resolution authorizing its President Ventura to sell the
four parcels of land to Sandiko with the condition that he would shoulder the mortgage debts.
Sandiko issued promissory notes to that effect. When Sandiko failed to comply with the obligation,
the corporation filed a recovery suit. The lower court held that the contract is void since it was
entered into with a corporation that has no corporate existence at the time the properties were
transferred to it.

Issue: WON Sandiko can be held liable for the mortgage debt?

Held: The SC affirmed the decision of the TC. The fact of the matter is Sandiko cannot be held liable
for the mortgage debt since there was no valid sale of the property, since at the time when Cagayan
supposedly acquired the property, it still had no juridical personality to acquire property. There was no
transfer of lots from Tabora to Cagayan since Cagayan was only incorporated five months after the
sale.

1.) A corporation should have full and complete organization and existence as an entity before it can
enter into any kind of contract or transact any business. A corporation until organized has no being,
 64

franchises or faculties nor do those engaged in bringing it into being have no power to bind it by
contract, unless so authorized by the charter.

2.) The contract entered into was not between Tabora and the corporation instead it was between
Tabora, as owner and Tabora, wife, plus others, as promoters of a corporation, since the corporation
was still non-existent. These promoters could not have acted as agents for a projected corporation
since that which had no legal existence could have no agent. Although a corporation has no life until
organized, it does not mean that under no circumstances may the act of promoters of a corporation be
ratified by the corporation if and when subsequently organized. But said doctrine of ratification is not
applicable here.

3.) Cagayan could not have and did not acquire the four parcels of land. It follows that it did not
possess any reluctant right to dispose of them by sale to Sandiko. It was not even a de facto
corporation at the time of transfer so that it does not have the personality to enter into contracts.

4.) Some peculiar circumstances: (a) Tabora formed a corporation by himself, wife and others but
subscribed to P45,000 of P48,700 (capital stock subscribed); (b) the lands remained in Taboras
name despite the sale to the corporation and Sandiko regarded Tabora as the owner; (c) Ventura
signed the contract in behalf of Tabora; (d) P/N issued by Sandiko was payable to the corporation to
avoid being attached by Taboras creditors.

Q: Why are we studying Cagayan?

A: This case espouses the element of contract law which is the lack of the element of consent; there
being one party, the corporation, lacking a juridical personality; the contract was thus declared void.
Cagayan and Rizal provides us the doctrine that promoters contract must be adopted and ratified by the
corporation. If the act of the promoters is ratified then that act is binding on the corporation.
CLV: The court here dismissed the action against Sandiko on the basis that at the time the properties
were sold to the corporation, it had no legal existence, therefore, it could not purchase anything. Having
bought nothing when it sold the said properties to Sandiko, it had in fact nothing to sell therefore there
was no valid assumption of loans and neither were there promissory notes supported by valid
consideration.

Q: What if Sandiko was aware at the time that the contract was entered that the corporation did
not exist? What if the corporation invokes the doctrine of the corporation by estoppel so that
Sandiko could not raise the defense that at the time the fraud was committed, the corporation has
no juridical personality?
A: Remember that the doctrine of corporation by estoppel is only applicable if at least one of the parties
knew that a corporation existed when in fact it did not. In this case, the doctrine cannot apply because
nobody was in the belief that it existed at the time when fraud was being committed. Even Tabora himself
knew from the start that at the time of the transfer, the corporation did not exist.

RIZAL LIGHT & ICE CO. INC. v. MUNICIPALITY OF MORONG

Facts: Rizal Light and Ice Co. Inc. is a domestic corporation granted by the Public Service
Commission, a certificate of public convenience for the installation, operation and management of an
electric light, heat, and power service in Morong, Rizal. PSC required Rizal light to show cause why it
should not be penalized for violation of the conditions of its CPC and for failure to comply with
directions to raise its service voltage, etc. Rizal failed to comply so the PSC ordered the cancellation
and revocation of Rizals CPC and forfeiture of its franchise. The order of revocation was set aside
when it was known that the company representative failed to appear due to illness.

The municipality of Rizal formally asked the PSC to revoke Rizals CPC and forfeiture of its franchise.
PSC found that Rizal failed to comply with its directive and violated the conditions of the CPC. PSC
ordered the cancellation and revocation of Rizals CPC and the forfeiture of its franchise.
 65

Later, Morong Electric, having been granted a franchise by the Municipality of Morong, filed with the
PSC an application for CPC. It later brought up the issue that Morong Electric had no legal personality
because its certificate of incorporation was issued only on October 17, 1962, while the application
was filed on September 10,1962. The motion to dismiss was denied on the ground that Morong
Electric is a de facto corporation. Thus, the PSC granted Morong Electric a CPC. Thus, this petition.

Held: Decision affirmed.

Under the law, before any CPC may be granted, three requisites must be present: (1) citizen of the
Philippines or the US or a corporation, co-partnership, association or joint-stock co. constituted and
organized under the laws of the Philippines, 60% at least of the stock or paid up capital of which
belongs entirely to citizens of the Philippines or the US; (2) financially capable of undertaking the
service; (3) prove that the operation of the public service proposed will promote public interest.

Petitioner contend that until a corporation has come into being, by the issuance of a certificate of
incorporation by the SEC, it cannot enter into any contract as a corporation and that its application
was null and void for being done prior to said issuance.

Its contention that Morong Electric, at the moment of application and grant of franchise did not yet
have a legal personality is correct. The legal existence of Morong Electric began upon issuance of the
certificate of incorporation before said time, the incorporators cannot be considered as de facto
corporation.

But the fact that Morong Electric at the moment of the application and grant of franchise was
granted does not render the franchise invalid because Morong later obtained its certificate of
incorporation and accepted the franchise in accordance with the terms and conditions thereof. While a
franchise cannot take effect until the grantee corporation is organized, the franchise, may,
nevertheless be applied for before the company is fully organized.

The incorporation of Morong and its acceptance of the franchise as shown by its action in prosecuting the
application filed with the PSC for the approval of said franchise, not only perfected a contract
between the Municipality of Morong and Morong Electric.

CLV: The theory used here by the SC to validate the contract is the continuing offer theory. A grant of the
franchise according to the SC, prior to the time that the corporation actually existed is like a conditional
grant that will be effective upon the corporations becoming a legal entity. Prior to that, it is merely a
continuing offer (on the part of the government).

CARAM Jr. v CA

Facts: Baretto and Garcia contracted the services of plaintiff Arellano to prepare a project study for
the organization of Filipinas Orient Airways. For failure to pay such services, Arellano sued the
corporation, Baretto and Garcia and petitioner Fermin and Rosa Caram as stockholders. They were
held solidarily liable with their co-defendants. Hence, this petition.

Peitioner Canson claims that said decision finds no support because they were mere investors in the
corporation later created. They should not be held solidarily liable with the corporation, who has a
separate juridical personality.

Held: Petition granted.

The services were acquired by virtue of the request of Baretto and Garcia so that a report can be
represented to financiers. Petitioners are not really involved in the initial steps that finally led to the
incorporation of Filipinas Orient Airways which were being directed by Baretto. Petitioners were
merely among the financiers whose interest was to be invited and who were persuaded to invest in
the airline.
 66

There was no showing that Filipinas was a fictitious corporation and did not have a separate juridical
personality to justify making the petitioner, as principal stockholders, responsible for its obligations.
As a bona fide corporation, Filipinas should alone be liable for its corporate acts as duly authorized by its
officers and directors. Thus, petitioner could not have been personally liable for the compensation
claimed by Arellano.

CLV: The case tried to distinguish participation of a promoter from that of a promotee, in a venture
that actually becomes a corporation late on. Not every person, who participates in a venture that will later
become a corporation is a promoter.

Q: How do you distinguish a participation of a promoter from that of a promotee who acts
together to form a corporation?
A: The promotees are merely passive investors. A plan is given to them and if they like it, they
invest. Promoters are the active participants. They found and they organize the corporation. According to
Caram only the promoters should be liable. The SC held that a mere promotee (those who merely
subscribe to the shares of stock) should not be held liable for a promoters contract (just as an ordinary
stockholder after a corporation has already been incorporated cannot be held liable for more that beyond
his investment).

CLV: Remember that once a corporation is formed, it usually follows that all promoters contracts get
ratified because the corporation actually arises out of these contracts. The corporation usually has no
choice. It rarely rejects the contracts for such would be commercial suicide. Once the corporation is
formed, the promoters contract of the corporation (if the latter accepts) and not the promoters. This is
why the promoter, once the corporation accepts, escapes liability. Remember that a promoter in a
promoters contract signs not in his own name but always for and in behalf of the corporation.

Q: What are the three theories in pre-incorporation contracts?

Theory #1 Therefore, since a promoters contract is really the promoters own, the only reason why the
corporation, once it is organized becomes liable is when the corporation adopts it as its own. The
promoters real contract theory is one of the three theories by which to validate a contract prior to
incorporation.

Theory #2 The 2nd theory as adopted by Jurisprudence is what is termed as a continuing offer. The
continuing offer that exists as to the time of the issuance of the certificate of incorporation. And if it is
accepted, then the offer means the acceptance, and there arises a contract.

Theory #3 Once the promoter enters into a contract for and in behalf of a non-existent principal, the
promoter becomes personally liable like an agent who acts without authority from the principal. The
contract entered into then is valid unless the agent acted without authority. But it is possible for the
contract to be adopted by the principal by accepting it.

In all three instances, there is deemed to be a valid contract of a valid offer. That is the basis of the
promoters contract so that the people will be willing to risk without much fear, investing their
money into a venture prior to the incorporation of a company or a corporation.

Q: Distinguish a promoter from an agent

A: The promoters are not the corporation itself, and although they may be regarded, for certain purposes
as sustaining to the corporation a relationship similar to that of an agent, strictly speaking they cannot be
regarded as such, there being at that time no existing principal.

Q: Distinguish a promoter from a trustee

A: A promoter is also sometimes likened to a trustee. But a trustee is supposed to be entirely
disinterested, while persons engaged in promotion expect to receive and seek to obtain a liberal award or
profit for their initiative.
 67

3. De Facto Corporation (Sec. 20)

Sec. 20 De Facto Corporations The due incorporation of any corporation claiming in good faith to
be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into
collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the
Solicitor General in a quo warranto proceeding.

Every corporation is deemed de jure until proven otherwise.

De Jure Corporation formed in accordance with law; perfectly incorporated; consequences:

separate juridical personality and perfect liability.

De Facto Corporation formed also in accordance with law but falls short of the requirements
provided by law. Such is awarded a separate juridical personality, it may thus enter into contracts, it
may sue and be sued (note: third parties may sue the corporation, incorporators may sue but the
corporation cannot sue). Note also that such has imperfect liability; only the actors will be held liable.
In proceeding against such, compliance with due process must be had.

The doctrine of de facto corporation applies as to the first level relationship (as between the State
and corporations) and also to the third level of relationship (as between third persons and
corporations). If it primarily concerns the first level, why does it draw its vitality from the third level?
Because without such, transactions shall have no effect but with such, despite the defects, the contracts
are valid and enforceable. But because of its primary relation to the first level, third persons cannot
question the legal personality of such de facto corporation.

Only the State through a quo warranto proceeding may do such.

Not all corporations which lack elements are de facto corporations.

Elements for Existence of De Facto Corporation:

1) Valid law under which it is incorporated: The Corporation Code

2) Attempt in good faith to incorporate colorable compliance: The corporation must have filed its
Articles of Incorporation and the SEC duly issued a Certificate of Incorporation. The minimum
requirement for this requisite is the issuance of a certificate such that even if you honestly believed that
you incorporated (and all the other requisites are present), it is still not a de facto corporation.

The above is need to prove reliance in good faith.

If any of the above element is absent can the principle be invoked by third persons?
No, but they may have a remedy under the principle of corporation by estoppel. Can such be used in
all instances? No, when both parties knew that no corporation existed, such may not be invoked.

Issuance of certificate of incorporation minimum requirement under this number.

3) Assumption of corporate powers: Minimum requirement: election of the Board of Directors.

Q: Why must there be an election of the BoD?

A: The basic principle is a de facto corporation is a mutual going about of the transaction in good faith.
Since the corporation has a juridical personality, the only way by which it can be said that there was good
faith in entering a transaction is that there must be a BoD by which a corporation can act. If there is no
BoD there is no good faith on the part of the corporation because it knows that it can only act through the
BoD not on the part of the parties dealing with the corporation because it knows that there must be BoD
for the corporation to bind itself. This is also important because this is by which the corporation manifests
 68

itself. (Remember: notion of a ghost A ghost manifest itself through signs, in the same manner, a
corporation manifests its existence through the existence of the BoD).

(a) Elements: Arnold Hall v. Piccio, 86 Phil. 634 (1950).

ARNOLD HALL v. PICCIO

Facts: Petitioner Arnold Hall and Bradley Hall and respondent Fred Brown, Emma Brown, Hipolita
Chapman and Ceferino Abella signed and acknowledged the Articles of Incorporation of the Far
Eastern Lumber and Commercial Co., Inc. a general lumber business. 23,428 shares of stock were
subscribed and fully paid for and certain properties were transferred to the corporation.

The Articles of Incorporation were filed with the SEC for the issuance of the corresponding certificates of
incorporation. The corporation proceeded to do business.

Pending the issuance of the certificates by SEC, the respondents Brown et. al. filed before the CFI of
Leyte a civil case entitled Fred Brown v. Arnold Hall alleging among others, that the Far Eastern
Lumber and Commercial Co. was an unregistered partnership; that they wish to have it dissolved
because of a bitter dissension among the members, mismanagement and fraud by the managers and
heavy financial losses. Hall, et. al. filed a motion to dismiss alleging the lack of jurisdiction by the
court. Judge Piccio ordered the dissolution of the company.

Held: The SEC had not issued the corresponding certificate of incorporation. All of them know or
ought to know that the personality of a corporation begins to exist only from the moment such
certificate is issued, not before. Here, the complaining associate have not represented to the others
that they were incorporated any more than the defendant had made similar representations. Since
nobody was led to believe anything to his prejudice and damage, the principle of estoppel does not
apply.

The section on de facto corporations does not apply in this case: (1) First, Far Eastern Lumber, even its
stockholders, may not probably claim in good faith to be a corporation not having obtained the certificate
of incorporation. Thus the immunity of collateral attack granted to corporations claiming in good faith to
be a corporation does not apply here. (2) Second, this suit is not one in which the corporation is a
party. This is a litigation between stockholders of the alleged corporation for the purpose of obtaining
its dissolution. Even the existence of a de jure corporation may be terminated in a private suit for its
dissolution between stockholders, without intervention of the State.

CLV: The de facto doctrine was formulated to safeguard the security of commercial transactions
whenever they involve the corporation. Parties dealing with said corporation are secured by the fact that
the transactions entered into with said corporations may be sued upon and they can recover. That is
why aside from the other two requisites there must be a set of officers (i.e. assumption of corporate
powers) or directors because of the principle that a corporation can only act through its officers.

Effect as to both parties: (1) cannot deny its existence (2) liable as general partners.

Not applicable to intra-corporate disputes, why? (1) it is a third level doctrine (2) public is not
expected to know, while the above are expected to know.

If the other party knows of the non-

3. Corporation by Estoppel (Sec. 21; a Salvatierra v. Garlitos, 103 Phil. 757 [1958]; a 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)

Sec. 21 Corporation by estoppel All persons who assume to act as a corporation knowing it to
 69

be without authority to do shall be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided, however, that when any such ostensible
corporation is sued on any transaction entered by it as a corporation or any tort committed by it as
such, it shall not be allowed to use as a defense its lack of corporate personality.

SALVATIERRA v. GARLITOS

Facts: Salvatierra owned a parcel of land in Leyte. She entered into a contract of lease with Philippine
Fibers Producers Co., Inc. allegedly a corporation duly organized and existing under the Philippine
laws, as represented by its President Refuerzo. The land will be leased for ten years and the lessor
would be entitled to 30% of the net income accruing from the harvest of any crop.

The alleged corporation did not comply with said obligation. Salvatierra filed with the CFI a complaint
against PFPC for accounting, rescission and damages. The corporation defaulted and the court
rendered judgment in favor of Salvatierra. The court issued a writ of execution and the three parcels of
land under the name of Refuerzo were attached because no property of PFPC was found available.

