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CORPORATION LAWS
Powers to be exercised Powers expressly granted by law or Powers authorized by the partners
implied from those granted or incident provided it is not contrary to law,
I. FORMATION AND ORGANIZATION OF CORPORATIONS to its existence morals, good customs, public order,
or public policy
CONSTITUTIONAL BASIS Management The power to do business is vested in When management is not agreed
the board of directors or trustees upon, every partner is an agent of
Art. XII, Sec. 16: The Congress shall not, except by general law, provide for the formation, organization,
the partnership
or regulation of private corporations. Government-owned or controlled corporations may be created or
Effect of The suit against a member of the A partner can sue a co-partner who
established by special charters in the interest of the common good and subject to the test of economic board of directors or trustees who mismanages
mismanagement
viability. mismanages must be in the name of
the corporation
DEFINITION OF CORPORATION Right of succession Has such right Has no such right
Extent of liability to The stockholders are liable only to the Partners (except limited partners) are
Sec. 2. Corporation defined. - A corporation is an artificial being created by operation of law, having the third persons extent of their investment as liable personally and subsidiarily
right of succession and the powers, attributes and properties expressly authorized by law or incident to its represented by the shares subscribed (sometimes solidarily) for partnership
existence. by them debts to third persons
Transferability of In a stock corporation, a stockholder A partner cannot transfer his interest
ADVANTAGES AND DISADVANTAGES OF CORPORATE FORM interest has the right to transfer his shares in the partnership so as to make the
1. CLV without the prior consent of the other transferee a partner without the
stockholders because a corporation is consent of all other existing partners
ADVANTAGES DISADVANTAGES
not based on this principle (pursuant to delectus personarum)
a) Strong Legal Personality a) Abuse of Corporate Management
Term of existence May not be formed for a term in excess May be established for any period of
b) Centralized Management b) Abuse of Limited liability feature
of 50 years extendible to not more than time stipulated by the partners
c) Limited Liability to the investors c) High cost of maintenance 50 years in any one instance
d) Free Transferability of Units of Investments d) Double Taxation Firm name May adopt any firm name provided it A limited partnership is required by
e) Lack of Personal Element is not identical or deceptively similar to the law to add the word "Ltd." to its
2. SUNDIANG any registered firm name or contrary to name
ADVANTAGES DISADVANTAGES existing law
a) The capacity to act as a legal unit; a) More complicated in formation and Dissolution Can only be dissolved with the consent of the May be dissolved at any time by will of any
State or all of the partners
b) Limitation of, or exemption from, individual liability management;
Laws which govern Corporation Code Civil Code
of shareholders; b) Higher cost of formation and operation;
c) Continuity of Existence; c) Lack of personal element;
d) Transferability of Shares; d) Greater governmental control and regulation; BASIC ATTRIBUTES / CHARACTERISTICS OF A CORPORATION
e) Centralized management of BoD; and e) Management and control are separate from 1. It is an artificial being
f) Standardized method of organization, and finance ownership; 2. It is created by operation of law
f) Stockholders have little voice in the conduct of 3. It enjoys the right of succession
business 4. It has the powers, attributes and properties expressly authorized by law or incident to its existence

Corporation and Partnership, distinguished ARTIFICIAL BEING


CORPORATION PARTNERSHIP Consequences of separate legal personality of corporations
Manner of creation By law or by operation of law By mere agreement of the parties a) Obligations incurred by a corporation, acting through its authorized agents, are its sole liabilities.
Number of At least five incorporators (except a At least two persons b) A corporation may not, generally, be made to answer for acts or liabilities of its stockholders (members)
incorporators corporation sole) or those of the legal entities to which it may be connected vice versa.
Commencement of From the date of the issuance of the From the moment the execution of c) A corporate officer is not personally and solidarily liable with the corporation for the money claims of
juridical personality certificate of incorporation by the SEC the contract of partnership discharged or retrenched employees
under its official seal o XPN: Officer acted with evident malice or bad faith in terminating their employment.

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d) All contracts entered into in its name by its regular appointed officers and agents are the contracts of the XPN to the XPN
corporation and not those of the stockholders or members. a. insolvent
e) The property of the corporation is not the property of the stockholders or members b. corporation cease to exist
Criminal case filed:
Theory of special capacities and Theory of general capacities, distinguished
a) By a corporation -> YES, crimes against property
THEORY OF SPECIAL CAPACITIES THEORY OF GENERAL CAPACITIES
b) Against a corporation -> NO, but technically, MONOPOLY can be.
Juridical persons Natural persons
Can only do what is authorized by the law Can do anything except those prohibited by law
Constitutional rights of corporations
Other notes: (as to theory of special capacities)
1. Due process The law itself provides what the corporation can do as a juridical entity.
2. Equal protection
3. Protection against unreasonable search and seizure a) Express powers
BUT a corporation is not entitled to the privilege against self-incrimination. b) Implied powers
c) Incident powers
e law itself is the source of power and
CREATED BY OPERATION OF LAW
GR: Corporation is created by law or operation of law
CASES:
Meaning: Corporations cannot come into existence by mere agreement of the parties as in the case of
business partnerships.
Petron v. NCBA, Feb. 16, 2007
They require special authority or grant from the State.
Whether petitioner Petron Corporation (Petron) should be held liable to pay attorneys fees and exemplary damages
The State exercises the power through the legislature:
to respondent National College of Business and Arts (NCBA).
a) By a special incorporation law or charter which directly creates the corporation NO, the RTC held Petron liable to NCBA for attorneys fees under Article 2208(5), which allows such an award "where
b) By a general corporation law under which individuals desiring to be and act as a corporation may the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiffs plainly valid, just, and
demandable claim." However, the only justification given for this verdict was that Petron had no reason to claim the
incorporate. V. Mapa properties because, in the RTCs opinion, the levy and sale thereof were void.
XPN: Corporation by prescription Petrons claim to the V. Mapa properties, founded as it was on final deeds of sale on execution, was far from
Note: Corporations can only come into existence in the manner prescribed by law. untenable. No gross and evident bad faith could be imputed to Petron merely for intervening in NCBAs suit against
DBP and the Monserrats in order to assert what it believed (and had good reason to believe) were its rights and to
have the disputed ownership of the V. Mapa properties settled decisively in a single lawsuit.
In relation to the theory of concession With respect to the award of exemplary damages, the rule in this jurisdiction is that the plaintiff must show that he is
Theory of concession: the existence and legal recognition to a private corporation emanates entirely from the entitled to moral, temperate or compensatory damages before the court may even consider the question of
whether exemplary damages should be awarded. In view of our ruling that Petron cannot be made liable to NCBA
discretion of the State. When the State recognizes the corporation, the latter is being conferred a privilege for compensatory damages (i.e., attorneys fees), Petron cannot be held liable for exemplary damages either.
because it is not a fundamental right to create a corporation.
Thus, recognition is conditioned on compliance with all legal documentary or otherwise requirements for the
Asset Privatization Trust v. CA, Dec. 29, 1998
issuance of a Certificate of Incorporation.
Whether or no MMIC is entitled to moral damages. NO, the Court held that how could the MMIC be entitled to a big
RIGHT OF SUCCESSION amount of moral damages when its credit reputation was not exactly something to be considered sound and
Rule: A corporation has a capacity of continuous existence irrespective of the death, withdrawal, insolvency, wholesome.
Under Article 2217 of the Civil Code, moral damages include besmirched reputation which a corporation may
or incapacity of the individual stockholders or members and regardless of the transfer of their interest or shares
possibly suffer. A corporation whose overdue and unpaid debts to the Government alone reached a tremendous
of stock. amount of P22 Billion Pesos cannot certainly have a solid business reputation to brag about.
BUT the corporation is NOT immortal. The arbiters exceeded their authority in awarding damages to MMIC, which is not impleaded as a party to the
derivative suit: MMIC was not joined as a party plaintiff or party defendant at any stage of the proceedings. As it is,
Under the Corporation Code, the life of the corporation is limited to the period of time started in the AOI not the award of damages to MMIC, which was not a party before the Arbitration Committee, is a complete nullity.
exceeding 50 years from the date of incorporation unless sooner dissolved or unless said period is extended. Settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the stockholder filing
suit for the corporation's behalf is only a nominal party. The corporation should be included as a party in the suit.
POWERS, ATTRIBUTES, AND PROPERTIES OF A CORPORATION An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds
Powers that may be exercised: Only such powers as are granted by the law of its creation. stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are
Is express grant of power necessary? NO, all powers which may be implied from those expressly provided by the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real party in interest.
law and those which are incidental or essential to the corporation's existence may also be exercised.
Test: Whether the act of the corporation is in direct and immediate furtherance of its business, fairly incidental It is a condition sine qua non that the corporation be impleaded as a party because:
to the express powers and reasonably necessary to their exercise. a) It is its cause of action that is being litigated and

Note: The powers, attributes, and properties of a corporation reinforces the theory of special capacities. b) Judgment must be a res judicata against it.
Thus, it cannot be said that a corporation has fundamental rights because these rights are sourced from the
If at all an award was due MMIC, which it was not, the same should have been given, regardless of whether or not
law. the party liable had equity in the corporation, in view of the doctrine that a corporation has a personality separate
When corporation is entitled to moral damages and distinct from its individual stockholders or members. DBP's alleged equity, even if it were indeed 87%, did not give
G.R. A corporation is not entitled to moral damages it ownership over any corporate property, including the monetary award, its right over said corporate property being

XPN: Besmirched reputation

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a mere expectancy or inchoate right. The case is a derivative suit, in which the aggrieved party or the real party in under the provision of the Constitution
interest is the MMIC and not any individual stockholder. prohibiting laws impairing the obligation
a) It is a basic postulate that a corporation has a personality separate and distinct from its stockholders. The
of contracts, renders such corporation
properties foreclosed belonged to MMIC, not to its stockholders. Hence, if wrong was committed in the foreclosure, it
was done against the corporation. not subject to visitation, control, or
b) Another reason is that Jesus S. Cabarrus, Sr. cannot directly claim those damages for himself that would result in change by the State, except in the
the appropriation by, and the distribution to, him part of the corporation's assets before the dissolution of the exercise of police power.
corporation and the liquidation of its debts and liabilities. Consent The consent of incorporators is necessary It may be created without
to the creation of private corporation. the consent of the locality to
Mambulao Lumber v. PNB, Jan. 30, 1968 be affected.
Whether or not Mambulao Lumber is entitled to moral damages. Law of creation Corporation Code: private corporation Administrative Code Special
Obviously, an artificial person like herein appellant corporation cannot experience physical sufferings, mental anguish, Public Service Act: quasi-public charter
fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis of moral damages. corporation
A corporation may have a good reputation which, if besmirched, may also be a ground for the award of moral Source of funds Stock: Funds from stockholders -> State
damages. The same cannot be considered under the facts of this case, however, not only because it is admitted that subscription price Non-stock: Members ->
herein appellant had already ceased in its business operation at the time of the foreclosure sale of the chattels, but contribution
also for the reason that whatever adverse effects of the foreclosure sale of the chattels could have upon its reputation
Management Stock: Board of Directors Non-stock: Board as provided for by law;
or business standing would undoubtedly be the same whether the sale was conducted at Jose Panganiban,
Camarines Norte, or in Manila which is the place agreed upon by the parties in the mortgage contract. Board of Trustees Depends upon that assigned
in law of creation
Other distinctions:
Hanil v. CA, July 30, 2001
1. As to taxation
The Court held that Hanil is entitled to temperate damages in the amount of P500,000.00. As a consequence of the
2. Liability for the torts or negligence of officers and agents
illegal writ, Hanil suffered the following damages: (1) some of the checks it issued were dishonored after its bank
accounts were garnished; (2) its operation stopped temporarily for five days because it was prevented from using its
Test: If the creation is created by the State as its own agency or instrumentality for political or public
equipments and machineries; and (3) its goodwill, reputation and commercial standing as one of the top multi-
purpose connected with the administration of government, then public corporation. Otherwise, private.
national construction firms in Asia was tarnished.

Dual status of public corporations


Bache and Co v. Ruiz, 37 S 823 A public or municipal corporation possesses two kinds of power:
Do private corporations enjoy protection under the Constitution? YES, they can also invoke right to due process,
against unreasonable search and seizure,etc. 1. Governmental or public -> municipal government
2. Proprietary or private -> corporate legal individual
Test in determining which function: Whether the act performed is for the common good or whether it is for the
Sulo ng Bayan v. Araneta, Aug. 17, 1976 special benefit or profit of the corporate entity.
Whether or not plaintiff corporation (non- stock may institute an action in behalf of its individual members for the
recovery of certain parcels of land allegedly owned by said members; for the nullification of the transfer certificates of Private corporation includes:
title issued in favor of defendants appellees covering the aforesaid parcels of land; for a declaration of "plaintiff's 1. [Ma'am says this is a public corporation] Government-owned and controlled corporations: those created or
members as absolute owners of the property" and the issuance of the corresponding certificate of title; and for
organized by the government or of which the government is the majority of stockholder.
damages. NO. A corporation is a distinct legal entity to be considered as separate and apart from the individual
stockholders or members who compose it, and is not affected by the personal rights, obligations and transactions of its Why GOCCs are treated as private corporations? Because they are not established for the government of a
stockholders or members. This separate personality of the corporation may be disregarded, or the veil of corporate portion of the State.
fiction pierced, in cases where it is used as a cloak or cover for fraud or illegality, or to work -an injustice, or where Examples: GSIS, NAPOCOR, PNR
necessary to achieve equity. Note: Real party in interest are the members and not the corporation, thus non-stock 2. Quasi-public corporations: private corporations which have accepted from the State the grant of franchise
corporation cannot institute action for them. or contract involving the performance of public duties but which are organized for profit.
May the members execute an SPA in favor of the corporation for the latter to represent them? YES!
They are private corporations that perform public service.
BUT note that this is the exception since as a general rule corporation cannot represent individual members of the
corporation. Also called "public utilities" and "public service corporations."
Examples: Electric, water, telephone and transportation companies.
CASES:
Boy Scouts of the Phils v. COA, July 7, 2011
CLASSIFICATIONS OF PRIVATE CORPORATION
Whether or not BSP is a public corporation.
YES. Reasons:
Private and Public Corporation, distinguished a) It is classified as a public corporation in the BSP charter, "An Act to Create a Public Corporation to be Known as the
PRIVATE CORPORATION PUBLIC CORPORATION Boy Scouts of the Philippines, and to Define its Powers and Purposes""
b) It is classified under Art. 44(2) of NCC, "Other corporations, institutions and entities for public interest or purpose
Control Stock: Stockholders Non-stock: Members State
created by law; their personality begins as soon as they have been constituted according to law." Thus, applying Art. 45
Governmental control The charter of a private corporation is a Being mere instrumentalities of NCC, "Juridical persons mentioned in Nos. 1 and 2 of the preceding article are governed by the laws creating or
contract between the State and the of the State, are subject to recognizing them."
corporation or incorporators, which, governmental visitation and Note that private corporations are regulated by laws of general application on the subject.
control c) It is classified as an attached agency of the DECS under the Administrative Code

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Attachment: the lateral relationship between the department or its equivalent and the attached agency or 3. The VFP is required to submit annual reports of its proceedings for the past year, including a full, complete and
corporation for purposes of policy and program coordination. itemized report of receipts and expenditures of whatever kind, to the President of the Philippines or to the Secretary of
The coordination may be accomplished by having the department represented in the governing board of the National Defense.20
attached agency or corporation. In this case, the DECS Secretary is a member of the National Executive Board of BSP. 4. Under Executive Order No. 37 dated 2 December 1992, the VFP was listed as among the government-owned and
In this sense, the BSP is not under government control or "supervision and control." Still this characteristic does not make controlled corporations that will not be privatized.
the attached chartered agency a private corporation covered by the constitutional proscription in question 5. In Ang Bagong Bayani OFW Labor Party v. COMELEC,21 this Court held in a minute resolution that the "VFP [Veterans
Federation Party] is an adjunct of the government, as it is merely an incarnation of the Veterans Federation of the
BSP not subject to test of government ownership or control and economic viability Philippines.
a) The BSP is a public corporation or a government agency or instrumentality with juridical personality, which does not
fall within the constitutional prohibition in Article XII, Section 16, notwithstanding the amendments to its charter. VFP's contention:
b) Not all corporations, which are not government owned or controlled, are ipso facto to be considered private 1. Petitioner claims that the VFP does not possess the elements which would qualify it as a public office, particularly the
corporations as there exists another distinct class of corporations or chartered institutions which are otherwise known as possession/delegation of a portion of sovereign power of government to be exercised for the benefit of the public.
"public corporations." The functions of petitioner corporation enshrined in Section 4 of Rep. Act No. 2640 should most certainly fall within the
c) These corporations are treated by law as agencies or instrumentalities of the government which are not subject to the category of sovereign functions. The protection of the interests of war veterans is not only meant to promote social
tests of ownership or control and economic viability but to different criteria relating to their public purposes/interests or justice, but is also intended to reward patriotism.
constitutional policies and objectives and their administrative relationship to the government or any of its Departments 2. Petitioner claims that VFP funds are not public funds
or Offices. The fact that no budgetary appropriations have been released to the VFP does not prove that it is a private
corporation.
Nature of BSP: Funds in the hands of the VFP from whatever source are public funds, and can be used only for public purposes.
a) The BSP is appropriately regarded as "a government instrumentality" under the 1987 Administrative Code. 3. Petitioner argues that it is a civilian federation where membership is voluntary
b) It thus appears that the BSP may be regarded as both a "government controlled corporation with an original charter" Petitioners stand that the VFP is a private corporation because membership thereto is voluntary is likewise erroneous.
and as an "instrumentality" of the Government within the meaning of Article IX (B) (2) (1) of the Constitution. x x x As stated above, the membership of the VFP is not the individual membership of the affiliate organizations, but merely
the aggregation of the heads of such affiliate organizations. These heads forming the VFP then elect the Supreme
Ruling: Council and the other officers, of this public corporation.
Since the BSP, under its amended charter, continues to be a public corporation or a government instrumentality, we 4. Petitioner claims that the Administrative Code of 1987 does not provide that the VFP is an attached agency, and nor
come to the inevitable conclusion that it is subject to the exercise by the COA of its audit jurisdiction in the manner does it provide that it is an entity under the control and supervision of the DND in the context of the provisions of said
consistent with the provisions of the BSP Charter. code.
The Administrative Code, by giving definitions of the various entities covered by it, acknowledges that its enumeration
is not exclusive. The Administrative Code could not be said to have repealed nor enormously modified Rep. Act No.
Liban v. Gordon, July 15, 2009 vis-a-vis Jan. 18, 2011 2640 by implication, as such repeal or enormous modification by implication is not favored in statutory construction.
PNRC as National Society: 5. Petitioner offers as evidence the DBM opinion that the VFP is a non-government organization in its certification that the
a) It is the main characteristic of National Societies that they "are not inspired by the desire for financial gain but by VFP "has not been a direct recipient of any funds released by the DBM.
individual commitment and devotion to a humanitarian purpose freely chosen or accepted as part of the service that -government organization is not
National Societies through its volunteers and/or members render to the Community." persuasive, since DBM is not a quasi-judicial agency
b) The PNRC, as a National Society of the International Red Cross and Red Crescent Movement, can neither "be
classified as an instrumentality of the State, so as not to lose its character of neutrality" as well as its independence, nor
strictly as a private corporation since it is regulated by international humanitarian law and is treated as an auxiliary of the
MIAA v. CA, July 20, 2006
State. Is MIAA a GOCC? NO, MIAA is not a government-owned or controlled corporation but an instrumentality of the National
Government and thus exempt from local taxation. Second, the real properties of MIAA are owned by the Republic of
Sui generis status of PNRC: the Philippines and thus exempt from real estate tax. A government-owned or controlled corporation must be
Although it is neither a subdivision, agency, or instrumentality of the government, nor a government-owned or "organized as a stock or non-stock corporation." MIAA is not organized as a stock or non-stock corporation. MIAA not a
controlled corporation or a subsidiary thereof, such a conclusion does not ipso facto imply that the PNRC is a "private stock corporation
corporation" within the contemplation of the provision of the Constitution, that must be organized under the Corporation MIAA is not a stock corporation because it has no capital stock divided into shares. MIAA has no stockholders or
Code. voting shares.
Section 3 of the Corporation Code defines a stock corporation as one whose "capital stock is divided into shares and x
x x authorized to distribute to the holders of such shares dividends x x x." MIAA has capital but it is not divided into shares
Baluyot v. Holganza, Feb. 9, 2000 of stock. MIAA has no stockholders or voting shares. Hence, MIAA is not a stock corporation.
The test to determine whether a corporation is government owned or controlled, or private in nature:
Is it created by its own charter for the exercise of a public function, or by incorporation under the general corporation MIAA not a non-stock corporation
law? a) It has no members. Section 87 of the Corporation Code defines a non-stock corporation as "one where no part of its
Those with special charters are government corporations subject to its provisions, and its employees are under the income is distributable as dividends to its members, trustees or officers." A non-stock corporation must have members.
jurisdiction of the Civil Service Commission, and are compulsory members of the Government Service Insurance System. b) Even if we assume that the Government is considered as the sole member of MIAA, this will not make MIAA a non-
stock corporation. Non-stock corporations cannot distribute any part of their income to their members. Section 11 of the
The PNRC was not "impliedly converted to a private corporation" simply because its charter was amended to vest in it MIAA Charter mandates MIAA to remit 20% of its annual gross operating income to the National Treasury.
the authority to secure loans, be exempted from payment of all duties, taxes, fees and other charges of all kinds on all c) Section 88 of the Corporation Code provides that non-stock corporations are "organized for charitable, religious,
importations and purchases for its exclusive use, on donations for its disaster relief work and other services and in its educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil service, or similar purposes, like
benefits and fund raising drives, and be allotted one lottery draw a year by the Philippine Charity Sweepstakes Office for trade, industry, agriculture and like chambers." MIAA is not organized for any of these purposes. MIAA, a public utility, is
the support of its disaster relief operation in addition to its existing lottery draws for blood program." As to PNRC's status, organized to operate an international and domestic airport for public use.
see Liban v. Gordon.
MIAA is a government instrumentality
MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental functions.
VFP v. Reyes, Feb. 28, 2006 MIAA is like any other government instrumentality, the only difference is that MIAA is vested with corporate powers.
Is the VFP a private corporation? NO, VFP is a public corporation. Reasons: Instrumentality: refers to any agency of the National Government, not integrated within the department framework,
1. Rep. Act No. 2640 is entitled "An Act to Create a Public Corporation to be Known as the Veterans Federation of the vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special
Philippines, Defining its Powers, and for Other Purposes." funds, and enjoying operational autonomy, usually through a charter.(Sec. 2, Adm. Code)
2. Any action or decision of the Federation or of the Supreme Council shall be subject to the approval of the Secretary
of Defense.19 corporation. Unless the government instrumentality is organized as a stock or non-stock corporation, it remains a
government instrumentality exercising not only governmental but also corporate powers.

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Sec. 3. Classes of corporations. - Corporations formed or organized under this Code may be stock or Available for public distribution and subscription
non-stock corporations. Corporations which have capital stock divided into shares and are authorized CLOSE CORPORATION OPEN CORPORATION
to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the Limited number of Shareholders: cannot exceed 20 As many shareholders as possible
shares held are stock corporations. All other corporations are non-stock corporations. or any lesser number as mention in AoI
Ownership, acquisition, and transfer of shares shall They have shares of stocks that are
1. As to Corporation Code:
a) Stock corporation: one which have capital stock divided into shares and are authorized to distribute to be subject to formal restrictions or qualifications available for subscription or acquisition by
the holders of such shares dividends or allotments or the surplus profits on the basis of the shares held. (Sec. the public in general.
3) Owner of stocks has absolute control of
o Ordinary business corporation created and operated for the purpose of making a profit which may be ownership
distributed in the form of dividends to stockholders on the basis of their invested capital. Absolutely prohibited from listing and selling its share Listed in the Stock Exchange Index.
b) Non-stock corporation: one which do not issue shares and are created not for profit but for public good
of stocks in any stock exchange Freedom to sell shares of stocks in any
and welfare and where no part of its income is distributable as dividends to its members, trustees, or officers.
exchange
(Sec 87)
Note: Absolutely prohibited by government to distribute dividends
Note: Some kinds of corporations cannot be organized except in the form of stock corporations:
i. Banks 8. As to their relation to another corporation
ii. Close corporations a) Parent or Holding corporation: one which is related to another corporation that it has the power either,
directly or indirectly to, elect the majority of the director of such other corporation
2. As to the number of persons who compose them: (relevant only to religious corporations)
b) Subsidiary corporation: one which is so related to another corporation that the majority of its directors can
a) Corporation aggregate: corporation consisting of more than one member or corporator;
E.g. religious societies, congregations, CICM be elected either, directly or indirectly, by such other corporation.
b) Corporation sole: religious corporation which consists of one member or corporator only and his It is one which another corporation owns at least a majority of shares and thus has control.
successor, such as a bishop or other head of the church. c) Affiliated corporation: one related to another by owning or being owned by common management or by a
Note: Freedom of religion applies in these corporations long-term lease of its properties or other control device.
o SEC cannot prevent formation of a religious corporation o Examples:
o State cannot order dissolution of religious corporation
i. Between a holding or parent company and its subsidiary
Note: A corporation aggregate does not become a corporation sole by the mere fact that its shares of
ii. Between two corporations owned or controlled by a third.
stock become vested in one person
Reason: The shares may again be transferred or sold by the holder to others. 9. As to whether they are corporations in a true sense or only in a limited sense:
a) True corporation: one which exists by statutory authority
3. As to whether they are for religious purpose or not: b) Quasi corporation: one which exist without formal legislative grant.
a) Ecclesiastical corporation: one organized for religious purpose i. Corporation by prescription: one which has exercised corporate powers for an indefinite period
b) Lay corporation: one organized for a purpose other than for religion. without interference on the part of the sovereign power and which by fiction of law, is given the
status of a corporation;
4. As to whether they are for charitable purpose or not:
a) Eleemosynary corporation: one established for or devoted to charitable purposes or those supported o Example: Roman Catholic Church
by charity. ii. Corporation by estoppel: one which in reality is not a corporation, either de jure or de facto,
b) Civil corporation: one established for business or profit because it is so defectively formed, but is considered a corporation in relation to those only who, by
reason of theirs acts or admissions, are precluded from asserting that it is not a corporation.
5. As to state or country under or by whose laws they have been created: Ma'am said that quasi-corporations includes those formed by the Administrative Code.
a) Domestic corporation: one incorporated under the laws of the Philippines Thus, it is a public corporation and it performs purely political purposes
b) Foreign corporation: 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. (Sec 123) 10. As to whether they are for public (government) or private purpose:
Modes to determine if local or foreign corporation: a) Public corporation: one formed or organized for the government or a portion of the State for the
i. Law of incorporation general good and welfare.
ii. Control test: At least 60% of capital stocks solely owned by Filipino citizens b) Private corporation: one formed for some private purpose, benefit or end

6. As to their legal right to corporate existence:


SPECIAL CHARTER CORPORATION
a) De jure corporation: one existing both in fact and in law
Sec. 4. Corporations created by special laws or charters. - Corporations created by special laws or charters
b) De facto corporation: one existing in fact but not in law
shall be governed primarily by the provisions of the special law or charter creating them or applicable to them,
supplemented by the provisions of this Code, insofar as they are applicable.
7. As to whether they are open to the public or not:
a) Close corporation: one which is limited to selected persons or members of the family. (Sec 96 105) Incorporation of a private corporation
b) Open corporation: one which is open to any person who may wish to become a stockholder or
member thereto.