Refuerzo filed a motion claiming that the decision was null and void since there was no allegation of his
personal liability. The court granted the motion and released his land from attachment. Hence, this
petition by Salvatierra.

Held: The failure of Salvatierra to specify Refuerzos personal liability was due to the fact that
Salvatierra was under the impression that PFPC, represented by Refuerzo was a duly registered
corporation, but subsequently, inquiry with the SEC yielded otherwise. While as a general rule, a
person who has contracted or dealt with an association in such a way as to recognize its existence as a
corporate body is estopped from denying the same in an action arising out of such transaction or
dealing. Yet, this doctrine is inapplicable where fraud takes a part in said transaction. Here Refuerzo
gave no confirmation of denial as to PFPCs juridical personality and Salvatierra was made to believe that
the corporation was duly organized.

The grant of separate juridical personality to corporations refer merely to registered corporations and
cannot be made applicable to the liability of members of an unincorporated association. Since an
organization which, before the law, is non-existent and has no personality and would be
incompetent to act and appropriate for itself the power and attributes of a corporation, it cannot
create agents or confer authority on another to ct in its behalf, thus, those who act or purport to act as
its representatives or agents do so without authority and at their own risk.

A person acting or purporting to act in behalf of a corporation which has no valid existence assumes
such privileges and obligations and becomes personally liable for contracts entered into or for other
acts performed as such agent.

Here, Refuerzo as president of the unregistered corporation was the spirit behind the consummation of
the lease contract, thus, his liability cannot be limited or restricted to that imposed upon corporate SHs.
In acting on behalf of a corporation, which he knew to be unregistered, he assumes the risk of reaping
the consequential damages or resultant rights, if any arising from the transaction.

ALBERT v. UNIVERSITY PUBLISHING CO.

Facts: The University Publishing Co. Inc. through its President Jose Aruego entered into a contract
with Mariano Albert whereby the corporation agreed to pay a certain sum in installments for the
exclusive right to publish his revised commentaries in the RPC and for his share in the previous sale of
the books first edit edition. The corporation failed to pay the second installment thereby making the
whole amount due and demandable (i.e. there was an acceleration clause). Albert then sued the
 70

corporation.

The lower court rendered judgment in favor of Albert and a writ of execution was issued against the
corporation. Albert however, petitioned for a writ of execution against Aruego, as the real defendant,
stating that there is no such entity as University Publishing Co. Inc. Albert annexed to his petition a
certification from the SEC saying that their records contain no such registered corporation.

The corporation countered by saying that Aruego is not a party to this case and that, therefore,
Alberts petition should be denied. The corporation countered by saying that Aruego is not a party to this
case, and that therefore, Alberts petition should be denied. The corporation, actually did not want
Aruego to be declared a party to the present case is because there would be no need to institute a
separate action against Aruego to be declared a party to the present case is because there would
then be a need to institute a separate action against Aruego; and if this is done, Aruego can set up the
defense of prescription under the Statute of Limitations.

Held:

1.) The corporation cannot invoke the doctrine of estoppel. The fact of non-registration of the
corporation has not been disputed because the corporation only raised the point that it and not
Aruego is the party defendant thereby assuming that the corporation is an existing corporation with
an independent juridical personality. HOWEVER, precisely on account of non- registration, it cannot be
considered a corporation not even a corporation de facto. It has therefore no personality separate from
Aruego; it cannot be sued independently. The estoppel doctrine has not been invoked and even if it had
been, it is not applicable to the case at bar: (a) Aruego had represented a non-existing entity and
induced not only Albert but also the court to believe in such representation (b) He signed the
contract as president of the corporation stating that this was a corporation duly organized and
existing under the laws of the Philippines. One who induced another to act upon his willful
misrepresentation that a corporation was duly organized and existing under the law, cannot thereafter
set up against his victim the principle of corporation by estoppel.

2.) Aruego is the real defendant as he had control over the proceedings. Had Aruego been named as
party defendant instead of or together with the corporation, there would be no room for debate as to
his personal liability. Since he was not so named, matters of due process have arisen. Parties to a suit
are persons who have a right to control the proceedings, to make defense, to adduce and cross-
examine witnesses and to appeal from a decision. In the case at bar, Aruego, was and in reality, the one
who answered and litigated through his own firm as counsel. He was in fact, if not on name, the
defendant. Clearly then Aruego had his day in court as the real defendant and due process of law has
been substantially observed.

3.) Aruego is the real party in interest because he reaped the benefits from the contract.

(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). [ 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).]
 71

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 organization which is not duly incorporated is not estopped to deny its
corporate existence when his purpose is not to avoid liability. a Intl Express Travel v. Court of
Appeals, 343 SCRA 674 (2000).

INTERNATIONAL EXPRESS TRAVEL v. CA

Facts: Philippine Football Federation got tickets from petitioner travel agency for the SEA games and
trips to China and Brisbane. Two partial payments were made. Petitioners wrote to Kahn (president of
the federation) demanding the completion of the payment. Federation, through Project Gintong Alay
paid the amount of P 31,000. Then Kahn issued a personal check for P 50,000. After that, no further
payments were made.

Petitioner then sued Kahn in his personal capacity and as president of the federation for the unpaid
balance for the purchased tickets as Kahn allegedly guaranteed the said obligation. Kahn maintained
that he did not guarantee the payment but merely acted as an agent of the Federation which has a
separate and distinct juridical personality.

RTC: Kahn is personally liable because neither the travel agency nor Kahn adduce any evidence
proving the corporate existence of the federation. Being the president, its corporate existence is within
the knowledge of Kahn and could have easily denied specifically the assertions of petitioner that it
is a mere sports association. Voluntary unincorporated associations have no power to enter into, or
to ratify, a contract. The contract entered into by its officers or agents in behalf of the association is
not binding or enforceable against it. Agents and officers personally liable. CA: reversed.

Held: RA 3135 and PD 604 recognized the juridical existence of national sports associations. The
power to adopt a constitution, raise funds, acquire property, etc. indicate that the associations may
acquire juridical personality. However, such does not automatically take place by the passage of the
laws. 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. Nowhere can it be found in the 2 above
mentioned laws any provision creating the Philippine Football Federation.

Before an entity may be considered as a national sports association, such entity must be recognized by
the accrediting organizations Philippine Amateur Athletic Federation (RA 3135) and Dept. of Youth
and Sports Development (PD 604). Although a copy of the constitution of the federation was
presented in court, thye same does not prove that it had been recognized. Therefore, the federation is
not a national sports association within the purview of the laws and that Kahn is personally
responsible for the obligation.

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. a Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728
(1999).

LIM TONG LIM V. PHILIPPINE FISHING GEAR INDUSTRIES

Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. entered into a contract with
Phil. Fishing Gear Industries Inc. for the purchase of fishing nets and floats. They claimed that they
were a fishing venture with Lim Tong Lim who was however not a signatory to the contract. They failed
to pay and so PFGI filed a collection case with a prayed for a writ of preliminary attachment. The case
was filed against Chua, Yao and Lim because it was found that Ocean Quest was a non- existent
corporation as shown by the certification from SEC. Chua admitted liability and Yao waived his right to
cross-examine and present evidence because he failed to appear while Lim filed a counterclaim
and a cross-claim. Court granted the writ of attachment and ordered the Auction Sale of the F/B
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Lourdes which was previously attached. Trial court ruled that PFGI was entitled to the Writ and Chua,
Yao and Lim were jointly liable as general partners.

Held:
1.) Lim was contesting that the CA ruled that there was a partnership in the Compromise
Agreement and alleges that he had no direct participation in the negotiations and was merely leasing F/B
ere was a partnership
formed by the three of them. They initially purchased two boats through a loan from Lims brother and
as security, was placed in the name of Lim Tong Lim. The repairs and supplies were shouldered by Chua
and Yao. A civil case was filed by Chua and Yao against Lim for nullity of commercial documents,
reformation of contracts and declaration of ownership of fishing boatswhich was settled amicably. In
the Compromise Agreement, it was revealed that they intended to pay the loan from Jesus Lim by
selling the boats and to divide among them the excess or loss. Therefore it was clear that a partnership
existed which was not solely based on the agreement. It was merely an embodiment of the relationship
among parties.

2.) Lim alleges that he was merely a LESSOR by showing the Contract of Lease and registration

courts, the boats were registered to Lim only as security for the loan that was granted to the
partnership by the brother of Lim, which was not an uncommon practice. Aside from the fact that it was
absurd for Lim to sell the boats to pay the debt he did not incur, if needed he was merely leasing the
boats to Chua and Yao.

3.) Lim contests his liability by saying that only those who dealt in the name of the ostensible
corporation should be held liable. His name was not in any of the contracts and never dealt with PFGI

Sec. 21 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 debts, liabilities and damages incurred or arising as a
result thereof; Provided however that when any such ostensible corporation is sued, on any
transaction entered by it as a corporation or ant tort committed by it as such, it shall not be allowed to
use as a defense its lack of corporate personality. Even if the ostensible corporate entity is proven to be
non-existent, a party may be estopped from denying its corporate existence because an unincorporated
association has no personality and would be incompetent to act and appropriate for itself the power
and attributes of a corporation as provided by law. It cannot create agents or confer authority on
another to act on its behalf. Thus, those who act or purport to act as its representatives do so without
authority and at their own risk. Clearly, Lim benefited from the use of the nets found inside F/B
Lourdes which was proved to be an asset of the partnership. He in fact questioned the attachment
because it has effectively interfered with the use of the vessel. Though technically, he did not
directly act on behalf of the corporation, however, by reaping the benefits of the contract entered into
by persons he previously had an existing relationship with, he is deemed part of said association and is
covered by the doctrine of corporation by estoppel.

CLV: Pioneer case: actors who knew of corporations non-existence are liable as general partners
while actors who did not know are liable as limited partners, passive investors are not liable; Lim
teaches us that even passive investors should be held liable provided they benefited from such
transactions.
(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).
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4. TRUST FUND DOCTRINE

See VILLANUEVA, "The Trust Fund Doctrine Under Philippine Corporate Setting," 31
ATENEO L.J. (No. 1, Feb. 1987).

The capital stock of the corporation especially its unpaid subscriptions is a trust fund for the benefit of
the general creditors of the corporation.

a) Commercial/Common Law Premise: Equity versus Debts (Art. 2236, Civil Code)

Art. 2236 The debtor is liable with all his property, present and future, for the fulfillment of his
obligations, subject to the exceptions provided by law.

b) Nature of Doctrine: Ong Yong v. Tiu, 401 SCRA 1 (2003).

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).

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])

Sec. 8 Redeemable Shares Redeemable shares may be issued by the corporation when
expressly so provided in the articles of incorporation. They may be purchased or taken up by the
corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained
earnings in the books of the corporation, and upon such terms and conditions as may be stated in the
articles of incorporation, which terms and conditions must also be stated in the certificate of stock
representing said shares.

Sec. 41 Power to acquire own shares A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate purpose or purposes, including but not
limited to the following cases: Provided, that the corporation has unrestricted retained earnings in
its books to cover the shares to be purchased or acquired: (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 shared sold during said sale; and
3) to pay dissenting or withdrawing stockholders entitled to the payment for their shares under the
provisions of this Code.
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Sec. 43 Power to declare dividends The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock
to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends
due on delinquent stocks shall first be applied to the unpaid balance on the subscription plus costs
and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid: Provided further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds of the outstanding capital stock at a
regular or special meeting duly called for that purpose.

Stock corporations are prohibited from retaining surplus profits in excess of one hundred
(100%) per cent of their paid-in capital stock, except: (1) when justified by definite corporate
expansion projects or programs approved by the board of directors; or (2) when the corporation is
prohibited under any loan agreement with any financial institution or creditor, whether local or foreign,
from declaring dividends without his/her consent and such consent has not yet been secured; or (3)
when it can be clearly shown that such retention is necessary under special circumstances obtaining
in the corporation, such as when there is need for special reserve for probable contingencies.

Sec. 122 Corporate Liquidation Every corporation whose charter expires by its own limitation
or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated
in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the
time when it would have been dissolved, for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close it affairs, to dispose of and convey its property and to
distribute its assets, but not for the purpose of continuing the business for which it was established.

At any time during said three (3) years, the corporation is authorized and empowered to convey all of
its property to trustees for the benefit of stockholders, members, creditors, and other persons in
interest. From and after any such conveyance by the corporation of its property in trust for the benefit
of its stockholders, members, creditors and others in interest, all interest which the corporation had
in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in interest.

Upon the winding up of corporate affairs, 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.

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute
any of its assets or property except upon lawful dissolution and after payment of all its debts and
liabilities.

(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.
 75

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).

ONG YONG v. TIU

Facts: In 1994, the construction of the Masagana Citimall in Pasay City by First Landlink Asia
Development Corporation (FLADC) owned by the Tiu family was threatened by the foreclosure by the
PNB for their P 190 M debt. In order to stave off the threat the Tiu family together with the Ong family
agreed to restructure FLADC and created a pre-subscription agreement and each were to maintain
equal shareholdings. The Ong family invested a total sum of P 190 M to the corporation while the Tiu
family included several real estate properties as added capital for the restructured corporation. The
Ong and Tiu families now owned 1,000,000 shares each of FLADC. After all the debts were paid,
the peace between Ong and Tiu did not last. Tiu claimed rescission based on substantial breach by
Ong upon the pre-subscription agreement. Ong, on the other hand maintained that it was Tiu who
committed the breach because one of the properties that they were supposed to include in the agreement
was in fact already in the real estate owned by FLADC. The SEC approved the rescission (both
parties were return to status quo, P 190 M to the Ong family and all the remaining FLADC assets to
the Tiu family, which included the now finished mall valued at more than P 1B) and the CA affirmed the
decision with slight modifications.

Held:

1.) Is rescission the proper remedy for an intra-corporate dispute? No, the Corporation Code, SEC
rules and even the Rules of Court provide for appropriate and adequate intra-corporate remedies, other
than rescission, in situations like this. Rescission is certainly not one of them, specially if the party asking
for it has no legal personality to do so (because it is a corporation, Tiu family is not the corporation) and
the requirements of the law therefore have not been met. A contrary doctrine will tread on extremely
dangerous ground because it will allow just any stockholder, for just about any real or imagined
offense, to demand rescission of his subscription and call for the distribution of some part of the
corporate assets to him without complying with the requirements of the Corp. Code.

2.) Granting rescission is a proper remedy, does it violate the TFD? Yes it will violate the TFD and the
procedures for valid distribution of assets and property under the Corp. Code. The TFD provides that
subscription to the capital stock of a corporation constitute a fund to which the creditors have a right to
look for the satisfaction of their claims. The doctrine is the underlying principle in the procedure for
the distribution of capital assets, in the Corp. Code which allows the distribution of corporate capital
only in three instances: (1) amendments of the Articles of Incorporation to reduce the authorized capital
stock (requires Board Resolution and stockholderss meeting) (2) purchase of redeemable shares
by the corporation, regardless of the existence of unrestricted retained earnings and (3) dissolution and
eventual liquidation of the corporation. 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 violation the TFD and the Corp. 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.

The trust fund doctrine applies in the following cases: (1) where the corporation has
distributed its capital among the stockholders without providing for the payment of creditors (2)
where it had released subscribers to capital stock from their subscription receivables (3) where it had
transferred corporate property in fraud of its creditors and (4) where the corporation is insolvent.

Statutory references: (1) Sec. 122 of the Corp. Code governing dissolution of corporations and their
liquidation when it provides that except by decrease of capital stock and as otherwise allowed by this
Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after
 76

payment of all its debts and liabilities. (2) SEC Rules governing Redeemable and Treasury Shares
expressly adopts the doctrine as follows, the outstanding capital stock of a corporation, including
unpaid subscriptions, shall constitute a trust fund for the benefit of its creditors which shall not be
returned to the stockholders by repurchase of shares or otherwise, except in the manner as provided
for under the Corporation Code and this rules.

Coverage of Trust Fund Doctrine adopted the two precursors of the trust fund doctrine which is the
a.) capital impairment rule and the b.) profit rule. A fixed capital must be preserved for protecting the
claims of creditors so that dividend distributions to stockholders should be limited to profits earned or
accumulated by the corporation. In a solvent corporation, the trust fund doctrine encompasses only the
capital stock.

1.) Coverage of capital stocks covers capital stock; the protection by the doctrine upon corporation
not in a state of insolvency but only up to the extent of the capital stock of the corporation.