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Rule: The enactment of special act creating a private corporation is subject to the natural or juridical person engaged in the business of undertaking and ensuring the formation of a
constitutional limitation that such corporation shall be owned or controlled by the corporation. (MLR)
government. It solicits investment or money to be used as capital in the business or proposed corporation
Important: A special law creating a private corporation which is neither owned nor Ensures that all the necessary steps or conditions pre-requisite to the registration of a corporation are
controlled by the government is VOID for being in violative of the constitutional provision. followed including the drafting of the AoI.
Undertakes that all the other requisites imposed or agreed upon by contract between the promoter and
Governing law the incorporators are observed.
Rule: A corporation created by a special law or charter is primarily governed by such law and
suppletorily by the provisions of the Corporation Code "insofar as they are applicable" o Principal right of promoter: to be paid compensation.
When Corporation Code is suppletorily applicable: o Ultimate Goal: secure AOI
a) They are not inconsistent with the special law or charter o Thus, from the perspective of the promoter the pre-incorporation contract is a service contract for
b) Expressly made applicable by the special law which he is entitled to compensation.
Law as to employees and officers of GOCC:
a) Created by special law (GOCC w/ original charter) -> Civil Service
b) Corporation Code -> Labor Code CLV Class Notes
May a GOCC be organized under the provisions of the Corporation Code and not by special law?
Q: Differentiate a promoter from an incorporator.
YES!
A: A promoter begins or initiates the formation of a corporation while an incorporator is one of the initial members of
the SH's CLV: The definition of promoter is important to determine the liability for promoter's contract. Before you can
Jurisdiction of SEC
make a promoter liable, you must be able to determine who is the promoter. He must be the one who takes initiative
Rule: SEC has NO jurisdiction over corporation with original charter or created by special law.
on the founding and organization of the business venture which eventually ends up as the corporation being
Jurisdiction of SEC: SEC can rule on the status of corporation belonging to this type. It has jurisdiction
organized.
to determine this issue.
Q: At the promoter's stage there is no juridical personality until 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
Rights, powers and privileges of the government
stage, what then is the status of the contract entered into by a promoter for and in behalf of the person or agent who
a. As a member of a corporation, the government never exercises its sovereignty; it acts merely as a
had undertaken the transaction?
corporator
A: Unenforceable. It is not binding upon the corporation because it has not given consent to the authority of the
b. Note: The mere fact that the government happens to be a majority stockholder of a corporation
person or agent who had undertaken the transaction.
does not make it a public corporation.
Q: How can ratification be done?
c. Thus, as a private corporation, it has no greater rights, powers, or privileges than any other
A: Ratification can be done in two ways:
corporation organized under the Corporation Code.
1. Express ratification- a mere board resolution making the corporation liable by accepting the contract and
2. Implied ratification- by accepting of benefits.
EDUCATIONAL CORPORATION
A stock or non-stock corporation organized to provide facilities for teaching or instruction. Q: What is the effect of promoter's contract on the corp and other contracting parties? A: As to the corp, it is voidable,
as to other contracting parties, it is valid and enforceable

STAGES IN THE FORMATION / ORGANIZATION OF A CORPORATION PROMOTERS CONTRACTS/PRE-INCORPORATION CONTRACTS/PROMOTIONAL CONTRACTS


- All contracts leading to the actual registration of corporation (MLR)
Stages: (generally)
- all contracts entered into by the promoters are under the suspensive condition that the corporation
1. Promotion will be eventually formed.
2. Incorporation - Have either the express/implied undertaking that the corporation will be registered. However, the
3. Reorganization (not all corporations though) promoter is not considered as an agent of the corporation, cannot be considered trustee because
4. Dissolution there is no agency if there is no principal, no trustee if no trustor.
5. Liquidation/Winding Up Promoter acts in his/her personal capacity; no representative capacity or authority.

Parties:
PROMOTION
1. Promoter for and in behalf of the future corporation
Number of business operations peculiar to the business world by which the company is brought into 2. Investors/subscribers
existence. - They bind themselves to pay money or property as initial capital of the proposed corporation with
Procuring necessary legislation the privilege that this contribution will be converted to share of stocks. (MLR)
Getting incorporations together - They are bound by the promise to contribute to the capital not as to the corporation but among
Procuring necessary subscribers to the articles of incorporation. themselves.
One principal obligation: pay the services of the promoter
This can, however, be dispensed with if the persons promoting have sufficient capital or funds;
Expectation: that a corporation shall be formed.
hence, there is no need to attract prospective investors to come in.
Thus, if no corporation is formed the promotional contracts are negated and the contribution of the
PROMOTER investors shall be returned.
Promoter is a person, natural/juridical who, acting alone or with others, takes initiative in founding and Note: Prior to registration with the SEC, the AoI represents a contract between and among the incorporators
organizing the business or enterprise of the issuer and receives consideration therefore. and initial subscribers. Thus, their agreement shall be expressly embodied in the AoI.

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Once approved by the SEC, such AoI is a contract between the State and corporation. And by INCORPORATION PROPER
exemption, the Articles also regulate the relationship between corporation and its officers vis-a-vis Drafting and execution of the Articles of Incorporation
the stockholders. Filing with the SEC of the Articles of Incorporation accompanied by an affidavit showing that at
Incorporators least 25% of the entire authorized shares has been subscribed and at least 25% of the entire
- Creators of the corporation subscription has been paid in cash.
- Investors If governed by a special law, a favorable recommendation of the appropriate government agency
- Established the corporation is needed in filing the Articles of Incorporation.
Payment of filing and publication fees.
- Listed in the AoI
Issuance of Certificate of Incorporation by the SEC (within a period of two years).
- Promised compensation to the promoter
Nature of Pre-incorporation Contracts FORMAL ORGANIZATION AND COMMENCEMENT OF BUSINESS OPERATIONS
Under Sec 60, any contract for the acquisition of unissued stock in a corporation still to be formed shall be
- Election of Board of Directors/Trustees, its corporate officers (President, Vice President, Secretary,
deemed a subscription within the meaning of the Corporation Code.
Treasurer) within 2 years from date of incorporation.
Under Sec 61, a subscription for shares of stock of a corporation still to be formed shall be irrevocable for
If it fails, then:
a period of 6 mos. from the date of subscription, unless all of the other subscriber consent to the
a) Corporate powers cease;
revocation, or unless the incorporation of said corporation fails to materialize within said period or
b) Corporation can be deemed dissolved.
within a longer period as may be stipulated in the contract of subscription. However, no pre-
If it commenced transaction of business but subsequently becomes inoperative for a period of at
incorporation subscription may be revoked after the submission of the articles of incorporation to SEC.
least 5 years, the same shall be a ground for the suspension of its corporate franchise (Certificate of
Secs 60 and 61 have effectively adopted in our jurisdiction a fused version of both contract theory and
Incorporation).
the offer theory in defining the nature of pre-incorporation subscription agreements.
Offer Theory: construes subscription agreement as only continuing offers to proposed corporations, which
CASES:
offer does not ripen into a contract until accepted by the corporation when organized. The obvious Marc II Marketing v. Joson, December 12, 2011
result of the offer theory is that it allows withdrawal of subscriber at least before the corporation Is the corporation liable for the Management Contract entered into before the certificate of incorporation was issued?
The Court held that the Management Contract executed between respondent and petitioner Lucila has no binding
comes into existence and accepts the offer.
effect on petitioner corporation for having been executed way before its incorporation. Logically, there is no
Contract Theory: A subscription agreement among several persons to take shares in a proposed corporation to speak of prior to an entitys incorporation. And no contract entered into before incorporation can bind
corporation becomes a binding contract and is irrevocable from time of subscription, unless the corporation.
cancelled by all parties before acceptance by the corporation. As can be gleaned from the records, the Management Contract dated 16 January 1994 was executed between
Subscription agreements are "special contract" in the sense that they go beyond what we would term as respondent and petitioner Lucila months before petitioner corporations incorporation on 15 August 1994. Similarly, it
ordinary contracts. Although subscription agreements are contracts between the subscriber and the was done when petitioner Lucila was still the President of Marc Marketing, Inc. Undeniably, it cannot have any binding
and legal effect on petitioner corporation.
corporation, they are at the same time deemed to be contracts among the stockholders of the
Also, there was no evidence presented to prove that petitioner corporation adopted, ratified or confirmed the
corporation. Management Contract. It is for the same reason that petitioner corporation cannot be considered estopped from
questioning its binding effect now that respondent was invoking the same against it. In no way, then, can it be
Theories on Liabilities for Promoters Contracts enforced against petitioner corporation, much less, its provisions fixing respondents compensation as General
- Without ratification by a corporation after its due incorporation, a contract entered into in behalf of Manager to 30% of petitioner corporations net profit. Consequently, such percentage cannot be the basis for the
computation of respondents separation pay. This finding, however, will not affect the undisputed fact that respondent
a corporation yet to be organized or still in the process of incorporation is void as against the
was, indeed, the General Manager of petitioner corporation from its incorporation up to the time of his dismissal.
corporation (Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223 [1937])
As regards petitioner Lucilas solidary liability, this Court affirms the same. Rule: Corporation has a personality separate
and distinct from its officers, stockholders and members such that corporate officers are not personally liable for their
G.R: Only the promoter is primarily liable / bound during the promotional or pre incorporation stage. The
official acts unless it is shown that they have exceeded their authority. However, this corporate veil can be pierced
corporation is not liable as it is yet to be established. when the notion of the legal entity is used as a means to perpetrate fraud, an illegal act, as a vehicle for the evasion
NOTE: Only parties to the contract can be held liable thereof. (Privity of Contracts) of an existing obligation, and to confuse legitimate issues. Under the Labor Code, for instance, when a corporation
- In case of violation, the investors can sue the promoter or vise versa. violates a provision declared to be penal in nature, the penalty shall be imposed upon the guilty officer or officers of
a. This is true even if the corporation is formed subsequently. the corporation. Note: Since services were rendered to Marc Marketing, if Lucila cannot pay then the former is
subsidiarily liable.

XPN: When corporation is bound by promotional contracts Summary: (MLR)


1. When there is express acknowledgment by the corporation 1. Corporation is not a party in the Management Contract between the promoter and the expert hired prior to
incorporation.
- Can only be made after the corporation is legally born.
2. The difference in the salary claimed by the expert may be collected not from the corporation but from the
How: BoD pass a resolution formally adopting the said promotional contracts. promoter.
2. Implied ratification 3. A corporation cannot be bound by contracts perfected and entered into before the corporation existed.
a) When corporation accepted or derived benefits or gain from the promotional contracts 4. Even if the consideration in a promotional contract is the formation of a future corporation, the said corporation is
b) Having knowledge of these contracts, the corporation failed to deny its liability either by silence not a party thereto.
or acquiescence, and a third party will be prejudiced.
o In both instances, the corporation cannot decline any liability that may arise from said
contract.
EXTENT OF LIABILTY OF THE CORP:
b. SOLIDARY WITH THE PROMOTER the promoter by ratification of its contracts is now
constituted as an agent of the corporation or a trustee of the corporation; unless it can
be shown that the promoter was grated absolute release by the corporation from liability
under those contracts.

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Rizal Light v. Municipality of Morong, Sept. 28, 1968


Cagayan Fishing v. Sandiko, Dec. 23, 1937 Petitioner's contention that Morong Electric did not yet have a legal personality on May 6, 1962 when a municipal
The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff herein, was affected on May 31, franchise was granted to it is correct. The juridical personality and legal existence of Morong Electric began only on
1930 and the actual incorporation of said company was affected later on October 22, 1930. October 17, 1962 when its certificate of incorporation was issued by the SEC. Before that date, or pending the issuance
In other words, the transfer was made almost five months before the incorporation of the company. The Court held of said certificate of incorporation, the incorporators cannot be considered as de facto corporation. But the fact that
that the contract here was entered into not between Manuel Tabora and a non-existent corporation but between the Morong Electric had no corporate existence on the day the franchise was granted in its name does not render the
Manuel Tabora as owner of the four parcels of lands on the one hand and the same Manuel Tabora, his wife and franchise invalid, because later Morong Electric obtained its certificate of incorporation and then accepted the
others, as mere promoters of a corporations on the other hand. For reasons that are self-evident, these promoters franchise in accordance with the terms and conditions thereof. American jurisprudence applied:
could not have acted as agent for a projected corporation since that which no legal existence could have no agent. The fact that a company is not completely incorporated at the time the grant is made to it by a municipality to use
the streets does not, in most jurisdictions, affect the validity of the grant. But such grant cannot take effect until the
A corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa mere. This is not corporation is organized.
saying that under no circumstances may the acts of promoters of a corporation be ratified by the corporation if and While a franchise cannot take effect until the grantee corporation is organized, the franchise may, nevertheless, be
when subsequently organized. There are, of course, but under the peculiar facts and circumstances of the present applied for before the company is fully organized.
case we decline to extend the doctrine of ratification which would result in the commission of injustice or fraud to the
candid and unwary. The incorporation of Morong Electric on October 17, 1962 and its acceptance of the franchise as shown by its action in
As such, if the plaintiff corporation could not and did not acquire the four parcels of land here involved, it follows that it prosecuting the application filed with the Commission for the approval of said franchise, not only perfected a contract
did not possess any resultant right to dispose of them by sale to the defendant, Teodoro Sandiko. between the respondent municipality and Morong Electric but also cured the deficiency pointed out by the petitioner
in the application of Morong EIectric.
Caram v. CA, June 30, 1987 The conclusion herein reached regarding the validity of the franchise granted to Morong Electric is not incompatible
The petitioners (Carams) were not involved in the initial stages of the organization of the airline, which were being with the holding of this Court in Cagayan Fishing Development Co., Inc. vs. Teodoro Sandiko upon which the petitioner
directed by Barretto as the main promoter. It was he who was putting all the pieces together, so to speak. The leans heavily in support of its position. In said case this Court held that a corporation should have a full and complete
petitioners were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the organization and existence as an entity before it can enter into any kind of a contract or transact any business. It
strength of the project study, to invest in the proposed airline. should be pointed out, however, that this Court did not say in that case that the rule is absolute or that under no
Significantly, there was no showing that the Filipinas Orient Airways was a fictitious corporation and did not have a circumstances may the acts of promoters of a corporation be ratified or accepted by the corporation if and when
separate juridical personality, to justify making the petitioners, as principal stockholders thereof, responsible for its subsequently organized. Of course, there are exceptions. It will be noted that American courts generally hold that a
obligations. As a bona fide corporation, the Filipinas Orient Airways should alone be liable for its corporate acts as duly contract made by the promoters of a corporation on its behalf may be adopted, accepted or ratified by the
authorized by its officers and directors. corporation when organized.

In the light of these circumstances, we hold that the petitioners cannot be held personally liable for the compensation
claimed by the private respondent for the services performed by him in the organization of the corporation. To repeat, DRAFTING OF THE ARTICLES OF INCORPORATION
the petitioners did not contract such services. It was only the results of such services that Barretto and Garcia presented - often associated with the term charter technically broader than AOI
to them and which persuaded them to invest in the proposed airline. The most that can be said is that they benefited - For GOCCs, the charter pertains to the special law that created it. For private corps, includes not
from such services, but that surely is no justification to hold them personally liable therefor. Otherwise, all the other just the OI but also includes the by-laws duly approved by the SEC; All govt rules and regulations
stockholders of the corporation, including those who came in later, and regardless of the amount of their share pertaining to that corporations private business, all relevant statutes including the corporation
holdings, would be equally and personally liable also with the petitioners for the claims of the private respondent.
code.; all written instruments that serve as source of authority or power.

Pioneer Insurance v. CA, July 28, 1989 ARTICLES OF INCORPORATION


Rule: While it has been held that as between themselves the rights of the stockholders in a defectively incorporated
- Within the control of the parties
association should be governed by the supposed charter and the laws of the state relating thereto and not by the
rules governing partners , it is ordinarily held that persons who attempt, but fail, to form a corporation and who carry on - Serves as the embodiment of the contract and its various stipulations among the incorporators
business under the corporate name occupy the position of partners inter se. - Once approved by the SEC, it also serves as the contract between the corporation and the State.
Thus, where persons associate themselves together under articles to purchase property to carry on a business, and MEMORIZE SC 14 & 15!
their organization is so defective as to come short of creating a corporation within the statute, they become in legal Lanuza v. CA, March 28, 2005
effect partners inter se, and their rights as members of the company to the property acquired by the company will be
Whether it is the companys stock and transfer book, or its 1952 Articles of Incorporation, which determines stockholders
recognized.
shareholdings, and provides the basis for computing the quorum. Articles of Incorporation. AoI and Stock and transfer
However, such a relation does not necessarily exist, for ordinarily persons cannot be made to assume the relation of book, distinguished
partners, as between themselves, when their purpose is that no partnership shall exist, and it should be implied only 1. Articles of incorporation: one that defines the charter of the corporation and the contractual relationships between the
when necessary to do justice between the parties; thus, one who takes no part except to subscribe for stock in a State and the corporation, the stockholders and the State, and between the corporation and its stockholders.
proposed corporation which is never legally formed does not become a partner with other subscribers who engage in 2. Stock and transfer book: is the book which records the names and addresses of all stockholders arranged
business under the name of the pretended corporation, so as to be liable as such in an action for settlement of the alphabetically, the installments paid and unpaid on all stock for which subscription has been made, and the date of
alleged partnership and contribution. payment thereof; a statement of every alienation, sale or transfer of stock made, the date thereof and by and to whom
A partnership relation between certain stockholders and other stockholders, who were also directors, will not be made; and such other entries as may be prescribed by law.
implied in the absence of an agreement, so as to make the former liable to contribute for payment of debts illegally It provides the only certain and accurate method of establishing the various corporate acts and transactions and
contracted by the latter. of showing the ownership of stock and like matters.
Like other corporate books and records, is not in any sense a public record, and thus is not exclusive evidence of
HELD: the matters and things which ordinarily are or should be written therein.
It is therefore clear that the petitioner never had the intention to form a corporation with the respondents despite his In fact, it is generally held that the records and minutes of a corporation are not conclusive even against the
representations to them. This gives credence to the cross-claims of the respondents to the effect that they were corporation but are prima facie evidence only, and may be impeached or even contradicted by other competent
induced and lured by the petitioner to make contributions to a proposed corporation which was never formed evidence. Thus, parol evidence may be admitted to supply omissions in the records or explain ambiguities, or to
because the petitioner reneged on their agreement. No de facto partnership was created among the parties which contradict such records.
would entitle the petitioner to a reimbursement of the supposed losses of the proposed corporation. The record shows This case is one instance where resort to documents other than the stock and transfer books is necessary. The stock and
that the petitioner was acting on his own and not in behalf of his other would-be incorporators in transacting the sale transfer book of PMMSI cannot be used as the sole basis for determining the quorum as it does not reflect the totality of
of the airplanes and spare parts. shares which have been subscribed, more so when the articles of incorporation show a significantly larger amount of
shares issued and outstanding as compared to that listed in the stock and transfer book.

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Rationale why STB was not used: The stock and transfer book of PMMSI cannot be used as the sole basis for determining l) The name of an internationally known foreign corporation or one similar to it may not be used
the quorum as it does not reflect the totality of shares which have been subscribed, more so when the articles of by a domestic corporation without the prior consent of the former;
incorporation show a significantly larger amount of shares issued and outstanding as compared to that listed in the stock m) If the full name of a person forms part of the corporate name, the consent of such person or
and transfer book. It is to be explained, that if at the onset of incorporation a corporation has 771 shares subscribed, the
Stock and Transfer Book should likewise reflect 771 shares. Any sale, disposition or even reacquisition of the company of its
his heir must be obtained; and
own shares, in which it becomes treasury shares, would not affect the total number of shares in the Stock and Transfer n) The word State, National, Maharlika and the Barangay cannot be used as part of the
Book. All that will change are the entries as to the owners of the shares but not as to the amount of shares already corporate name since these are reserved for the exclusive use of the government.
subscribed. Notes: BUT when will stock and transfer book prevail over AOI, as a way of exception? o) Use of "day care" or "child care" must have permit from DSWD.
the current outstanding stock ownership. Doctrine of secondary meaning
o A word or phrase originally incapable of exclusive appropriation with reference to an article on the
CONTENTS market, because geographically, or otherwise descriptive, might nevertheless have been used so long
CORPORATE NAME and so exclusively by one producer with reference to his article, that in that trade or to that branch of
the purchasing public, the word or phrase has come to mean that the article was his product.
Necessity of the corporate name o Ex. Ang Tibay, merely descriptive, but its products are already associated with it.
1. The corporation acquires juridical personality under the name stated in the Articles of Incorporation;
2. The corporation has the power to succession thru that name; Test of infringement
3. It identifies and distinguishes it from other corporations; o Whether the similarity is such as to mislead a person using ordinary care and discrimination.
4. By its name it is authorized to transact business; The right to the exclusive use of a corporate name with freedom from infringement is
5. Corporate/trade name is a property right, a right in which it may assert and protect against the whole determined by priority of adoption.
world. (power to sue and be sued) o Remedy in case of infringement: Injunction.
6. By which the business and operation may be monitored or regulated & taxed by the government.
Sec. 18. Corporate name. No corporate name may be allowed by the Securities and Exchange Cases under corporate name
Commission if the proposed name is identical or deceptively or confusingly similar to that of any
1. A corporation has no right to intervene in a suit using a name, not even its acronym, other than its
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 registered name, as the law requires and not another name which it had not registered. Laureano
issue an amended certificate of incorporation under the amended name. Investment and Dev. Corp. v. Court of Appeals, 272 SCRA 253 (1997).
Guidelines/Limitations for corporate name 2. There would be no denial of due process when a corporation is sued and judgment is rendered
1. Not identical or deceptively or confusingly similar to that of another existing corporation or to any 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
other name already protected by law.
SCRA 312 (1997).
2. Not patently deceptive or contrary to existing law;
3. Names protected by law cannot be used; (tradename, trademarks,brandnames) 3. 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
4. The name of the corporation must end with word Incorporated or Inc. unless it includes the
word corporation. (1970).
4. A change in the corporate name does not make a new corporation, and has no effect on the
5. Prohibited Use of Certain Words:
a) Emblem, official seal, and the name of the United Nations both in its full or abbreviated form identity of the corporation, or on its property, rights, or liabilities. Republic Planters Bank v. Court of
Appeals, 216 SCRA 738 (1992
for commercial purposes (RA No. 226);
b) Unlawful to use the word Bonded, in part or in whole as business name of those maintaining Smartmatic v COMELEC (12/8/15)
any warehouse not licensed under the General Bonded Warehouse Act (Act No. 3893). The AoI was amended thus subjected for approval by the SEC. There is valid existing corporation at the time of the
bidding process.
c) Using the word bank, banking, banker, building and loan association, trust
The Failure to submit the AOI during the first stages of the bidding process was cured and the same was not required to
corporation, trust company, or words of similar import, when not conducting the business of be submitted. There is nothing in the bid requirements imposing the submission of the AOI. (Reqts: Vert of Reg, DTI
commercial banking corporation, trust corporation, savings and mortgage bank, or building permits..)
and loan association;
d) Using the words Rural Bank, when not authorized under the Rural Banks Act (RA No. 7353); Lanuza v. CA
e) Using the term savings and loan association when not organized under the Savings and Loan The quorum is based not on the stock transfer book but on the AOI.
Association Act (RA No. 3779), or the term development bank unless organized under the
Private Development Banks Act (RA No. 4093);
GSIS FAMILY BANK V BPI FAMILY BANK
f) Using the word National as portion of their name or title, except the Philippines National Bank In this case, respondent was incorporated in 1969 as Family Savings Bank and in 1985 as BPI Family Bank.
(PD 694), due to its connotation of being a government agency or a government-owned or Petitioner, on the other hand, was incorporated as GSIS Family Thrift Bank only in 2002,[5] or at least seventeen (17)
controlled corporation; years after respondent started using its name. Following the precedent in the IRCP case, we rule that respondent has the
g) UN, Olympic, and Bureau in full or abbreviated form or business purposes; prior right over use of the corporate name.
h) Financing Company, Finance Investment Company, unless organized as a financing The second requisite in the Philips Export case likewise obtains on two points: the proposed name is (a) identical
company (RA No. 5980); or (b) deceptive or confusingly similar to that of any existing corporation or to any other name already protected by law.
On the first point (a), the words Family Bank present in both petitioner and respondents corporate name satisfy the
i) Engineer, or Architect unless used by persons properly registered and licensed as civil requirement that there be identical names in the existing corporate name and the proposed one. Respondent cannot
engineers or architects (RA Nos. 544, 545); justify its claim under Section 3 of the Revised Guidelines in the Approval of Corporate and Partnership Names,[6] to wit:
j) Geodetic Engineers is prohibited except when majority of the members of the partnership or 1. The name shall not be identical, misleading or confusingly similar to one already registered by another
corporation are properly registered and licensed as geodetic engineers (RA No. 4374); corporation or partnership with the Commission or a sole proprietorship registered with the Department of
k) Subsidiary corporation of a foreign firm may carry the name of the principal company with the Trade and Industry.
word Phil. Or Philippines affixed to the firm name, with the written consent of the mother If the proposed name is similar to the name of a registered firm, the proposed name must contain at least one distinctive
word different from the name of the company already registered.
company.

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Section 3 states that if there be identical, misleading or confusingly similar name to one already registered by another The corporate names in question are not Identical, but they are indisputably so similar that even under the test of
corporation or partnership with the SEC, the proposed name must contain at least one distinctive word different from the "reasonable care and observation as the public generally are capable of using and may be expected to exercise"
name of the company already registered. To show contrast with respondents corporate name, petitioner used the invoked by appellant, We are apprehensive confusion will usually arise, considering that under the second amendment
words GSIS and thrift. But these are not sufficiently distinct words that differentiate petitioners corporate name from of its articles of incorporation on August 14, 1964, appellant included among its primary purposes the "manufacturing,
respondents. While GSIS is merely an acronym of the proper name by which petitioner is identified, the word thrift is dyeing, finishing and selling of fabrics of all kinds" in which respondent had been engaged for more than a decade
simply a classification of the type of bank that petitioner is. Even if the classification of the bank as thrift is appended to ahead of petitioner. Factually, the Commission found existence of such confusion, and there is evidence to support its
petitioners proposed corporate name, it will not make the said corporate name distinct from respondents because the conclusion.
latter is likewise engaged in the banking business.
Petitioners corporate name is GSIS Family BankA Thrift Bank and respondents corporate name is BPI
Lyceum of the Phils v. CA, March 5, 1993
Family Bank. The only words that distinguish the two are BPI, GSIS, and Thrift. The first two words are merely the
Lyceum of the Phils not deceptively similar to Lyceum of Camalaniugan, Aparri, etc. The Court held that the corporate
acronyms of the proper names by which the two corporations identify themselves; and the third word simply describes
names of private respondent institutions are "identical with, or deceptively or confusingly similar" to that of the petitioner
the classification of the bank. The overriding consideration in determining whether a person, using ordinary care and
institution. True enough, the corporate names of private respondent entities all carry the word "Lyceum" but confusion and
discrimination, might be misled is the circumstance that both petitioner and respondent are engaged in the same
deception are effectively precluded by the appending of geographic names to the word "Lyceum." Thus, we do not
business of banking. The likelihood of confusion is accentuated in cases where the goods or business of one corporation
believe that the "Lyceum of Aparri" can be mistaken by the general public for the Lyceum of the Philippines, or that the
are the same or substantially the same to that of another corporation.
"Lyceum of Camalaniugan" would be confused with the Lyceum of the Philippines.

Alonso v. Cebu, January 31, 2002 Doctrine of secondary meaning: a word or phrase originally incapable of exclusive appropriation with reference to an
Change of name of a corporation does not result to a change of ownership of property owned by the corporation article in the market, because geographical or otherwise descriptive might nevertheless have been used so long and so
under the previous name. Thus, the title of the land can be validly reconstituted under the second name of the exclusively by one producer with reference to this article that, in that trade and to that group of the purchasing public, the
corporation. word or phrase has come to mean that the article was his produce.
While the appellant may have proved that it had been using the word 'Lyceum' for a long period of time, this fact alone
did not amount to mean that the said word had acquired secondary meaning in its favor because the appellant failed to
prove that it had been using the same word all by itself to the exclusion of others.
Industrial Refractories v. CA, October 3, 2002 More so, there was no evidence presented to prove that confusion will surely arise if the same word were to be used by
P: Industrial Refractories Corporation of the Philippines (formerly Synclaire Manufacturing Corporation) other educational institutions. Consequently, the allegations of the appellant in its first two assigned errors must necessarily
R: Refractories Corporation of the Philippines fail."
Jurisdiction of SEC over corporate names It is the SECs duty to prevent confusion in the use of corporate names not only
for the protection of the corporations involved but more so for the protection of the public, and it has authority to de- Other definition of DSM: Generic or dictionary words belong to the public domain and therefore not susceptible of private
register at all times and under all circumstances corporate names which in its estimation are likely to generate confusion. appropriation. However, when such words have through time been long associated with a particular product or
Presence of deceptive name Prohibition of law: Section 18 of the Corporation Code expressly prohibits the use of a merchandise, the manufacture or producer thereof is now allowed to exclusively appropriate and use such generic word.
corporate name which is identical or deceptively or confusingly similar to that of any existing corporation or to any the burden of proof lies upon the manufacturer or producer to show that the generic word has attained a secondary
other name already protected by law or is patently deceptive, confusing or contrary to existing laws. meaning.
Two requisites to fall under the prohibition:
1. That the complainant corporation acquired a prior right over the use of such corporate name; and
2. The proposed name is either: Indiana Aerospace University v. CHED, April 4, 2001
a) identical, or Rules:
b) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; No school may claim to be a university unless it has first complied with the prerequisites provided in Section 34 of the
or Manual of Regulations for Private Schools.
c) patently deceptive, confusing or contrary to existing law. The act sought to be enjoined by petitioner is not violative of the latters rights. Respondents Cease and Desist Order of
Test: Whether the similarity is such as to mislead a person using ordinary care and discrimination. Petitioners corporate July 30, 1997 merely restrained petitioner from using the term university in its name. It was not ordered to close, but merely
name is Industrial Refractories Corp. of the Phils., while respondents is Refractories Corp. of the Phils. Obviously, both to revert to its authorized name; hence, its proprietary rights were not violated.
names contain the identical words Refractories, Corporation and Philippines.
The only word that distinguishes petitioner from respondent RCP is the word Industrial which merely identifies a
corporations general field of activities or operations. We need not linger on these two corporate names to conclude that Philips Export BV v. CA, Feb. 21, 1992
they are patently similar that even with reasonable care and observation, confusion might arise. It must be noted that P: Philips Export BV, Philip Electrical Lamps, Inc. and Philips Industrial Development, Inc.
both cater to the same clientele, i.e. the steel industry. R: Standard Philips Corporation
In fact, the SEC found that there were instances when different steel companies were actually confused between the Held: While the corporate names of Petitioners and Private Respondent are not identical, a reading of Petitioner's
two, especially since they also have similar product packaging. Such findings are accorded not only great respect but corporate names, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC.,
even finality, and are binding upon this Court, unless it is shown that it had arbitrarily disregarded or misapprehended inevitably leads one to conclude that "PHILIPS" is, indeed, the dominant word in that all the companies affiliated or
evidence before it to such an extent as to compel a contrary conclusion had such evidence been properly associated with the principal corporation, PEBV, are known in the Philippines and abroad as the PHILIPS Group of
appreciated. And even without such proof of actual confusion between the two corporate names, it suffices that Companies. It is settled, however, that proof of actual confusion need not be shown. It suffices that confusion is probably or
confusion is probable or likely to occur. likely to occur.

Ang mga Kaanib sa Iglesia ng Diyos vs. Iglesia, Dec. 12, 2001
P: Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan
PRIMARY AND SECONDARY PURPOSE
R: Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K, sa Bansang Pilipinas. (H.S.K means Haligi at Saligan ng Determines the core business or the nature of the corporation
Katotohanan) Sec. 14. Contents of the articles of incorporation. All corporations organized under this code shall file with the
The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." in petitioner's name are, as correctly observed Securities and Exchange Commission articles of incorporation in any of the official languages duly signed
by the SEC, merely descriptive of and also referring to the members, or kaanib, of respondent who are likewise residing and acknowledged by all of the incorporators, containing substantially the following matters, except as
in the Philippines. Significantly, the only difference between the corporate names of petitioner and respondent are the otherwise prescribed by this Code or by special law:
words SALIGAN and SUHAY. These words are synonymous both mean ground, foundation or support. 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
Universal Mills Corp. v. Universal Textile Mills, July 28, 1977 which is/are the secondary purpose or purposes: Provided, That a non-stock corporation may not include a
P: Universal Mills Corp purpose which would change or contradict its nature as such;
R: Universal Textile Mills , Inc

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Provide additional sources of profits


outside of the main body of business.
Enable the corporation to invest its funds
to increase profitability in unrelated
enterprise
Purpose of purpose clause RULE: if a purpose is not stated in the AOI, any contract
1. Source of power or authority on the part of corporation or expenditure of corporate funds in pursuit thereof is
2. Limits what the corporation can do absolutely void/ultra vires; Any contract in pursuit of
primary purpose is considered in the ordinary course of
Note: The best proof of the purpose of a corporation is its articles of incorporation and by-laws. The business, needs only the approval/ratification of the
BOD.
articles of incorporation must state the primary and secondary purposes of the corporation, while the by- If the contract is in pursuit of the secondary purpose/s,
laws outline the administrative organization of the corporation, which, in turn, is supposed to insure or there must be an approval of majority vote from the
BOD and 2/3 of the OCS (because it places
facilitate the accomplishment of said purpose. Therefore, the Court brushed aside the contention that
unnecessary risk in their investment)
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. Significance of separating the primary Gala v. Ellice Agro-Industrial Corp, Dec. 11, 2003
from secondary purpose (MLR) Petitioners contend that the purposes for which Ellice and Margo were organized should be declared as illegal and
contrary to public policy. They claim that the respondents never pursued exemption from land reform coverage in good
faith and instead merely used the corporations as tools to circumvent land reform laws and to avoid estate taxes. HELD:
1. Any act, transaction or expenditure of corporate funds in pursuit of the primary purpose is considered in Purpose not illegal The best proof of the purpose of a corporation is its articles of incorporation and by-laws. The articles of
the ordinary course of business. Therefore, requires only the approval of the Board. incorporation must state the primary and secondary purposes of the corporation, while the by-laws outline the
2. On the other hand, if in pursuit of secondary purpose is not considered in the ordinary course of administrative organization of the corporation, which, in turn, is supposed to insure or facilitate the accomplishment of said
business but in furtherance of purpose other than the core purpose therefore requires approval of purpose. In the case at bar, a perusal of the Articles of Incorporation of Ellice and Margo shows no sign of the allegedly
majority votes of the Board and 2/3 of outstanding capital. illegal purposes that petitioners are complaining of. 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.
As to the validity of transfers:
The Court was convinced that the arguments raised by the petitioners are nothing but unwarranted conclusions of law.
Note: Transactions must be reasonably connected to, auxiliary to or implied to the primary or secondary Specifically, they insist that the Gala spouses never meant to part with the ownership of the shares which are in the names
purpose. Anything outside such are ultra vires transactions and therefore void. Rule on purposes as to of their children and encargados, and that all transfers of property to these individuals are supposedly void for being
stock corporation For a stock corporation, the primary or secondary purposes must be entirely different absolutely simulated for lack of consideration. However, as correctly held by the SEC En Banc, the transfers were only
relatively simulated, inasmuch as the evident intention of the Gala spouses was to donate portions of their property to their
businesses and not connected to one another for as long as they are susceptible of lawful combination.
children and encargados.
Illegal combinations :
1. Banking + insurance
Heirs of Pael v. CA, Feb. 10, 2000
2. Life + non-life insurance
There was violation of the purpose clause At the time PFINA acquired the disputed properties in 1983, its corporate name was
3. Two or more forms of transportation PFINA Mining and Exploration, Inc., a mining company which had no valid grounds to engage in the highly speculative
4. Stock dealership + stock brokerage business of urban real estate development.
5. Radio/TV + print From the Feb 2000 decision: The Court of Appeals also found it unbelievable for PFINA to acquire extremely valuable real
STOCK NON-STOCK estate in Quezon City for only P30.00 per square meter. In 1983, PFINA Mining and Exploration, Inc. was a mining company. It
- Any purpose/s for profit or gain - Primary purpose is charity, literary, scientific, changed its corporate name to PFINA Properties, Inc., only on January 22, 1998, six (6) days before filing its petition-in-
- Must be licit not contrary to laws, public policy, fraternal and similar non-profit objectives intervention with the Court of Appeals. In its petition, PFINA claimed to have bought urban real estate in 1983,
public order notwithstanding that at the time it was still a mining company which had no business dabbling in the highly speculative
- Secondary purpose/s are allowed but must not
- As to number, may enumerate as many corporate urban real estate trade.
contradict the its nature as non-profit.
purposes; if ONLY one, that defines the core - In case of religious non-stock corp, primary
business; if two or more, the ff limitations must be Uy Siuliong v. Director, Dec. 1, 1919
purpose is to propagate faith, thus cannot place
observed: HELD: A corporation may be organized under the laws of the Philippine Islands for mercantile purposes, and to engage in
secondary purpose as retail of goods.
a. Only one must be the primary purpose, all such incidental business as may be necessary and advisable to give effect to, and aid in, the successful operation and
others are the secondary purpose
- Non-stock corps or associations are further required
to submit a MODUS OPERANDI detailed plan as to conduct of the principal business. Notes:
b. All of them must be susceptible of lawful
how to achieve the primary purpose.
combination. BUT, current laws state that you cannot combine other purposes/businesses with BANKING business.
c. The ff are illegal combination: - (if they venture into profit earning business, should
Banking &Insurance not be stated in the AOI, otherwise, denied)
Life with Nonlife
One form of transportation Asuncion v. De Yriarte, Sept. 24, 1914
(Land/maritime/civil aviation) Prohibition to make a barrio a corporation: The object of the proposed corporation, as appears from the articles offered for
Power generator with power transmission or registration, is to make of the barrio of Pulo or San Miguel a corporation which will become the owner of and have the right
power distribution to control and administer any property belonging to the municipality of Pasig found within the limits of that barrio. This
Stock brokerage with stock dealership clearly cannot be permitted.
Fair Competition Act
NOTE: There is no requirement or necessity for the
secondary purposes to be related to the primary PRINCIPAL OFFICE
purpose. Sec. 14. xxx The place where the principal office of the corporation is to be located, which must be within the
BENEFIT OF SECONDARY PURPOSE: Philippines; xxx

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- It is the domicile of the corporation or the place where the principal office of the corporation is to earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier
be established or located. extension as may be determined by the Securities and Exchange Commission.

- The purpose of the requirement is to fix the residence of a corporation in a definite place, instead of
allowing it to be ambulatory for effective regulation and supervision of the corporation
- It should be stated in the AOI the specific ADDRESS which shall include the street number, street Notes:
name, barangay, municipality or city. Not exceeding 50 years
- A corporation is in the metaphysical sense a residence of the place where its principal office is No extension of term can be effected once dissolution stage has been reached, as it constitutes new business.
located as stated in the AOI. UP Class Notes: Shall exist for a period not exceeding 50 years from the date of incorporation; may be extended for
period not exceeding 50 years by an indefinite number of amendments (meaning that the corporation can virtually live
- It determines the venue of the action by or against it. forever); no extension can be made earlier than 5 years before the expiry date unless there are justifiable reasons for the
CHANGE OF ADDRESS earlier extension.
a. In case of change of address involving change of city or municipality, an amendment of Duty of State to during the term of corporation
the OI stating the new address must be filed with the SEC. GR: The State shall accord legal recognition and all rights of a corporation including the right to exist and
b. If the new address is located within the same city or municipality, file a notice with the operate.
SEC regarding the change of address indicating therein the new address. XPN: When the corporation is guilty of offending the privilege granted by the State then it is subject to
Davao Light and Power Co., Inc. v. CA, Aug. 20, 2001 involuntary dissolution, and the same is a pre-termination of term of a corporation.
A corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in the Extension of term
articles of incorporation. The Corporation Code precisely requires each corporation to specify in its articles of - Only by amendment of the Articles of Incorporation.
incorporation the "place where the principal office of the corporation is to be located which must be within the When:
Philippines." The purpose of this requirement is to fix the residence of a corporation in a definite place, instead of
a) Within the period of 5 years before the expiry date.
allowing it to be ambulatory.
b) Earlier than 5 years could be made if there is a justifiable reason as determined by the SEC.

Clavecilla Radio System v. Antillon, Feb. 18, 1967 Procedure for Extension (Sec. 37)
Settled is the principle in corporation law that the residence of a corporation is the place where its principal office is 1. Amendment of the Articles of Incorporation to be approved by a majority vote of the Board of
established. Since it is not disputed that the Clavecilla Radio System has its principal office in Manila, it follows that the Directors/Trustees (board resolution) and ratified at a meeting of stockholders representing at least 2/3
suit against it may properly be filed in the City of Manila. The fact that it maintains branch offices in some parts of the of the capital stock (or 2/3 of the members).
country does not mean that it can be sued in any of these places.
2. Written notice of the proposed action, time, place of the meeting must be addressed to each
To allow an action to be instituted in any place where a corporate entity has its branch offices would create confusion
and work untold inconvenience to the corporation. Why actions cannot be filed against a corporation in any place
stockholder as shown in the corporate books;
where the corporation maintains its branch offices? 3. Delivery of the notice to the stockholder by depositing the same to the addressee in the post office
The Court ruled that to allow an action to be instituted in any place where the corporation has branch offices, would with postage prepaid, or served personally
create confusion and work untold inconvenience to said entity. By the same token, a corporation cannot be allowed to 4. Amendments (with appropriate markings) will be submitted to the SEC attached to the original copy.
file personal actions in a place other than its principal place of business unless such a place 5. Amendment is effected before the corporate term of existence, for after dissolution by expiration of
the corporate term, no more corporate life to extend.

Sy v. Tyson Enterprises, Dec. 15, 1982 Doctrine of relation


No waiver, in this case, as to improper venue. Where the delay in effecting the amendment is due to the neglect of the officer with whom the
The petitioners, before filing their answer, filed a motion to dismiss based on improper venue. That motion application is required to be filed or to a wrongful refusal on his part to receive it, the same will be
was seasonably filed. The fact that they filed a motion for a bill of particulars before they filed their motion to dismiss did treated as having been filed before the expiry date.
not constitute a waiver of their objection to the venue. Notes: But the occurrence of a fortuitous event or force majeure may justify the doctrine. The doctrine does
When summon is served and accepted in the residence of the president of the corporation, the said corporation is
not estopped from assailing the proper venue, if residence of president is different from residence of corporation as
not apply if the delay is attributable to the corporation.
mentioned in AOI, subject to the rules on waiver or exclusively agreed venue in the contract.
Shortening of term
a) President One mode of voluntary dissolution
b) General manager Can be made ANYTIME
c) Corporate secretary
d) Treasurer RENEWAL EXTENSION
e) In-house counsel
- Addition of another 50 years - Addition of 1-50 years.
Where should summons be served?
At the principal office mentioned in the articles of incorporation.
Alhambra Cigar v. SEC, 24 S 269
HELD:
Young Auto Supply v. CA, June 25, 1993
a) Continuance of a dissolved corporation for 3 years has only for its purpose the closure of its affairs and no
The residence of a corporation is not that one mentioned in the deed of sale or any other contracts entered into, but other. The corporation is enjoined from doing business for which it was established.
that which is mentioned in the Articles of Incorporation. b) Liquidation is necessary because the Corps life has ended. For this reason alone, the corporation's life may no
longer be extended.
c) An extension, which is in fact an amendment, must be made during the life of the corporation and before the
TERM expiration of the term of existence as fixed by the Articles.
Sec. 11. Corporate term. A corporation shall exist for a period not exceeding fifty (50) years from the date of d) Moreover, the filing of the certificate of extension cannot retroact to the date of the passing of the resolution
incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the extending the life.
articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an Notes:
amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made Once the corporation is dissolved, there is really nothing to extend. The three years is allotted for liquidation
only.

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INCORPORATORS
Sec. 10. Number and qualifications of incorporators. Any number of natural persons not less than five (5) but INCORPORATORS CORPORATORS
not more than fifteen (15), 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 s stock corporation must own or be a - only those who formed the corporation - Includes those who subsequently joined
subscriber to at least one (1) share of the capital stock of the corporation. from the beginning; named in the AOI. the corp
- Refers to SH of a stock corporation
Incorporators, defined
whether natural or juridical
- They are those mentioned in the article of Incorporation as originally forming and composing the
corporation, having signed the AoI and acknowledged the same before a notary public. They have no
- Members: non-stock only natural
powers beyond those vested in them by the statute. (purely personal)
Incorporators, corporators, stockholders and members - Except: federation : labor unions
1. Incorporators: Only those stockholders or members from the beginning of the existence of a
corporation
INCORPORATING DIRECTORS
2. Corporators: Those who compose the corporation, whether as stockholders or members, whether
Sec. 14. xxx 7. The names, nationalities and residences of persons who shall act as directors or trustees until the
joined from the beginning or after incorporation
first regular directors or trustees are duly elected and qualified in accordance with this Code; xxx
3. Stockholders or shareholders: Owners of shares in a stock corporation
Number of incorporating directors
4. Members: Corporators in a non-stock corporation
1. Stock corporation: 5 - 15 only
XPN:
Number & Qualifications of Incorporators
a) Merged or consolidated corporation: 5 - 21
1. Not less than 5 but not more than 15 incorporators who must be natural persons
b) Closed corporation: 5 - 20
Reason: Artificial persons, without brain or body and existing only on paper through
2. Non-stock corporation: 5 - no limit
legislative command, cannot create other artificial persons.
Note: All the incorporating directors/trustees must be qualified as incorporators i.e. possesses 5
Exception: Rural Banks Act of 1992 (Sec. 4, RA No. 7353). Duly established cooperatives and
abovementioned qualifications
corporations primarily organized to hold equities in rural banks and/or subscribe shares of stocks of
a rural bank can be incorporators of rural banks.
Exception to the number requirement: a corporation sole which is incorporated by only one person, AUTHORIZED CAPITAL STOCK
e.g., bishop, priest, rabbi Capital stock and capital, distinguished
A corporation may become a stock holder in another corporation by subscribing or CAPITAL STOCK CAPITAL
purchasing the latters stocks for the power of one corporation to own a stock in another The amount fixed in the articles of incorporation, to be The entire property or assets of the corporation
subscribed and paid in or agreed to be paid in by the
corporation is entirely different from its power to create or itself become one of the
stockholders of a corporation, in money, property, services or
incorporators of another corporation. other means.
A cooperative cannot be a corporation because a corporation must be formed under the
Corporation Code, but it has a separate legal existence from its members. Abstract: Amount Concrete: Actual corporate property

2. Incorporators must have the capacity to enter into a valid contract Amount fixed in the articles of incorporation (where shares are Fluctuates or varies from day to day accordingly
Reason: an act of forming a corporation is contractual in nature. with par value) and is unaffected by profits and losses. as there are profits or losses or appreciation or
depreciation of corporate assets.
It must be acknowledged before a notary public (its articles of incorporation).
It is also to secure the State and all concerned individuals against the possibility of any fictitious name
being subscribed to the articles and to furnish proof of the genuineness of the signatures. When issued belongs to the stockholders It belongs to the corporation

3. Majority of the incorporators must be residents of the Philippines Always personal Real or personal property
- A corporation composed of entirely aliens may be incorporated as long as a majority of the
incorporators are residents of the Philippines, except in cases of nationalized corporations. CAPITAL STOCK LEGAL CAPITAL
Reasons for Residence Requirement: Merely an amount and remains unchanged except as outstanding shares are increased or reduced in number or
a) Because they transact business in the Philippines. amount.
b) So that they could be easily notified (as when there are special or regular meetings). Limits the maximum amount or number of shares that may be Sets the minimum amount of the corporate assets
issued without formal amendment of the articles of which for the protection of corporate creditors,
incorporation may not be lawfully distributed to stockholders.
4. Citizenship Requirement
Kinds of capital stock
- It is a necessary qualification for incorporators in corporations in which a certain percentage of the
1. Authorized capital stock
capital stock is required to be owned by Filipino Citizens. This rule applies to directors and trustees.
- The amount of capital stock as specified in the articles of incorporation.
Reason: Certain nationalized activities are exclusively reserved to Filipino Citizens like quasi-public
When shares have par value: ACS same as capital stock
corporations.
When share have no par value: No ACS, but it has capital stock the amount of which is not specified in the
AOI.
5. Each of the incorporators of a Stock Corporation must own or be a subscriber to at least one (1)
Note: Additional shares may not be issued unless the AOI are amended by vote of the stockholders.
share of the capital stock of the corporation.
Void shares: Share which exceeds the ACS; no rights whatsoever
Reason: The presumption is that where an incorporator has a pecuniary interest in the corporation,
2. Subscribed capital stock
he will be concerned with the management of its affairs.
- Amount of capital stock subscribed, whether fully paid or not.

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- It connotes an original subscription contract for the acquisition by a subscriber of unissued c) Where the capital stock is divided into par value shares and no par value shares: The requirement as to
shares in a corporation. par value shares is as indicated above and for the no par value shares, the 25% is based on the number
3. Paid-up capital stock of the said no par value shares.
- That portion of the subscribed or outstanding capital stock that is actually paid. 2. Minimum Paid-Up Capital:
- Basically same as "actual capital stock" At least 25% of the total subscription must be paid upon subscription but must not be less than P5,000.00.
MSCI-NACUSIP v. NWPC, March 3, 1997 Reason: To give assurance to the investing public dealing with the new corporation that it is financially
Discussions about paid-up capital: By express provision of Section 13, paid-up capital is that portion of the authorized and actually able to operate and undertake to do business as they arise from the start of its operations.
capital stock which has been both subscribed and paid. To illustrate, where the authorized capital stock of a XPN: When special laws require higher minimum capitalization such as:
corporation is worth P 1 million and the total subscription amounts to P250,000.00, at least 25% of this amount, namely, i. Insurance Corporations P5 million
P62,500.00 must be paid up per Section 13. The latter, P62,500.00, is the paid-up capital or what should more
ii. Pawnshop established as a corporation P100,000.00
accurately be termed as "paid-up capital stock."
In the case under consideration, there is no dispute, and the Board even mentioned in its August 17, 1993 iii. Financial Intermediary applying for authority to perform quasi-banking functions P50 million
Decision, that MSCI was organized and incorporated on February 15, 1990 with an authorized capital stock of P60
million, P20 million of which was subscribed. Of the P20 million subscribed capital stock, P5 million was paid-up. This Summary of percentages
fact is only too glaring for the Board to have been misled into believing that MSCI'S paid-up capital stock was P64 1. 100% Filipino owned:
million plus and not P5 million. The losses incurred by the company is way beyond its paid-up capital making it a) Mass media (radio, TV, and printed)
qualified to be a distressed employer. b) Rural Banks 100% of its capital stock
c) Rice and corn industry
4. Outstanding capital stock d) Security, watchman, and detective agency
- The portion of the capital stock which is issued and held by persons other than the corporation 2. 70% Filipino owned
itself. a) Advertising Industry
Code: The total shares of stock issued to subscribers or stockholder, whether or not fully or partially paid (as b) Banks other than rural banks and new banks established by consolidation of branches or agencies of
long as there is a binding subscription agreement), except treasury shares. foreign banks in the Philippines
5. Legal Capital c) Private development Banks
- Amount equal to the aggregate par value and/or issued value of the outstanding capital stock. d) Savings and Loan associations
- Excess not part of legal capital: When par value shares are issued above par, the premium or excess 3. 60% Filipino owned
is not to be considered as part of the legal capital. a) Financing companies - 60 % of its capital stock
- All legal capital if no par value shares: In case of no par value shares, the entire consideration b) Fishing and business activity relating to fishing Industry 60% of its capital stock
received forms part of legal capital and shall not be available for distribution as dividends. c) Exploration, Development, and Utilization of Natural Resources
d) Owners of lands
Subscription contract e) Operation of Public Utility
Contract between the corporation (issuer) and another (subscriber) whereby the latter agrees to f) Educational institutions other than those established by religious groups
take and pay for a specified number of shares whether fully paid or not. g) Any business reserved by Congress
Special kind of special contract whereby the only object is share of stock (originally being 4. Majority Owned by Filipinos
disposed of) a) Investment House
Minimum requirements for incorporation Proprietary rights arising from ownership of share of stocks
Sec. 12. Minimum capital stock required of stock corporations. Stock corporations incorporated under this Code
1. Dividend rights - right to the surplus profit
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. 2. Voting rights - right to participate in the management of the corporation
3. Asset rights
Minimum Capital Stock
GR: No minimum capital stock is required for stock corporations incorporated under the As to authorized capital stocks
Corporation Code as long as the paid-up capital is not less than P5,000.00
XPN: Filipino percentage ownership requirement regarding corporate capital in nationalized a) Max shares
corporations or when special laws state otherwise. b) IF one type only: Mere number of shares to its maximum
c) IF mix shares: Max number of shares for each class
Minimum Subscription and Paid-Up Capital for Incorporation example
1. Minimum Subscribed Capital: At least 25% of the authorized capital stock as stated in the Articles of ACS - P10M consisting of 1M par value shares
Incorporation must be subscribed at the time of incorporation;
Computation of the 25% subscription requirement:
a) Where capital stock consists of par value shares: The minimum subscription should be 25% of the
amount of the authorized capital stock or 25% of the aggregate value of all the shares of stock the
ACS - P10M no par value shares, value to be determined by ______.
corporation is authorized to issue. In par value stock corporations, the percentage subscription
Who must determine the par value share?
requirement shall always be based on the amount of the authorized capital stock irrespective of the
GR: Expressly stated in AoI
class, number, and par value of the shares.
XPN: BoD + majority of ACS holders.
b) Where the capital stock consist of no par value shares: The 25% requirement shall be computed on the
basis of the entire number of authorized shares. Corporations whose shares have no par value have no
authorized capital stock the issued price of no par value shares need to be fixed in the articles of
As to subscribed capital stocks
incorporation.
Rule: At least 25% must be subscribed

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Subscribed: Disposed of and in the hands of third persons, whether paid or unpaid. The ownership of share of stock confers no immediate legal right or title to any of the
Need of subscription contract: It is a contract between the corporation and persons where the latter agreed property of the corporation
to pay for shares. 2. Shares of stock constitute property distinct from the capital or tangible property of the corporation
and belong to the different owners.
Who are initial subscribers? Incorporators!
3. Incorporeal in nature, the shares are personal property of the stockholder (except treasury stock
Reason: They need to own at least one share of stock.
which belongs to the corporation)
As to paid up capital stocks
Rule: At least 25% of the subscribed capital stocks 4. They are in the nature of choses in action, but not in a strict sense.
Minimum PCS requirement: Shares do not constitute an indebtedness of the corporation to the shareholder and are, therefore,
GR: No minimum for paid up capital stock but must not be less than 5K. not credits as to make the stockholder a creditor of the corporation.
XPN: If special law sets minimum PCS for a business 5. A share of stock only typifies a proportionate or aliquot part of the corporation's property, or the right
to share in its proceeds to that extent when distributed according to law.
SHARES OF STOCK Certificate of stock
Section 6. Classification of shares. The shares of stock of stock corporations may be divided into classes or series - A written acknowledgment by the corporation of the interest, right, and participation of a
of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated
in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and person in the management, profits, and assets of a corporation.
issued as preferred or redeemable shares, unless otherwise provided in this Code: Provided, further, That there shall
always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may .
have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That CLASSIFICATIONS OF SHARES OF STOCK
banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted
GR: The shares of stock in a corporation may be divided into classes or series of shares, or both, any
to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the of which classes or series of shares may have such rights, privileges or restrictions thus must be stated
corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the in the AoI in order to be valid.
articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock XPNs:
may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, a) No share may be deprived of voting rights except those classified and issued as "preferred" or
may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and "redeemable" shares.
conditions shall be effective upon the filing of a certificate thereof with
b) There shall always be a class or series of shares which have complete voting rights.
the Securities and Exchange Commission.
c) Any or all the shares or series of shares may have par value or have no par value as may be
Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such provided for in the AoI, except that banks, trust companies, insurance companies, public
shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value utilities, and building and loan associations shall not be permitted to issue no par value shares of
may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire stock.
consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be Everything is possible
available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal
Except:
requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each 1. Par Common non voting
share shall be equal in all respects to every other share. Where the articles of incorporation provide for non-voting shares 2. No par common non voting
in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following 3. No par preferred/redeemable voting
matters: 4. No par preferred/redeemable non voting
1. Amendment of the articles of incorporation; REASON:
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;
Common shares must always be voting
4. Incurring, creating or increasing bonded indebtedness; Preferred or redeemable maybe deprived of voting rights
5. Increase or decrease of capital stock; Preferred/redeemable must always be par
6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate Therefore:
funds in another corporation or business in accordance with this Code; and Preferred/redeemable must always be par
8. Dissolution of the corporation. Preferred/redeemable may be deprived of voting rights
Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act
All common shares are voting shares
as provided in this Code shall be deemed to refer only to stocks with voting rights.