2.) Retained earnings although part of the stockholders equity, do not constitute part of the capital
stock. It is not covered by the doctrine. The corporation is at liberty to declare and pay out dividends
from its assets.

3.) Outstanding capital stock total shares of stock issued to subscribers or stockholders whether
or not fully or partially paid (as long as there is a binding subscription agreement) except treasury
shares (Sec. 137 ).

4.) Par value stock capital stock represented by aggregate par value of all shares issued and
subscribed. If par value shares are sold at premium, excess is not treated as legal
capital/capital stock but can be declared as stock dividends. This stock dividends fall within the ambit of
the Trust Fund doctrine.

5.) No par value stock legal capital = total consideration received for the shares of stock. Entire
consideration for no par value stock treated as capital and not available for distribution as dividends.

Funds received by a corporation to cover subscription payment on increase in authorized capital stock
prior to approval thereof of the SEC would not be covered by the TFD. As a TF, this money is still
withdrawable by any of the subscribers at any time before issuance of the corresponding shares of stock,
unless there is a pre-subscription to the contrary.

VII. ARTICLES OF INCORPORATION

See relevant portions of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No. 2, June
1994).

The articles of incorporation is:

1.) A CONTRACT an agreement that gives rise to obligations:

a.) Between the corporation and the state (because it is under the AI by which the state grants the

consent by the filing of the AI, through the incorporators and eventually through the Board of Directors.

b.) Between the state and stockholders

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inst the corporation, the stockholders do not

have individual standing but only standing as a group.

stockholders and the Board of Directors

f.) Between the corporation and the public (since the AI is a public document.)

2.) A PUBLIC DOCUMENT because it is registered with the SEC. Such works with the doctrine of
public notice that when the public deals with the corporation, the contents of AI binds them whether
they in fact have seen the AI or not. When a person enters into a contract or any transaction with a
corporation whether or not he has checked with the SEC the terms and conditions of the AI, he will
be bound by it. He cannot claim ignorance of the charter of the corporation.

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).

GOVERNMENT OF P.I. v. MANILA RAILROAD CO.

Facts: The GPI filed a petition for mandamus in the SC to compel the Manila Railroad and Jose
Paez, its manager to provide and equip the telegraph poles of the company in Tarlac and La Union
with crosspieces for 6 telegraph wires belonging to the government which, it alleged, are necessary for
public service between certain municipalities. Petitioner relies on Sec. 84 of Act No.
1459 which provides that the railroad company shall establish a telegraph line for the use of the
railroad and that such posts may be used for government wires and shall be sufficient for
crosspieces to carry the number of wires which the government may consider necessary for public
service. Petitioner contends that since 6 crosspieces are now necessary for public service, the
company should provide sufficient crosspieces. Respondent answers by saying that the Charter of
Manila Railroad (Act No. 1510) repealed Sec. 84 of Act 1459 and contended that the Government is
entitled to only 4 wires.

Held: Petition denied. Inasmuch as Act No. 1510 is the charter of the Manila Railroad Co.
constitutes a contract between the corporation and the government, it would seem that the corporation
is governed by its contract and not by the provisions of the general law. But from a reading of the
charter it will be seen that there is no indication that the government intended to impose upon said
company any other conditions or obligations not expressly found in the said contract or charter.
Section 84 of the Corp. Law was intended to apply to all railways in the Philippines which did not
have a special charter or contract. Act No. 1510 applies only to Manila Railroad and being a special
charter, its adoption had the effect of superseding the provisions of the corporation law which are
applicable to railroads in general.

The charter of a corporation is a contract between three parties: (1) it is a contract between the
state and the corporation to which the charter is granted (2) it is a contract between stockholders and
the state (3) it is a contract between the corporation and its stockholders. A special charter constitutes a
contract between the corporation and the government and as such are both equally bound by its
provisions. For the State to impose an obligation or a duty upon the respondent corporation, not
expressly provided in the charter would amount to a violation of said contract. The provisions of Act
1459 relate to the number of wires which the government may place upon poles of the company are
different and more onerous than the provisions of the charter.

NOTE: Articles of Incorporation cannot prevail over statutory provisions. Such cannot overcome the
law. However in the case of GPI, its special charter overruled the Gen. Law on the ground that the
former is both a contract and a law. Thus, its charter as a law creates an amendment to all other laws.
In the same manner, if the former were a mere contract then the case would have been decided
differently.
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2. Procedure and Documentary Requirements (Sec. 14 and 15)

Sec. 14 Contents of the Articles of Incorporation All corporations organized under this code
shall file with the SEC articles of incorporation in any of the official languages duly signed and
acknowledged by all of the incorporators, containing substantially the following matters, except as
otherwise prescribed by this Code or by special law.

1. The name of the corporation;

2. The specific purpose or purposes for which the corporation is being incorporated. Where a
corporation has more than one stated purpose, the articles of incorporation shall state which is the
primary purpose and which is/are the secondary purpose or purposes: Provided, that a non-stock
corporation may not include a purpose which would change or contradict its nature as such;

3. The place where the principal office of the corporation is to be located, which must be within the
Philippines;

4. The term for which the corporation is to exist;

5. The names, nationalities and residences of the incorporators;

6. The number of directors and trustees which shall not be less than five nor more than fifteen;

7. The names, nationalities and residences of persons who shall act as directors or trustees until the
first regular directors or trustees are duly elected and qualified in accordance with this Code;

8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the
Philippines, the number of shares to which it is divided, and in case the share are par value shares,
the par value of each, the names, nationalities and residences of the original subscribers, and the amount
subscribed and paid by each on his subscription, and if some or all of the shares are without par value,
such fact must be stated;

9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences
of the contributors and the amount contributed by each; and

10. Such other matters as are not inconsistent with law and which the incorporators may deem
necessary and convenient.

The SEC shall not accept the articles of incorporation of any stock corporation unless
accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least
twenty-five percent (25%) of the authorized capital stock of the corporation has been subscribed and at
least twenty-five percent (25%) of the total subscription has been fully paid to him in actual cash and/or in
property the fair valuation of which is equal to at least twenty- five percent (25%) of said subscription,
such paid-up capital being not less than P5,000.

Sec. 15 Forms of Articles of Incorporation Unless otherwise prescribed by special law,

articles of incorporation of all domestic corporations shall comply substantially with the following
form: NOTE: The form goes into the validity and enforceability of the Articles of Incorporation.

a) As to Number and Residency of Incorporators (Sec. 10);

Sec. 10 Number and Qualifications of Incorporators Any number of natural person not less than
five but not more than fifteen, all of legal age and a majority of whom are residents of the Philippines,
may form a private corporation for any lawful purpose or purposes. Each of the incorporators of a
stock corporation must own or be a subcriber to at least one share of the capital stock of the
corporation.
 79

NOTE: Incorporators must be warm-blooded individuals for purposes of accountability. They must not be
more than fifteen for pragmatic reasons, and they must be less than five because two and four create a
deadlock, while three is not as efficient as five. (Institution of the Board of Directors is a clear embodiment
of the corporations centralized management.)

b) Corporate Name (Secs. 18, 14(1) and 42; Red Line Trans. v. Rural Transit, 60 Phil. 549 [1934]).
Sec. 18 Corporate Name No corporate name may be allowed by the SEC if the proposed name
is identical or deceptively confusing or 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. When a change
in the corporate name is approved, the Commission shall issue an amended certificate of incorporation
under the amended name.

Sec. 42 Power to invest corporate funds in another corporation or business or for any other
purpose Subject to the provisions of this Code, a private corporation may invest its funds in any other
corporation or business or for any other purpose other than the primary purpose for which it was
organized when approved by a majority of the board of directors or trustees and ratified by the
stockholders representing 2/3 of the outstanding capital stock or at least 2/3 of the members in case of
non-stock corporations, at a stockholders or members meeting duly called for the purpose. Written
notice of the proposed investment and the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served personally: Provided: That
any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That
where the investment by the corporation is reasonably necessary to accomplish its primary purpose
as stated in the articles of incorporation, the approval of the stockholders or members shall not be
necessary.

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).

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
 80

(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).

The name of a corporation is very important, the incorporators constituting as body politic and
corporate under the name stated in the articles of incorporation for the period of time mentioned
therein. Such name is fatal in commercial transactions. The public may only know the corporation
through its name.

The name of a corporation is (1) essential to its existence (2) it cannot change its name except
in the manner provided by the statute (3) by that name alone is it authorized to transact business
and (4) it is through its name that a corporation can sue and be sued and perform all other legal acts.

SEC reserves the right to order a corporation to change name when it appears that there is an
identical name.

Guidelines on Corporate Names:

1.) Name must contain Corp. or Inc.

2.) Name must not tend to mislead or confuse the public and must not contain such descriptive
words as excellent fair good, etc.

3.) Name must not be similar to a name already used by another partnership or corporation.

4.) If proposed name contains a word similar to a word already used as a part of the firm name of a
registered corporation, proposed name must contain two other words different from the name of the
company already registered.

5.) If name or surname used as part of corporate name, the incorporators must have a basis for such
surname; it being one of the incorporators: Otherwise, consent of the person whose name is being
used must be submitted.

6.) If it contains initials, it must contain an explanation of the meaning and relevance or reason
thereof.

7.) The use of the words State Maharlika and Baranggay are prohibited and reserved for the
government.

The following words when used must at least relate to the line of business namely: Financing and
Investment. The following words are prohibited from being used namely: National, Engineer,
Architect.

c) Purpose Clause (Secs. 14(2) and 42; Uy Siuliong v. Director of Commerce and Industry,
40 Phil. 541 [1919])

Sec. 42 Power to invest corporate funds in another corporation or business or for any other
purpose Subject to the provisions of this Code, a private corporation may invest its funds in any other
corporation or business or for any other purpose other than the primary purpose for which it was
organized when approved by a majority of the board of directors or trustees and ratified by the
stockholders representing 2/3 of the outstanding capital stock or at least 2/3 of the members in case of
non-stock corporations, at a stockholders or members meeting duly called for the purpose. Written
notice of the proposed investment and the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the books of the corporation and
 81

deposited to the addresse in the post office with postage prepaid, or served personally: Provided: That
any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That
where the investment by the corporation is reasonably necessary to accomplish its primary purpose
as stated in the articles of incorporation, the approval of the stockholders or members shall not be
necessary.

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).

Significance: It confers as well as limits the powers which a corporation may exercise. Other
reasons: (1) prospective investors shall know the kind of business the corporation deals with (2)
management shall know the limits of its action (3) a third party can know whether his dealing with the
corporation is within the corporate functions and powers (4) also, for the administrative supervision and
monitoring of the State, to determine which particular agency shall have jurisdiction over the operations
of the corporation.

The purpose must be lawful, having only one primary purpose and many secondary purposes.

d) Corporate Term (Sec. 11)

Sec. 11 Corporate Term A corporation shall exist for a period not exceeding fifty years (50)
from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate
term as originally stated in the articles of incorporation may be extended for periods not exceeding
fifty years (50) in any single instance by an amendment of the articles of incorporation in accordance
with this Code; Provided, that no extension can be made earlier than five years (5) prior to the
original or subsequent expiry dates unless there are justifiable reasons for an earlier extension as may
be determined by the SEC.

The purpose of the limit emphasizes the contractual nature of the corporation the extension must
be approved by the State.

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).

e) Principal Place of Business (Sec. 51)

Sec. 51 Place and time of meetings of stockholders or members Stockholders or members

meetings, whether regular or special, shall be held in the city or municipality where the principal
office of the corporation is located and if practicable in the principal office of the corporation: Provided,
That Metro Manila shall, for purposes of this section, be considered a city or municipality.

Notice of meetings shall be in writing, and the time and place thereof stated therein.

All proceedings had and any business transacted at any meeting of the stockholders or members,
if within the powers or authority of the corporation shall be valid even if the meeting be improperly
held or called, provided all the stockholders or members of the corporation are present or duly
represented at the meeting.

IMPORTANCE: For jurisdictional purposes. The corporation cannot be allowed to file an action in
a place other than that place or in the place of residence of the defendant.
 82

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)

Sec. 12 Minimum capital stock required of stock corporation Stock corporations incorporated under
this Code shall not be required to have any minimum authorized capital stock except as otherwise
specifically provided for by special law, and subject to the provisions of the following section.

Sec. 13 Amount of capital stock to be subscribed and paid for the purposes of incorporation At
least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation
must be subscribed at the time of incorporation and at least twenty-five percent (25%) of the total
subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in
the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call
for payment by the Board of Directors: Provided however, that in no case shall the paid-up capital be less
than five thousand pesos (P5,000).

Q: Does the Corp. Code expressly provide for a minimum requirement of the authorized
capital stock?
A: Under Sec. 12 there is no minimum requirement but the Code says that in no case shall the paid
up capital be less than P5,000 (Sec. 13). Thus it turns out that P5,000 is the minimum.

Q: Why is the maximum capitalization required to be indicated?

A: (1) To protect the stockholders and also it limits the issuance of capital stock and the
extent of the voting power or capacity of a stockholder
(2) Because of accountability. Whether a corporation is going to do good or bad will depend upon the
assets its holds. The only way by which the State can look at the accountability of a corporation in terms
of assets it receives is to get a maximum so that if the corporation wants to go beyond that, it has to go
back to the State.

g) Subscription and Paid-up Requirements (Sec. 13)

Sec. 13 Amount of capital stock to be subscribed and paid for the purposes of incorporation At
least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation
must be subscribed at the time of incorporation and at least twenty-five percent (25%) of the total
subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in
the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call
for payment by the Board of Directors: Provided however, that in no case shall the paid-up capital be less
than five thousand pesos (P5,000).

Q: What is the 25%-25% rule?

A: It means that of the authorized capital stock applied for, 25% thereof must be subscribed. Of the 25%
subscribed thereof must be paid up. Example, a corporation is by 5 individuals and they ask for an
authorized capital stock of P2M, how much must each subscribe to? P125,000. RATIONALE: The
purpose of such a requisition is that the State may be assured of the successful prosecution of the work
and that creditors of the company may have to the extent, at least, of the required subscription, the
means of obtaining satisfaction for their claims.

Q: Must each subscribe equally?

A: No.

NOTES:
 83

1.) Capital Stock the amount fixed in the AI procured to be subscribed and paid up. It is settled that
shares issued in excess of the authorized capital stock are void.

2.) Capital the actual property or estate of the corporation whether in money or property. It may be
higher or lower than the capital stock.

3.) Subscribed Capital Stock the portion of the capital stock subscribed (procured to be paid)
whether or not fully paid.

4.) Subscription the mutual agreement of the corporation and the subscriber to take and pay for the
stock of the corporation.

5.) Pre-incorporation the stage in which each incorporator or stockholder agrees to

contribute to a proposed corporation.

6.) Par value share one in the certificate of stock of which appears an amount in pesos as the
nominal value of shares; must be stated in the AI and par value share cannot be issued at less than such
par value, which may only be changed by amendment.

7.) No par value share stated in the AI that it would be issued by the corporation and its consideration
cannot be less than the issued value, which cannot be less than five pesos (P5). Value may be fixed in
any of the three ways: (1) by the articles of incorporation (2) by the board of directors when so
authorized by said articles or by the by-laws (3) by the stockholders representing at least a majority
of the controlling stockholders.

h) Steps and Documents Required in SEC

In addition to the AI, documents required are:

1.) Treasurers Affidavit accompanied by a sworn statement of the Treasurer that at least 25% of
the capital stock authorized is subscribed and at least 25% of such have been fully paid in cash or
property fair valuation of which is equal at least to 25% of the said subscription, such paid-up capital
not being less than P5,000.

2.) Certificate of Deposit

3.) Letter of Authority for the SEC authorizing it to examine the bank deposit, books of account and
supporting records as to the existence and utilization of the paid-up capital stock

4.) Written undertaking to change their partnership or corporate name in case there is another person,
firm, entity with a prior right to use of the said income or one similar to it.

1. Grounds for Disapproval (Sec. 17)

Sec. 17 Grounds when articles of incorporation or amendment may be rejected or

disapproved The SEC may reject the articles of incorporation or disapprove any amendment thereto if
the same is not in compliance with the requirements of this Code: Provided, that the Commission shall
give the incorporators a reasonable time within which to correct or modify the objectionable portions
of the articles or amendment. The following are grounds for such rejection or approval

1.) That the articles of incorporation or any amendment thereto is not substantially in
accordance with the form prescribed herein;
 84

2.) That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral or
contrary to government rules and regulations;

3.) That the Treasurers Affidavit concerning the amount of capital stock subscribed and/or paid is
false.