COMMON AND PREFERRED SHARES, DISTINGUISHED


Stock or share of stock, defined
1. Common shares
One of the units which the capital stock is divided . -Shares which do not enjoy any preference, thus rights by owners are purely STATUTORY.
- One which entitles the holder thereof to a pro rata division of profits, if there are any, and in its
CAPITAL STOCK SHARE OF STOCK assets upon dissolution, without any preference or advantage in that respect over other
Used in a collective sense to signify the whole body of shares Commonly used in a distributive sense to refer to stockholders or class of stockholders but equally with all other stockholders except preferred
of stock in the corporation. the stock in the hands of the stockholders and, stockholders.
therefore, belong to them. - Its holders stand upon equal footing, without extraordinary rights or privileges.
- Common shares have complete voting rights.
Nature of share of stock o They cannot be deprived of said rights except as provided by law.
1. Each share merely represents a distinct undivided share or interest in the common property of the -A corporation may issue more than one class of common stock e.g. "Class A," "Class B"
corporation.
2. Preferred shares

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-One with a stated par value which entitles the holder thereof to certain preferences over the 3. Cumulative Participating Preferred Share
holders of common stock. - The holder is entitled not only to dividends in arrears but also, after receiving his preferred
-These entitle the shareholder to some priority on distribution of dividends and assets over those share of dividends, to participation with the holders of common stocks in the remaining
holders of common shares. profits.
-Distribute the dividends and assets first as mentioned in the AoI with regard to preferred shares, - Preference among preferred shares
then whatever is left must be distributed to owners of common shares. Preference may be in form - Rule: Preferred shares of stock enjoy the same preferences or privileges.
of: - This is true when AOI is silent about such classification.
1. Sum of money
2. Percentage Other rules regarding preferred stockholders
Rule: Preferred and redeemable shares may be issued only with a stated par value. 1. Preferences granted to preferred stockholders do not give them a lien upon the property of
There may be more than one class of preferred shares e.g. "first preferred," "second preferred" the corporation.
Preference, basis: Those stated in AOI 2. Stock cannot be issued with a fixed interest instead of dividends inasmuch as this will make
Guaranteed stock: Synonymous with preferred stock on which the payment of dividend is the contract of subscription one of loan.
guaranteed. 3. The dividends payable by the corporation may be in the nature of interest.
Distinction with preferred stock: GS is entitled to arrears in dividends, while PS is not. Note: In number 2, fixed interest is prohibited because the preferred shareholder must also
Interest bearing stock: The corporation agrees absolutely to pay interest before dividends are assume the risk of profit or loss. Whereas in this number, there is already a profit and dividends is
paid to common stockholders just made payable in the form of interest.
When legal: If construed as requiring payment of interest as dividends from net earnings or 4. Dividends are, in terms, guaranteed.
surplus only. Does not make the shareholders creditors as they are entitled to dividends only when there
Kinds of preferred shares are profits out of which dividends may be declared .
1. Preferred shares as to assets: Shares which gives the holder preference in the distribution of the Effect of guarantee: Makes the dividends cumulative, making the profits of one year make up
assets of the corporation in case of liquidation. for the deficiencies of the preceding year or years.
Note: Cumulative and non-cumulative preferred shares can also be applied here. 5. It is immaterial how or where the holder obtained his stock since the preference belongs to the
a) Participating preferred shares stock and not to the stockholder.
- A share which gives the holder thereof not only the right to receive the stipulated dividends Thus, the fact that preferred stockholders were formerly corporate creditors gives them no greater
but also to participate with the holders of common shares in the remaining profits pro rata right as against creditors.
after the common shares have been paid the amount of the stipulated dividend at the Limitations regarding issuance of preferred shares
same preferred rate. 1. Preferred shares deprived of voting rights in the AOI shall still be entitled to vote on the following
-Entitled to participate with the common shares in excess distribution matters: (although they shall not be entitled to vote on other matters)
a) Amendment of the articles of incorporation;
b) Nonparticipating preferred shares b) Adoption and amendment of by-laws;
-It is a share which entitles the holder thereof to receive the stipulated preferred dividends and c) Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of
no more. The balance, if any, is given entirely to the common stocks. the corporate property;
- Not entitled to participate with the common shares in excess distribution d) Incurring, creating or increasing bonded indebtedness;
Right of stockholders to assets of corporation e) Increase or decrease of capital stock;
a) During lifetime of corporation: Stockholders has no right over the assets f) Merger or consolidation of the corporation with another corporation or other corporations;
b) When corporation is dissolved: Stockholders acquire rights over the assets PROVIDED THAT g) Investment of corporate funds in another corporation or business in accordance with this
there is residual assets after paying the corporation's liabilities. Code; and
c) How payment is made? Liquidating dividends h) Dissolution of the corporation.
2. Preferences of the preferred shares must not be violative of the provisions of the Code.
2. Preferred shares as to dividends: Shares which are entitled to receive dividends on said share to 3. Preferred shares may be issued only with a stated par value.
the extent agreed upon before any dividends at all are paid to the holders of common stock. 4. The board of directors may fix the terms and conditions of preferred shares of stock or any
Note: Participating and non-participating preferred shares can also be applied here. series thereof only when:
a) Authorized by the AOI; and
a) Cumulative preferred shares b) Such terms and conditions shall be effective upon filing a certificate thereof with the SEC.
o Share which entitles the holder thereof not only the payment of current Concurrence of stockholders not required: No need for concurrence of 2/3 of the
dividends but also to dividends in arrears. outstanding capital under Sec. 16.
o Rule: If the stipulated dividend is not paid in a given year, it shall be added to the No blanket authority for BOD: In fixing the terms and conditions of BOD, they must state the
dividend which shall be due the following year. privileges, preferences, restrictions, or rights of the preferred shares.
o Thus, the accumulated dividends must be paid to the holder of said preferred
share before any dividend may be paid to the holders of common stock. PAR VALUE AND NO PAR VALUE SHARES, DISTINGUISHED
b) Non-cumulative preferred shares 1. Par value shares
o Share which entitles the holder thereof to the payment of current dividends only - Shares with a value fixed in the articles of incorporation and the certificates of stock.
in preference to common stockholders. Purpose: The par value fixes the minimum issue price of the shares.
o Rule: If dividends are not declared in a given year, the right to the dividends for GR: A corporation cannot sell less than the par value but a shareholder may sell the same less than
that particular year is extinguished. the par value because it is his.
o There is no need to make up for undeclared dividends XPN: Corporation can sell REISSUED TREASURY SHARES even below par values.
o May a corporation issue shares with different par values? YES.

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o Shares sold below its par value is called watered stocks. b) Adoption and amendment of bylaws
o Watered stocks are subject to Sec. 65 liability; you can hold responsible corporate officers c) Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of
liable. the corporate property
d) Incurring, creating or increasing bonded indebtedness
2. No par value shares e) Increase or decrease of capital stock
These are shares having no stated value in the article of incorporation. f) Merger or consolidation of the corporation with another corporation or other corporations
A no par value share has no par value but it has always an issued value, which is the g) Investment of corporate funds in another corporation or business in accordance with this
consideration fixed by the corporation for its issuance. Code
Note: BoD can change the issued value of NPV shares unlike PV shares. h) Dissolution of the corporation.
Note further that the law PROHIBITS the selling of stocks WITHOUT consideration.
NPV shares represent only an aliquot part of the whole number of such shares of the issuing FOUNDERS SHARES Section 7.
corporation and NOT proportionate interest in the capital stock measured by value Founders shares. Founders shares classified as such in the articles of incorporation may be given certain
Limitations: rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to
a) Shares which are no par value, cannot have an issued price of less than P5.00; vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five
b) The entire consideration for its issuance constitutes capital so that no part of it should be (5) years subject to the approval of the Securities and Exchange Commission. The five-year period shall
commence from the date of the aforesaid approval by the Securities and Exchange Commission.
distributed as dividends;
Founders' shares, defined
c) They cannot be issued as preferred stocks;
Shares issued to organizers and promoters of a corporation in consideration of some supposed
d) They cannot be issued by banks, trust companies, insurance companies, public utilities and
right or property.
building and loan association;
Such share usually share in profits only after a certain percentage has been paid upon the
e) The articles of incorporation must state the fact that it issued no par value shares as well as
common stock BUT are often given special privileges over the other stock as to voting and as to
the number of said shares;
division of profits
f) Once issued, they are deemed fully paid and nonassessable.
But if an exclusive right to vote and be voted for as director is granted, it needs:
o This presumption is rebuttable.
a) The approval of the SEC, and
o Non-assessable: Cannot be declared delinquent (if really not paid), thus it eliminates the risk
b) Cannot exceed 5 years from the date of approval.
of delinquency.
o This limitation is non-extendible.
o Thus, after the 5-year limitation period, founders shall have equal rights with the holders of
VOTING AND NON-VOTING SHARES, DISTINGUISHED
common shares.
1. Voting shares
o Notes: Preferred shares are not affected by this limitation. Their status remains even after the
Share with right to vote
expiration of 5-year period.
Each common share shall be equal in all respect to every other common share. Thus,
prohibited acts:
REDEEMABLE SHARES Section 8
i. Issuing multiple voting and non-voting common shares
Redeemable shares. Redeemable shares may be issued by the corporation when expressly so provided
ii. Limiting the maximum number of votes per stockholder irrespective of the number of
in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of
shares he holds. a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation,
Preferred and redeemable shares: May be deprived of voting rights and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and
Founder's shares: May be given exclusive right to vote and be voted for in the election of directors conditions must also be stated in the certificate of stock representing said shares.
for a limited period in which case voting common stocks will have no right to vote for directors. Redeemable shares
Note: Whenever a vote is necessary to approve a particular corporate act, such vote refers only to Shares, usually preferred, which by their terms are redeemable at a fixed date or at the option
stocks with voting rights except those mentioned under Sec.6, par.6. of:
o Rule: "One share, one vote" and NOT "one holder, one vote" a) The issuing corporation or
b) The stockholder or
2. Non-voting shares c) Both at a certain redemption price.
Share without right to vote
There must be EXPRESS denial of voting rights in AoI; otherwise, they are considered as voting Redemption
shares. It is the repurchase, the reacquisition of stock by a corporation which issued the stock in
Rules: exchange for cash or property, whether or not the acquired stock is cancelled, retired or held in
i. If stock is originally issued as voting stock, it may not thereafter be deprived of the right to vote the treasury.
without the consent of the holder. Effects of redemption:
ii. The law only authorizes the denial of voting rights in the case of redeemable shares and a) Redemption, in a sense, is a repurchase of the stock for cancellation.
preferred shares, provided that there shall always be a class or series of shares which have b) Reacquired redeemable shares are considered retired and no longer issuable, except if provided
complete voting rights. otherwise by AoI.
iii. Where non-voting shares are provided for, the Code requires that there shall always be a class
or series of shares which have complete voting rights. Limitations on redeemable shares
iv. Only preferred and redeemable shares may be denied the right to vote. 1. Redeemable shares may be issued only when expressly provided for in the Articles of
Instances where holders of non-voting shares are allowed to vote Incorporation;
These redeemable and preferred shares, when such voting rights are denied, shall nevertheless Note: Common shares are never "redeemed."
be entitled to vote on the following fundamental matters: (AASIIMID) Redemption optional with corporation: The redemption rests entirely with the corporation, and the
a) Amendment of articles of incorporation stockholder is without right to either compel or refuse the redemption of his stock.

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Status of TS on resale differs from that of newly created shares which cannot be issued for less
2. The terms and conditions affecting such shares must be stated both in the articles of Incorporation than the legal minimum consideration.
and in the certificates of stock representing such shares;
Effect of purchase or acquisition
3. Redeemable shares may be deprived of voting rights in the Articles of Incorporation, unless If purchased from stockholders: The transaction in effect is a return to the stockholders of the
otherwise provided in the Corporation Code. value of their investment in the company and a reversion of the shares to the corporation.
The corporation must have surplus profits with which to buy the shares so that the transaction will
4. Redeemable shares may be redeemed regardless of the existence of unrestricted retained not cause impairment of the capital.
earnings provided that the corporation has, after such redemption, sufficient assets in its books to If acquired by donation from the stockholders: The act would amount to surrender of their stock
cover debts and liabilities inclusive of capital stock. without getting back their investments that are, instead voluntary given to the corporation.
Unrestricted retained earnings: These are surplus profits not subject to encumbrance. Treasury shares need not be sold at par or issued value but may be sold at the best price
obtainable, provided it is reasonable.
5. Redemption may not be made where the corporation is: Subject to tax: The sale of treasury shares should be treated as a sale of ordinary property of
a) insolvent; or the corporation.
b) if such redemption would cause insolvency or inability of the corporation to meet its debts as
they mature. Limitations on treasury shares
6. Corporation who issued redeemable shares must set up and maintain a sinking fund to cover the 1. They may be reissued or sold again as long as they are held by the corporation as treasury
redemption price of the redeemable shares at specified dates in the future shares.
2. Cannot participate in dividends.
TREASURY SHARES Section 9 3. It cannot be represented during stockholders meetings.
Treasury shares. Treasury shares are shares of stock which have been issued and fully paid for, but 4. The amount of URE equivalent to the cost of treasury shares being held shall be restricted from
subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some being declared and issued as dividends.
other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of Note: When treasury shares are sold below its par or issued value, there can be no watering
directors. of stock because such watering contemplates an original issuance of shares.

Other classifications of stocks


Treasury shares 1. Convertible shares
Shares which have been lawfully issued by the corporation and fully paid for and later A share that is changeable by the stockholder from one class to another at a certain price
reacquired it either by: (PROF-D) and within a certain period.
a) Purchase GR: Stockholder may demand conversion at his pleasure.
b) Redemption XPN: Otherwise restricted by the articles of incorporation.
c) Donation Convertibility of Shares:
d) Forfeiture or i. Preferred to Common in the absence of an express provision in the AoI as to that
e) Other lawful means. convertibility, preferred shares cannot be converted to common.
To put simply, these are shares reacquired by the corporation. They are called treasury shares ii. No Par Value to Par Value allowed by SEC provided there would be no change in the
because they remain in the corporate treasury until reissued. More importantly, they have no: stockholders percentage interest in the total assets of the corporation.
a) Voting Rights
b) Right to dividends. 2. Fractional share
Note: Treasury shares are not retired shares. They do not revert to the unissued A share with a value of less than one full share
shares of the corporation but are regarded as property acquired by the 3. Shares in escrow
corporation which may be reissued or resold at a price to be fixed by the Board of Subject to an agreement by virtue of which the share is deposited by the grantor or his agent
Directors. with a third person to be kept by the depositary until the performance of certain condition or
So how would you retire treasury shares? By decreasing the capital stock of the the happening of a certain event contained in the agreement.
corporation in accordance of Sec. 38 for the purpose of eliminating the treasury 4. Overissued stock
shares. It is a stock issued in excess of the authorized capital stock; it is null and void.
Since they do not lose their status as issued shares, they cannot be treated as new
issues when disposed of or reissued. 5. Street certificate
Treasury shares are not liability of corporation: Treasury shares are issued shares but being in the It is a stock certificate endorsed by the registered holder in blank and the transferee can
treasury, they do not have the status of outstanding shares in the sense that they do not command its transfer to his name from issuing corporation.
constitute a liability of the corporation.
6. Promotional share
Treasury shares vs. authorized but unissued shares This is a share issued by promoters or those in some way interested in the company, for
The acquisition of the former does not reduce the number of issued shares or the amount of incorporating the company, or for services rendered in launching or promoting the welfare of
capital stock the company.
Their sale does not increase the number of issued shares or the amount of stated capital.
Are classes of shares infinite?
Treasury shares vs. retired or cancelled shares Yes. There can be other classifications as long as they are indicated in the AOI, stock
Former may be sold, the latter has disappeared altogether. certificate and not contrary to law.

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Who may classify shares then? As to non-stock corporations


a) Incorporators: the classes and number of shares which a corporation shall issue are first 1. The amount of its capital or money contributed or donated by specified persons
determined by the incorporators as stated in the articles of incorporation filed with the SEC. 2. The names, nationalities, and residences of the donors or contributors
b) Board of directors and stockholders: After the corporation comes into existence; they may 3. The respective amount contributed by each.
be altered by the board of directors and the stockholders by amending the articles of
incorporation pursuant to Sec. 16. Where shares with par value
Doctrine of equality of shares: If shares have only one par value: Authorized capital stock would be the number of shares multiplied
Where the Articles of Incorporation do not provide for any distinction of the shares of by the par value.
stock, all shares issued by the corporation are presumed to be equal and enjoy the same If different classes of shares with different par value: Authorized capital stock would be the total of the
rights and privileges and are also subject to the same liabilities (Sec. 6). products of the number of shares in each class multiplied by the par value of such class of shares.

SUBSCRIBERS Where shares without par value, requirements:


1. Such fact must be stated in the AOI.
Subscription requirement, explained
2. The number of shares into which said capital stock is divided must be stated since no amount of
Section 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. At
capital stock is specified in the articles
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 (25%) per cent 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 Where shares with par value and without par value, requirements
of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, 1. The AOI must state such fact
however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. 2. The number of shares into which the capital stock is divided
Sec. 14. x x x 8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the 3. The number of shares with par value and their par value
Philippines, the number of shares into 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
4. The number of shares without par value
each on his subscription, and if some or all of the shares are without par value, such fact must be stated; x x x
Acknowledgment, signature and verification; rules
25-25 RULE 1. Each of the signatories must acknowledge his signature to the articles and there is no corporation de
When you form a corporation, at least 25% of the authorized capital stock must be subscribed and at least 25% of jure unless acknowledged by the minimum number required by law.
the subscription must be paid. 2. Unless otherwise provided by the statute, the acknowledgment of the signatures of the incorporators
You can form a subsidiary where 5 individuals will subscribe to 1 share each to qualify for the boardyou must own is not a part of the AoI.
at least 1 share to be an incorporator, the rest of the shares will be subscribed by the holding corporation and that 3. Purpose of law in requiring acknowledgment
will satisfy the 25-25 rule, because that holding corporation paid for the subscription. In computing 25-25 rule, a) To secure the State and all concerned against the possibility of any fictitious name being
subscriptions made by a corporation will be included. Corporations can be subscribers, only that they cannot be
incorporators.
subscribed to the articles
b) To furnish proof of the genuineness of the signatures
Note: It is not required for purposes of incorporation that each and every subscriber shall pay 25% of his
subscription as long as the 25% of the total subscription is paid.
Note: The minimum 25% paid-up requirement applies only to par value shares TREASURER-IN-TRUST
Reasons: A subscriber to no par value shares must pay in full his subscription. - The person elected by the subscribers as Treasurer of the corporation at the time of the incorporation
In no case shall the paid-up capital be less than P5K. Other considerations who is named as such in the AoI and who has been authorized to receive for and in the name of the
a) Violation of the provision may subject the erring incorporators and/or directors for prosecution. corporation, all subscriptions, fees, contributions or donations paid of given by the subscribers or
b) Full payment of subscription by foreigners members.
o Reason: Difficulty in compelling them to pay when outside the country - Not a regular treasurer
c) The number of shares subscribed, the amount subscribed, and the amount paid by each - The treasurer who signs the treasurers affidavit in Section 15.
stockholder must be stated in the AOI.
When 25-25 rule is applicable: SPECIAL PROVISIONS
a) During the incorporation period Section 15. x x x No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less
b) In case of increase of the authorized capital stock than the required percentage of the capital stock as provided by existing laws shall be allowed or
permitted to be recorded in the proper books of the corporation and this restriction shall be indicated in all
Subscription of corporations stock certificates issued by the corporation.
They may subscribe initially to the capital stock of another proposed corporation but their
subscriptions cannot be taken into consideration in the computation of 25%. 1. "No Transfer" Clause: Prohibition of transfer of stock or interest which will reduce the ownership of
Note: It is the policy of SEC to require corporations to pay their subscriptions in full. Filipino citizens to less than the required percentage of the capital stock as provided by existing laws
Reason: While a corporation has an unlimited capacity to contract obligations, it has only a limited Must be stated not just in AoI but also in all certificate of stock.
capacity to pay. 2. Expanded Pre-emptive Rights: Pre-emptive right is the stockholders right to SUBSCRIBE to all issues or
Summary of contents of AOI as to capital stock/capital and subscribers/contributors disposition of shares of any class in proportion of his stockholdings.
As to stock corporations 3. Right of first refusal
1. The amount of its authorized capital stock in pesos 4. High quorum and/or high voting requirements
2. The number of shares into which it is divided High Quorum/High Voting Requirement (Poison Pill)
3. The par value in pesos of each share - Maybe stated in the AOI that unanimous votes are required instead of 2/3 to discourage third
4. The names, nationalities, and residences of the original subscribers
parties to acquire share and taking control of the corporation.
5. The amount of capital stock subscribed and paid by each on his subscription; and
6. If some or all of the shares are without par value, such fact. Golden Parachute (Poison Pill)

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- In case there is a change in the management, the existing management must be paid 800% of their c) Rules and regulations applicable to such corporations
current compensation. d) All laws applicable thereto, including the Corporation Code the provisions of which apply suppletorily
DOCUMENTS ACCOMPANYING THE ARTICLES
1. Treasurer's affidavit Procedure in amending Articles of Incorporation
2. Favorable recommendation from government agency regulating the business(regulator) 1. Board of Directors convene to a meeting and make a proposal for amendments to be converted
"Certificate of Authority to Register" into a board resolution;
Business regulated by law: Not required to all businesses as it is only required when business or
purpose is regulated by law. 2. The resolution stating such amendments must be approved by a majority vote of the Board of
3. Bank certificate or any proof of payment of paid-up capital stocks (when in doubt) Directors/Trustees;
In whose name shall the bank account be opened for the purpose of payment of paid up capital
stock? Treasurer in trust 3. The approved resolution must be submitted to the stockholders for ratification;

AMENDMENT AND/OR REJECTION OF ARTICLES OF INCORPORATION 4. The required vote for ratification is the approval of stockholders representing at least 2/3 of the
Section 16. Amendment of Articles of Incorporation. Unless otherwise prescribed by this Code or by special law, and outstanding capital stock or 2/3 of the members (for non-stock); a meeting to that effect may not
for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority be necessary since they can just submit their written assent representing at least 2/3 of the
vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two- outstanding capital stock.
thirds (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 two-thirds (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 be
Note: Written assent is not allowed in
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 i. Extending or shortening the corporate term (Sec.37);
or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the ii. Decreasing or increasing the capital stock and
stockholders or members, shall be submitted to the Securities and Exchange Commission. The amendments shall take iii. In close corporations (Sec. 103), a meeting of the stockholders is always necessary.
effect upon their approval by the Securities and Exchange Commission or from the date of filing with the said 5. The articles, as amended, must be indicated by underscoring the change or changes made, a
Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.
Section 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. The Securities and
copy thereof must be certified under oath by the corporate secretary and the fact that it has been
Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not duly approved by the required vote of the stockholders/members.
in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a 6. Submission to the SEC; and
reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The
following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form 7. It takes effect upon approval by the SEC or from the date of filing if not acted upon within 6 months
prescribed herein;
2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to
if the delay is not attributable to the corporation.
government rules and regulations; This rule does NOT apply if the amendment is intended to dissolve the corporation. You have to
3. That the Treasurers Affidavit concerning the amount of capital stock subscribed and/or paid is false; wait for the approval of the SEC.
4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been There can be no presumption that when 6 months have already lapsed, it is deemed approved.
complied with as required by existing laws or the Constitution.
-Reason: dissolution must be made at the consent of the State.
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,
Non-amendable facts in the Articles of Incorporation
educational institutions, and other corporations governed by special laws shall be accepted or approved by the -Those matters referring to facts existing as of the date of the incorporations such as:
Commission unless accompanied by a favorable recommendation of the appropriate government agency to the a) Names of incorporators;
effect that such articles or amendment is in accordance with law. b) Names of original subscribers to the capital stock and their subscribed and paid-up
capital;
Corporate charter c) Treasurer elected by the original subscribers;
- An instrument or authority from the sovereign power bestowing the right or privilege to be and act d) Members who contributed to the initial capital of a non-stock corporation;
as a corporation. e) Date and place of execution of the AOI;
- Differentiate with franchise: f) Witnesses to the signing and acknowledgment of the AOI
Charter is the instrument bestowing such right and privilege while
franchise is the right and privilege itself of being a corporation. REQUISITES FOR AMENDMENT (MLR LECTURE)
A. Majority Vote of the BOD based on the number stated in he AOI.
Components of corporate charter B. Concurrence by atleast 2/3 of the ocs or membership.
1. Corporations formed under general incorporation law How to obtain the 2/3 votes:
a) The law under which it is organized a. MMERE WRITTEN CONSENT
b) Articles of incorporation Dispenses any required meeting
c) By-laws Done by MAILED BALLOTS provided that the meeting is not mandatory
d) All applicable provisions of the Constitution and the general laws of the State in force at the time the i.e. Change of name
corporation is incorporated which are as much a part of its charter though expressly written therein.
b. MEETING CALLED FOR THAT PURPOSE
2. Corporations formed under special laws With prior notices sent to the stockholders or members of the board (because
a) The special law which creates the corporation it changes the nature of their investment)
b) Executive orders of the President

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NOTE: if the corporation is a public company, the notice must be published in Asuncion v. De Yriarte, 28 Phil. 67 (1914)
newspaper of general circulation When the proposed articles show that the object is to organize a barrio into a separate corporation for
i.e. the purpose of taking possession and having control of all municipal property within the incorporated
change of corporate purpose barrio and administer it exclusively for the benefit of the residents, the object is unlawful and the articles
can be denied registration.
increase or decrease of capital stock
adoption amendment of the By Laws
Sale o all or substantially all of the assets Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003)
It is well to note that, if a corporations purpose, as stated in the Articles of Incorporation, is lawful, then the
Incurring bonded indebtedness
SEC has no authority to inquire whether the corporation has purposes other than those stated, and
Merger or consolidation mandamus will lie to compel it to issue the certificate of incorporation.
Investment in another corporation
Dissolution Revocation of certificate of registration of corporations
They are purely proprietary decisions left to the SHs or Effectivity: SEC order of revocation is immediately effective.
members Effects of revocation
The changes are so fundamental; the SHs assent must be a) The subject corporation's existence is terminated at that very instant and is deemed terminated
obtained and cannot be left to the BOD alone. until the particular revocation order is lifted.
b) It may not continue to operate its business and issue shares
MLR Lecture c) It may, however, sell its assets pursuant to Sec. 122 but it may only purchase property if such
Assuming that all the provisions that govern the relationship between and among the Incorporators are purchase will be consistent with liquidation.
present, the AOI must be signed by all the incorporators as a signification of their agreement. If one of the d) It may sue for purposes of recovering its property.
listed incorporators in Par 5 cannot sign, his name must be removed. e) It may not, however, allege in its complaint in court that it is a corporation duly organized and
existing under the Philippine laws.
Then have it NOTARIZED (to convert it into a public document)as it is a contract of conveyance of their Lifting of Order of Revocation, effect: The lifting restores the corporation to its original status as
contributions. if there was no revocation order issued against it, with the capacity to exercise all the powers a
duly registered corporation under the Corporation Code.

Grounds for suspension/revocation of certificate


POWER OF THE SEC 1. Fraud in procuring the certificate of incorporation (ex. Paid-up capital);
- Begins only from the moment that the draft of the AOI has been submitted to it. However, the SEC 2. Serious misrepresentation causing great damage and prejudice to the public;
will require the following: 3. Refusal to comply with a lawful order of the SEC;
a. Treasurers Affidavit 4. Continuous inoperation for a period of at least 5 years;
b. Favorable recommendation of the government agency regulator 5. Failure to file by-laws within the required period; and
c. Bank certificate(named to the TIT) in case of doubt (proof of payment of the paid up 6. Failure to file required reports in appropriate forms as determined by the SEC within the prescribed
capital) period.
- The SEC has discretionary power to exercise when all the documents required are present.
FRANCHISES OF A CORPORATION
SUBSCRITION CONTRACT 1. Primary franchise / CERTIFICATE OF REGISTRATION
- The best proof of the subscribed capital stock - Right or privilege granted by the State to individuals to exist and act as a corporation after its
- Parties: incorporators/Subscribers and promoters incorporation. It is inalienable. It is a part of the corporation and cannot be sold or assigned;
- The name of the corporation already appears in this contract. otherwise, a corporation would be created without the consent of the legislature.
2. Secondary franchise
Grounds for disapproval of Articles of Incorporation - "Certificate of authority to engage in ________ business"
1. Not substantially in compliance with the form prescribed by the Code; - A corporation may start its operation only from the moment of issuance thereof.
2. Purpose/purposes are patently unconstitutional, illegal, immoral or contrary to government rules and - The special right or privilege conferred upon an existing corporation to the business for which it
regulations; was created. May ordinarily be conveyed/mortgaged under the general power granted to a
3. Treasurers affidavit concerning the amount of capital stock subscribed and/or paid is false; corporation to dispose of its property, except such franchises charged with a public use (e.g., to
4. Required percentage of ownership of the capital stock to be owned by citizens of the Philippines has operate a messenger and express delivery service, to use the streets of a city to lay pipes or tracks).
not been complied with as required by existing laws or the Constitution. - Available only to regulated businesses
E.g. Monetary Board of the Central Bank for banking institutions. Absence of this, transactions involving the business not in accordance with its primary purpose is illegal/
However, if the corporation is involved in a public utility the SEC may give such corporation a ultra vires, thus may justify the revocation of its registration.
reasonable time to modify the objectionable portion.
Note, however, the following: Zuellig Freight v NLRC
a) Action of SEC in approving or rejecting is discretionary and NOT ministerial function.
the amendments of the articles of incorporation of Zeta to change the corporate name to Zuellig Freight and Cargo
b) SEC is required to give the incorporators reasonable time within which to correct or modify the Systems, Inc. did not produce the dissolution of the former as a corporation. For sure, the Corporation Code defined and
objectionable portions of the AOI or amendment delineated the different modes of dissolving a corporation, and amendment of the articles of incorporation was not one
Rejection is not preferred; a defective AOI may be returned by the SEC which shall give the of such modes. The effect of the change of name was not a change of the corporate being,
incorporators a reasonable time to correct or modify the objectionable portions without the necessity of The changing of the name of a corporation is no more the creation of a corporation than the changing of the name of
filing the same again (UP class notes) a natural person is begetting of a natural person. The act, in both cases, would seem to be what the language which
we use to designate it imports a change of name, and not a change of being.

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Zeta and petitioner remained one and the same corporation. The change of name did not give petitioner the license to evidence to show that the corporate personalities were used to perpetuate fraud, or circumvent
terminate employees of Zeta like San Miguel without just or authorized cause. The situation was not similar to that of an the law, the corporations are to be rightly treated as distinct and separate from each other.
enterprise buying the business of another company where the purchasing company had no obligation to rehire (Laguio v. NLRC, 262 SCRA 715 (1996))
terminated employees of the latter.18Petitioner, despite its new name, was the mere continuation of Zetas corporate
being, and still held the obligation to honor all of Zetas obligations, one of which was to respect San Miguels security of
tenure. The dismissal of San Miguel from employment on the pretext that petitioner, being a different corporation, had Having interlocking directors, corporate officers and shareholders is not enough justification to
no obligation to accept him as its employee, was illegal and ineffectual. pierce the veil of corporate fiction in the absence of fraud or other public policy
considerations. (Velarde v. Lopez, 419 SCRA 422 (2004))

Republic Planters Bank v. CA, Dec. 21, 1992


The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original
corporation. It is the same corporation with a different name, and its character is in no respect changed. A change in the Being corporate officer
corporate name does not make a new corporation, and whether effected by special act or under a general law, has no Being an officer or stockholder of a corporation does not by itself make one's property
affect on the identity of the corporation, or on its property, rights, or liabilities. also of the corporation, and vice-versa, for they are separate entities, and that shareholders are in no
The corporation continues, as before, responsible in its new name for all debts or other liabilities which it had previously legal sense the owners of corporate property which is owned by the corporation as a distinct legal
contracted or incurred. GR: Officers or directors under the old corporate name bear no personal liability for acts done or
person. Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991). (The Shareholders and members are
contracts entered into by officers of the corporation, if duly authorized. Inasmuch as such officers acted in their capacity
as agent of the old corporation and the change of name meant only the continuation of the old juridical entity, the covered by the main doctrine but the actors (officers) are not. They are covered by agency)
corporation bearing the same name is still bound by the acts of its agents if authorized by the Board.
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. Booc v. Bantuas, 354 SCRA 279 (2001).
EFFECTIVITY
A. Express It is hornbook law that corporate personality is a shield against personal liability of its officersa
B. Implied lapsation; inaction of the SEC; deemed approved; effective as to the date of filing. 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
COMMENCEMENT OF CORPORATE EXISTENCE / Alexander T. Ty v. Court of Appeals, 356 SCRA 61 (2001).
THEORY OF CONCESSION
Dealings between corporation and stockholders
Sec. 19. Commencement of corporate existence. A private corporation formed or organized under this The fact that the majority stockholder had used his own money to pay part of the loan of the
Code commences to have corporate existence and juridical personality and is deemed incorporated from the corporation cannot be used as the basis to pierce. It is understandable that a shareholder
date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and would want to help his corporation and in the process, assure that his stakes in the said
thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporation are secured. LBP v. Court of Appeals, 364 SCRA 375 (2001).
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.
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
Concession Theory a dummy of the individual stockholder. A corporation may assume any name provided it is
Espouses that a corporation is an artificial creature without any existence until it has received the lawful, and there is nothing illegal in a corporation acquiring the name or as in this case, the
imprimatur of the State acting according to law, through the SEC.
initials of one of its shareholders. LBP v. Court of Appeals, 364 SCRA 375 (2001).
DOCTRINE OF SEPARATE PERSONALITY Doctrine of separate personality The mere fact that a stockholder sells his shares of stock in the corporation during the pendency
A corporation has a juridical personality separate and distinct from that of its stockholders or of a collection case against the corporation, does not make such stockholder personally liable
members. for the corporate debt, since the disposing stockholder has no personal obligation to the
Important: From the date of issuance of AoI and not date of acceptance. creditor, and it is the inherent right of the stockholder to dispose of his shares of stock anytime
Used for purposes of convenience and to subserve the ends of justice he so desires. PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).
Consequences:
a) Ownership of property, capacity to sue and be sued in its own right (Art. 46, NCC); Just because two foreign companies came from the same country and closely worked
b) Entitlement to constitutional rights; e.g. Due process, equal protection; together on certain projects would the conclusion arise that one was the conduit of the other,
c) Liability for crimes or torts; thus piercing the veil of corporate fiction. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001).
d) Cannot always claim equal rights with natural persons; i.e. entitlement to moral damages.
The creation by DBP as the mother company of the three mining corporations to manage and
APPLICATIONS OF DOCTRINE Majority equity ownership and interlocking directorship
operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose
Ownership of a majority of capital stock and the fact that majority of directors of a corporation are their value, does not indicate fraud or wrongdoing and will not constitute application of the
the directors of another corporation creates no employer-employee relationship with the latter's
piercing doctrine. DBP v. Court of Appeals, 363 SCRA 307 (2001).
employees. (DBP v. NLRC, 186 SCRA 841 (1990))
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
The facts that two corporations may be sister companies, and that they may be sharing
stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personnel and resources, without more, is insufficient to prove that their separate corporate
personality. (Manila Hotel Corp. v. NLRC, 343 SCRA 1 (2000))
personalities are being used to defeat public convenience, justify wrong, protect fraud, or
Mere substantial identity of incorporators of two corporations does not necessarily imply fraud, defend crime. Padilla v. Court of Appeals, 370 SCRA 208 (2001). [CLV: In past decisions, such
nor warrant the piercing of the veil of corporate fiction. In the absence of clear and convincing
situation would generally warrant alter-ego piercing.]

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On privileges enjoyed - courts are required to exercise extreme caution keeping in mind that the fiction of a
The tax exemption clause in the charter of a corporation cannot be extended to nor enjoyed corporation emanated from the state. There must be an exceptional circumstance to justify
by even its controlling stockholders. Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. piercing its veil of corporate fiction because absence thereof, the courts must respect the
895 (1936). separate and distinct personality of the corporation.

Obligations and debts Types of piercing application


Corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's o The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely:
debt or credit that of the corporation. Traders Royal Bank v. Court of Appeals, 177 SCRA 789 a) Defeat of public convenience as when the corporate fiction is used as a vehicle for the
(1989). evasion of an existing obligation;
b) Fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a
A corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its crime (fraud piercing); or
members in their individual capacity, even when the corporation is organized for the benefit of the c) Alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business
members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347 (1976). conduit of a person, or where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
Stockholders have no personality to intervene in a collection case covering the loans of the corporation (alter ego piercing or instrumentality test).
corporation since the interest of shareholders in corporate property is purely inchoate. Francisco
Motors Corp. v. Court of Appeals, 309 SCRA 72 (1999). Alter Ego or Instrumentality Rule
Requisites:
The majority stockholder cannot be held personaly liable for the attorneys fees charged by a lawyer a) Control test: There must be control, not merely majority or complete stock control, but complete
for representing the corporation. Laperal Dev. Corp. v. Court of Appeals, 223 SCRA 261 (1993). dominion, not only on finances but of policy and business in respect to the transaction attacked so
that the corporate entity as to this transaction had at the time no separate mind, will, or existence of
Even when the foreclosure on the corporate assets was wrongfully done, stockholders have no his own; (control)
standing to recover for themselves moral damages; otherwise, it would amount to the appropriation b) Fraud test: Such control must have been used by the defendant to commit fraud or wrong, to
by, and the distribution to, such stockholders of part of the corporations assets before the dissolution of perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in
the corporation and the liquidation of its debts and liabilities. APT v. Court of Appeals, 300 SCRA 579 contravention of plaintiffs legal right (breach of duty) ; and
(1998). c) Harm test: Such control and breach of duty must proximately cause the injury to the plaintiff.
In piercing the veil, the stockholders become liable instead of the corporation.
The obligations of a stockholder in one corporation cannot be offset from the obligation of the Do not immediately pierce the veil just because a ground exists. Determine first the facts and
stockholder in a second corporation, since the corporation has a separate juridical personality. CKH circumstance.
Industrial and Dev. Corp v. Court of Appeals, 272 SCRA 333 (1997). Steps:
a) Determine first the following Items:
i. Common Ownership
PIERCING THE VEIL OF CORPORATE FICTION ii. Identity of directors;
This doctrine allows the State to disregard the fiction of juridical personality of the corporation where iii. Identity of stockholders
the entity is formed or used for non-legitimate purposes. iv. Manner of keeping records;
Grounds: v. Manner of conducting business.
a) Where corporate fiction is used to defeat public convenience; b) Is there a misuse of corporate fiction?
o Corporate Fiction is a personality separate from the stockholders/members. o The mere control by a single person of the majority shares is not a ground to pierce the
o Public Convenience: Instead of dealing with all the individual stockholders, it is for public veil [Sunio vs. NLRC, 127 SCRA 390 (1984)]
convenience to deal with the corporation alone. o Evidence of fraud must be proven clearly and convincingly [Del Rosario vs. NLRC, 182 SCRA
b) Where corporate fiction is used to justify a wrong, to protect fraud, or to defend a crime; 777 (1990)]
c) Where the corporation serves as a mere alter ego of another person; Concept Builders, Inc. v. NLRC, May 29, 1996
d) Where the corporation serves merely as an instrument of another corporation. Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may be disregarded.
e) Where the corporation is controlled by aliens, in violation of the law as where it was organized
The control necessary to invoke the rule is not a majority or even completes stock control but such domination of
under Philippine laws but most of its stockholders are Germans (normally a Filipino corporation), finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence
the Supreme Court went beyond the corporate fiction during the war and considered it as an of its own, and is but a conduit for its principal.
enemy corporation.
Purpose of Piercing the Veil
Pointers as to the nature of piercing the veil of corporate fiction 1. To seek satisfaction of an obligation directed against the stockholders;
1. Piercing doctrine is only an equitable remedy: It is an equitable doctrine developed to address 2. Direct always the action against the stockholders: If directed against the corporation, you cannot
situations where the separate corporate personality of a corporation is abused or used for anymore pierce the veil. A suit cannot be brought against the corporation to satisfy the obligation
wrongful purposes of its stockholders. (Umali case [182 SCRA 529 (1990)])
Important: It does not warrant the revocation of the corporation; it only makes responsible
officers personally liable. Net Effect of Piercing the Veil
It is a remedy of last resort. 1. Only one corporation: Liability attaches to its stockholders;
2. Piercing the veil cannot be employed to allow fraud. The corporation will be treated merely as an association of persons and the stockholders or
3. Piercing applies only when the corporate fiction was the very tool used to commit fraud or evade members will be considered as corporation, that is, liability will attach personally or directly to the
obligations. officers and stockholders.

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2. Two or more Corporations: The court treats them as only one. Allegation: In justifying its claim against the Pantranco properties, PNB alleges that Mega Prime, the buyer of its entire
They will be merged into one, the one being merely regarded as the instrumentality, agency, stockholdings in PNB-Madecor was indebted to it (PNB). Considering that said indebtedness remains unpaid, PNB insists that it
conduit or adjunct of the other. has an interest over PNB-Madecor and Mega Primes assets.

Held: The contention is bereft of merit. While PNB has an apparent interest in Mega Primes assets being the creditor of the
latter for a substantial amount, its interest remains inchoate and has not yet ripened into a present substantial interest, which
would give it the standing to maintain an action involving the subject properties. PNB only has an inchoate right to the
properties of Mega Prime in case the latter would not be able to pay its indebtedness. This is especially true in the instant
case, as the debt being claimed by PNB is secured by the accessory contract of pledge of the entire stockholdings of Mega
Prime to PNB-Madecor.
Landmark cases in piecing the veil of corporate fiction
Hacienda Luisita v. PARC, July 5, 2011
LIPCO and RCBC are purchasers in good faith for value entitled to the benefits arising from such status. When LIPCO and
RCBC purchased industrial land, there was no notice of any supposed defect in the title of its transferor, Centennary, or
First International Bank v. CA, January 24, 1996
that any other person has a right to or interest in such property. Landmark: In addition to the many cases where the corporate fiction has been disregarded, we now add the instant case,
To be sure, intervenor RCBC and LIPCO knew that the lots they bought were subjected to CARP coverage by means of a and declare herewith that the corporate veil cannot be used to shield an otherwise blatant violation of the prohibition
stock distribution plan, as the DAR conversion order was annotated at the back of the titles of the lots they acquired. against forum-shopping.
However, they are of the honest belief that the subject lots were validly converted to commercial or industrial purposes Shareholders, whether suing as the majority in direct actions or as the minority in a derivative suit, cannot be allowed to
and for which said lots were taken out of the CARP coverage subject of PARC Resolution No. 89-12-2 and, hence, can be trifle with court processes, particularly where, as in this case, the corporation itself has not been remiss in vigorously
legally and validly acquired by them. prosecuting or defending corporate causes and in using and applying remedies available to it. To rule otherwise would be to
Both RCBC and LIPCO cannot be considered at fault for believing that certain portions of Hacienda Luisita are encourage corporate litigants to use their shareholders as fronts to circumvent the stringent rules against forum shopping.
industrial/commercial lands and are, thus, outside the ambit of CARP. The PARC, and consequently DAR, gravely abused its Related discussions The Court held that there was identity of parties, or at least, of interests represented. Although the
discretion when it placed LIPCOs and RCBCs property which once formed part of Hacienda Luisita under the CARP plaintiffs in the Second Case (Henry L. Co. et al.) are not name parties in the First Case, they represent the same interest and
compulsory acquisition scheme via the assailed Notice of Coverage. Note: Sale even after judgment against the properties entity, namely, petitioner Bank, because:
of Luisita was held valid due to belief of RCBC and LIPCO that the same were industrial/commercial lands thus outside the 1. They are not suing in their personal capacities, for they have no direct personal interest in the matter in controversy. They
ambit of CARP. are not principally or even subsidiarily liable; much less are they direct
The PARC did NOT gravely abuse its discretion in revoking the subject SDP and placing the hacienda under CARPs parties in the assailed contract of sale; and
compulsory acquisition and distribution scheme. The revocation of the approval of the SDP is valid: (1) the mechanics and 2. The allegations of the complaint in the Second Case show that the stockholders are bringing a derivative suit. In the
timelines of HLIs stock distribution violate DAO 10 because the minimum individual allocation of each original FWB of caption itself, petitioners claim to have brought suit for and in behalf of the Producers Bank of the Philippines. Indeed, this is
18,804.32 shares was diluted as a result of the use of man days and the hiring of additional farmworkers; (2) the 30-year the very essence of a derivative suit:
timeframe for HLI-to-FWBs stock transfer is contrary to what Sec. 11 of DAO 10 prescribes.
It is clear as day that the original 6,296 FWBs, who were qualified beneficiaries at the time of the approval of the An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in
SDP, suffered from watering down of shares. As determined earlier, each original FWB is entitled to 18,804.32 HLI shares. The order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be
original FWBs got less than the guaranteed 18,804.32 HLI shares per beneficiary, because the acquisition and distribution of sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the
the HLI shares were based on man days or number of days worked by the FWB in a years time. corporation as the real party in interest. (Gamboa v. Victoriano, 90 SCRA 40, 47 [1979]). In the face of the damaging
admissions taken from the complaint in the Second Case, petitioners, quite strangely, sought to deny that the Second Case
was a derivative suit, reasoning that it was brought, not by the minority shareholders, but by Henry Co et al., who not only
Pantranco Employees v. NLRC, March 17, 2009 own, hold or control over 80% of the outstanding capital stock, but also constitute the majority in the Board of Directors of
PNB, PNB-Madecor, Mega Prime, and PNEI are corporations with their own personalities. PNB was only a stockholder of PNB- petitioner Bank. That being so, then they really represent the Bank. So, whether they sued derivatively or directly, there is
Madecor which later sold its shares to Mega Prime; and that PNB-Madecor was the owner of the Pantranco properties. undeniably an identity of interests/entity represented.
Moreover, these corporations are registered as separate entities and, absent any valid reason, we maintain their separate
identities and we cannot treat them as one. Where one corporation sells or otherwise transfers all its assets to another
corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor.
Court cannot can merge the personality of PNEI with PNB simply because the latter acquired the former. INSTANCES WHERE THE VEIL WAS PIERCED
Effects of piercing the veil of corporate fiction:
a) Corporation is a mere collection of individuals or an aggregation of persons undertaking business as a group, Collector v. Norton & Harrison Co., 11 S 714 (1964)
disregarding the separate juridical personality of the corporation unifying the group. Where a corporation functions for the benefit of a single person who has complete control over the funds and the said
b) When two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, person is the sole owner thereof. The corporate entity is but an alter ego or the business conduit of the owner and the
when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct property of the corporation may be considered the property of the controlling individual and may be seized in an action
entities and treat them as identical or as one and the same. against the latter.
Circumstances that justify piercing the veil of corporate fiction (CD-FSG-SBD-PIR) Common SH; Norton owns SH of JB; Same BOD; JB financed by Norton; employees of JB is Nortons and composition of JB
1. The parent corporation owns all or most of the capital stock of the subsidiary BOD is also of Nortons. JB is a department of Norton.
2. The parent and subsidiary corporations have common directors or officers; we find sufficient grounds to support the theory that the separate identities of the two companies should be disregarded.
3. The parent corporation finances the subsidiary; Among these circumstances are: Norton and Harrison owned all the outstanding stocks of Jackbilt; of the 15,000 authorized
4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation; shares of Jackbilt, 14,993 shares belonged to Norton and Harrison and one each to seven others; Norton constituted Jackbilt's
5. The subsidiary has grossly inadequate capital; board of directors in such a way as to enable it to actually direct and manage the other's affairs by making the same officers
6. The parent corporation pays the salaries and other expenses or losses of the subsidiary; of the board for both companies; Norton financed the operations of the Jackbilt, and this is shown by the fact that the loans
7. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to obtained from the RFC and Bank of America were used in the expansion program of Jackbilt, to pay advances for the
or by the parent corporation; purchase of equipment, materials rations and salaries of employees of Jackbilt and other sundry expenses; Norton treats
8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department Jackbilt employees as its own. Evidence shows that Norton paid the salaries of Jackbilt employees and gave the same
or division of the parent corporation, or its business or financial responsibility is referred to as the parent privileges as Norton employees, an indication that Jackbilt employees were also Norton's employees. Furthermore services
corporations own; rendered in any one of the two companies were taken into account for purposes of promotion; Compensation given to
9. The parent corporation uses the property of the subsidiary as its own; board members of Jackbilt, indicate that Jackbilt is merely a department of Norton. The offices of Norton and Jackbilt are
10. The directors or executives of the subsidiary do not act independently in the interest of the subsidiary, but take their located in the same compound. Payments were effected by Norton of accounts for Jackbilt and vice versa. Payments were
orders from the parent corporation; also made to Norton of accounts due or payable to Jackbilt and vice versa.
11. The formal legal requirements of the subsidiary are not observed. Hence, the corporate personality of the two corporations must be disregarded.

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Tan Boon Bee v. Jarencio, 163 S 153 (1988) authority. Hence, the power to sue and be sued in any court or quasi-judicial tribunal is necessarily lodged with the said
Where a corporation is merely instrumentality, an adjunct, business conduit or alter ego of another corporation, the separate board.
personality of the corporation may be disregarded. There is a complete listing of authorized signatories to the verification and certification required by the rules, the
determination of the sufficiency of the authority was done on a case to case basis. The rationale applied in the foregoing
cases is to justify the authority of corporate officers or representatives of the corporation to sign the verification or certificate
Azcor Manufacturing v. NLRC, 303 S 26 (1999) against forum shopping, being in a position to verify the truthfulness and correctness of the allegations in the petition.
Where the corporate fiction was used as a means to perpetrate a social injustice or as a vehicle to evade obligations, it
would be discarded and the two corporations would be merged as one, the first being merely considered as the
instrumentality, agency, conduit or adjunct of the other Sarona V NLRC, 18 January 2012
Capulso was led into believing that while he was working with Filipinas Paso, his real employer was AZCOR. Petitioners never The respondents scheme reeks of bad faith and fraud and compassionate justice dictates that Royale and Sceptre be
dealt with him openly and in good faith, nor was he informed of the developments within the company, i.e., his alleged merged as a single entity, compelling Royale to credit and recognize the petitioners length of service with Sceptre. The
transfer to Filipinas Paso and the closure of AZCOR's manufacturing operations beginning 1 March 1990. AZCOR manifested respondents cannot use the legal fiction of a separate corporate personality for ends subversive of the policy and purpose
for the first time before the Court that it had already ceased its business operations. Understandably, Capulso sued AZCOR behind its creation or which could not have been intended by law to which it owed its being.
alone and was constrained to implead Filipinas Paso as additional respondent only when it became apparent that the latter Also, Sceptre and Royale have the same principal place of business. As early as October 14, 1994, Aida and
also appeared to be his employer. Wilfredo became the owners of the property used by Sceptre as its principal place of business by virtue of a Deed of
In the case, the corporate fiction was used as a means to perpetrate a social injustice or as a vehicle to evade obligations or Absolute Sale they executed with Roso. Royale, shortly after its incorporation, started to hold office in the same property.
confuse the legitimate issues. Such corporate fiction would be discarded and the two (2) corporations would be merged as These, the respondents failed to dispute. Royale also claimed a right to the cash bond which the petitioner posted when he
one, the first being merely considered as the instrumentality, agency, conduit or adjunct of the other was still with Sceptre. If Sceptre and Royale are indeed separate entities, Sceptre should have released the petitioners cash
bond when he resigned and Royale would have required the petitioner to post a new cash bond in its favor.
The way on how petitioner was made to resign from Sceptre then later on made an employee of Royale,
Claparols v. CIR, July 31, 1975 reflects the use of the legal fiction of the separate corporate personality and is an implication of continued employment.
Where a corporation is dissolved and its assets are transferred to another corporation to avoid a financial liability of the Royale is a continuation or successor or Sceptre since the employees of Sceptre and of Royale are the same and said
first corporation to its employees, both firms being owned and controlled by the same persons with the result that the second companies have the same principal place of business.
corporation should be considered a continuation and successor of the first entity.
the CSNP, which ceased operation in June 30, 1957, was succeeded by the CSC effective next day, July 1, 1957 up top
December 7, 1962, when the latter finally ceased to operate, were not disputed by petitioners. It is very clear that the latter Francisco v Mejia, 14 August 2001
was a continuation and successor of the first entity, and its emergence was skillfully timed to avoid the financial liability that There was an intent to defraud when Francisco deliberately failed to pay the taxes of the property and despite the rescission
already attached to its predecessor. Both corporations were owned and controlled by petitioner Eduardo Claparols and case, he did not say anything until the redemption period has lapsed.
there was no break in the succession and continuity of the same business. This avoiding-the-liability scheme is very patent, Merryland cannot be solidarily liable with Francisco. The only act imputable to Merryland in relation to the mortgaged
considering that 90% of the subscribed shares of the CSC were owned by Claparols himself, and all the assets of the dissolved properties is that it purchased the same and this by itself is not a fraudulent or wrongful act. No evidence has been adduced
CSNP were turned over to the CSC. to establish that Merryland was a mere alter ego or business conduit of Francisco. Time and again it has been reiterated that
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. Neither has it been alleged or proven that
Telephone Engineering & Service Co v. Workmen Compensation Commission, 104 S 354 (1981) Merryland is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency,
In workmen's compensation cases, where there is admission that two corporations are sister companies, operating under one conduit or adjunct of Cardale. Even assuming that the businesses of Cardale and Merryland are interrelated, this alone is not
single management, and housed in same building, piercing the veil may be considered. 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. Thus, Merryland's separate juridical personality must be upheld.
Villa Rey Transit, Inc. v. Ferrer, 25 S 845
Where a corporation is formed by a seller of a certificate of public convenience for the purpose of evading his individual
contract that he "shall not for a period of 10 years from the date of this sale, apply for any TPU service identical or competing Heirs of Pajarillo v CA, 537 S96
with the buyer." The two corporations are one and the same. The family corporation was created after the filing of the first complaint. The
sole proprietorship was merely transformed into a corporation with the intent to evade its liabilities subject matter of the
Livesey v Binswanger, 19, march 2014 complaint.
The subsequent corporation was used to evade the liability of the former dissolved corporation. The almost simultaneous The corporate mask may be lifted and the corporate veil may be pierced when a corporation is but the alter ego of a
dissolution and creation of the two corporations was an attempt to evade the liabilities of the dissolved corporation, that is person or another corporation. It is clear from the foregoing that P.V. Pajarillo Liner Inc. was a mere continuation and
to pay the back wages of petitioner. successor of the sole proprietorship of Panfilo. It is also quite obvious that Panfilo transformed his sole proprietorship into a
family corporation in a surreptitious attempt to evade the charges of respondent union. Given these considerations, Panfilo
and P.V. Pajarillo Liner Inc. should be treated as one and the same person for purposes of liability.
Concept Builders v NLRC. 257 S 149
HPPI was created to evade the liabilities of the corporation. The two corporations have the same stockholders and the same
office. First International Bank v CA, 252 S 259
Res Judicata was present between the original case and the derivative suit filed by the SH in behalf of the bank.
- Identity of parties (Bank and the Shareholders representing the bank)
Gold Line Tours v Heirs of Lacsa, 18 June 2012 - Identity of the relief sought (declaration of the contract of sale as unenforceable because Rivera had no
Gold Line & Travel and Tours were considered as one and the same. Travel and Tours uses the bus of Gold Line; William authority)
Cheng is the President and Treasurer of both corporations. Gold Line was considered as the company while Travel and Tours - Judgment has already been rendered with respect to the original case in the RTC which is a competent court
war created to evade the liabilities of Gold line and has jurisdiction over the same)
Where the main purpose in forming the corporation was to evade ones subsidiary liability for damages in a criminal case, The identity of the parties was deemed present to prevent FORUM SHOPPING.
the corporation may not be heard to say that it has a personality separate and distinct from its members, because to allow it
to do so would be to sanction the use of fiction of corporate entity as a shield to further an end subversive of justice.
Cordon v Balicanta, 4 October 2002
Disbarment against Balicanta.
Cagayan Valley Drug Corp V CIR Complainants H dies. Atty. B directed her to form a corporation t develpoe lands. The heirs inheritance were transferred to
A corporation has a separate and distinct personality from its directors and officers and can only exercise its corporate the established corporation. Rosaura and daughter own 93% OCS. Atty. 3%, he was elected Director, Chairman, Pres %
powers through the board of directors. Thus, it is clear that an individual corporate officer cannot solely exercise any Treasurer. Respondent leased lands of the corporation without compliance to the voting requirements. The resolution was
corporate power pertaining to the corporation without authority from the board of directors. signed by him alone.
Only individuals vested with authority by a valid board resolution may sign the certificate of non-forum shopping on behalf of PIERECED: The property of the corp is stil Rosauras.
a corporation. The action can be dismissed if the certification was submitted unaccompanied by proof of the signatorys Peircing applied because of the breach of the fiduciary relationship to his client.