4.) That the percentage of ownership of the capital stock to be owned by the citizens of the
Philippines has not been complied with as required by existing laws or the Constitution.

No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-

banking institutions, building and loan associations, trust companies and other financial intermediaries,
insurance companies, public utilities, educational institutions and other corporations governed
by special laws shall be accepted or approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect that such articles or amendment is
in accordance with law.

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 Incorporation, 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
Agro-Industrial Corp., 418 SCRA 431 (2003).

SECs duty is not merely ministerial It has been granted by PD 902-A the powers to examine and
approve or disapprove the articles of incorporation and registration of a corporation.

4. Amendments to the Articles of Incorporation (Sec. 16).

Sec. 16 Amendment of Articles of Incorporation Unless otherwise prescribed by this Code or by

special law and for legitimate purposes, any provision or matter stated in the articles of incorporation
may be amended by a majority vote of the board of directors or trustees and the vote or written
assent of the stockholders representing at least 2/3 of the outstanding capital stock, without prejudice
to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the
vote or written assent of at least 2/3 of the members if it be a non-stock corporation.

The original and amended articles together shall contain all provisions required by law to set out in
the articles of incorporation. Such articles, as amended shall be indicated by underscoring the
change or changes made, and a copy thereof duly certified under oath by the corporate secretary
and a majority of the directors or trustees stating the fact that said amendment or amendments have
been duly approved by the required vote of the stockholders or members shall be submitted to
the SEC.

The amendments shall take effect upon their approval by the SEC or from the date of the filing with
the said Commission if not acted upon within six (6) months from the date of filing for a cause not
attributable to the corporation.

NOTES: The matter to be amended, even if it does not concern the Board, must always be
concurred with by the Board. More importantly, the impetus to amend must always come from the
Board. The stockholders merely ratify such amendment. Such is the case because the Board
constitutes the centralized management. The impetus of the Board comprises the obligatory force of the
contracts entered into.
 85

case to
make it easier to amend by-laws.

5. Commencement of Corporate Existence (Sec. 19).

Sec. 19 Commencement of corporate existence A private corporation formed or organized under

this Code commences to have corporate existence and juridical personality and is deemed incorporated
from the date the SEC issues a certificate of incorporation under its official seal and thereupon the
incorporators, stockholders/members and their successors shall constitute a body politic and corporate
under the name stated in the articles of incorporation for the period of time mentioned therein, unless
said period is extended or the corporation is sooner dissolved in accordance with law.

VIII. BY-LAWS

See relevant portions of VILLANUEVA, "Corporate Contract Law," 38 ATENEO L.J. 1 (No. 2, June 1994).

1. Nature and Functions (Gokongwei v. SEC, 89 SCRA 337 [1979]; Pea v. CA, 193 SCRA 717
[1991])

GOKONGWEI vs. SEC

FACTS: In 1972, Universal Robina Corp acquired 622,987 share in San Miguel Corp. In 1972 also,
Consolidated Foods Corp. acquired SMC shares amounting to P543,959. John Gokongwei, the
presidne tand controlling stockholder of URC & CFC purchased 5,000 SMC shares. Gokongwei tried
to get a seat in the SMC BoD but was rejected by the SHs n the grounds that he was engaged in a
competitive business and his securing a seat in the BoD would subject SMC to great disadvantages.

On September 18, 1976 repondent SHs amended the by-laws of SMC, Gokongwei contends that:

1. the BoD acted without authority & in usurpation of the power of the SHs since the
computation of 2/3 vote was based on the authorized capital stock as of 1961 & not as of
1976

2. The authority granted in 1961 was also extended in 1962 & 1963 when said authority was supposed to
cease to exist

3. Prior to said amendment, petitioner had all the qualifications as Director & that as a substitute
SH he has the right to vote & be voted as director & that in amending the by- laws, the corp. purposely
provided for Gokongweis disqualification& deprived him of his vested right.

4. Gokongwei further alleges that the corp. has no inherent power to disqualify a SH & that provision
allowing the BoD to consider such factors as business & family relations is unreasonable &
oppressive, thus void.

Gokongwei prays that the amended by laws be declared null & void. He also wanted to inspect and
get a copy of certain documents pertaining to the corp. The SEC allowed him to see the minutes of the
meeting only. So he filed an MR & a petition with the SC due to the alleged deliberate inability of the
SCE to action on his petition.

The SEC had earlier ruled in denying the MR, allowing Gokongwei to run as director but he should
not sit as such if elected until there is a decision on the validity of the by-laws.

The SMC answered by saying that he is engaged in a business antagonistic to SMC & that in allowing
him to sit in the BoD, he would have access to SMC trade secrets and plans. It says that the amended
by laws were adopted to preserve & protect SMC from danger which was based in its right for self-
 86

preservation.

ISSUE: Whether or not the amended by-laws of SMC disqualifying a competitor from nomination or
election to the BoD of SMC are valid and reasonable?

HELD:

1. Every corp. has the inherent right to adopt by-laws for its internal government & to regulate the
conduct & prescribe the rights and duties of its members towards itself & among themselves in
reference to the management of its affairs. This is
expressly recognized by Sec. 21 of the Corp. Code & has been enunciated in Govt vs. El Hogar.

2. Any person who buys stocks in a corp. does so with the knowledge that its affairs are dominated
by a majority of the stockholders & that he impliedly contracts that the will of the majority shall
govern in all matters within the limits of the AoI & By-laws. A stockholder is said to have parted
with his right to regulate the disposition of his property which he invested in the corporation. Thus, no
contract between the SHs and corp. was infringed.

3. Pursuant to Sec. 18 of the Corp. Law, any corp. may amend its AoI by a vote or written assent of
the Shs representing at least t 2/3 of the subscribed capital stock. If it changes, diminishes or restricts
the rights of SHs, the dissenting minority has only the right to object in writing & demand payment of
their share. Petitioner has no vested right to be elected director.

4. A director stands in a fiduciary relation to the corp. & its SHs. He has control & guidance of
corporate affairs & property & hence, of the property interests of SHs. Equity recognizes that
SHs are properties of corporate interest & are ultimately the only beneficiaries thereof. Thus, he
cannot serve 2 adverse masters without detriment to one of them He cannot utilize his inside
information & strategic position to his own preferment.

5. An amendment to the by-laws which renders a SH ineligible to be a director, if he be also a director in

a competitor corp. has been sustained valid. This is based on the principle that where the director is
employed in the service of a rival corp he cannot serve both but must betray one or the other. Such
an enactment merely advances the benefit of the corp
& for its own good. Corporate officers are not permitted to use their position of trust &
confidence to further their private interests.

6. DOCTRINE OF CORPORATE OPORTUNITY rests on the unfairness of an officer or director

taking advantage of an opportunity for his own personal profit where the interest of the corporation calls
for protection. Here BoD members have access to marketing strategies, pricing structure, budget for
expansion, R&D sources of funding, availability of personnel, mergers & tie-ups, etc. The questioned
amendment of the y-laws was done to prevent the creation or an oppositor for an officer or director of
SMC, also an officer of a competing corp. from taking advantage of the information which he as
director to promote his individual corporate interests to the detriment of SMC, it would be hard to
avoid any possibility of Gokongweis taking advantage of his position as SMC director.

7. The SC grants the petition regarding Gokongweis petition to examine the book and records of
SMC

8. However, it sustained the validity of the amendment to the by-laws without prejudice to the
question of actual disqualification of Gokongwei to run if elected to sit as SMC director being decided,
after proper hearing by the SMC BoD, whose decisions shall be appealable to the SEC & to the SC,
unless disqualified, the prohibiton in the said by-laws will not apply to Gokongwei.

PEA vs. CA
FACTS: PAMBUSCO, original owners of the lots in question, mortgaged the same to DBP in
consideration of P935,000. This mortgage was foreclosed and said properties were awarded to
 87

Rosita Pea as highest bidder in the foreclosure sale. The Board of PAMBUSCO, through three of its
members resolved to assign its to one of its members, Atty. Joaquin Briones, to execute and sign a
deed of assignment for and in behalf of PAMBUSCO in favor of any interested party. Thus, Briones
executed a deed of Assignment of PAMBUSCOs redemption right over the subject lots in favor of
Marelino Enriquez. The latter then redeemed the said properties and a certificate of redemption
dated Aug. 15, 1975 was issued. Enriquez executed a deed of absolute sale of the subject properties in
favor of plaintiff-appellants, the spouses Rising T. Yap and Catalina Lugue.

Pea wrote the sheriff notifying him that the redemption was not valid as it was made under a void
deed of assignment. She then requested the recall of the said redemption and a restraint on any
registration or transaction regarding the lots. Defendant Pea through counsel wrote the sheriff asking
for execution of a deed of final sale in her favor on the ground that the one year period of redemption
has long elapsed without any valid redemption having been exercised. Plaintiff Yap wrote defendant
Pea asking for payment for back rentals in the amount of P42,750.00 for the use and occupancy of
the land and house. Later, the spouses Yap were prompted to file the instant case on the ground that
being registered owners, they have the right to enforce their right to possession against defendant who
has been allegedly in unlawful possession thereof.

It was contended that plaintiffs could not have acquired ownership over the subject properties under a
deed of absolute sale executed in their favor by one Marcelino Enriquez who likewise could not have
become the owner of the properties in question by redeeming the same under a void deed of
assignment. The defense was that since the deed of assignment executed by PAMBUSCO in favor of
Enriquez was void ab initio for being an ultra vires act of its board of directors and for being without
any valuable consideration, it could not have had any legal effect. TC found for petitioner. CA
reversed.

HELD: In order that the SEC can take cognizance of a case, the controversy must pertain to any of
the following relationships:

a. between corp., partnership or assoc. and the public

b. between the corp. and its SH, members, officers
c. between corp. and the state in so far as its franchise, permit or license to operate is concerned
d. among the stockholders, partners or associates themselves.

Neither petitioner nor respondents Yap spouses are stockholders or officers of PAMBUSCO.
Consequently, the issue of the validity of the series of transactions may be resolved only by the
regular courts.
The by-laws of a corporation are its own private laws which substantially have the same
effect as the laws of the corporation. They are in effect written into the charter. In this sense, they
become art of the fundamental law of the corporation which the corporation and its directors and
officers must comply with. Only three out of five directors of PAMBUSCO convened on November
19, 1974 by virtue of a prior notice of a special meeting. There was no quorum to validly transact
business since, under Section 4 of the amended by-laws herein above reproduced, at least 4 members
must be present to constitute a quorum in a special meeting of the BoD. The AoI or by-laws of the
corp. may fix a greater number than the majority than the majority of the number of board
members to constitute the quorum necessary for the valid transaction f business. Being a dormant
corp. for several years, it was highly irregular, if not anomalous, for a group of three individuals
representing themselves to be the directors of respondent PAMBUSCO to pass a resolution
disposing of the only remaining asset of the corporation in favor of a former corporate officer. The
latest list of SH of respondent PAMBUSCO on file with the SEC does not show that the said alleged
directors were among the SHs of respondent PAMBUSCO. Since the disposition of said redemption right
of PAMBUSCO by virtue of the questions ed resolution was not approved by the required number of
SHs under the law, the said resolution, as well as the subsequent assignment executed assigning to
respondent Enriquez the said right of redemption should be struck down as null and void.
 88

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).

Q. Distinguish by-laws from AoI

A. The AoI is not an internal document that binds the parties to a corporate setting. It is also a
document that binds the State. The BL is an intramural document, its supposed to bind the inner
workings of a corp.

Q. Are the AoI and BL public documents?

A. Yes, both are public documents because they are not valid and binding without the approval of the
SEC

Q. Does the BL have to be approved by the SEC?

A. Yes, prior to the approval of the SEC, the by-laws are not binding since the code expressly
requires the approval of the SEC to be binding upon the SHs and members. Absent the codal
provision, it is binding because of a corp.s inherent power to adopt its own by-laws.

Q. Do BL bind the public?

A. As a general rule, BL provisions do not bind the public, except if the third person has knowledge of
the BL provision.

(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 (1998By-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

By-laws: China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).

China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).

 89

FACTS: Calapatia, a stockholder of PR Valley Golf and Country Club pledged his Stock Certificate to
petitioner China Banking. Petitioner wrote VGCCI requesting that the aforementioned pledge
agreement be recorded in its books. Later, Calapatia obtained a loan of P20,000 from petitioner,
payment of which was secured by the aforestated pledge agreement still existing between Calapatia
and petitioner. Due to Calapatias failure to pay his obligation, petitioner filed a petition for extra-
judicial foreclosure. Petitioner informed VGCCI of the above- mentioned foreclosure
proceedings and requested that the pledged stock be transferred to its name. However, VGCCI wrote
petitioner expressing its inability to accede to petitioners request due to Calapatias unsettled accounts
with the club.

Despite the foregoing, Notary Public de Vera held a public auction and petitioner emerged as
the highest bidder, VGCCI sent Calapatia a notice demanding full payment of his overdue account in
the amount of P18,783.24. VGCCI caused to be published in the newspaper Daily Express a notice of
auction sale by VGCCI of its subject share of stock and thereafter filed a case with the RTC of Makati for
the nullification. The RTC dismissed the case for lack of jurisdiction over the subject matter on the
theory that it involves an intra-corporate dispute.

Petitioner filed a complaint with the SEC. The Commission en banc believed that appellant- petitioner
had a prior right over the pledged share and because of pledgors failure to pay the principal debt
upon maturity, appellant-petitioner could proceed with the foreclosure sale of the pledged share.
The auction sale conducted by appellee-respondent Club was declared null and void. The CA rendered
its decision nullifying and setting aside the orders of the SEC and its hearing officers on the ground
of lack of jurisdiction over the subject. The CA declared that the controversy between CBC and
VGCCI is not intra-corporate.

HELD:

VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art. VIII of its by- laws
which provides that after a member shall have been posted as delinquent, the Board may order
his/her/its share sold to satisfy the claims of the club. It is pursuant to this provision that VGCCI also sold
the subject share at public auction, of which it was the highest bidder. VGCCI caps its argument by
asserting that its corporate by-laws could prevail. The SEC therefore took proper cognizance of the
instant case.

Moreover, VGCCI completely disregarded petitioners right as pledgee. It even failed to give petitioner
notice of said auction sale. Such actuations of VGCCI thus belie its claim of good faith. In defending its
actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues that the G.R. is that
third persons are not bound by the by-laws of a corporation since they are not privy to thereto. The
exception to this is when 3rd persons have actual or constructive knowledge of the same. In the
case at bar, petitioner had actual knowledge of the by-laws of private respondent when petitioner
foreclosed the pledge made by Calapatia and when petitioner purchased the share foreclosed.
Thus, the petitioner purchased the said share subject to the right of the PR to sell the said shares
for reasons of delinquency and the right of PR to have a first lien on said shares as these rights are
provided for in the by-laws very clearly.

In order to be bound, the 3rd party must have acquired knowledge of the pertinent by-laws at the time the
transaction or agreement between said 3rd party and the shareholder was entered into, in this case, at
the time the pledge agreement was executed. Petitioners belated notice of said by- laws at the time of
the foreclosure will not suffice. By-laws signify the rules and regulations of 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.
The purpose of a by-law is to regulate the conduct and define the duties of the members towards the
corporation and among themselves.

Note: Knowledge of the by-laws must be present at the time of the perfection of the contract. Such is not
the case here, knowledge of the by-laws was had only during the proceedings, as such, it cannot bind
 90

China Bank. However, one may argue in the same way in Land Titles, where banks are required to go
beyond the face of the title as they are institutions endowed with public interest; in this case China
Bank should have inquired into such by-laws before entering into the transactions mentioned.

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. a PMI Colleges v. NLRC,
277 SCRA 462 (1997).

PMI COLLEGES v. NLRC

FACTS: PMI is an educational institution offering courses on basic seaman training and other marine-
related courses hired private respondent as contractual instructor with an agreement that the latter shall
be paid at an hourly rte of P30 t P50. PR then organized classes in marine engineering. PR and other
instructors were compensated for services rendered during the first three periods of the above-
mentioned contract. However, for reasons unknown to PR, he stopped receiving payment for the
succeeding rendition of services.