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Other instances: the agreement, assuming that the parties agreed to the consultancy, is null and void as against public policy. Therefore, it is
1. Where all the stockholders or members of a corporation, acting as individuals instead of formal corporate action, enter unenforceable before a court of justice.
into an illegal act.
2. To shield a violation of the prohibition against forum shopping.
PNB v Hydro Resources, 13 March 2013
3. To avoid a judgment credit
The corporations cannot be pierced of its corporate veils for these entities were created by the mandate of certain laws.
4. To avoid the payment of higher taxes
5. To avoid inclusion of corporate assets as part of the estate of a decedent
6. To promote unfair objectives Pantranco Ees Assn et al v NLRC, 17 March 2009
7. To violate a provision under the Labor Code declared to be penal in nature The separate personality of the corporations was upheld. These were merely creditors.
8. To avoid judgment in favor of an employee where the employer corporation is no longer existing and is unable to Probative factors indicative that the parent company is the same as that of the subsidiary:
satisfy the judgment, the employee's recourse being against the officers of the corporation who were, in effect, acting a. Parent co. own all or most of the stocks
in behalf of the corporation. b. Parent and the subsidiary have the same offices
c. Parent finances the subsidiary
d. Subsidiary does not have enough assets to sustain its operation
INSTANCES WHERE THE VEIL WAS NOT PIERCED e. Parent subscribe to the subsidiarys capital stock
f. Parent pays the salaries of the subsidiarys ees
g. Parent pays the expenses of the subsidiary
Manila Hotel Corp v. NLRC, 343 S 1
h. Subsidiary lacks some of the formal requirements of a corporation
The mere fact that a corporation owns 50% of the capital stock of another corporation or the mere majority ownership of the
i. Parent uses the property of the subsidiary
stocks of a corporation is not per se a cause for piercing the corporate veils.
j. Subsidiary is considered as a division only of the parent co
MHC, as a separate and distinct juridical entity cannot be held liable. True, MHC is an incorporator of MHICL and owns fifty
k. Subsidiarys ees are treated as ees of the parent co
percent (50%) of its capital stock. However, this is not enough to pierce the veil of corporate fiction between MHICL and MHC.
Combination of at least three of these factors would justify piercing.

Del Rosario v. NLRC, 187 S 777 Ramirez v Mar Fishing Inc., 13 June 2012
Substantial identity of the incorporators of two corporations does not necessarily imply fraud. For the separate juridical
Mere similarity in the location of the offices of the corporations do not warrant piercing. Only Mar Fishing is liable to pay
personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be
petitioners.
presumed.
Mar Fishing, and not Miramar, is required to compensate petitioners. Indeed, the back wages and retirement pay earned
Fraud was not employed since the judgment acme later and the corporation existed long before the dissolution. The
from the former employer cannot be filed against the new owners or operators of an enterprise.
dissolution resulted from the expiration of the license.
Miramar and Mar Fishing are separate and distinct entities, based on the marked differences in their stock
Not only has there been a failure to establish fraud, but it has also not been shown that petitioner is the corporate officer
ownership. Also, the fact that Mar Fishings officers remained as such in Miramar does not by itself warrant a conclusion that
responsible for private respondent's predicament. It must be emphasized that the claim for differentials and benefits was
the two companies are one and the same. The mere showing that the corporations had a common director sitting in all the
actually directed against the foreign employer. Philsa became liable only because of its undertaking to be jointly and severally
boards without more does not authorize disregarding their separate juridical personalities.
bound with the foreign employer, an undertaking required by the rules of the POEA, together with the filing of cash and surety
Neither can the veil of corporate fiction between the two companies be pierced by the rest of petitioners
bonds, in order to ensure that overseas workers shall find satisfaction for awards in their favor.
submissions, namely, the alleged take-over by Miramar of Mar Fishings operations and the evident similarity of their
businesses. Since piercing the veil of corporate fiction is frowned upon, those who seek to pierce the veil must clearly
China Banking v. Dyne-Sem, Sesbreno v. CA, Jardine Davies v. JRB Realty establish that the separate and distinct personalities of the corporations are set up to justify a wrong, protect a fraud, or
The mere fact, however, that: perpetrate a deception. This, unfortunately, petitioners have failed to do.
1. The businesses of two or more corporations are interrelated.
2. A common director sits on the boards of directors of all three companies organized as separate corporate entities Petron v NLRC, 505 S 596
3. When some of the employees of one corporation are the same persons manning and providing for
For an officer of a corporation t b held liable, there must be an evident bad faith which was not proven. The separate
auxiliary services to the units of the other corporation and that the physical plants, offices and facilities are situated in the same
personality of the corporation was upheld.
compound
the apparent basis for the NLRC in holding petitioner Maligro solidarily liable with Petron were its findings that (1) the
4. Two corporations are admittedly sister companies and sharing personnel and resources
Investigation Committee was created a day after the summons in NLRC RAB was received, with Maligro no less being the
5. The mere existence of interlocking directors, corporate officers and shareholders
chairman thereof; and (2) the basis for the charge of insubordination was the private respondents alleged making of false
IS not enough justification for disregarding their personalities.
accusations against Maligro.
9. XPN: Unless there is sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third
Those findings, however, cannot justify a finding of personal liability on the part of Maligro inasmuch as said findings do not
persons of their rights, or perpetrate wrong.
point to Maligros extreme personal hatred and animosity with the respondent. It cannot, therefore, be said that Maligro was
Petitioner failed to prove that Dyne-Sem was organized and controlled, and its affairs conducted, in a manner that
motivated by malice and bad faith in connection with private respondents dismissal from the service.
made it merely an instrumentality, agency, conduit or adjunct of Dynetics, or that it was established to defraud Dynetics
creditors, including petitioner.
Laguio v NLRC, 262 S 709
There was no clear and convincing evidence to prove control. Mere substantial ownership of the shares does not warrant
Marubeni Corp v. Lirag, 362 S 620
piercing. There was no control where the impleaded owns 2 shares of the company.
Not because two foreign corporations came from the same country and closely worked together on certain projects i.e. first
The two corporations have two different set of officers managing their respective affairs in two separate offices. It is basic
corporation as the supplier and contractor of the project hired and subcontracted the project to the second corporation,
that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well
would the conclusion arise that one was conduit of the other.
as from that of any other legal entity to which it may be related. Mere substantial identity of the incorporators of the two
The only basis of Lirag in claiming from Marubeni was because he claims that they are sister companies since Marubeni was
corporations does not necessarily imply fraud, 15 nor warrant the piercing of the veil of corporate fiction. In the absence of
the supplier and contractor of the Sanritsu. Not because two foreign companies came from the same country and closely
clear and convincing evidence that April and Well World's corporate personalities were used to perpetuate fraud, or
worked together on certain projects would the conclusion arise that one was the conduit of the other, thus piercing the veil of
circumvent the law said corporations were rightly treated as distinct and separate from each other.
corporate fiction.
The separate personality of the corporation may be disregarded only when the corporation is used as a cloak or cover for
fraud or illegality, or to work injustice, or where necessary for the protection of creditors. Aside from the self-serving testimony Delpher Trades v IAC, 26 January 1988
of respondent regarding the existence of a close working relationship between Marubeni and Sanritsu, there was nothing that Pilaria and Delphin still had control over the land even if it was transferred to the corporation. They had not violated the right
would support the conclusion that Sanritsu was an agent of Marubeni. of Hydro.
Any agreement entered into because of the actual or supposed influence which the party has, engaging him to influence After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from the
executive officials in the discharge of their duties, which contemplates the use of personal influence and solicitation rather corporation or from individual owners thereof. In the case at bar, in exchange for their properties, the Pachecos acquired
than an appeal to the judgment of the official on the merits of the object sought is contrary to public policy. Consequently, 2,500 original unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the Pachecos

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became stockholders of the corporation by subscription "The essence of the stock subscription is an agreement to take and - Ownership of majority Stocks, control is exercised by the corporation over the policies including the practices of
pay for original unissued shares of a corporation, formed or to be formed. It is significant that the Pachecos took no par the other corporation.
value shares in exchange for their properties. NSDC is under the control of PNB for the restructuring of the sugar industries. Assets of pasumil who contracted
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Andrada under the PNB was transferred to NSDC.
Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group. 2. Fraud such control must have been used by the defendant to commit fraud or a wrong to perpetuate the
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their violation of a statutory or other positive legal duty, or a dishonest and unjust act in contravention of plaintiffs
properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher legal right,
Trades Corporation to take control of their properties and at the same time save on inheritance taxes. 3. Harm the said control and breach of duty must have proximately caused the injury or unjust loss complained
The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a of.
contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family No evident bad faith; Mere ownership of assets and interlocking officers is insuffiencient to pierve the veil. NMIC is the only
merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, the private one liable. There is no proof that PNB and DBP used NMIC to commit fraud.
respondent has no basis for its claim of a light of first refusal under the lease contract. The absence of the elements in the present case precludes the piercing of the corporate veil. First, other than the fact
that petitioners acquired the assets of PASUMIL, there is no showing that their control over it warrants the disregard of
corporate personalities. Second, there is no evidence that their juridical personality was used to commit a fraud or to do a
WPM International v Labayen, 17 September 2014
wrong; or that the separate corporate entity was farcically used as a mere alter ego, business conduit or instrumentality of
The petitioners are aware that they were dealing with WPM and not Manlapaz. Manlapaz has no control over the
another entity or person. Third, respondent was not defrauded or injured when petitioners acquired the assets of PASUMIL.
corporation notwithstanding being a principal SH of the corporation.
Being the party that asked for the piercing of the corporate veil, respondent had the burden of presenting clear and
convincing evidence to justify the setting aside of the separate corporate personality rule. However, it utterly failed to
Francisco Motors v CA, 309 S 73 discharge this burden; it failed to establish by competent evidence that petitioners separate corporate veil had been used
The heirs, directors and incorporators owed the estate. They are personally liable not the corporation. to conceal fraud, illegality or inequity.
the piercing of the corporate veil was not applied because 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 Complex Elecronics Ees Assn v NLRC, 310 S403
schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. However, in the
CE is a manufacturer owning majority stocks of Ionics.
case at bar, instead of holding certain individuals or persons responsible for an alleged corporate act, the situation has been
Mere ownership of the same SH does not per se warrant piercing. No Control, no Fraud, harm is attributable only to CE.
reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain individual
Ionics may be engaged in the same business as that of Complex, but this fact alone is not enough reason to pierce the veil
directors, officers and incorporators concerned. Furthermore, according to private respondent Gregorio Manuel his services
of corporate fiction of the corporation. Well-settled is the rule that a corporation has a personality separate and distinct from
were solicited as counsel for members of the Francisco family to represent them in the intestate proceedings over Benita
that of its officers and stockholders. This fiction of corporate entity can only be disregarded in certain cases such as when it is
Trinidads estate. These estate proceedings did not involve any business of petitioner.
used to defeat public convenience, justify wrong, protect fraud, or defend crime. To disregard said separate juridical
The personality of the corporation and those of its incorporators, directors and officers in their personal capacities ought to
personality of a corporation, the wrongdoing must be clearly and convincingly established.
be kept separate in this case. The claim for legal fees against the concerned individual incorporators, officers and directors
As to the additional documentary evidence which consisted of a newspaper clipping filed by petitioner Union, we agree
could not be properly directed against the corporation without violating basic principles governing corporations.
with respondent Ionics that the photo/newspaper clipping itself does not prove that Ionics and Complex are one and the
same entity. The photo/newspaper clipping merely showed that some plants of Ionics were recertified to ISO 9002 and does
not show that there is a relation between Complex and Ionics except for the fact that Lawrence Qua was also the president
Umali v CA, 13 September 1990 of Ionics. However, as we have stated above, the mere fact that both of the corporations have the same president is not in
The mere fact that the corporations have the same office does not prove fraud. There was no clear and convincing itself sufficient to pierce the veil of corporate fiction of the two corporations
evidence of the intent to defraud petitioners,
Assuming that petitioners were indeed defrauded by private respondents in the foreclosure of the mortgaged properties, this Matuguina Integrated Wood Products v CA, 263 S 490
fact alone is not, under the circumstances, sufficient to justify the piercing of the corporate fiction, since petitioners do not
For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly
intend to hold the officers and/or members of respondent corporations personally liable therefore. Petitioners are merely
established. It cannot be presumed.
seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained without having to disregard the
In the case at bar, there is, insufficient basis for the appellate court's ruling that MIWPI is the same as Matuguina. The alleged
aforesaid corporate fiction attaching to respondent corporations. Secondly, petitioners failed to establish by clear and
control of Plaintiff Corporation was not evident in any particular corporate acts of Plaintiff Corporation, wherein Maria
convincing evidence that private respondents were purposely formed and operated, and thereafter transacted with
Milagros Matuguina Logging Enterprises is using Plaintiff Corporation, executed acts or powers directly involving Plaintiff
petitioners, with the sole intention of defrauding the latter.
Corporation. Also, mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stocks
The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a justification for disregarding
of the corporation, is not itself a sufficient warrant for disregarding the fiction of separate personality.
their separate personalities, absent sufficient showing that the corporate entity was purposely used as a shield to defraud
creditors and third persons of their rights.
Lim v CA, 323 S 102
It was proven that said properties were registered in the name of the corporation, hence the same were owned by the
San Juan structural v CA, 296 S 634
corporation despite the fact that, assuming true, it was Pastor Lim who organized the corporation.
The corporation was not treated as a closed corporation notwithstanding the ownership of 90% of the capital stock by the
spouses. If the corporation will be treated as a closed corporation, the spouses and the family corporation will be treated as
and the same. Villa Rey Transit v Ferrer, 29 October 1968
Upon the foregoing considerations, the Court so held that the preponderance of evidence have shown that the Villa Rey
Transit, Inc. is an alter ego of Jose M. Villarama, and that the restrictive clause in the contract entered into by the latter and
Lanuza v BF Corporation, 1 October 2014
Pantranco is also enforceable and binding against the said Corporation. For the rule is that a seller or promissor may not
Shangriila to BF Corp Construction of a Parking lot. Shangrila failed to pay.
make use of a corporate entity as a means of evading the obligation of his covenant. Where the Corporation is substantially
Issue: w/n shangrilas corp veil be pierced with the board
the alter ego of the covenantor to the restrictive agreement, it can be enjoined from competing with the covenantee.
Held: Pierced for purpose of arbitration. According to the SC, evem the directors initially sued must participate wth the
arbitration proceeding
Vlason enterprise v Ca, 310 S 26
In the present case, Bebero was the secretary of Angliongto, who was president of both VSI and petitioner, but she was an
PNB v Andrada Electric, 381 S 244
employee of VSI, not of petitioner. The piercing of the corporate veil cannot be resorted to when serving summons.
The court held that the elements of alter ego must first be present.
Doctrinally, a corporation is a legal entity distinct and separate from the members and stockholders who compose it.
The following are the three pronged test to determine control.
However, when the corporate fiction is used as a means of perpetrating a fraud, evading an existing obligation,
1. Instrumentality/Control Test not mere stock control, but complete domination not only of finances, but of
circumventing a statute, achieving or perfecting a monopoly or, in generally perpetrating a crime, the veil will be lifted to
policy and business practice in respect to the transaction attacked, must have been such that the corporate
expose the individuals composing it. None of the foregoing exceptions has been shown to exist in the present case. Quite
entity as to this transaction had at the time no separate mind, will or existence of its own.
the contrary, the piercing of the corporate veil in this case will result in manifest injustice.

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Not having obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. even its stockholders
may not probably claim "in good faith" to be a corporation.
DE FACTO CORPORATION
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 BY ESTOPPEL
corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.
Sec. 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
Requisites of a de facto corporation 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
1. Organized under a valid law. assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there
2. Attempt in good faith to form a corporation according to the requirements of the law. was in fact no corporation.
Note: The Supreme Court requires that Articles of Incorporation have already been filed with the SEC and
the corresponding certificate of incorporation is obtained.
3. Use of corporate powers. Corporation by estoppel (Ostensible corporation)
Bona fide user of corporate powers Note: Corporation by estoppel may arise even if no de facto corporation exists.
Note: The corporation must have performed the acts which are peculiar to a corporation like entering
into a subscription agreement, adopting bylaws, and electing directors. When applied:
4. Must have a certificate of incorporation issued in their favor a) When persons assume to form a corporation and exercise corporate functions and enter into business
relations with third persons.
Other rules: b) Applies to a third party only when he tries to escape liability on a contract from which he has benefited
1. Remedy, quo warranto: The existence of a de facto corporation shall not be inquired into collaterally in on the irrelevant ground of defective corporation.
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. When not applied: When no third persons (subject to exception below) involved and the conflict arises only
2. As long as it exists, a de facto corporation enjoys all attributes of a corporation until the State questions its among those assuming the form of a corporation who know that it has not been registered.
existence. Liability of persons: General partners
3. Same liability as de jure corporation: In comparison with a corporation by estoppel where the Estoppel of persons dealing with the corporation
stockholders are liable as general partners, stockholders in a de facto corporation are liable as a de jure 1. Stockholders or members
corporation. Hence, up to the extent of their share holdings. 2. Third persons, who deal with such a corporation recognizing it as such and the pretended
4. Colorable compliance: There must be a true, colorable compliance with the statute to constitute a de corporation itself.
facto corporation.
Note: Substantial compliance results to de jure corporation. De facto corporation and corporation by estoppel, distinguished
5. Actual users of power needed: To create a de facto corporation, it is a MUST that there is an actual user
DE FACTO CORPORATION CORPORATION BY ESTOPPEL
or exercise of corporate powers or franchise. There is existence in law There is no existence in law
6. Corporation must act in good faith upon discovery of defect: There is a duty to correct the defect if The dealings among the parties on a corporate basis is NOT The dealings among the parties on a corporate basis
discovered. required is required
Bona fide attempt to incorporate When the requisites are lacking, it can be corporation by It will be considered a corporation in any shape or
Rule: When there has been no attempt in good faith to create a corporation de jure, there can be no de estoppel form
facto corporation.
There must be a bona fide attempt to comply with the requirements of the law. Pogi Inc. X -
DE JURE DE FACTO ESTOPPEL/OSTENSIBLE
Pres Y- GM
Defects which will result to the creation of de facto corporation X and Y doing business under the name
Plaintiff yes yes
Pogi Inc.
1. The AOI fails to state all the matters required by the Code to be stated, or state some of them
incorrectly. Residence Principal office in AoI Same as de jure Residence of X, Y or defendant
2. The name of the corporation closely resembles that of a pre-existing corporation that it will tend to A vs. X and Y doing business under the
Defendant Yes Yes
name Pogi Inc
deceive the public.
Residence of persons misrepresenting (X &
3. The incorporators or a certain number of them are not residents of the Philippines
Y)
4. The acknowledgment of the AOI or COI is insufficient or defective in form, or it was acknowledged Summons Principal office in AoI Same as de jure
BUT there can be substituted service in their
before the wrong officer. place of principal business
5. The percentage of Filipino ownership of the capital stock required for the business is less than that Separate property of person who
Property of
prescribed by the law. debt corporation
Same as de jure misrepresented (liabilities of general
6. The minimum paid-up capital stock has not been paid to and received by the corporate treasurer partners)
contrary to his affidavit. Yes (due to violation
of its franchise as Yes (for the State to
7. The failure to submit its by-laws on time. (Sawadjaan v. CA, 459 S 516) Quo warranto No
corporation, Sec. 6 of correct its own mistake)
Defects which will not result to creation of de facto corporation PD 902A)
1. Absence of articles of incorporation
2. Failure to file articles of incorporation with the SEC
3. Lack of certificate of incorporation from the SEC International Express v. CA, Oct. 19, 2000
Hall v. Piccio, June 29, 1950

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under R.A. 3135, and the Department of Youth and Sports Development under P.D. 604, for a Federation to acquire subsequently becomes
juridical existence it is a requirement that the federation must be recognized by the accrediting organization, the continuously
Philippine Amateur Athletic Federation. And Kahn failed to prove that such requirement was complied with by the inoperative
Federation. It is a settled principal in corporation law that any person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered
into or for other acts performed as such agent.1 As president of the Federation, Henri Kahn is presumed to have known
about the corporate existence or non-existence of the Federation.
Dissolution not automatic
SEC opined that the dissolution contemplated under this section is NOT automatic. The corporation
continues to exist as such, notwithstanding its non-operational status until the dissolution or revocation
has been lawfully declared by the Commission after due notice and hearing. (SEC Opinion, Oct. 4, 1989)
Lim Tong Lim v. Philippine Fishing Gear Industries, 317 S 728 Justification allowed: Where non use of charter or continuous inoperation is due to causes beyond the
Rule: An unincorporated association, which represented itself to be a corporation, will be estopped from denying its control of the corporation.
corporate capacity in a suit against it by a third person who relied in good faith on such representation. It cannot
allege lack of personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it Acts constituting formal organization
received advantages and benefits. Reasons for the doctrine:
1. Adoption of by-laws
1. 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; 2. Filing of by-laws with SEC
2. It cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its 3. Elections of Board of Directors
representatives or agents do so without authority and at their own risk. 4. Establishment of principal office
3. A person acting or purporting to act on behalf of a corporation which has no valid existence assumes such 5. Providing for the subscription and payment of the capital stock
privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as 6. Taking of such other steps as are necessary to enable the corporation to transact legitimate business or
such agent.
accomplish the purpose for which it was created.

Albert v. University Publishing, Jan. 30, 1965 Acts constituting commencement of business
The fact of non-registration of University Publishing Co., Inc. in the SEC has not been disputed. Defendant would only
When it has performed preparatory acts geared toward the fulfillment of the purposes for which it
raise the point that "University Publishing Co., Inc.," and not Jose M. Aruego, is the party defendant; thereby assuming
that "University Publishing Co., Inc." is an existing corporation with an independent juridical personality. Precisely, was established.
however, on account of the non-registration it cannot be considered a corporation, not even a corporation de facto. It
has therefore no personality separate from Jose M. Aruego; it cannot be sued independently. The corporation-by- Exceptions
estoppel doctrine has not been invoked. At any rate, the same is inapplicable here. Aruego represented a non- The rule that a corporation must formally organize and commence the transaction of its business or the
existent entity and induced not only the plaintiff but even the court to believe in such representation. He signed the construction of its works within 2 years from the date of its incorporation (the exercise of its secondary
contract as "President" of "University Publishing Co., Inc.," stating that this was "a corporation duly organized and
franchise) does not apply to:
existing under the laws of the Philippines," and obviously misled plaintiff (Mariano A. Albert) into believing the same.
One who has induced another to act upon his wilful misrepresentation that a corporation was duly organized and a) Special Corporations, because the law creating them provides for the commencement of their
existing under the law, cannot thereafter set up against his victim the principle of corporation by estoppel. juridical personality;
b) Corporation Sole, the person incorporating is not required to wait for the certificate of
incorporation. Mere filing of the Articles of Incorporation makes it incorporated already.
NON-USER OF CHARTER v. CONTINUOUS INOPERATION
Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. If a
corporation does not formally organize and commence the transaction of its business or the construction of its works
Loyola Grand Villas v. CA, Aug. 7, 1997
within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be Whether or not LGVHAI's failure to file its by-laws within the period prescribed by Section 46 of the Corporation Code
deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently had the effect of automatically dissolving the said corporation.
becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension
or revocation of its corporate franchise or certificate of incorporation. This provision shall not apply if the failure to NO. The legislative deliberations of the Corporation Code reveals that it was not the intention of Congress to
organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due automatically dissolve a corporation for failure to file the By-Laws on time.
to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission.
Moreover, By-Laws may be necessary to govern the corporation, but By-Laws are still subordinate to the Articles of
Incorporation and the Corporation Code. In fact, there are cases where By-Laws are unnecessary to the corporate
existence and to the valid exercise of corporate powers.
ACT PERIOD EFFECT
Non-user of charter Within 2 years from the date Corporate powers cease and the
The Corporation Code does not expressly provide for the effects of non-filing of By-Laws. However, these have been
- Does not formally of its incorporation corporation shall be deemed dissolved.
rectified by Section 6 of PD 902-A which provides that SEC shall possess the power to suspend or revoke, after proper
organize and (Though not automatic)
notice and hearing, the franchise or certificate of registration of corporations upon failure to file By-Laws within the
commence the required period.
transaction of its This shows that there must be notice and hearing before a corporation is dissolved for failure to file its By-Laws. Even
business or the assuming that the existence of a ground, the penalty is not necessarily revocation, but may only be suspension.
construction of its works

Continuous inoperation At least 5 years Ground for the suspension or revocation of


- Commenced the its corporate franchise or certificate of II. BOARD OF DIRECTORS
transaction of its incorporation
business but

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Sec. 23. The board of directors or trustees. Unless otherwise provided in this Code, the corporate powers of all Under Section 23 of the Corporation Code, the power and the responsibility to decide whether the
corporations formed under this Code shall be exercised, all business conducted and all property of such corporations corporation should enter into a contract is lodged in the Board, subject to the articles of incorporation, by
controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there laws, or relevant provisions of law.
is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are However, just as a natural person may authorize another to do certain acts for and on his behalf, the BoD
elected and qualified. Every director must own at least one (1) share of the capital stock of the corporation of which he
is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the
may validly delegate some of its functions and powers to officers, committees or agents.
owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be Source: The authority of such individuals to bring the corporations is generally derived from law, corporate by-
a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all laws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the
corporations organized under this Code must be residents of the Philippines. general course of business.

Doctrine of Centralized Management Limitations: Board cannot delegate


A corporations management is centralized in the board of directors. A corporation presents a more 1. Discretionary powers e.g. to declare dividends.
stable and efficient system of governance and dealings with third parties, since management It may delegate purely ministerial duties.
prerogatives are centralized in its board of directors. 2. Entire supervision and control of the corporation to others.
As can be gleaned from Sec 23 of Corporation Code, it is the board of directors or trustees which 3. Special powers especially conferred upon it by a resolution of the stockholders or members of the
exercises almost all the corporate powers in a corporation. (Firme vs. Bukal) corporation.
4. Other powers restricted by the by-laws.
A. NATURE OF OFFICE
Theory of Directly Vested Power BUSINESS JUDGMENT RULE
Power of the Board is original and undelegated. Unless otherwise provided in the Code, all corporate powers and prerogatives are vested directly in the
Under Sec. 23, it is the board of directors or trustees which exercises almost all the corporate powers in BoD.
a corporation. Consequences:
As such, it cannot be said that the Board acts as agents of the stockholders, since their source of a) The resolution, contracts and transactions of the Board, cannot be overturned or set aside by the
power originally vested by law and not delegated by the stockholders. stockholders or members and not even by the courts under the principle that the business of the
corporation has been left to the hands of the Board.
Theory of Delegated Power (from the Stockholders) b) Directors and duly authorized officers cannot be held personally liable for acts or contracts done with the
The directors are the officers and agents of the corporation, representing the interests of that abstract exercise of their business judgment.
legal entity and of those who own shares of stock and as such, they can bind the corporation XPNs:
provided they act within the scope of their authority. i. When the Corporation Code expressly provides otherwise
ii. When the Directors or officers acted with fraud, gross negligence or in bad faith; and
As to other nature iii. When Directors or officers act against the corporation in conflict of interest situation
1. Power is really directly conferred by law Remedies in case of mismanagement
2. Board must act as a body: Can bind the corporation only by action taken at a board meeting. - In case of mismanagement or abuse of powers, the remedy of stockholders shall be:
Reasons: a) Receivership
i. A meeting is necessary in order that any action may be deliberately adopted, after opportunity for b) Injunction if the act has not yet been done
discussion and an interchange of views, and c) Dissolution if abuse amounts to a ground for quo warranto but Solicitor General refuses to
ii. As agents of the corporation managing its affairs, directors/trustees have no power to act other than act
as a board. d) Derivative suit or complaint filed with RTC (special commercial courts)
Effect of Bogus Board: The acts or contracts effected by a bogus board would be VOID
pursuant to Art. 1318 of Civil Code because of the lack of consent. B. REQUIREMENTS
QUALIFICATIONS AND DISQUALIFICATIONS Qualifications of Directors/Trustees
Exceptions: Where act is binding despite lack of board meeting 1. Stock Corporation: Must own at least one (1) share capital stock of the corporation in his own name;
1. Where the directors happen to be the sole stockholders. Non-stock Corporation: Must be a member.
2. Where contract entered into by a corporate officer, authorized by the board of directors either He must be a stockholder in his own right. It must be a legal title and not beneficial title.
expressly or impliedly, to bind it by contract. Example: the stockholder- trustor in a voting trust agreement cannot be a director because he has
3. Where transaction is ratified in a subsequent board meeting. beneficial title; the trustee can be elected as director because he has legal title.
4. Acts of one of its directors or agents held out by the corporation to the public as possessing power to 2. The share of stock held by the director must be registered in his name on the books of the corporation
do those acts. The election of a person to the BoD of a corporation does not necessarily mean that he has paid for the
5. Where stockholders waived the necessity for a meeting of the board of directors. shares recorded in his name. In most cases, nominee directors do not pay for the qualifying shares
6. Acts of executive committee with authority to act on such specific matters within the competence of assigned to them. (Baguio v. CA, 226 S 366)
the board, subject to limitations set forth by law. 3. A majority of the directors/trustees must be residents of the Philippines.
7. Presence of management contract under which the corporation delegates the management of its 4. He must not have been convicted by final judgment of an offense punishable by imprisonment for a period
affairs to another corporation for a certain period of time. exceeding six (6) years or a violation of the Corporation Code, committed within five (5) years before the
8. In a close corporation, any action by the directors without a meeting or at a meeting improperly laid, date of his election
shall, unless the by-laws otherwise provide, be deemed valid or ratified in cases in Sec. 101. Note: It is the commission (not conviction) that must take place during the 5-year period.
5. He must be of legal age
DELEGATION OF BOARD POWER 6. He must possess other qualifications as may be prescribed in the by-laws of the corporation.
Note: Additional qualifications of directors or trustees cannot be enforced unless approved by the
stockholders or members and contained in the by-laws of the corporation.