Repeated demands having likewise failed, PR was soon constrained to file a complaint seeking
payment for salaries earned. PMI contended that classes in the courses offered which complainant
claimed to have remained unpaid were not held in the school premises of PMI. Only PR knew whether
classes were indeed conducted. Later in the proceedings, petitioner manifested that Mr. Tomas
Cloma Jr., a member of the petitioners BoD wrote a letter to the Chairman of the Board clarifying the
case of PR and stating therein that under PMIs by-laws, only the Chairman is authorized to
sign any employment contract. A decision was rendered by the Labor Arbiter finding for PR. The
NLRC affirmed.

HELD: The contract would be invalid just because the signatory was not the chairman which
allegedly violated PMI by-laws but since by-laws operate merely as internal rules among the stock
holders, they cannot affect or prejudice 3rd persons who deal with the corporation in good faith unless
they have knowledge of the same. No proof appears on record that PR ever knew anything about the
provisions of said by-laws. Petitioner itself merely asserts the same without even bothering to attach a
copy or excerpt thereof to show that there is such a provision. That this allegation has never been
denied by PR does not necessarily signify admission.

2. Adoption Procedure (Sec. 46)

Section 46. Adoption of by-laws. - Every corporation formed under this Code must, within one (1) month
after receipt of official notice of the issuance of its certificate of incorporation by the Securities
and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this
Code. For the adoption of by-laws by the corporation the affirmative vote of the stockholders
representing at least a majority of the outstanding capital stock, or of at least a majority of the
members in case of non-stock corporations, shall be necessary. The by-laws shall be signed by
the stockholders or members voting for them and shall be kept in the principal office of the corporation,
subject to the inspection of the stockholders or members during office hours.

A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the
secretary of the corporation, shall be filed with the Securities and Exchange
Commission which shall be attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to
incorporation; in such case, such by- laws shall be approved and signed by all the incorporators
and submitted to the Securities and Exchange Commission, together with the articles of incorporation.
 91

In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange
Commission of a certification that the by-laws are not inconsistent with this Code.

The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment
thereto of any bank, banking institution, building and loan association, trust company, insurance
company, public utility, educational institution or other special corporations governed by special
laws, unless accompanied by a certificate of the appropriate government agency to the effect that
such by-laws or amendments are in accordance with law. (20a)

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).

3. Contents (Sec. 47)

Section 47. 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 or special meetings of the stockholders or
members;

3. The required quorum in meetings of stockholders or members and the manner of voting therein;

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 of 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 stock certificates; and

10. Such other matters as may be necessary for the proper or convenient transaction of its
corporate business and affairs. (21a)

4. Amendments (Sec. 48)

- Power to amend may be delegated to the BoD

Section 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote
thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority
of the members of a non-stock corporation, at a regular or special meeting duly called for the
purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of
the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may
delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new
by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal
 92

any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or
representing a majority of the outstanding capital stock or a majority of the members in non-stock
corporations, shall so vote at a regular or special meeting.

Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall
be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified
under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with
the Securities and Exchange Commission the same to be attached to the original articles of
incorporation and original by-laws.

The amended or new by-laws shall only be effective upon the issuance by the Securities and
Exchange Commission of a certification that the same are not inconsistent with this Code. (22a
and 23a)

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).
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IX. CORPORATE POWERS, AUTHORITY AND ACTIVITIES

1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45;
Land Bank of the Philippines v. COA, 190 SCRA 154 [1990])

Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and regulations of their
organization.

Sec. 36 Corporate powers and capacity Every corporation incorporated under this Code has the
power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of incorporation
and the certificate of incorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporations in accordance with the provisions of this Code;

5. To adopt by-laws, not contrary to law, morals or public policy, and to amend or repeal the same in
accordance with this Code;

6. In case of stock corporations, to issue or 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;

7. To purchase, receive, take or 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
transactions of the lawful business of the corporation may reasonably and necessary require, subject to
the limitations prescribed by law and the Constitution;

8. To enter into merger or consolidation with other corporations as provided in this Code;

9. To make reasonable donations, including those for the public welfare or hospital or 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;

10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and

11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.

Sec. 45 Ultra vires acts of corporations No corporation under this Code shall possess or
exercise any corporate powers except those conferred by this Code or by its articles of
incorporation and except such as necessary or incidental to the exercise of the powers so conferred.

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)
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a) Classification of Corporate Powers: Express; Implied; and Incidental

EXPRESS IMPLIED INCIDENTAL
These powers given to a Those powers that exist as a Those powers that:
corporation either: necessary consequence of:
a.) attach to a corporation at the
a.) By clear or express provision a.) the exercise of express moment of its creation
of the law. powers of the corporation or
b.) without regard to its express
Some of the other powers b.) the pursuit of its purpose powers or particular primary
expressly granted under Sec. 36 as provided for in the article of purposes and
are considered to be inherent or incorporation
incidental powers which even if c.) is said to be inherent in it as
not given by express grant are - a legal entity or a legal
nevertheless deemed to be corporation, in the absence of organization.
within the capacity of the foreign express restrictions, has
entities (such as the power to discretionary authority to enter - Powers that go into the very
adopt by-laws) into contracts or transactions nature and extent of a
which may be deemed corporations juridical entity
b.) By the charter or articles of reasonably necessary or cannot be presumed to be
incorporation. incidental to its business incidental or inherent powers.
purpose. This juridical entity is State-
Express grant of authority grant and cannot be altered or
from the board of directors amended without State authority
needed to validly bind the (egs. right of succession, right to
corporation. merger)

Thus the SC held that

absent any board resolution
authorizing an officer or any
person to exercise express
powers given to a corporation
such as filing a suit on its
behalf, such an action is invalid.

The power of a corporation to

sue and be sued in any court
is lodged with the board of
directors that exercise its
corporate powers.

-laws are not a source of

powers.
Art. 46 of the Civil Code
expressly provides for
powers of a corporation as
juridical personality possesses.
Sec. 36 of the Corporation
Code expressly enumerates the
ten powers which a corporation
may exercise.
Sub-paragraph 11 of Sec. 36
the provide that a corporation has
a the power and capacity to
exercise such powers as may
be essential or necessary to
carry out its purpose
purposes as stated in
its articles of incorporation.
Sec. 2 of the Corp. Code
provides the corporation as
having the powers, attributes
and properties expressly
authorized by law or incident to
or its existence.

Sec. 45 of the Corporation

Code recognizes other powers
provided in the Articles of
Incorporation.
 95

Generally exercised by the Board Generally, purely members of the Generally, purely members of the
of Directors with exception to Board of Directors exercise this. Board of Directors exercise this.
certain instances where
shareholders assent are needed

Ultra Vires doctrine is connected with ancillary doctrines as of (1) apparent authority and of
(2) estoppel.

One has to look at the corporation as a person before the law because of the (1) issue of
consent and (2) liability who commits itself to obligation. The state only gives a corporation limited
powers and not general powers as an individual has because of the consent and liability.

(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).

PRIMARY RULE: The Board of Directors/Trustees is the repository of all corporate powers (sec.
23)

The source of power of the board of directors is therefore primary and not delegated power from
the stockholders or members of the corporation. However, there are specified instances in the
Corporation Code where the particular exercise of power of the corporation by the board, in order to
be binding and effective, requires the consent and ratification of the stockholders or members, on
one hand, and the State, on the other hand.

IN CONSONANCE WITH CONTRACT LAW PRINCIPLES in conformity with the principles of

contract law, that a party cannot relieve himself from the contractual terms and conditions, much less
amend or alter them, without the consent or approval of the other party or parties.

EXCEPTION TO THE GENERAL RULE, in cases where the stockholders consent is required,
majority rules. The consent or dissent of the stockholders is recognized by their majority vote or their
qualified two-thirds as the case may be which would bind even those who abstained or dissented. For
those who dissented, there is a way out for them by way of exercising their appraisal right (depending
on the issue).

2. ULTRA VIRES DOCTRINE

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See relevant portions of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No. 2, June
1994).

(a) Concept and Types (Sec. 45)

Sec. 45 Ultra vires acts of corporations No corporation under this Code shall possess or
exercise any corporate powers except those conferred by this Code or by its articles of
incorporation and except such as necessary or incidental to the exercise of the powers so conferred.

Sec. 45 of the Corporation Code is the statutory embodiment of the Ultra Vires Doctrine that
provides that the corporation cannot exercise powers beyond what had been granted to it by statute or
by its articles of incorporation except such as necessary or incidental to the exercise of powers
so conferred. It was meant to control and regulate the actions of corporations.

BASIS OF ULTRA VIRES DOCTRINE (Two Corporate Principles)

1. A corporation is a creature of the law and has only such powers and privileges as are granted by
the State the ultra vires doctrine is a product of the theory of concession as provided in Sec. 2.

2. The doctrine upholds the fiduciary duty of directors and officers to the stockholders or members
such duty dictates that the corporation engage only in transactions to which the stockholders and
members bind themselves by way of the provisions of the purposes clause. This is also necessarily
include an obligation not to enter into transactions which violate the law.

TEST TO DETERMINE ULTRA VIRES Whether the act in question is in direct and immediate
furtherance of the corporations business, fairly incident to the express powers and reasonably
necessary to their exercise. The strict terms direct and immediate refers to the business of the
corporation while the liberal terms fairly incident and reasonably necessary with reference to
the powers of the corporation. With regard to the business of the corporation as the reference point,
much latitude is given to the corporation to enter into various contracts as long as they have logical
relation to the pursuit of such business. On the other hand, when the purpose clause used limiting words
that Court will hold such corporation to such limited business.

POLICIES SUPERVENING IN ULTRA VIRES ISSUES Acts not per se illegal, liberal
interpretation.

1.) PUBLIC CONVENIENCE if corporation contracts are strictly construed, the public would be
inconvenienced by having to verify and enter into contractual safeguards when entering into contracts
with corporations. As such liberal construction is afforded to such corporate contracts.

2.) CONTRAVENTION OF CONTRACTUAL EXPECTATIONS setting aside the corporate contract on

the ground of ultra vires would contravene the expectations of both parties who entered into the
contract expecting to be bound.

3.) PRINCIPLE OF BUSINESS JUDGMENT the court will not sit in judgment to substitute their
business judgment for that of the directors; and that as much as possible, directors in the exercise of
their business judgment, should be given leeway to adopt corporate policies and to engage in
transactions as they deem best for the corporation.

4.) NATURE OF BUSINESS OF OPERATIONS it is impossible to anticipate all possible

contingencies at the time the Articles are drawn thus there would be a need to amend or revise the
Articles to keep abreast with the various aspects of the business.

ULTRA VIRES ACTS DISTINGUISHED FROM ACTS WHICH ARE ILLEGAL PER SE

Illegal acts of a corporation are those acts which are contrary to law, morals, or public order or
 97

contravenes some rule of public policy or public duty are void. Such acts or contracts cannot be the
basis of any court action nor acquire validity by performance, ratification or estoppel.

Ultra vires acts are those which are not illegal and void ab initio but are within the scope of the
articles of incorporation are merely voidable and may become binding and enforceable when ratified
by stockholders. Said ratification cures the infirmity of the corporate act and makes it valid and
enforceable.

TYPES OF ULTRA VIRES CASES

1.) acts or contracts which a

2.) acts done beyond the powers of the corporation as provided for in the law or its articles of

3.) acts or contracts entered into in behalf of the corporation by persons who have no corporate

Ultra vires acts of the second type are void as between the corporation and the State or in the first
level of corporate existence while it is merely voidable in the third level because of public policy. The
public who deals in good faith with the corporation has the right to expect that the obligation entered into
shall be complied with.

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 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. a Atrium Management Corp. v. Court of Appeals, 353 SCRA 23
(2001).

ATRIUM MANAGEMENT CORP. v. COURT OF APPEALS

Facts: Hi-Cement through the corporate signatories (De Leon treasurer, Delas Alas chairman)
issued checks in favor of E.T. Henry & Co. Inc. as a collateral for a loan) E.T. Henry endorsed the four
checks to Atrium for valuable consideration. Upon presentment for payment, the bank dishonored all
four checks because the payment was stopped. Atrium filed with the RTC an action for collection of
the proceeds of four postdated checks amounting to P2M. The TC ordered that De Leon, ET Henry
and Hi-Cement pay Atrium jointly and severally the value of the four checks plus interest. The CA on the
other hand absolved Hi-Cement from liability.

Issue: WON De Leon was not authorized to issue the checks

WON the issuance of the checks were ULTRA VIRES ACTS

Held: De Leon was authorized and such issuance is not an ultra vires act.

Ratio: De Leon as treasurer of the corporation is authorized to sign checks for the corporation. As a
rule, the act of issuing checks is within the ambit of a valid corporate act. And securing a loan to
finance the activities of the corporation is not an ultra vires act. While an ultra vires act is one
committed outside the object or which a corporation is created as defined by law of its organization
and therefore beyond the power conferred upon it by law, the act pertained to in the case is not an
illegal act.

De Leon on the other hand was negligent in confirming that such checks were issued to ET Henry as
payment for their companys debt with the former. That is why she was held to be personally liable
to Atrium.
 98

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).

(b) Ratification of Ultra Vires Acts: (a 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]; a Crisologo Jose v. Court of Appeals, 177 SCRA 594 [1989]; a Harden v. Benguet
Consolidated Mining Co., 58 Phil. 140 [1933]).

PIROVANO DE LA RAMA STEAMSHIP CO. INC.

Facts: The story began with Enrico Perovano becoming President of the Dela Rama Corporation.
Under his management, the corporation grew into a multi-million company until his death. Don
Esteban dela Rama who owned and controlled the stock of the corporation, distributed his
shareholdings among his five daughters including Estefania. The company has a bonded
indebtedness amounting to P7,500 in 1940 but had assets/capitals of P15 M as of 1941 which were
mortgaged as security for the debt to the National Development Corp. This bonded indebtedness was
converted to non-voting preferred shares of the company under the condition that they would bear a fixed
cumulative divisor of 6% per annum and this was carried out in 1949. NDC now had the right to be
represented by four out of nine members in the Board of Directors. It was in 1946 that the Board of
Directors adopted the questioned resolution where the corporation ser aside P400,000 to the four
minor children with the sum convertible into shares of stock. Lourdes de la Rama later learned that
since the company shares of stock was actually 3.6 times their par value, the company would in
effect be giving them an amount totaling to P1,440,000 and that stocks if were given to the children, the
voting strength of the De la Rama daughters would be adversely affected. This caused Lourdes to
ask for the cancellation and waiver of her pre-emptive rights. Don Esteban then advised the
corporate secretary that the resolution be nullified due to the misunderstanding as to its
implications.

In 1947, the Board adopted a resolution changing the form of donation from 4,000 shares to merely a
renunciation in favor of the children of the corporate right, titles and interests as beneficiary to the
proceeds of the life insurance policy subject to the condition that proceeds be retained by the
company as a loan with 5% interest ($321,500). Estefania as guardian of the children, accepted the
donation in their behalf. Said donation was formally ratified in 1949 after Estefania bought a house in New
York for $75,000. In 1950 Osmena Jr. husband of Lourdes de la Rama addressed an inquiry to the
SEC asking for an opinion regarding the donation. SEC opined that the donation was void
because the corporation could not dispose of its assets by gifts. Therefore, it acted beyond the scope of
its powers. Thus, the stockholders revoked the donation on this ground.

With these revocation, plaintiff as represented by Estefania their mother, seek t enforce this
resolutions adopted by the Board of Directors and Stockholders of De la Rama Steamship Co. giving
to said children the proceeds of the insurance policies of the deceased with the company as the
beneficiary. The company contends that the resolution and the contract executed pursuant thereto are
ultra vires and if valid, the obligation to pay the amount given is not yet due and demandable. Plaintiffs
won in the lower court, hence this petition.

Issue: WON the said Board of Directors resolution was an ultra vires act? Held:
The grant or donation in question is remunerative in nature and was given in consideration of the
services rendered by the heirs father to the corporation. The donation has already been perfected
such that the corporation could no loner rescind it. It was embodied in a Board Resolution.
Representatives of the corporation and even its creditors as the NDC have given their concurrence.
The resolution was actually carried out when the corporation and Estefania entered into an
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agreement that the proceeds will be entered as a loan. Estefania accepted the donation and such
was recorded by the corporation. The Board of Directors approved Estefanias purchase of the house in
New York. Company stockholders formally ratified the donation.