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The petitioners argue that by virtue of the voting trust agreement the petitioners can no longer be considered directors
Example: The percentage of equity participation of foreigners with respect to nationalized activities must of ALFA. They cited that to be directors, the Corporation Code requires that it must own at least 1 one (1) share of the
be complied with or he must not be a director in a competing corporation. capital stock of the corporation of which he is a director which share shall stand in his name on the books of the
corporation. The voting trust agreement effectively transferred to DBP, as the trustee, legal ownership of the stock
7. Only natural persons can be elected directors/trustees. covered by the agreement and the latter became the stockholder of record with respect to the said shares of stocks.
It is clearly deducible from Section 23 that only natural persons can be elected as directors or trustees and Since the petitioners no longer had in their names even a single share in the corporation, they ceased to be qualified as
they must be elected from among the stockholders or members. However, a corporation which owns directors, hence they are no longer authorized to receive summons. Being so, the service of summons upon the
shares of stock or is a corporate member in another corporation can designate by board resolution its petitioners was invalid.
officer or representative to sit in the latters board and thus qualifying him to be elected as director or
trustee. A contrary rule would create a situation where there would be no board as where all the Disqualifications of Directors/Trustees
stockholders or members are corporation or juridical persons. The appointment must be recorded in the DQ as to Corporation Code Sec. 27. Disqualification of directors, trustees or officers. No person convicted
corporate books. (SEC Opinion No. 05-06, June 8, 2005) by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a
violation of this Code committed within five (5) years prior to the date of his election or appointment, shall
Villafuerte v Moreno, 2 October 2009 qualify as a director, trustee or officer of any corporation.
Respondents asserted that Villafuerte never assumed the position of Chairman of the BAP-SBP because he failed to
qualify for the same; that before Villafuerte could legally assume the Chairmanship of BAP-SBP, he must first be elected a 1. Must not have been convicted of a crime punishable by imprisonment of exceeding six (6) years
member of the Board of Trustees.
2. Must not have committed any violation of the Corporation code within five (5) years prior to his election
As correctly pointed out by CA, petitioner Villafuertes nomination must of necessity be understood as being subject to
or in accordance with the qualifications set forth in the By-Laws of the BAP-SBP. Since the said by-laws require the
Chairman of the Board of Trustees to be a trustee himself, petitioner Villafuerte was not qualified since he had neither
been elected nor appointed as one of the trustees of BAP-SBP. In other words, petitioner Villafuerte never validly assumed DQ as to General Banking Law of 2000 (Fit and proper rule)
the position of Chairman because he failed in the first place to qualify therefore.. Except in rural banks, no appointive or elective public official, whether fulltime or part-time shall at the same
time serve as officer of any private bank, save in cases where such service is incident to financial assistance
Baguio v CA, 226 S 366 provided by the government or GOCCs to the bank or unless otherwise provided under existing laws
The court ruled that there was no payment. The resolution adopted by the Board does Not speak of any sales
transaction and receipt of payment. It merely states that the petitioner Was accepted as a stockholder to the DQ as to Code of Corporate Governance
corporation. Even assuming that a transaction between The petitioners and the spouses Palma transpired, the 1. Any person who has been finally convicted by a competent judicial or administrative body of the following
corporation had nothing to do with the Business transactions entered by its officers in their personal capacity and
petitioner. Furthermore, petitioner cannot claim that being a member of the board of directors and Occupying the
crimes:
position of Vice-President-International necessarily imply that he mustnnhave Owned duly-paid shares of stock. The a) Involving purchase or sale of securities;
election of a person to the board of directors of a b) Arising out of the persons conduct as an underwriter, broker, dealer, investment adviser, principal
Corporation does not necessarily mean that he has paid for the shares recorded in his name. In Most cases, nominee distributor. Mutual fund dealer, principal distributor, mutual fund dealer, futures commission
directors do not pay for the qualifying shares assigned to them. Likewise, The Corporation Code does not require that merchant, commodity trading advisor, floor broker; and
one elected or appointed as vice-president of a Corporation should be the owner of shares of stock of the corporation. c) Arising out of his relationship with a bank, quasi-bank, trust company, investment house or as an
affiliated person of any one of them
Detective and Protective Bureau v Cloribel, 26 S 255 2. Any person who, by reason of any misconduct, is permanently or temporarily enjoined by order, judgment or
The Court ruled that there is in the record no showing that Jose de la Rosa owned a share of stock in the corporation. If decree by the SEC or any court or other administrative body from:
he did not own any share of stock, certainly he could not be a director pursuant to the mandatory provision of Section
a) Acting as underwriter, broker, dealer, investment adviser, principal distributor, mutual fund dealer,
30 of the Corporation Law, which in part provides: "Sec. 30. Every director must own in his own right at least one share of
the capital stock of the stock corporation of which he is a director, which stock shall stand in his name on the books of futures commission merchant, commodity trading advisor, or a floor broker;
the corporation." b) Acting as a director or officer of a bank, quasi-bank, trust company, investment house, Investment
If the managing director-elect was not qualified to become managing director, respondent Fausto Alberto could not Company or an affiliated person of any of them;
be compelled to vacate his office and cede the same to the managing director-elect because the by-laws of the c) Engaging in or continuing any conduct or practice in connection with any such activity or willfully
corporation provides in Article IV, Section 1 that "Directors shall serve until the election and qualification of their duly violating laws governing securities, and banking activities (but also includes when covered by an
qualified successor
effective interim order); such person is also disqualified when he is currently subject to an effective
order of a self-regulatory organization suspending or expelling him from membership or participation
Grace Christian HS v CA, 281 S 133 or from associating with a member or participant of the organization
The present Corporation Code states that the board of directors of corporations must be elected from among the
3. Any person finally convicted judicially or administratively of an offense involving moral turpitude, fraud,
stockholders or members. There may be corporations in which there are unelected members in the board but it is clear
that in the examples cited by petitioner the unelected members sit as ex officio members, i.e., by virtue of and for as embezzlement, theft, estafa, counterfeiting, misappropriation, forgery, bribery, false oath, perjury or other
long as they hold a particular office. But in the case of petitioner, there is no reason at all for its representative to be fraudulent act of transgressions.
given a seat in the board. Nor does petitioner claim a right to such seat by virtue of an office held. In fact it was not 4. Any person finally found by SEC or a court or other administrative body to have willfully violated, or willfully
given such seat in the beginning. It was only in 1975 that a proposed amendment to the by-laws sought to give it one. aided, abetted, counseled, induced or procured the violation of, any provision of the Securities and
Since the provision in question is contrary to law, the fact that for fifteen years it has not been questioned or Regulation Code, or any other law administered by SEC or Corporation Code, or any rule, regulation or
challenged but, on the contrary, appears to have been implemented by the members of the association cannot
order of SEC or BSP, or by a foreign court or equivalent financial regulatory of similar acts.
forestall a later challenge to its validity. Neither can it attain validity through acquiescence because, if it is contrary to
law, it is beyond the power of the members of the association to waive its invalidity. For that matter the members of the 5. Any person judicially declared to be insolvent.
association may have formally adopted the provision in question, but their action would be of no avail because no 6. Any person finally found guilty by a foreign court or equivalent regulatory authority of acts, violations or
provision of the by-laws can be adopted if it is contrary to law. misconduct similar to any of the acts, violations or misconduct listed in numbers 1 to 5.
Also, petitioner cannot claim a vested right to sit in the board on the basis of "practice." Practice, no matter 7. Any affiliated person who is ineligible, by reason of numbers 1 to 5 to serve or act in the capacities listed in
how long continued, cannot give rise to any vested right if it is contrary to law. Even less tenable is petitioner's claim that those paragraphs.
its right is "coterminus with the existence of the association."
8. Conviction by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years,
or a violation of Corporation Code, committed within five (5) years prior to the date of his election or
Lee v Ca, 205 S752 approval.

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3. Voting may be in person or by proxy (authorized in writing to represent stockholder)


Brias v Hord, 24 P 286
The petitioner was a duly elected member of the Board of BPI. When he requested before Hord, the President of the Time to determine voting right
company, an examination of the books and finances of the company, the same was denied, even after repeated 1. Share standing in one's name at the time fixed in by-laws
demands. Thereafter, he alleged that the respondents made it appear that the petitioner had tendered a resignation 2. Where by-laws is silent, at the time of election.
and declared that his position was vacant. Hence the latter filed this complaint demanding that he be reinstated from
his former office.
Entitled to relief? Aurbach v Sanitary Wares, 180 S 131
Based from the documentary and testimonial evidence there is no clear showing that the petitioner had actually The Court ruled that Wolfgang Aurbach, John Griffin, David P Whittingham, Ernesto V. Lagdameo, Baldwin Young, Raul A.
resigned. The testimonies of the respondents posed several and fatal inconsistencies while the testimony of the petitioner Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee as the duly elected directors of Saniwares at the
more or less proves what really transpired during the meeting. With these, the petitioner is still entitled to his position and March 8, 1983 annual stockholders meeting were the duly elected members of the Board. Under their agreement, both parties
his request for examination of the corporate books must be granted. were given the right their shares cumulatively. ASI, however, should not be allowed to interfere in the voting within the Filipino
group. Otherwise, ASI would be able to designate more than the three directors it is allowed to designate under the Agreement,
and may even be able to get a majority of the board seats, a result which is clearly contrary to the contractual intent of the
RESIDENCE parties. The foreign Group (ASI) was limited to designate three directors . This is the allowable participation of the ASI Group.
A majority of the directors/trustees must be residents of the Philippines. Hence, in future dealings, this limitation of six to three board seats should always be maintained as long as the joint venture
agreement exists considering that in limiting 3 board seats in the 9-man board of directors there are provisions already agreed
NATIONALITY upon and embodied in the parties' Agreement to protect the interests arising from the minority status of the foreign investors.
Rule: There is no citizenship requirement demanded of the members of BoD.
In corporations not organized under the Code, citizenship requirements are established.
Thus, in case of domestic banks, the General Banking Act requires that at least two-thirds of the members Bataan Shipyard v PCGG, 150 S 181
of the BoD must be citizens of the Philippines. (Section 13 of RA No. 337). PCGG may properly exercise the prerogative to vote sequestered stock of corporations, granted to it by the President of the
For rural banks, registered investment companies and private development banks, all the members of the Philippines through a Memorandum dated June 26, 1986. That Memorandum authorizes the PCGG, pending the outcome of
BoD must be citizens of the Philippines. (Section 4 of RA 720, as amended by RA 1097; Section 4 of RA proceedings to determine the ownership of sequestered shares of stock, to vote such shares of stock as it may have
sequestered in corporations at all stockholders' meetings called for the election of directors, declaration of dividends,
4093)
amendment of the Articles of Incorporation, etc. Moreover, in the case at bar, there was adequate justification to vote the
Under the Constitution, aliens may not be elected as directors of corporation engaged in business or incumbent directors out of office and elect others in their stead because the evidence showed prima facie that the former
industries which are totally or partially nationalized business or industries were just tools of President Marcos and were no longer owners of any stock in the firm, if they ever were at all.
Time of annual election
C. ELECTION The Code authorizes the corporation to provide in its by-laws "the time for holding the annual
Sec. 24. Election of directors or trustees. At all elections of directors or trustees, there must be present, either in election of directors or trustees."
person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, Why annual election? Because Sec. 23 fixes the tenure of directors or trustees at one year.
or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by
any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote
in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the Postponement of election
stock books of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may
GR: BoD cannot change the date of annual meeting prescribed in by-laws to lengthen their terms of office
vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares
and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares XPN: Reason is justifiable (e.g. lack of quorum) and proper notice of the postponement is given to the
shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, stockholders or members.
That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books
of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent
stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of Methods of voting
corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast
1. Straight voting
more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected.
Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time Every stockholder may vote such number of shares for as many persons as there are directors to be
but not sine die or indefinitely if, for any reason, no election is held, or if there are not present or represented by proxy, at elected.
the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the Illustration
member entitled to vote. X owns 100 shares in ABC Corporation. If there are 5 directors to be chosen, X is entitled to 500 votes
obtained by multiplying 100 by 5. He may give to the 5 candidates he wants to be elected 100 votes
each. Under this method, the votes are distributed equally among the 5 candidates without preference.
Mere designation of directors/trustees NOT allowed
Mere designation by the stockholders or by a corporate officer empowered by the stockholders
2. Cumulative voting for one candidate
without election of the directors in the manner provided by the by-laws will not be sufficient.
A stockholder gives to one candidate as many votes as the number of directors to be elected
multiplied by the number of his shares shall equal.
QUORUM What constitutes a quorum?
Purpose of cumulative voting: To give the minority stockholders representation in the BoD by electing
Stock: Majority of the outstanding capital stock (presence of holders of majority stock)
one or more directors BUT such a provision has been held not to insure minority stockholders of
Note: Non-voting stocks are to be taken into account although they are not entitled to vote for purposes of
proportional representation or of representation in that BoD under all circumstances.
determining the majority.
Note: A director elected because of the vote of minority stockholders who united in cumulative
Non-stock: Majority of the members entitled to vote
voting cannot be removed without just cause.
Illustration
VOTING Manner of election
GR: By-laws
1. In any form; or
2. By ballot when requested by any voting stockholder or member;

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X owns 100 shares in ABC Corporation. There are 5 directors to be elected. Under this method, the entire
500 vote can be given to a single candidate. Observe: Suppose there are 1000 shares, A and B own 800 Premium Marble v. CA, 264 S 11
shares while C, D, E and F own 200 shares. The objective sought to be achieved by Sec. 26 is to give the public information, under sanction of oath of responsible
If there are 5 directors to be elected, A and B are entitled to 4000 votes while C, D, E and F can give 1000 officers, of the nature of business, financial condition and operational status of the company together with information
votes. The highest number of votes that A and B can give each of their four candidates is 1,000. Hence, by on its key officers or managers so that those dealing with it and those who intend to do business with it may know or
cumulating their 1,000 votes in favor of a candidate, C, D, E and F would be able to secure representation have the means of knowing facts concerning the corporation's financial resources and business responsibility. Only the
in the board of directors. directors and officers of the corporation whose names appear in the report submitted to SEC are deemed legally
constituted to bind the corporation in bringing any suit in behalf of the corporation. Note: Failure to submit report of
3. Cumulative voting by distribution elections will make the previous members of the Board still the legal and authorized BoD under holdover capacity.
A stockholder cumulates his shares by multiplying also the number of his shares by the number of
directors to be elected and distribute the same among as many candidates as he shall see fit.
Illustration
X owns 100 shares in ABC Corporation. There are 5 directors to be elected. X may distribute his votes as E. TERM OF OFFICE / HOLDOVER
follows: A = 100, B = 150 and C = 250 votes. Any combination is allowed provided the total of votes cast by
Term of office
him does not exceed 500 votes
Rule: One year (term expires one year after election to the office) AND until their successors are elected and
Right of stockholders to use cumulative voting
qualified.
Right to cumulative voting is a STATUTORY right.
Note: Permanent unelected seat in BoD is PROHIBITED.
Rule: A corporation is without power to deprive the stockholders of its use or even to restrict the right
Educational non-stock corporation Up to 5 years
to vote to only one way or method.
A stockholder may or may not exercise the right as "he shall see fit." Other non-stock corporation Up to 3 years
Stock corporation One year subject to holdover rule
Other considerations
Plurality and not majority: The law requires only plurality, and not majority of the votes cast at the election.
Failure to hold election, suspension: The meeting may be adjourned from day to day or time to time but it Holdover principle
cannot be adjourned sine die or indefinitely Rule: Upon failure of a quorum at any meeting of the stockholders or members called for an election, the
Presence of winning director/member not required: For one to be elected as director/trustee or officer, it directorate naturally holds over and continuous to function until another directorate is chosen and qualified.
is not required that he must be physically present at the meeting at the time of his nomination and The failure to elect does not terminate the terms of incumbent officers nor dissolve the corporation.
election
XPN: Unless otherwise provided by the by-laws Seneres v. COMELEC, April 16, 2009
Questions regarding qualifications, disqualifications, or conduct of elections can be questioned in Purpose of holdover: To accord validity to what would otherwise be deemed as dubious corporate acts and gives
special commercial courts under intra-corporate controversies. continuity to a corporate enterprise in its relation to outsiders. The old holdover officer is a de facto officer and by
fiction of law, his acts as such are considered valid and effective. (Ma'am says those holdover officers are de jure
officer)
Voting in non-stock corporation
Rule: Members of non-stock corporations may cast as many votes as there are trustees to be
SEC v Baguio Country Club, 12 August 2015
elected but may not cast more than one vote for one candidate.
The petitions have been rendered moot by the 2005 amendment of the by-laws. The validity of the
D. REPORT ON ELECTION
two (2) year term provision and the calling of meeting for the election of members of the board of
Sec. 26. Report of election of directors, trustees and officers . Within thirty (30) days after the election of the
directors to replace those holding a two (2) year term should no longer be in issue.
directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the
Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees, and officers The Ilusorios initiated their query, which turned into a formal action, because of the SEC approved
elected. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, amended by-law provision extending the term of a member of the board of directors to two (2)
the secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such years. In their very own words, "What was merely brought by RKI to the attention of the SEC was
fact to the Securities and Exchange Commission. respondent's violation of the Corporation Code".
As can be gleaned from the SEC's Order, the calling of the meeting for the conduct of an election
Report on election was made to rectify the inadvertent approval of the two (2) year term for the members of the
When: Within 30 days after the election of the directors, trustees and officers of the corporation board. With the return of the one (1) year term, there is no more actual controversy that warrants the
Who: The secretary, or any other officer of the corporation exercise of our judicial power. An actual case or controversy exists when there is a conflict of legal
What: Submit to the Securities and Exchange Commission, the names, nationalities and residences of the rights or an assertion of opposite legal claims, which can be resolved on the basis of existing law and
directors, trustees, and officers elected jurisprudence. A justiciable controversy admits of specific relief through a decree that is conclusive in
character, whereas an opinion only advises what the law would be upon a hypothetical state of
Report on death, resignation or cessation from office of director, trustee or officer facts.
Who:
a) Heirs in case of death
b) Secretary or any other officer of the corporation F. HOW REMOVED
c) Director, trustee or officer himself
Sec. 28. Removal of directors or trustees. Any director or trustee of a corporation may be removed from office by a vote
What: Report to SEC, fact of death, resignation or cessation from office of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a
non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall
Nature of these reports take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after
MANDATORY and JURISDICTIONAL previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special
The determination of who are the legal directors and officers of the corporation is conditioned upon the meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must
be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least
reports submitted to SEC pursuant to said section.

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a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation,
members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special
give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be
any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand.
the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by
be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal
the right of representation to which they may be entitled under Section 24 of this Code. without cause may not be used to deprive minority stockholders or members of the right of representation to which they may
be entitled under Section 24 of this Code. (Emphasis supplied)
only the President and the Board of Directors are authorized by the by-laws to call a special meeting. In cases where the
Requisites for removal person authorized to call a meeting refuses, fails or neglects to call a meeting, then the stockholders representing at least 100
1. It must take place either at a regular meeting or special meeting of the stockholders or members called for shares, upon written request, may file a petition to call a special stockholders meeting.
the purpose;
In the instant case, there is no dispute that the 17 December 1997 Special Stockholders Meeting was called neither by the
GR: President through corporate secretary calls meeting President nor by the Board of Directors but by the MSCOC. While the MSCOC, as its name suggests, is created for the
XPN: Stockholders may file petition to special commercial courts, similar to mandamus for the conduct purpose of overseeing the affairs of the corporation, nowhere in the by-laws does it state that it is authorized to exercise
of a meeting corporate powers, such as the power to call a special meeting, solely vested by law and the MSC by-laws on the President or
the Board of Directors.
2. There must be previous notice to the stockholders or members of the intention to remove; Consequently, such Special Stockholders Meeting called by the Oversight Committee cannot have any legal effect. The
3. The removal must be by a vote of the stockholders representing 2/3 of outstanding capital stock or 2/3 removal of the Bernas Group, as well as the election of the Cinco Group, effected by the assembly in that improperly called
members. meeting is void, and since the Cinco Group has no legal right to sit in the board, their subsequent acts of expelling Bernas
from the club and the selling of his shares at the public auction, are likewise invalid.
4. The director may be removed with or without cause unless he was elected by the minority, in which case, it
is required that there is cause for removal. The Cinco Group cannot invoke the application of de facto officership doctrine to justify the actions taken after the invalid
Note: The removal of a director does not depend upon the qualification of his successors as long as the election since the operation of the principle is limited to third persons who were originally not part of the corporation but
removal has been duly made. became such by reason of voting of government- sequestered shares.33

No removal by electing replacement prior to expiration of term Lambert v Fox, 26 P 588


Rule: The incumbent directors or trustees CANNOT be removed merely by electing a new set of directors or The suspension of the power to sell has a beneficial purpose, results in the protection of the corporation as well as of the
individual parties to the contract, and is reasonable as to the length of time of the suspension.
trustees prior to the expiration of their term.
The intention of parties to a contract must be determined, in the first instance, from the words of the contract
Reason: Directors or trustees can only be removed by at least 2/3 of OCS or members entitled to vote, while itself. It is to be presumed that persons mean what they say when they speak plain English. Interpretation and construction
vacancies in the Board, when they exist, can only be filled by mere majority (or plurality) of vote. should by the instruments last resorted to by a court in determining what the parties agreed to. Where the language used by
the parties is plain, then construction and interpretation are unnecessary and, if used, result in making a contract for the
Removal by disqualification parties.
In case of disqualification by operation of law, there is no need to follow the procedure under Sec. 28. In this jurisdiction, there is no difference between a penalty and liquidated damages, so far as legal results are
concerned. Whatever differences exists between them as a matter of language, they are treated the same legally. In either
A mere declaration of such disqualification is sufficient to remove him from office. (SEC Opinion, Oct. 6,
case the party to whom payment is to be made is entitled to recover the sum stipulated without the necessity of proving
1994) damages. Indeed one of the primary purposes in fixing a penalty or in liquidating damages is to avoid such necessity.

Power to remove vested on stockholders


G. HOW VACANCY FILLED
Officers deriving their title from the stockholders (or members), they can be removed only by the power
Sec. 29. Vacancies in the office of director or trustee. Any vacancy occurring in the board of directors or trustees
that appointed them.
other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a
Board has no power to remove: The Board has no power to remove one of its members as director or majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the
trustee. stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be
Neither can it replace the vacancy caused by removal effected by the stockholders or members of the elected only or the unexpired term of his predecessor in office. Any directorship or trusteeship to be filled by reason of an
corporation. increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of
Resignation of directors or trustees stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees
if so stated in the notice of the meeting
Right to resign anytime: Nothing in the law prevents a director or trustee from resigning any time.
Form of resignation: In the absence of express provision, a resignation need not be in any particular form.
It may be either oral or in writing, but it must clearly show an intent to resign. How vacancy is created
Report to SEC: The Code requires the resignation of director or trustee to be immediately reported to the 1. Death
SEC. 2. Resignation from the Board and not as stockholder
3. Withdrawal
Effectivity date: At the moment the resignation is made to the proper officer or body.
4. Disqualification (e.g. conviction of crime of murder)
5. Removal
Bernas v Cinco, 1 July 2015
6. Expiration of the term
The Corporation Code laid down the rules on the removal of the Directors of the corporation by providing, inter alia,
the persons authorized to call the meeting and the number of votes required for the purpose of removal, thus: 7. Increase in the number of directors/trustees
Sec. 28. Removal of directors or trustees. - Any director or trustee of a corporation may be removed from office by a vote of Requisite: Amendment of the AoI
the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a
non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal
shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either
case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the
meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or
trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the

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b) By a vote of stockholders representing at least a majority of the outstanding capital stock.


1. Death 1. By appointment: remaining members of the BoD/BoT, if still constituting a quorum Note: A stockholder's resolution or agreement for the payment of compensation for such services would be
2. Resignation from the Board Who should they choose? Stockholders possessing qualifications and not valid.
3. Withdrawal or transfer possessing disqualifications
4. Disqualification 2. By special elections: if no quorum
BUT the stockholders CANNOT ratify a board of directors' action fixing their own salaries.
Example: 5 BoDs Limitation: The yearly compensation of directors shall in no case exceed 10% of the NET income before income
a) 3 BoDs died, then special elections tax of the corporation during the preceding year.
b) 1 BoD died, then the remaining 4 will choose from SH

5. Removal Special or regular elections


Per diems of directors
6. Expiration of term
The power of the BoDs to fix per diems for themselves is conferred by the law itself.
7. Increase in number of Elections in a regular or special meeting called for that purpose
directors/trustees Basis of reasonableness of per diems
a) Financial condition of the corporation
b) Nature of service performed by the director
HOLDOVER PRINCIPLE Board of Directors under holdover capacity c) Actual cost incurred by the director
When: Occurs if no election was held due to lack of quorum, or successors have not elected or qualified Per diems granted to directors should not be included in their total yearly compensation for
purposes of the 10% limitation.
Nature: Stockholders' or members' suit: Per diems received without proper authorization or found to be
a) Their acts are binding against the corporation unreasonably excessive may ordinarily be recoverable in a stockholders' or members' suit.
b) They are entitled for all rights, monuments, etc.
c) They will extend for another term otherwise they will abandon their office Other considerations
d) They are de facto officers Corporate officer who are not director: But a corporate officer who is not a director may be
compensated as an employee of the corporation.
Corporate officer and director at the same time: A corporate officer who is also a director may likewise
be compensated, in addition to his per diems, the amount to be fixed by a board resolution in the
absence of provision to the contrary in the by laws and subject to the limitation.

Valle Verde Country Club v. Africa, 598 S 202 Singon et al v COA, 9 August 2010
Can a member of a corporation's BoD elect another director to fill in a vacancy caused by the resignation of a hold- Section 30 of the Corporation Code, which authorizes the stockholders to grant compensation to its directors, states: In
over director? the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation,
NO. as such directors, except for reasonable per diems; Provided, however, that any such compensation (other than per
The holdover period is not part of the term of office of a member of the board of directors. Consequently, when diems) may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding
during the holdover period, a director resigns from the board, the vacancy can only be filled-up by the stockholders, capital stock at a regular or special stockholders meeting. In no case shall the total yearly compensation of directors, as
since there is no term left to fill up pursuant to the provisions of Sec. 29 of the Corporation Code which mandates that such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding
a vacancy occurring in the board of directors caused by the expiration of a member's term shall be filled by the year.
corporation's stockholders. That a director continues to serve after one year from his election (i.e. on a holdover From this, it is clear that the directors of a corporation shall not receive any compensation for being
capacity), cannot be considered as extending his term. This holdover period, however, is not to be considered as members of the board of directors, except for reasonable per diems. The two instances where the directors are to be
part of his term, which, as declared, had already expired. Notes: entitled to compensation shall be when it is fixed by the corporations by-laws or when the stockholders, representing at
During holdover period, 2 of the 5 BoDs resigned, can the 3 remaining choose or appoint? NO, they are only on least a majority of the outstanding capital stock, vote to grant the same at a regular or special stockholders meeting,
their holdover capacities; Conduct special elections instead. subject to the qualification that, in any of the two situations, the total yearly compensation of directors, as such directors,
shall in no case exceed ten (10%) percent of the net income before income tax of the corporation during the preceding
year.
In this regard, the Court upholds the findings of respondent that petitioners right to compensation as
Tenure and term, distinguished members of the PICCI Board of Directors is limited only to per diem of P1,000.00 for every meeting attended, by virtue of
Tenure: Represents the term during which the incumbent actually holds office. the PICCI By-Laws.
It may be SHORTER or LONGER (in case of holdover) than the term for reasons within or beyond the
power of the incumbent. Western Institute v Salas, 278 S216
Term: Shall only be ONE year after election to the office. Under section 30, there are two (2) ways by which members of the board can be granted compensation apart from
The holdover period is not part of director's original term of office nor is it a new term. reasonable per diems: (1) when there is a provision in the by-laws fixing their compensation; and (2) when the
stockholders representing a majority of the outstanding capital stock at a regular or special stockholders' meeting agree
to give it to them. The proscription under said section pertains to compensations granted to members of the Board. But
they are not prohibited to be compensated if these members of the Board act as officers of the corporation, more
H. HOW COMPENSATED particularly as Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of Technology
Sec. 30. Compensation of directors. In the absence of any provision in the by-laws fixing their compensation,
the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, Central Coop Exchaange v Tibe, 33 S 593
however, That any such compensation other than per diems may be granted to directors by the vote of the resolutions are contrary to the By-Laws of the federation and, therefore, are not within the power of the board of
stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders directors to enact. The By-Laws, in the aforequoted Section 8, explicitly reserved unto the stockholders the power to
meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of determine the compensation of members of the board of directors, and the stockholders did restrict such compensation
the net income before income tax of the corporation during the preceding year. to "actual transportation expenses plus the per diems of P30.00 and actual expenses while waiting." Even without the
Compensation of BoD/BoT express reservation of said power, the directors are not entitled to compensation under the Corporation Code.
GR: BOD/BOT are not entitled to compensation except for reasonable per diems The directors, in assigning themselves additional duties, such as the visitation of FACOMAS, acted within their
XPN: (when they can receive compensation as a matter of right) power, but, by voting for themselves compensation for such additional duties, they acted in excess of their authority, as
a) If provided for in the by-laws; or expressed in the By-Laws.