The donation was a corporate act carried out by the corporation not only with the sanction of the
Board of Directors but also of its stockholders. The donation has reached a stage of perfection which is
valid and binding upon the corporation and cannot be rescinded unless there exists legal grounds for
doing so. The SEC opinion nor the subsequent Board Resolution are not sufficient reasons to nullify
the donation.

The donation is also not an ultra vires act. The corporation was given broad and unlimited powers to
carry out the purpose for which it was organized which includes the power to (1) invest and deal with
corporate money not immediately required in such manner as from time to time may be determined (2)
aid in any other manner to any person, association or corporation of which any obligation is held by this
corporation. The donation undoubtedly comes within the scope of this broad power.

An ultra vires act is (1) an act contrary to law, morals, or public order or contravene some rules of
public policy or duty. It cannot acquire validity by performance, ratification, estoppel. It is essentially void
(2) those within the scope of the Articles of Incorporation and not always illegal. It is merely voidable
and may become binding and enforceable when ratified by stockholders.

Since it is not contended that the donation is illegal or contrary to any of the expressed provisions of the
Articles of Incorporation nor prejudicial to the creditors of the corporation, said donation even if ultra
vires is not void and if voidable, its infirmity has been cured by ratification and subsequent atcs of the
corporation. The corporation is now estopped or prevented from contesting the validity of the
donation. To allow the corporation to undo what it has done would be most unfair and contravene the
well-settled doctrine that the defense of ultra vires cannot be se up or availed of in any completed
transaction.

NOTE: The ratification of the stockholders of the donation made is the key in this case. Because such
ratification is meant to protect the contractual relationship or interest of stockholders.

CRISOLOGO-JOSE v. COURT OF APPEALS

Facts: Atty. Benares was the President of Movers Enterprise while Ricardo Santos Jr. was the Vice-
President. On April 1980 Atty. Benares in accommodation of his clients, the spouses Jaime and Clarita
Ong issued a check drawn against Traders Royal Bank in the amount of 45,000 payable to Crisologo-
Jose. Since the check was under the account of the corporation, the president and the treasurer
should sign the check. But since the treasurer was not available, Benares asked Santos to be the
alternate signatory. The check was issued to Crisologo-Jose in consideration of the waiver of
Crisologo over a certain property which the GAIA agreed to sell to the clients of Benares (spouses
Ong) with the understanding that upon approval of the compromise agreement with the spouses
Ong, the check will be encashed accordingly. However, the compromise agreement was not
approved within the expected period. So Benares replaced the check with another one with the same
amount also payable to Jose. When petitioner deposited the check, it was dishonored for insufficiency of
fund. Petitioner filed criminal complaint for violation of BP 22. Meanwhile, during the preliminary
investigation, Santos tendered cashiers check in payment of the dishonored check but petitioner
refused to accept it. Santos then encashed the check and deposited the money to the Clerk of Court.
Incidentally, Benares purchased the cashiers check and gave it to the plaintiff to be applied as
payment of the dishonored check. RTC held that it was not persuaded to believe that consignation is
applicable here. So the complaint was dismissed. CA reversed and set aside such decision. Petitioner
contends that the accommodation party in this case is Mover Enterprises and not private respondent who
merely signed the check in a representative capacity.

Issue: Assuming that Mover Enterprises is the accommodation party, WON it may be held liable on
 100

the accommodation instrument.

Held: No. Corporation is not liable. The provisions of the NIL which holds an accommodation party
liable on the instrument to a holder for value, although such holder at the time of taking the
instrument knew him to be only an accommodation party, it does not apply to corporations which are
accommodation parties This is because issue or endorsement of negotiable paper by a corporation
without consideration and for the accommodation is an ultra vires act.

By way of a corporation, an officer or agent may do so ONLY IF specifically authorized to do so. But
where the facts show that the accommodation involved was for their personal account, undertaking
or purpose and the creditor was aware thereof.

NOTE: That while the public is not required to know that one is authorized or not to bind the
corporation for a certain obligation and that while the contract may be enforced even without
authority because the public dealing in good faith has the right to expect that the obligation entered into
shall be complied with, such doctrine does not apply when the dealing public in the first place is in bad
faith, as in this case; that is why the corporation was not bound to such accommodation agreement.

HARDEN v. BENGUET CONSOLIDATED MINING

Facts: Benguet Consolidated Mining and Balatoc Mining Co. are entities organized for the
purpose of engaging in the mining of gold in the Philippines and their respective properties lie only a few
miles apart. The original stockholders of Balatoc were unable to supply the means for profitable
operation thus, its board ordered a suspension of all work. A general meeting of the stockholders
approved to establish a committee to find investors. The committee in turn approached Bean, President
and General manager of Benguet to secure the necessary capital for the development of the Balatoc
properties. The management of both companies executed a contract where Benguet was to proceed with
the development and construction of a milling plant for the mine and to erect a power plact. In return,
Benguet would receive from Balatoc shares of par value of P600,000 in payment of the first 600,000 to
be advanced to it.

By 1929, Benguet had spent P1,417,952,15 in pursuance of the contract. Balatoc stockholders have
been receiving large dividends. Harden and two other stockholders filed a suit against Benguet,
Balatoc and the officers to annul the certificate covering P600,000 shares of Balatoc issued to
Benguet and to recover a large sum of money alleged to have been unlawfully collected by Benguet and
to annul the contract. The trial court dismissed the complaint, hence this petition.

Issue: WON it is lawful for Benguet to hold any interest in another mining corporation?

Held: No. Section 75 of the Philippine Bill of 1902 prohibits corporation engaged in mining from being
interested in any other corporation engaged in mining. This was amended by Act No. 3518 which
now provided that a corporation is prohibited to hold more than 15% of the OCS of another
corporation. The Corp. Law did not contain any clause directly penalizing the acts of a corporation or
member in an interest contrary to Sec. 13 of Act 1459. The penalties imposed by the Corp. Law are
of such nature that they can be enforced only by a criminal prosecution or by an action of quo
warranto which can only be maintained by the Atty. General. Benguet Co. has committed no civil
wrong against the plaintiff stockholders and if a public wrong is committed, the directors of Balatoc and
plaintiff Harden himself were the active inducers of the commission of that wrong. The contracts have
been performed on both sides and there is no possibility of undoing what has been done.

Plaintiffs then invoke Art. 1305 which declares that an innocent party to an illegal contract may
recover anything that he may have given while he is not bound to fulfill any promise he may have made.
Supposing this is applicable, the general remedy provided by Art. 1305 cannot be invoked where a
special remedy is supplied in special law.
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In as much as the corporation law prohibits the acquisition by one mining corporation of any interest in
another and that these were enacted in the exercise of general police power of the government, it results
that where a corporation does so, the stockholders cannot maintain an action to annul the contract
by which such interest was acquired. The remedy must be sought in a criminal proceeding or quo
warranto action instituted by the government. Until thus assailed in a direct proceeding, the contract
by which the interest was acquired will be treated as valid as between the parties.

NOTE: We are studying Harden because of the pronouncement that even where corporate contracts
are illegal per se, when only public or government policy is at stake and no private wrong is
committed, the courts will leave the parties as they are in accordance with their original contractual
expectations. (The only contracts that the courts will touch are contracts which are void for being illegal
per se.)

(i) 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. aLipat 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 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).

validated if there are equitable grounds for taking such action. Here it is fair that the resolution
be upheld at least on the ground of estoppel.
Ratification (a) the act must be consummated and not executory (b) creditors are not
prejudiced or all of them have given their consent (c) rights of the public or the State are not involved (d)
all the stockholders must give their consent.

(ii) Theory of Apparent Authority (Art. 1883, Civil Code;a Prime White Cement Corp. v.
IAC, 220 SCRA 103, 113-114 [1993]; a Francisco v. GSIS, 7 SCRA 577 [1963]; a Yao Ka
Sin Trading v. CA, 209 SCRA 763 [1992]).

Outward appearance, the agents apparent representation yields to the principals true
representation and the contract is considered as entered into between the principal and the third
person.
 102

Due what seems to be and what happens otherwise.

Q: Upon whom is placed the burden of discovering that the agent has no authority?
A: In view of the authority of apparent authority, the third person dealing with the corporation is not given
the burden of discovering whether the agent has authority or not. It is also therefore reasonable in a
case where an officer of a corporation has made a contract in its name, that the corporation should be
required, if it denies the authority of the officer, to state such defense in its answer, since it allows the
plaintiff to be appraised of the fact that the agents authority is contested; and he is given an opportunity
to adduce evidence showing either that the authority existed or that the contract was ratified and
approved.

NOTE: The theory of apparent authority is classified into two types by which such may be
manifested or proved, which are by position and by circumstance. The burden of proof
mentioned above applies to the second classification.

PRIME WHITE CEMENT CORP. v INTERMEDIATE APPELLATE COURT

Facts: A director (Te) entered into an agreement of Dealership agreement with PWCC, signed by its
chairman and president of the corporation to supply 20,000 bags of white cement per month for five
years at a fixed price of P9.70 per bag. Subsequently, the Board refused to abide by the contract
unless new conditions are accepted providing for a new price formula. The dealing director sued for
specific performance on the contract.

Held: The Court held that under both the Corporation Law then and the present Corporation Code,
the doctrine is that all corporate powers shall be exercised by the Board of Directors, except as those
provided by law. Although it cannot completely abdicate its powers and responsibility to act for the
juridical entity, the Board may expressly delegate specific powers to its president or any of its
officers. In the absence of such express delegation, a contract entered into by its President on behalf of
the corporation may still bind the corporation if the Board should ratify the same expressly or impliedly.

Implied ratification takes various forms (1) silence or acquiescence (2) by acts showing approval or
adoption of the contract or (3) by acceptance and retention of the benefits flowing therefrom.

Even in the absence of express or implied authority by ratification, the President as a general rule
may bind the corporation by a contract in the ordinary course of business, provided the same is
reasonable under the circumstances. These rules are basic but general and flexible. Applies where
the President is dealing with third persons but different where a director is dealing with his own
corporation.

The court herein held that the director holds a position of trust and as such he owes a duty of loyalty to
his corporation and his contracts with the corporation must always be at reasonable terms otherwise
the contract is void or voidable at the instance of the corporation. The court here found the terms of the
Dealership Agreement were unreasonable for the corporation and that the unfairness in the contract was
a basis which renders a contract entered into the President without authority from the Board, void or
voidable, although it may have been in the ordinary course of business.

NOTE: The President as the highest office of the corporation, by practice and jurisprudence embodies
apparent authority. On the other hand, the general manager on its own may or may not embody such
authority depending on the circumstances that go with it. The corporate secretary and lawyer enjoy no
such presumption because their positions do entail much commercial significance.

FRANCISCO v. GSIS

Facts: Trinidad Francisco mortgaged to GSIS a parcel of land with 21 bungalows (Vic-Mari Compound)
 103

for a P400,000 loan of which P336,100 was released payable within 10 years with 7% interest per
annum compounded monthly. In 1959 GSIS extrajudicially foreclosed the mortgage on the ground of
default of payment in the amount of P32,000 ( total payment amounted to P130,000) where GSIS
was also the buyer. Atty. Francisco, the father of Trinidad proposed to the General Manager of
GSIS to pay P30,000 of the P52,000 and asked that the foreclosure be set aside and for GSIS to take
over the administration of the mortgaged property and to collect installments due on the unpaid purchase
price for more than 31 house and lot payees to be applied to the arrearage and the loan. The GSIS
approved this and Atty. Francisco was notifed by telegram. GSIS accepted a check for P30,000 and
remittances totaling to P44,121.29 for which the corresponding ORs were issued. GSIS then sent 3
letters signed by the GM asking a proposal for the payment of the debt since the 1yr. Period for
redemption had expired.

Atty. Francisco protested and brought to the attention of GSIS the concluded contract and its
acceptance by telegram. GSIS replied asking payment for various expenses and that the telegram
should be disregarded for its failure toe express the content of a board resolution due to error of its
minor employees in the sending of the telegram. The approval was apparently conditioned on Atty.
Franciscos agreement to pay all expenses incurred in foreclosure. GSIS held that the remittances
were insufficient so that GSIS consolidated title to the compound in its name. Hence, this suit for
specific performance and damages. The lower court ruled in favor of Francisco.

Held: The SC finds no reason for altering the conclusion that the offer of compromise made by
Francisco had been validly accepted and was binding on the defendant GSIS. The terms of the offer
were clear and the acceptance of the proposal was signed by the GM Andal. The telegram hinted on no
anomaly and was within Andals apparent authority.

Corporation transactions would speedily come to a standstill where every person dealing with a
corporation held duty-bound to disbelieve every act of its responsible officers, no matter how regular they
should appear on their face.

If a corporation knowingly permits one of its officers or any other agent within the scope of an
apparent and thus holds him out to the public as possessing power to do those acts, the corporation will
as against any one who has in good faith dealt with the corporation through such agent be
estopped from denying such authority. Hence, even if it were the Board Secretary who sent the
telegram, the corporation could not evade the binding effect produced by the telegram. The
corporation had sufficient notice of the allegedly unauthorized telegram when it pocketed the
P30,000 but kept silent about it.

Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of his
employment and in relation to matters within the scope of his authority is notice to the corporation,
whether he communicates such knowledge or not.

The silence taken together with the unconditional acceptance of 3 other substantial remittances of the
original agreement constitute a binding ratification of the original agreement. Ratification may be effected
expressly or tacitly. There is tacit ratification if with knowledge of the reason which renders it voidable
and such reason having ceased, to a person who has a right to invoke it should execute an act which
necessarily implies an intention to waive his right.

As between two innocent parties, the one who made it possible for the wrong to be done should be the
one to bear the resulting loss.

YAO KA SIN TRADING v. COURT OF APPEALS

Facts:

Maglana, the president and chairman of PWCC sent a letter to Yao Ka Sin Trading represented by its
manager Yao. It quoted the following P24.30/94 lbs. Bag net FOB CEBU; P24.30/94 lbs. Bag FOB
 104

Asturias; 45,000 bags (15,000/month). On June 30, 1973 Mr. Yao accepted the letter offer and issued a
check for P243,000, PWCC Board of Directors disapproved the same. On July 5, 1973 PWCC
informed YKS of the disapproval. However with respect to the 10,000 bags of cement. YKS accepted
without protest. On August 4, 1973 PWCC wrote a letter to YKS stating that it is withdrawing or taking
delivery of not less than 10,000 bags of cement. On September 10, 1973 YKS insisted on the delivery of
the 45,000 bags of cement. On December 7, 1973 PWCC only delivered 9,775 bags. YKS filed an
action for specific performance with the CFI. It was discovered that PWCC by-laws give the Chairman
and the President the power to execute and sign for and in behalf of the corporation all contracts or
agreements which the corporation enters into subject to the qualification that all his actuations shall be
given to the Board of Directors of the corporation. PWCC contends that Mr. Maglana was not
authorized to make any offer and sign a contract in behalf of the corporation and only the Board has the
power to do so. The lower court ruled in favor of YKS but the CA reversed. Hence, this peition.

Issue: WON the contract originally entered into by PWCC through President Maglana, binds the
corporation despite the rejection of the Board of Directors.

Held:

The by-laws do not confer upon the President, the authority to enter into contracts independently of the
Board of Directors. The fact that contracts are signed through the President was only meant to
expedite its execution but still presupposes a prior act of the corporation, through the Board of
Directors. No greater authority can be implied from such express, but limited, delegated authority. It may
be presumed that the President has authority to make contracts if he is given general control and
supervision over affairs of the corporation. But here, there is a general manager charged with direct
management of the business which Mr. Maglana was not involved in.

The doctrine on apparent authority provide that if a private corporation intentionally or negligently clothes
its officers or agents with apparent power to perform acts for it, the corporation will be estopped to
deny that such apparent authority is real, as to innocent 3rd persons dealing in good faith with such
officers or agents. This apparent authority may result from: (1) the general manager by which the
corporation holds out an officer or agents as having power to act (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, whether with or without the scope of
power. However, YKS failed to prove that PWCC indeed clothed Mr. Maglana with apparent power.
PWCC also showed that no contract can be signed by the President without the Board of Directors
approval (and clearance from the NIDC representative and legal counsel). The first contract is at most
unenforceable.

The first contract was disapproved and rejected by the Board of Directors which at the same time
considered the P243,000 received by Maglana as payment for 10,000 bags of cement, treated as an
entirely different contract. YKS had in fact agreed to this by accepting the delivery receipt without
protest.

NOTE: Under the doctrine of apparent authority and under the sub-classification of apparent
authority by circumstance, the first contract is unenforceable because PWCC effectively proved
through clear and convincing evidence that their President cannot bind the corporation without
authorization from the Board of Directors, so not the burden shifted upon YKS for him to provide for
such circumstances which have led him to believe that the President has such apparent authority to
bind the corporation; however such was not effectively discharged by YKS, that is why the first
contract is unenforceable. Also, it is most important to note, that the contract for 10,000 bags of
cement is enforceable because such is a contract of sale entered into by the President in the regular
course of business of the corporation. However, the 45,000 bags contract is unenforceable because it is
a contract of dealership which is in the extraordinary course of the business of the corporation.,
hence, not within the purview of the apparent authority of the President.

NOTE: By-laws can bind third parties only when they have knowledge of such, otherwise, such may
not bind third parties. In the same manner, knowledge of a third person of such by-laws may bind the
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corporation.

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).

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 Philipine 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).

When a banking corporation, when an officers arranges 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, G.R. No. 159352, 14 April 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).

NYCO SALES CORPORATION v BA FINANCE CORPORATION

Facts: Rufino Yao was the President and General Manager of Nyco Sales Corporation which was
engaged in the business of selling construction materials. Nyco Sales through Yao was approached
by Santiago and Renato Fernandez on behalf of Sanshell Corporation requesting for credit
accommodation since Nyco had discounting privileges with BA Finance. The Fernandezes wen to Yao
for the purpose of discounting their post-dated BPI check worth P60,000 made payable to Nyco.
The discounting process agreed upon was that Nyco through Yao endorsed the check to BA Finance
then BA Finance would issue a check payable to Nyco for which Nyco would then endorse it to
Sanshell. With the exchange of checks, the parties agreed to a Deed of Assignment executed by
Nyco in favor of BA Finance the subject of which was the check. The Deed contained a Continuing
Suretyship Agreement at the back whereby the Fernandezes unconditionally guaranteed to BA
Finance full and prompt payment and discharge of any and all indebtedness of Nyco. BPI check
was dishonored which therefore led BA Finance to report it to the Fernadezes. They then issued
another check, this time from Security Bank which was also dishonored. Despite repeated demands,
Nyco and Fernandezes failed to settle their obligation which prompted BA Finance to file an action in
court. TC ruled against Nyco and the Fernandezes to pay jointly and severally. Nycos cross-claim
against the Fernadezes was denied they were not declared in default in connection with the cross-
claim and that no1 evidence was presented (it was also mentioned that Nyco should have impleaded
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Sanshell by way of a third party complaint and not a cross-claim). CA affirmed the TC with modifications.

Issue: WON Nyco can be held liable for its President unauthorized acts.

Held:
Nyco as an assignor-vendor warranted that both the credit itself (its existence and legality) and the
person of the debtor (his solvency) according to Article 1628of the NCC. Therefore, any breach of the
warranties, the assignor should be held answerable. It is of no question that the assignor is liable for the
invalidity of whatever he assigned. The deed of assignment executed by Nyco in favor of BA Finance
with Sanshell as debtor. BA Finance is actually enforcing the assignment. The check is merely an
incidental matter and so Nyco is not being held liable for both the BPI and the Security Bank check but
rather the deed of assignment. The issue on no notice of dishonor was given is belied not only by the
formal demand letter but also the findings of the TC that Yao and the Fernandezes had frequent
contacts before, during and after dishonor. There is no novation because there was no express
agreement that BA Finance;s acceptance with Security Bank check will discharge Nyco from liability.
Neither is there incompatibility because both checks were given precisely to terminate a single
obligation.

Nyco disowned the Presidents acts claiming that it had not authorized Yao to apply to BA Finance for
credit accommodation saying that it did not issue a board resolution giving such authority. However, the
by-laws clearly provide for the power of its President, which include executing contracts and
agreements, borrowing money, signing, indorsing and delivering checks, all in behalf of the
corporation. Also, there was already a prior transaction of discounting checks involving the same
parties wherein any enabling resolution from Nyco was dispensed with and yet BA was still able to
collect from Nyco and Sanshell was able to discharge of its liabilities. Therefore, that places Nyco
under estoppel in pais which arises when one, by his acts, representations or admissions, or by his
silence when he ought to speak out, intentionally or through culpable negligence, induce another to
believe certain facts to exist and such other rightfully relies on such belief, so that he will be
prejudiced if the former is permitted to deny the existence of such fact..

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, G.R. No. 126006, 29 January 2004.

3. Express Powers

a) Enumerated Powers (Secs. 36)

Sec. 36 Corporate powers and capacity Every corporation incorporated under this Code has the
power and capacity:

1.) To sue and be sued in its corporate name;

2.) Of succession by its corporate name for the period of time stated in the articles of incorporation and
the certificate of incorporation;

3.) To adopt and use a corporate seal;

4.) To amend its articles of incorporations in accordance with the provisions of this Code;

5.) To adopt by-laws, not contrary to law, morals or public policy, and to amend or repeal the same in
accordance with this Code;

6.) In case of stock corporations, to issue or 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
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non-stock corporation;

7.) To purchase, receive, take or 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
transactions of the lawful business of the corporation may reasonably and necessary require, subject to
the limitations prescribed by law and the Constitution;

8.) To enter into merger or consolidation with other corporations as provided in this
Code;

9.) To make reasonable donations, including those for the public welfare or hospital or 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;

10. ) To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers
and employees; and

11.) To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.

b) Extend or Shorten Corporate Term (Secs. 37 and 81 [1])

Sec. 37 Power to extend or shorten corporate term A private corporation may extend or shorten its
term as stated in the articles of incorporation when approved by majority vote of the board of director
or trustees and ratified at a meeting by the stockholders representing at least 2/3 of the outstanding
capital stock or by at least 2/3 of the members in case of non- stock corporation. Written notice of
the proposed action and of the time and place of the meeting shall be addressed to each stockholder
or member at his place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid or served personally. Provided, that in case of
extension of corporate term, any dissenting stockholder may exercise his appraisal right under the
conditions provided in this code.

Sec. 81[1] Instances of appraisal right Any stockholder of a corporation shall have the right to
dissent and demand payment of all the fair value of his shares in the following instances: In case any
amendment to the articles of incorporation has the effect of changing or restricting the rights of any
stockholders or rights of any stockholder class of shares, or of authorizing preferences in any
respect superior to those outstanding shares of any class, or of extending or shortening the term of the
corporate existence.

Such power only concerns the Juridical Entity Level such extending or shortening of the term of the
corporation tampers with the powers given the corporation by the State.

Q: Why should such extension or shortening require the ratificatory vote of stockholders when
this does not concern the business enterprise level but the juridical entity level?
A: Such in effect is an amendment of the articles of incorporation, and any amendment to such would
always require the consent of the State and of the corporations stockholders. They also have a say in
this because the extension or shortening of the corporate term affects these stockholders investments.

Q: Why do stockholders not have appraisal right with respect to the shortening of the corporate
term whereas they do in the extension of the corporate term?
A: Actually, there is a seeming conflict between Sec. 37 which makes no mention of stockholders
appraisal right with respect to the shortening of the corporate term while Sec. 81(1) refers to such. CLV
tells us that stockholders should be afforded an appraisal right even in the case of the shortening of the
corporate term because it is not enough to talk of free transferability of interests when you dissent to the
decrease because such concerns ones expectations with respect to the business enterprise.
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c) Increase or Decrease Capital Stock (Sec. 38)

Sec. 38 Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness No corporation shall increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority vote of the board of directors
and, at a stockholders meeting duly called for the purpose, 2/3 of the outstanding capital stock shall
favor the increase or diminution of the capital stock, or the incurring, creating, or increasing ant
bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or
of the incurring, creating, or increasing of any bonded 3 indebtedness and of the time and place of
the stockholders meeting at which the proposed increase or diminution of the capital stock or the
incurring or increasing of any bonded indebtedness is to be considered, must be addressed to
each stockholder at his place of residence as shown on the books of the corporation and deposited
to the addressee in the post office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of directors of the corporation and

countersigned by the chairman and the secretary of the stockholders meeting, setting forth:

(1) That the requirements of this section have been complied with;

(2) The amount of the increase or diminution of the capital stock;

(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par
stock thereof actually subscribed the names, nationalities, residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by each., and the amount paid by each
on his subscription in cash or property, or the amount of capital stock or number of shares of
no-par stock allotted to each stockholder if such increase is for the purpose of making effective
stock dividend thereof authorized;

(4) Any bonded indebtedness to be incurred, created or increased;

(5) The actual indebtedness of the corporation on the day of meeting;

(6) The amount of stock represented at the meeting; and

(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating, or
increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing any bonded
indebtedness shall require prior approval of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall
be filed with the Securities and Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and Exchange Commission and the issuance
by the Commission of its certificate of filing, the capital stock shall stand increased or decreased
and the incurring, creating or increasing any bonded indebtedness authorized, as the certificate of filing
may declare. Provided, That the Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer
of the corporation lawfully holding office at the time of the filing of the certificate, showing that at
least 25% of such increased capital stock has been subscribed and that at least 25% of the amount
subscribed has been paid either in actual cash to the corporation or that there has been
transferred to the corporation property the valuation of which is equal to 25% of the subscription:
Provided further, that no decrease of the capital stock shall be approved by the Commission if its effect
shall prejudice the rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness or increase the same with the
approval by a majority vote of the board of trustees and of at least 2/3 of the members in a meeting duly
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called for that purpose.

Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof.

The policy behind the non-granting of appraisal right with respect to the increase and
decrease of the capital of the corporation is the fact that every stockholder should come into the
corporation setting aware that the expediencies of corporate life may require that eventually the
corporation may need to increase capitalization to fund its operations or expansions, and needs to
look primarily into its equity investors to fund the same.

In the increase, a stockholder may always sell his stock if he dissents to the increase of the
capital stock. Moreover, such appraisal right may defeat the purpose of the corporation in increasing
the funds; by increasing the funds for survival, if you grant the appraisal right in effect you pay out
capital when you seek to keep more money inside.

In the decrease of capital stock, why appraise when in effect you will be returning capital to
your stockholders.

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.
National Wages and Productivity Commission, 260 SCRA 368 (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).

Why do you need the consent of the stockholders when you increase or decrease capital stock?
When you increase the capital stock, stockholders have to put in more money to maintain their
proportionate interest in the corporation, as such the increase dilutes the value of the stock they have
prior to such increase. Moreover, such increase affects their rights as in their voting capacity, their
sharing in the dividends, their participation in the management, the extent of their participation in the
dissolution of the corporation, etc. The consent of the stockholders is needed because such change
once again affects their contractual expectation when they first entered into the corporation.

But in decreasing capital stock, why do you again need the consent of the stockholders
whereas in effect they will be receiving part of their investment? Such once again affects their contractual
expectation when they first entered into the corporation.

d) Incur, Create or Increase Bonded Indebtedness (Sec. 38)

Sec. 38 Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness No corporation shall increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority vote of the board of directors
and, at a stockholders meeting duly called for the purpose, 2/3 of the outstanding capital stock shall
favor the increase or diminution of the capital stock, or the incurring, creating, or increasing ant
bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of
the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the
stockholders meeting at which the proposed increase or diminution of the capital stock or the
incurring or increasing of any bonded indebtedness is to be considered, must be addressed to
each stockholder at his place of residence as shown on the books of the corporation and deposited
to the addressee in the post office with postage prepaid, or served personally.
 110

A certificate in duplicate must be signed by a majority of directors of the corporation and

countersigned by the chairman and the secretary of the stockholders meeting, setting forth:

1. That the requirements of this section have been complied with;

2. The amount of the increase or diminution of the capital stock;

3. If an increase of the capital stock, the amount of capital stock or number of shares of no-par
stock thereof actually subscribed the names, nationalities, residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by each., and the amount paid by each
on his subscription in cash or property, or the amount of capital stock or number of shares of
no-par stock allotted to each stockholder if such increase is for the purpose of making effective
stock dividend thereof authorized;

4. Any bonded indebtedness to be incurred, created or increased;

5. The actual indebtedness of the corporation on the day of meeting;

6. The amount of stock represented at the meeting; and

7. The vote authorizing the increase or diminution of the capital stock, or the5 incurring,
creating, or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing any bonded
indebtedness shall require prior approval of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall
be filed with the Securities and Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and Exchange Commission and the issuance
by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and
the incurring, creating or increasing any bonded indebtedness authorized, as the certificate of filing
may declare Provided, That the Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer
of the corporation lawfully holding office at the time of the filing of the certificate, showing that at
least 25% of such increased capital stock has been subscribed and that at least 25% of the amount
subscribed has been paid either in actual cash to the corporation or that there has been
transferred to the corporation property the valuation of which is equal to 25% of the subscription:
Provided further, that no decrease of the capital stock shall be approved by the Commission if its effect
shall prejudice the rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness or increase the same with the
approval by a majority vote of the board of trustees and of at least 2/3 of the members in a meeting duly
called for that purpose.

Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof.

Bond security representing denominated units of indebtedness issued by a corporation to raise

money or capital obliging the issuer to pay the maturity value at the end of a specified period which
should be not less than 360 days. That is why not all indebtedness of the corporation require the
ratification of the stockholders, only bonded indebtedness require the ratification of the stockholders.

A bond in contrast to a promissory note represents a unit of a large indebtedness, whereas a

promissory note represents a single indebtedness and may stand on its own. Mostly all properties of
the corporation i.e. the business enterprise comprise of the security of such bonded indebtedness.
 111

The SEC also require that a company has a minimum net worth of P25 M at the time of the filing
of the application and must have been in operation for three years.

(e) Sell or Dispose of Assets (Sec. 40)

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).

Sec. 40 Sale or other disposition of assets Subject to the provisions of existing law on illegal
combination and monopolies, a corporation may by a majority vote of its board of directors or trustees,
sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property
and assets including its goodwill, upon such terms and conditions and for such consideration, which may
be money, stocks, bonds or other instruments for the payment of money or other property or
consideration as its board of directors or trustees deem expedient, when authorized by the vote of
stockholders representing at least 2/3 of the outstanding capital stock, or in the case of non-stock
corporation, by the vote of at least 2/3 of the members, in a stockholders or members meeting duly
called for that purpose. Written notice of the proposed action and of the time and place of the meeting
shall be addressed to each stockholder or members at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post office with postage prepaid paid,
or served personally: Provided, that any dissenting stockholder may exercise his appraisal right under
the conditions provided for in the Code.

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets
if thereby the corporation would be rendered incapable of continuing the business or accomplishing the
purpose for which it was organized.

After such authorization or approval by the stockholders or members, the board of directors or
trustees, may nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage,
pledge or other disposition of property and assets subject to the rights of third parties under any
contracting relating thereto without further action or approval by the stockholders or members.

Nothing in this section is intended to restrict the power of any corporation, without the authorization
by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of
any of its property and assets if the same is necessary in the usual and regular course of business
of said corporation or if the proceeds of the sale or other disposition of such property and
assets be appropriated for the conduct of its remaining business.

In non-stock corporations where there are no members with voting rights, the vote of at least a majority
of the trustees in office will be sufficient authorization for the corporation to enter into any transaction
authorized by this section.

NOTE: When the transaction is in the normal course of business, it only needs the majority of the
quorum of the Board of Director to approve such transaction. However, when such is in the
extraordinary course of the business as in the disposition of all or substantially all of the assets of
the corporation, such needs the vote of the absolute majority of the Board of Directors plus the
ratification of 2/3 vote of stockholders representing at least 2/3 of the outstanding capital stock of the
corporation in case it is a stock corporation, or in the case of a non-stock corporation, 2/3 of the
members.

This case is one of the exceptions to the rule where the stockholders have proprietary
interests in the business enterprise. This is also an exception to the rule that generally the Board of
Directors have the power to bind the, and transact for the corporation.

If transactions are entered into relating to this section without the ratification of the
stockholders, such transaction is void for it is illegal per se as it runs contrary to Sec. 40 of the
 112

Corporation Code.

Example: San Miguel decides to sell its Pale Pilsen formula, but retains all of its P 4B worth of
investment, will such transaction need the ratification of the stockholders and the absolute majority vote
of the Board? Yes, since it concerns substantially all of the assets of the corporation as such
formula pertains to the capacity of the corporation to earn. The absence of such ratification violates
the social compact as between the stockholders and the corporation. Such sale violates the
contractual expectation of these stockholders, and as such, their ratification must be availed of before
it may be entered into. The same is also the case, if San Miguel decides to share the P 4B and retain the
Pale Pilsen formula.

(f) Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 42; De la Rama v. Ma-ao
Sugar Central Co., 27 SCRA 247 [1969])

Sec. 42 Power to invest corporate funds in another corporation or business or for any other business
purpose Subject to the provisions of this Code, a private corporation may invest its funds in any other
corporation or business or for any purpose other than the primary purpose for which it was organized
when approved by a majority of the board of directors or trustees and ratified by the stockholders
representing at least 2/3 of the outstanding capital stock, or at least by 2/3 of the members in the
case of non-stock corporations, at a stockholders or members meeting duly called for that purpose.
Written notice of the proposed investment and the time and place of the meeting shall be addressed
to each stockholder or member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid or served
personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this
Code: Provided however, That where the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders
or members shall not be necessary.

DE LA RAMA v. MA-AO SUGAR CENTRAL CO.

Facts: De la Rama et.al. contend that Ma-ao Sugar Central through its President, subscribed P300,000
worth of capital stock of the Philippine Fiber Processing Co. Inc. They allege that the time of the first
two payments were made there was no board resolution authorizing the investment and that it was only
before the third payment that the President was so authorized by the Board of Directors. De la Rama
also contends that even assuming, arguendo, that the said Board Resolutions are valid, the
transaction is still wanting in legality, no resolution having been approved by the affirmative vote of the
stockholders holding shares in the corporation, entitling them to at least 2/3 of the voting power.

Issue: WON the investment of corporate funds of Ma-ao were in violation of corporation law.

Held: Investment of corporate funds in another corporation if done in pursuance of the corporate
purpose, does not need the approval of the stockholders, but where the purchase of the shares of
another corporation is done solely for investment and not to accomplish the purpose of its incorporation,
the vote of approval of the stockholders is necessary. The investment made in Philippine Fiber was
upheld by the SC. Philippine Fiber was engaged in the manufacture of bags or investments in another
corporation engaged in the manufacture of bags. Since the sugar central is engaged in the
manufacture of sugars, sugar bags necessarily would come under the purview of its needs under the
regular course of business

Any corporation whatever its primary purpose has a choice of placing such fund either in a
savings or time deposit account or in money market placements, or treasury bills, or even in shares
of stocks of other corporations which are traded in the stock exchange. The exercise of such business
judgment on the part of the board in consistency with the primary purpose, since it is expected
even from the stockholders to believe, that it is within the ordinary business discretion of the Board
to place the corporations investible fund in the form of investment that would yield the best possible
return to the corporation and would not require the ratification of the stockholders or members each
 113

time.

situation where the Board exercises ordinary business discretion, such investment would run contrary to
the relationship of the Board to the stockholders whereby they engaged to manage the hotel
corporation alone, and whereby they vowed to devote all their time and all their effort in such
corporation. By investing in 20% of another corporation, said Board obtained a very big role in
the management of such corporation, hence such would run contrary to its obligation to the
stockholders to take care of the business enterprise of the hotel corporation and not any other
corporations business enterprise. As such, it would need a ratificatory vote of 2/3 of the stockholders.

needed since such is really within the ordinary business discretion of the Board. And by investing only in
a relatively minimal share in the assets of another company, it does not really engage in the
business enterprise of another corporation, hence, they still afford priority to the business enterprise of
the hotel corporation.

(g) Declare Dividends (Sec. 43; a Nielson & Co. v. Lepanto Consolidated Mining Co., 26
SCRA 540 [1968])

Sec. 43 Power to declare dividends The board of directors of a stock corporation, may declare
dividends out of the unrestricted retained earnings which shall be payable in cash, in property or in
stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash
dividend due on delinquent stock shall first be applied to the unpaid balance on the subscription plus
costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his
paid subscription is fully paid: Provided further, that no stock dividend shall be issued without the
approval of stockholders representing not less than 2/3 of the outstanding capital stock at a regular or
special meeting duly called for that purpose.

Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in
capital stock, except: (1) when justified by definite corporate expansion projects or programs approved
by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any
financial institution or creditor whether local or foreign, from declaring dividends without its/his consent,
and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation, such when there is need for
special reserve for probable contingencies.
NIELSON & CO. v. LEPANTO CONSOLIDATED MINING CO.

Facts: In 1937, Lepanto entered into a management contract with Nielson. In this agreement, Nielson
was to manage and operate the Mankayan mining claim of Lepanto in consideration for (a) P2,500 a
month and (b) 10% of dividends declared and paid. In 1941, Lepanto declared dividends amounting
to P175,000 10%of which Nielson was entitled to P17,500. Lepanto however never paid Nielson a
cent. During the liberation in 1945, Lepanto unilaterally terminated the management contract with
Nielson. In 1958, Nielson instituted an action for its 10% share in the dividends declared by Lepanto in
1941. The suit reached the SC and it decided against Lepanto in 1941. The suit between Nielson
and Lepanto was suspended in 1942 when the US Army bombarded the Mankayan mining claims,
thus preventing Nielson from complying with its obligation (i.e. operating and managing the claim).
The tribunal further said that the contract remained suspended even after the war was over in 1945
until 1948 when the mines were fully operational; and that the management contract still had five years
to go from 1948. Thus, the SC stated that Nielson was entitled to 10% of the dividend
declarations in 1949 and 1950 worth P3M. Lepanto sought reconsideration of SCs decision in 1966.

It raised two main points at issue namely: (1) What is the nature of the management contract? Is it one of
agency and hence terminable at the principals will or is it a contract of lease of services which may
be terminated only upon agreed causes? (2) Is Nielson entitled to 10% of the stock dividend even
though Lepanto is not a stockholder?
 114

Held: The management contract is a contract for lease of service.

(1) The theory of agency was raised only on reconsideration which is a belated move by Lepanto (2)
Agency is premised on representation while lease of service is based on employment. While an agent
can execute juridical acts in behalf of his principal ; an employee under a lease of service can only
perform non-juridical acts or only material acts.
(3) Since the acts of Nielson (exploration, purchase, etc.) are subject to general control and approval of
the Board of Directors of Lepanto and cannot create, modify, extinguish business relations between
Lepanto and Nielson, these acts can only be considered as material acts done for an employer for
compensation. The contract, is therefore, a contract of lease of services. Being such a contract, it cannot
be revocable at the will of the employer. The contract specifically provided that Lepanto can cancel the
contract only: a.) upon the 90-day written notice and b.) for Nielsons failure to operate and develop the
mining claims for any cause except those causes due to the acts of God.
(4) Since the war and the bombardment constitute acts of God, they cannot be considered as
grounds to terminate the contract. In fact, the contract is deemed suspended from 1942 to 1948 when
neither of the parties could comply with their obligations under it. Under its terms, the contract is
suspended in cases of fortuitous events. And such terms must be interpreted to mean that a period
equal to the period of suspension must be added to the original term of the contract by way of extension.
Thus, from 1948 the contract still had five more years. And by virtue of this extension, Nielson is
entitled to 10% of the dividends declared in 1949 and 1950.

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; a 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?

Sec. 44 Power to enter into management contracts No corporation shall conclude a

management contract with another corporation unless such contract shall have been approved
by the board of directors and by stockholders owning at least the majority of the
outstanding capital stock, or by at least a majority of the members in the case of a non-9 stock
corporation of both managing and the managed corporation at a meeting duly called for that purpose:
Provided, That (1) where a stockholder or stockholders representing the same interest of both the
managing and managed corporations own or control more than 1/3 of the total outstanding capital stock
entitled to vote of the managing corporation; or (2) where a majority of the members of the board of
directors of the managing corporation also constitute a majority of the members of the board of
directors of the managed corporation, then the management contract must be approved by the
stockholders of the managed corporation owning at least 2/3 of the total outstanding capital stock
entitled to vote, or by at least 2/3 of the members in the case of a non-stock corporation. No
management contract shall be entered into for a longer period than five years for any one term.

The provisions of the next preceding paragraph shall apply to any contract whereby a corporation
undertakes to mange or operate all or substantially all of the business of another corporation, whether
such contracts are called service contracts, operating agreements or otherwise: Provided however,
That such service contracts or operating agreements which relate to exploration, development,
exploitation or utilization of natural resources may be entered into for such periods as may be
provided by the pertinent laws or regulations.

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
 115

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. Pilipinas Loan
Co. v. SEC, 356 SCRA 193 (2001).

A mining company has not power to engage in real estate development. Heirs of Antonio Pael v. Court
of Appeals, 372 SCRA 587 (2001).

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

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

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).

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
 116

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).

(d) Provide Gratuity Pay for Employees

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).

(e) Donate

(f) Enter Partnership or Joint Venture. a Tuason & Co. v. Bolanos, 95 Phil. 106 (1954); SEC Opinion,
dated 29 February 1980.

TUASON & CO. v. BOLANOS

Facts: JM Tuason & Co. Inc. represented by its managing partner Gregorio Araneta Inc. filed a
complaint in the CFI for recovery of possession of registered land situated in Tatalon, QC against
Quirino Bolanos. Defendant in his answer claims through prescription and that the registration of
said land was obtained through fraud. The CFI ruled in favor of the plaintiff and declared that
defendant had no right to the land. Hence, this appeal.

Issue: WON the case should have been dismissed on the ground that it was not brought by the real
party in interest?

Held:

No, the rules of court require that an action be brought in the name of but not necessarily by the real party
in interest. In fact,the practice really is for the attorney-at-law to bring the action and file the complaint in
plaintiffs name which was done her. And while it is true that the complaint also states that the plaintiff
is represented herein by its managing partner G. Araneta Inc. another corporation, there is nothing
against one corporation being represented by another person, natural or juridical in a suit in court.

The contention that G. Araneta Inc. cannot act as a managing partner on the theory that it is illegal for two
corporations to enter into a partnership without merit, for the true rule is that though a corporation has no
power to enter into a partnership without merit for the true rule is that though a corporation has no power
to enter into a partnership, it may nevertheless enter into a joint venture with another where the nature of
the venture is incline with the business authorized by its charter. There is nothing in the record to show
that the venture which plaintiff is represented by G. Araneta is not incline with the corporate business of
either corporation.

The SEC rule provides in an Opinion, that the right of the corporation to engage as a limited
partner (not a general partner, meaning that its liability is limited to the amount of investment it pours
into the partnership). But such a power to engage in a partnership must be specifically provided for in
the corporations charter.
 117

QUICK REFERENCE ON THE POWERS OF THE CORPORATION

POWER STATUTORY REQUIREMENT PROCEDURE WITH OR WITHOUT

APPRAISAL RIGHT
Power to shorten or 1. Approved by a majority vote of1. Written notice to Extension: Yes, such constitutes
extend corporate term the Board of Directors (majority of each stockholder a novation of the contract.
(Sec. 37) the quorum)
Shortening: No, but not because
2. Ratified by at least such is inherent, because such is
2/3 of the OCS or not inherent as it constitutes an
2/3 of members in a non-stock alteration of the powers granted it
corporation. by the State.

Power to increase 1. Approved by a majority vote1. Written notice to Increase: None, dilutes the worth
capital stock and also of the Board of Directors (majority each stockholder of the stock, defeats the
the power to decrease of quorum) purpose of the increase.
capital stock (Sec. 38) Special documentary
2. Ratified by at least requirements: Decrease: None, because in
2/3 of the OCS a. Prior approval of effect there is a return of part of
the SEC; SEC shall investments of the stockholders
not accept for filing
unless with a sworn
statement by treasurer
that 25-
25 rule complied with
b. SEC approval
triggers
Power to incur, create Approved by a majority vote of 1. Written noticeeffectivity None drains the
or increase the Board of Directors (majority of 2. Prior approval Corporation
of the SEC of financial
indebtedness (Sec. 38) quorum) 3. Supporting resources contrary to the
documents required: purpose for which the power is
- Ratified by at least 2/3 of the a. Trust indenture with exercised.
OCS a trustee bank;
b. Underwriting
SEC INTERIM GUIDELINES: agreement
Corporation must have: 4. Bonds registered
1. Minimum net worth of 25M at with the SEC
the time of the filing of the
application
2. In operation for at least 3
years
3. Must fulfill financial ratio
mandated by the SEC in interim
guidelines
 118

Power to sell, dispose, 1) Of all or substantially all of (1) Must comply with Yes, such a sale does
lease, encumber its property the Bulk Sales Law not necessarily leads to a
(Sec. 40) dissolution of the corporation and
- Majority vote of Board of the corporate return of the residual value of the
ALL: Quantitative Test Directors (majority of quorum) creditors and the amount corporation. Such is afforded as
a matter of equity and fairness.
and nature of their
SUBSTANTIALLY ALL: - Ratified or approved by 2/3 of
Qualitative Test claims
the OCS or 2/3 of the members
(purpose for which it
was incorporated) renders
- Relates to the primary purpose. transaction void

2) Exception to Sec. 40 if the(2) If no ratificatory

sale is necessary in the
usual and regular course ofvote of stockholders, it
business or if proceeds of the is an utra vires act of
sale or other disposition of the third kind
such property and assets be
appropriated for the conduct of
its remaining businesses

Majority vote of Board of

Directors (business judgment rule)

Power to purchase own Must be for a legitimate purpose example: None

shares (Sec. 41) Does not relate to primary or
secondary
(1) purpose
eliminate fractional shares arising out of stock
Buy back of shares (i)dividends
decrease the cost of (2) collect or compromise an indebtedness to the
doing business corporation
(ii) perpetuate
arising
control
out ofofthe enterprise.
unpaid subscription in a
delinquency sale, and to purchase delinquent shares during
said sale and
(3) to pay dissenting or withdrawing stockholders
exercising their appraisal right

- Taken from URE only, except redeemable shares


Power to invest 1. Approved by a Written notice of the
corporate funds in majority vote of the
another corporation or Board of Directors
business or for any (majority of quorum)
other purpose (Sec.42) 2. Ratified by at least
2/3 of the OCS
As a g e n e r a l rule,
section 42 applies if the
investment is for
secondary or other than
the primary purpose.
Exception: If the
investment is
reasonably necessary
to accomplish its
primary purpose as
stated in the Articles of
Incorporation, approval
of the stockholders is
not necessary as it is
included in the Business
Judgment of theBOD
Power to declare Cash dividends:
dividends(Sec.43) (1)Absolute majority of
Board of Directors in
accordance with the
Business Judgment Rule
(2) Only declared out of the
URE which shall be payable
in cash, in property or in
stock
(3)However, cash
dividends due on
delinquent shares shall be
first applied to the unpaid
balance while stock
dividends shall be withheld
until fully paid
Stock dividends:
Approval of 2/3of the OCS at
a regular or special meeting
called for that purpose.
119
Yes, because minus
proposed investment the ratificatory vote, the
and the time and place contractor transaction
of meeting shall be falls under the realm of
addressed to each ultra vires transactions
stockholder or member of the third type.
at his place of residence
as shown in the books of
the corporation and
deposited to the
addressee in the Post
Office with postage
prepaid or served
personally.
Sec. 43 prohibits stock Yes.
corporation from
retaining surplus profits
in excess of 100%of their
paid-up capital stock,
EXCEPT:
1. When justified by
definite corporate
expansion projects or
programs as approved
by the Board of
Directors
2. When corporation is
prohibited under any
loan agreement from
declaring dividends
without its consent and
such consent has not yet
been secured, or
 120

(3) When it can be

clearly shown that such
retention is necessary under
special circumstances
obtaining in the
corporation such as
when there is need for
special reserve for
profitable
contingencies.

Power to enter into Approved by absolute majority of the Board of Directors

management contracts (Sec. Approved by stockholders owning majority of the OCS
44)
HOWEVER where:
(1) Stockholders representing the same interest of both
managing and the managed corporation own or control
more than 1/3 of the total OCS entitled to vote of the
managing corporation OR (2) Where a majority of the
members of the Board of Directors of the managing
corporation also constitute a majority of the members of
the Board of Directors of the managed corporation. Then it
must be approved by the stockholders of the managed
corporation owning at least 2/3 of the OCS

EXCEPT if the corporation is organized primarily as

management company.

Not for a period longer than five years for any one term.