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Shipside v CA, 352 S 334


Lingayen Gulf v Baltazar, 93 P 404 The Court of Appeals dismissed the petition for certiorari on the ground that Lorenzo Balbin, the resident manager for
It is clear that he is not entitled to the same. The by-laws of the company are silent as to the salary of the President. And, petitioner, who was the signatory in the verification and certification on non-forum shopping, failed to show proof that he
while resolutions of the incorporators and stockholders provide salaries for the general manager, secretary-treasurer and was authorized by petitioner's board of directors to file such a petition.
other employees, there was no provision for the salary of the President. On the other hand, other resolutions provide It was clear from the record that when the general manager filed the petition, there was no proof attached
for per diems to be paid to the President and the directors of each meeting attended, P10 for the President and P8 for as to the authorization by the Board. However, when the petitioner filed its motion for reconsideration a resolution or
each director, which were later increased to P25 and P15, respectively. This leads to the conclusions that the President secretarys certification stating that that on October 11, 1999, or ten days prior to the filing of the petition, Balbin had been
and the board of directors were expected to serve without salary, and that the per diems paid to them were sufficient authorized by petitioner's board of directors to file said petition. The Court accepted this certification, although belatedly
compensation for their services. Furthermore, for defendant's several years of service as President and up to the filing of presented, as a valid authorization. The Court was reiterated that belated submission of a verification is allowed the same
the action against him, he never filed a claim for salary. being not a mandatory and jurisdictional requirement, and as to the non-forum shopping the same was considered to be
valid because the case of the petitioner must be litigated based on its merit and must not be dismissed based on technical
and procedural infirmities, which were actually cured.

I. POWER/AUTHORITY OF BOARD OF DIRECTORS ABS-CBN v CA, 301 S 573


BOD/BOT as repository of corporate powers Contracts that are consensual in nature are perfected upon mere meeting of the minds. Once there is concurrence
GR: The corporate powers of the corporation, all business conducted and all property of such corporation between the offer and the acceptance upon the subject matter, consideration, and terms of payment, a contract is
controlled and held by the BOD/BOT (Sec. 23) produced. The offer must be certain. To convert the offer into a contract, the acceptance must be absolute and must
not qualify the terms of the offer; it must be plain, unequivocal, unconditional, and without variance of any sort from the
XPNs: proposal. A qualified acceptance, or one that involves a new proposal, constitutes a counter offer and is a rejection of
the original offer. Consequently, when something is desired which is not exactly what is proposed in the offer, such
a) In case of an Executive Committee duly authorized in the by-laws;
acceptance is not sufficient to generate consent because any modification or variation from the terms of the offer annuls
b) In case of a contracted manager which may be an individual, a partnership, or another corporation. the offer.
(Note: In case the contracted manager is another corporation special rule: Sec. 44 applies)
c) In case of close corporations, the stockholders may manage the business of the corporation instead by
a board of directors, if the Articles of Incorporation provide. Asset Privatization Trust v CA, 300 S 582
The FRP was not adopted by PNB and DBP hence there was no valid restructuring program undertaken and the option of
NOTE: When majority of quorum required: Transactions in the ordinary course of business When majority of total the banks to foreclose the properties were never divested. Although there were allegations that representatives of PNB
members of the Board required: ABISIMID and DBP were part of the drafting of the FRP there was no showing that the representatives of PNB and DBP in MMIC even
had the requisite authority to enter into a debt-for-equity swap. And if they had such authority, there was no showing that
Rules as to verification and certification of non-forum shopping the banks, through their board of directors, had ratified the FRP. Hence, without such proof, the Court ruled that those
representatives, singly or collectively, are not themselves PNB or DBP. They are individuals with personalities separate and
GR: All the members of the Board must sign
distinct from the banks they represent. PNB and DBP have different boards with different members who may have different
decisions. And estoppel cannot be used to impose upon them the decision of the board of another company. Otherwise
the rights of entirely separate distinct and autonomous legal entities like PNB and DBP with thousands of stockholders will
XPN: (When only one member of the Board signed yet the same is valid) be suppressed and rendered nugatory. Wherefore, the decisions of the appellate court were reversed.
a) Authorized by Board resolution
b) Authorized by by-laws BA Savings Bank v Sia, 336 S 484
c) Inherent in the nature of office e.g. President, general manager, chairman of the Board, HRD Director A corporation exercises powers through its board of directors and/or its duly authorized officers and agents. Physical acts,
(in labor cases) like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate
Riosa v Tabaco, 23 October 2013 bylaws or by a specific act of the board of directors. In this case, the corporations board of directors issued a Resolution
specifically authorizing its lawyers to act as their agents in any action or proceeding before the Supreme Court, the Court
Article 1390(2) of the Civil Code provides that contracts where the consent is vitiated by mistake, violence, intimidation,
of Appeals, or any other tribunal or agency and to sign, execute and deliver in connection therewith the necessary
undue influence or fraud are voidable or annullable. Article 1335 of the Civil Code, meanwhile, states that [t]here is
pleadings, motions, verification, affidavit of merit, certificate of non-forum shopping and other instruments necessary for
intimidation when one of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent
such action and proceeding. The Resolution was sufficient to vest such persons with the authority to bind the corporation
and grave evil upon his person or property, or upon the person or property of his spouse, descendants or ascendants, to
and was specific enough as to the acts they were empowered to do.
give his consent. The same article, however, further states that [a] threat to enforce ones claim through competent
Circular 28-91 requires the parties themselves to sign the certificate of non-forum shopping. However, such
authority, if the claim is just or legal, does not vitiate consent.
requirement cannot be imposed on artificial persons, like corporations, for the simple reason that they cannot personally
do the task themselves. In this case, the corporation very well exercised its power to authorize a representative to act on
La Bugaal v Ramos, 421 S 148 its behalf.
It bears noting that there is nothing in E.O. No. 200 that prevents a law from taking effect on a date other than even
before the 15-day period after its publication. Where a law provides for its own date of effectivity, such date prevails
Montelibano v Bacolod Murcia, 5 S 36
over that prescribed by E.O. No. 200. Indeed, this is the very essence of the phrase "unless it is otherwise provided" in
The Court ruled that the August 20, 1936 resolution, passed in good faith by the board of directors, was valid and binding
Section 1 thereof. Section 1, E.O. No. 200, therefore, applies only when a statute does not provide for its own date of
and formed an integral part of the amended milling contracts, the milling company having agreed to give concessions
effectivity.
to the planters, precisely to induce them to agree to an extension of their contracts.
As noted, "service contracts" is a term that assumes different meanings to different people. The
Petitioner filed two motions for reconsideration; however, the doctrine of res judicata had set in. Wherefore, the appeal
commissioners may have been using the term loosely, and not in its technical and legal sense, to refer, in general, to
was denied.
agreements concerning natural resources entered into by the Government with foreign corporations. These loose
statements do not necessarily translate to the adoption of the 1973 Constitution provision allowing service contracts.
In any case, the constitutional provision allowing the President to enter into FTAAs with foreign-owned Powers v Marshall, 9 May 1988
corporations is an exception to the rule that participation in the nation's natural resources is reserved exclusively to Section 2 (b) of P.D. No. 732 granting certain rights to the International School, Inc., expressly authorized the Board of
Filipinos. Accordingly, such provision must be construed strictly against their enjoyment by non-Filipinos. As Commissioner Trustees "upon consultation with the Secretary of Education and Culture, ... to determine the amount of fees and
Villegas emphasized, the provision is "very restrictive."Commissioner Nolledo also remarked that "entering into service assessments which may be reasonably imposed upon its students, to maintain or conform to the school standard of
contracts is an exception to the rule on protection of natural resources for the interest of the nation and, therefore, being education." Such consultation had been made with the Secretary of Education and Culture who expressed his conformity
an exception, it should be subject, whenever possible, to stringent rules." Indeed, exceptions should be strictly but with the reasonableness of the assessment of P2,625.00 per student for the whole school year to carry out its development
reasonably construed. program. Since the collection of the development fee had been approved by the Board of Trustees of the International

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School, Inc., it was a valid exercise of corporate power by the Board, and said assessment was binding upon all the When the by-laws provide for the position of "Superintendent/ Administrator," it is clearly a corporate officer position and
members of the corporation. issues of reinstatement would be within the jurisdiction of the SEC (now RTC) and not the NLRC.

Private respondent is an officer of Petitioner Corporation and not its mere employee. The by-laws of the Galeria de
Premium Marble v CA, 264 S 11
Magallanes Condominium Association specifically include the Superintendent/Administrator in its roster of corporate
The petitioners asserted that the Board authorized such filing. However, from the records of the case as well as that of the
officers. He was appointed directly by the Board of Directors not by any managing officer of the corporation and his
corporations, no evidence was seen and shown that the results of the election where the supposed members of the Board
salary was, likewise, set by the same Board. Having thus determined, his dismissal or non-appointment is clearly an intra-
who allegedly authorized the filing were filed with the Securities and Exchange Commission. The Corporation Code
corporate matter and jurisdiction, therefore, properly belongs to the SEC and not the NLRC. Despite not being elected,
mandates that within thirty (30) days after the election of the directors, trustees and officers of the corporation, the
P.D. 902-A Sec. 5(c) expressly covers both election and appointment of corporate directors, trustees, officers and
secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission, the names,
managers.
nationalities and residences of the directors, trustees and officers elected. Failure to comply with such requirement, the
elected members cannot be considered as the duly constituted and elected members of the Board. Hence, being not
duly constituted, the filing of the case was not authorized by the Board. Lao v CA, 325 S 694
Co asserted that he should not be held jointly and severally liable with the Corporation because in filing the affidavit-
complaint against respondent Lao, he was acting as the executive vice-president of the Corporation and his action was
Ramirez v Orientalist, 38 P 634;
within the scope of his authority as such corporate officer. Based from the records, Co was the vice-president of the
Although there were no evidence as to the authority of Ramon Fernandez to enter into said contract, the Court had
corporation when he filed the affidavit- complaint. The corporation failed tomake an issue out of his authority to file said
observed that when the defendant corporation failed to question the validity of the contract, it resulted to eliminating
case. Upon well-established principles of pleading, lack of authority of an officer of a corporation to bind it by contract
the question of his authority from the case. This is a case where an officer of a corporation has made a contract in its
executed by him in its name, is a defense which should have been specially pleaded by the Corporation
name, that the corporation should be required, if it denies his authority, to state such defense in its answer. By this means
The Corporation's failure to interpose such a defense could only mean that the filing of the affidavit-complaint
the plaintiff is apprised of the fact that the agent's authority is contested; and he is given an opportunity to adduce
by petitioner Co was with the consent and authority of the Corporation. In the same vein, petitioner Co may not be held
evidence showing either that the authority existed or that the contract was ratified and approved. Failure to question
personally liable for acts performed in pursuance of an authority and therefore, holding him solidarily liable with the
such timely and appropriately question such authority results to the admission of such fact.
Corporation for the damages awarded to respondent Lao does accord with law and jurisprudence.

J. DELEGATION OF AUTHORITY TO CORPORATE OFFICERS De Tavera v Phil. Tuberculosis Society, 112 S 243
CORPORATE OFFICERS / OFFICE vis-a-vis EMPLOYMENT The Court ruled that there was no clear indication that the petitioner was appointed to a permanent position. Although
Who are "corporate officers?" the minutes of the organizational meeting show that the Chairman mentioned the need of appointing a "permanent"
a) The officers provided by the Corporation Code, namely, the President, Treasurer and Secretary Executive Secretary, such statement alone cannot characterize the appointment of petitioner without a contract of
b) Those provided for in the by-laws of the corporation employment definitely fixing her term. Without such term, the appointment was deemed to be temporary, and is subject
to the pleasure of the Board or of the appointing body. Hence, when the Board opts to replace the incumbent,
Nature: They do not enjoy security of tenure, and their incumbency is within the business judgment discretion of
technically there is no removal but only expiration of term and in an expiration of term, there is no need of prior notice,
the BOD/BOT. due hearing or sufficient grounds before the incumbent can be separated from office.
Removal: Their removal is considered an intra-corporate controversy and beyond the reach of labor tribunals .
CORPORATE OFFICERS (statutory)
Real v Sangu Phil, 19 January 2011 Generally, they cannot act alone unless to those functions inherent in their office. They need authority
Petitioner is not a corporate officer. It has been consistently held that an office is created by the charter of the either from the by-laws or resolutions by the Board.
corporation and the officer is elected (or appointed) by the directors or stockholders. Clearly here, respondents failed to 1. The President (who shall be and director)
prove that petitioner was appointed by the board of directors. Although they had been reiterating that the petitioner was
He executes or implements policies, in-charge in day-to-day operations
employed as a manager, there was no indication as to how he was put into such position. For respondents failure to
substantiate its claim the petitioner was deemed to be not a coporate officer, hence jurisdiction properly lies with the LA. Shall be selected in accordance with: by-laws (usually through election by SH) or Board itself from
among themselves (if by-laws is silent)
Meatling v Coros, 13 October 2010 All certificates must be issued in the name of Pres
The petitioners contend that the position of Vice President for Finance and Administration was a corporate office, having
2. Treasurer (who may not be a director)
been created by Matlings President pursuant to the by-Law. Custodian of money of corporation
However, the Court explained that an "office" is created by the charter of the corporation and the officer is Custodian of the trust fund
elected by the directors or stockholders. On the other hand, an employee occupies no office and generally is employed Duty to submit financial statement to SEC and other offices annually
not by the action of the directors or stockholders but by the managing officer of the corporation who also determines the 3. Corporate Secretary (who shall be a resident and citizen of the Philippines)
compensation to be paid to such employee. In this case, respondent was appointed vice president for nationwide Custodian of all corporate books and records
expansion by Malonzo, petitioner's general manager, not by the board of directors of petitioner. Also his compensation
was paid by Malonzo. Thus, respondent was an employee, not a "corporate officer.
His signature is required in all stock certificates and reports submitted to government agencies
Also, the Board of Directors of Matling could not validly delegate the power to create a corporate office to Manages minutes of meetings, stock and transfer book
the President, in light of Section 25 of the Corporation Code requiring the Board of Directors itself to elect the corporate 4. And such other officers as may be provided in the by-laws.
officers. Verily, the power to elect the corporate officers was a discretionary power that the law exclusively vested in the
Board of Directors, and could not be delegated to subordinate officers or agents.The office of Vice President for Finance Notes:
and Administration created by Matlings President pursuant to the by- law was an ordinary, not a corporate, office. 1. Consent of the Board is not always required as to order by the corporate president, provided that such
decision or transaction relates to the business of the corporation.
Manila Metal v PNB, 511 S 444 2. Treasurer and secretary may not even be required to be stockholders unless provided in the by-laws.
There is no evidence that the SAMD was authorized by respondent's Board of Directors to accept petitioner's
offer and sell the property. Any acceptance by the SAMD of petitioner's offer would not bind respondent. A corporation
can only execute its powers and transact its business through its Board of Directors and through its officers and agents
when authorized by a board resolution or its by-laws. Absent such valid delegation/authorization, the rule is that the
declarations of an individual director relating to the affairs of the corporation, but not in the course of, or connected with QUALIFICATIONS
the performance of authorized duties of such director, is held not binding on the corporation. The Corporate Officers are:
a) The President (who shall be a director)
Ongkingco v. NLRC, 270 S 613

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b) Treasurer (who may not be a director) corporation has discharged its burden under the Ramirez Doctrine, then the burden of proof now shifts to the
c) Corporate Secretary (who shall be a resident and citizen of the Philippines contracting party to show that indeed by previous acts and actuations, the acting officer had been clothed by the
d) And such other officers as may be provided in the by-laws. corporation with apparent authority for the public to take such authority at face value.
GR: Any two (2) or more positions may be held concurrently by the same person.
XPN: No one shall act as President and Secretary or as President and Treasurer, at the same time.
LIABILITY
DISQUALIFICATIONS Rule: Officers or directors bear no personal liability for acts done or contracts entered into for the corporation, if
Sec. 27, CC: No person convicted by final judgment of an offense punishable by imprisonment for a duly authorized.
period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the See discussions on three-fold and personal liabilities of directors, officers, etc.
date of his election or appointment, shall qualify as a director, trustee or officer of any corporation. Q: Who are the basic set of officers?
A: President, Secretary and Treasurer

Q: Who are the by-laws officers of a corporation?


A: If the by-laws provides that the BoD may create positions and provide for their function. The officers elected to
AUTHORITY Rule on Corporate Officers Power to Bind Corporation such positions are bylaws officers. But the by-laws should be amended to reflect the office created.
An officers power as an agent of the corporation must be sought from the statute, charter, the by-
laws or in a delegation of authority to such officer, from the acts of the board of directors formally Q: Why is the determination whether an officer is a bylaw officer or a management officer important?
A: As regards intra-corporate dispute. Bylaws officers are under the SEC while non-by-laws officers are under the
expressed or implied from a habit or custom of doing business.
NLRC

Actual: express or implied authority Q: Who are management officers?


1. Inherent authority or power of an officer or agent is taken to mean that authority to act and bind the A: Those not mentioned in the by-laws and not elected by the BoD. Their positions are created by the management.
corporation which the officer has by reason of his office, although it may not be sanctioned by express
How do you elect Chairman and Vice-Chairman if the bylaws does not provide for it?
authority.
1. By laws must give power to the BoD to create other positions and provide for their functions;
2. Express authority of an officer or agent includes every power or authority expressly conferred upon him by 2. Amend the Bylaws if there is no such provision;
law and the by-laws of the corporation.
3. Implied authority of an officer or agent of a corporation includes all such incidental authority as is necessary,
usual, and proper to effectuate the main authority expressly conferred.
Matling v. Coros, Oct. 13, 2010
Although the by-laws provide expressly that the BoD "shall have full power to create new offices and to appoint the
Apparent or ostensible authority officers thereto," any office created, and any officer appointed pursuant to such clause DOES NOT become a
Apparent authority is naturally the same as and based upon the same principle as authority by estoppel. "corporate officer," but is an employee and the determination of the rights and liabilities relating to his removal are
Purpose: To place the corporation in estoppel within the jurisdiction of the NLRC. They do not constitute intra-corporate controversies. A different interpretation can
easily leave the way open for the BoD to circumvent the constitutionally guaranteed security of tenure of the
Requisites: employee by the expedient inclusion in the by-laws of an enabling clause on the creation of just any corporate officer
position. The Tabang and Nacpil rulings are no longer controlling.
a) Unauthorized person guilty of misrepresenting himself as an agent of a corporation with
knowledge that no such power exists
b) Corporation also has knowledge of such misrepresentation and acquiesce to the acts of its
Okol v. Slimmers World International, 608 S 97
unauthorized agent
Office: created by charter of the corporation and the officer is elected by the directors or stockholders
Corporation is bound by the acts of its unauthorized agent if an innocent third party relied on such Employee: usually occupies no office and generally is employed not by action of the directors or stockholders but by
misrepresentation in good faith. the managing officer of the corporation who also determines the compensation to be paid to such employee.
GR: In the absence of an authority from the board of directors, no person, not even the officers of the corporation, Okol was a corporate officer at the time of her dismissal. According to the Amended By-Laws of Slimmers
can validly bind the corporation. XPNs: World which enumerate the power of the board of directors as well as the officers of the corporation, the general
1. Doctrine of Ratification or Estoppel: management of the corporation shall be vested in a board of five directors who shall be stockholders and who shall be
entered into in behalf of elected annually by the stockholders and who shall serve until the election and qualification of their successors and like
the corporation is outside the usual powers of the corporate officer, the corporations ratification of the contract and the Chairman of the Board and the President, the Vice President shall be elected by the Board of Directors from its own
acceptance of the benefits have made such contract binding upon the corporation. members. The Vice President shall be vested with all the powers and authority and is required to perform all the duties
Note: Ratification that would bind the corporation would have to come from the board of directors or a properly of the President during the absence of the latter for any cause. The Vice President will perform such duties as the Board
authorized representative. Ratification can never be made on the part of the corporation by the same persons who of Directors may impose upon him from time to time. This clearly shows that Okol was a director and officer of Slimmers
wrongfully assume the power to make the contract, but the ratification must be by the officers as governing body World.
having authority to make such contract. An office is created by the charter of the corporation and the officer is elected by the directors and
2. Doctrine of Apparent Authority: If a corporation knowingly permits one of its officers, or any other agent to act stockholders. On the other hand, an employee usually occupies no office and generally is employed not by action of
within the scope of an apparent authority, it holds him out to the public possessing the power to do so those acts; the directors or stockholders but by the managing officer of the corporation who also determines the compensation to
and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be be paid to such employee.
estopped from denying the agents authority.

Note: Existence of apparent authority must be ascertained through:


Gomez v. PNOC DMC, 606 S 187
a) General manner in which the corporation holds out an officer or agent as having the power to act or in, other Ordinary company employees are generally employed not by action of the directors and stockholders but by that of
words, the apparent authority to act in general, with which it clothes him; or the management officer of the corporation who also determines the compensation to be paid such employees.
b) The acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within Corporate officers, on the other hand, are elected or appointed by the directors or stockholders, and are those who
or beyond of his ordinary powers. are given that character either by the Corporation Code or by the corporation's by-laws. The relationship of a person
to a corporation whether as officer or agent or employee is not determined by the nature of services he performs but
Ramirez Doctrine: If the corporation desires to set up the defense that the contract was executed by one not by the incidents of his relationship with the corporation as they actually exists. A corporation is not prohibited from
authorized as agent, it must plead such fact. Yao Ka Sin-Timely Repudiation Doctrine: However, once the hiring a corporate officer to perform services under circumstances which will make him an employee.

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Sec 11 Rule 14 of the Rules of Civil Procedure may take various forms like silence or acquiescence; by acts showing approval or adoption of the contract; or by
acceptance and retention of benefits flowing therefrom. Furthermore, even in the absence of express or implied
authority by ratification, the President as such may, as a general rule, bind the corporation by a contract in the ordinary
E.B. Villarosa and Partners Co, Inc. v Benito, 312 S 65
course of business, provided the same is reasonable under the circumstances. These rules are basic, but are all general
Section 13, Rule 14 of the Rules of Court which provided that: Service upon private domestic corporation or partnership,
and thus quite flexible. They apply where the President or other officer, purportedly acting for the corporations, is dealing
If the defendant is a corporation organized under the laws of the Philippines or a partnership duly registered, service may
with a third person, i.e., a person outside the corporation. The situation is quite different where a director or officer is
be made on the president, manager, secretary, cashier, agent, or any of its directors.
dealing with his own corporation. Herein, Te was not an ordinary stockholder; he was a member of the Board of Directors
The Court ruled that under such provision, it is clear upon whom the service of summons should be made.
and Auditor of the corporation as well. He was what is often referred to as a "self-dealing" director
The designation of persons or officers who are authorized to accept summons for a domestic corporation or partnership
is now limited and more clearly specified. The rule now states "general manager" instead of only "manager"; "corporate
secretary" instead of "secretary"; and "treasurer" instead of "cashier." The phrase "agent, or any of its directors" is Louis Vitton SA s Villanueva
conspicuously deleted in the new rule. In this case, since the summons was served upon a branch manager, who is not The ground which was relied upon by the trial court in acquitting the accused finds basis in the well-settled doctrine that
authorized to accept the same, there was improper service of summons. a corporation has a distinct personality from that of its stockholders/owners. A corporation is vested by law with a
personality of its own, separate and distinct from that of its stockholders and from that of its officers who manage and run
its affairs. This decision is assailed to be unjust mainly because it did not consider the Prosecution's Memorandum with
Supreme Steel Pipe Corporation and Reagan Sy v Bardaje, 522 S 155
Motion and Motion for Early Resolution filed by private prosecutor, herein complainant, on February 8, 1991 and February
It appears that respondent impleaded SSPC President Regan Sy only because he is an officer/agent of the company.
11, 1991, respectively. According to complainant, had respondent judge taken the former motion into account, he would
However, the court ruled that he cannot be made solidarily liable because for the termination of respondents
not have acquitted the accused, Jose V. Rosario. Instead, he would have been held guilty for giving others an opportunity
employment, since there is no showing that the dismissal was attended with malice or bad faith. The rule still stand that
engage in unfair competition as prescribed by Article 189 of the Revised Penal Code.
the liabilities of a corporation should not be directly imputed to its officers and it shall be borne entirely by the
In the first place, it would not have made any difference because Jose v. Rosario was charged as
corporation itself
owner/proprietor. COD is not a single proprietorship but one that is run and owned by a corporation, Rosario Bros., Inc., of
which the accused is stockholder and Executive Vice-President. A stockholder generally does not have a hand in the
Cagayan Valley Drug Corp v CIR, 545 S 10 management of the corporate affairs. On the other hand, the Vice-President had no inherent power to bind the
In several cases the court has recognized the authority of some corporate officers to sign the verification and certification corporation.
against forum shopping. In these cases, the court allowed the: (1) the Chairperson of the Board of Directors, (2) the As general rule, his duties must be specified in the by-laws. In the criminal case, the information did not specify
President of a corporation, (3) the General Manager or Acting General Manager, (4) Personnel Officer, and (5) an his duties as Executive Vice-President. The trial court had no basis for holding that as such, the accused entered into a
Employment Specialist in a labor case, to sign said documents, without need of a board resolution. contract with the concessionaire thereby giving the latter an opportunity to practice unfair competition. Whereas, Section
Also in this case, an authorization was belatedly submitted. Although belated, the court still accepts it as a 23 of the Corporation Code is explicit that the directors, acting as a body, exercise corporation powers and conduct the
valid and which it had cured the procedural infirmities of the case. corporation's business.

Pabon v NLRC, 296 S 8 EXECUTIVE COMMITTEE


Bookkeeper can be considered as an agent of private respondent corporation within the purview of Section 13, Sec. 35. Executive committee. The by-laws of a corporation may create an executive committee, composed of
Rule 14 of the old Rules of Court. The rationale of all rules with respect to service of process on a corporation is that such not less than three members of the board, to be appointed by the board. Said committee may act, by majority vote of all
service must be made to an agent or a representative so integrated with the corporation sued as to make it a its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on
priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders approval is also
him. The bookkeeper's task is one under consideration. The job of a bookkeeper is so integrated with the corporation that required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws;
his regular recording of the corporation's "business accounts" and "essential facts about the transactions of a business or (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable;
enterprise" safeguards the corporation from possible fraud being committed adverse to its own corporate interest. and (5) a distribution of cash dividends to the shareholders.
Although it may be true that the service of summons was made on a person not authorized to receive the
same in behalf of the petitioner, nevertheless since it appears that the summons and complaint were in fact received by
the corporation through its said clerk, the Court finds that there was substantial compliance with the rule on service of Creation of Execom
summons. Indeed the purpose of said rule as above stated to assure service of summons on the corporation had thereby 1. The by-laws of a corporation may create an executive committee
been attained. The need for speedy justice must prevail over technicality. 2. Composed of not less than three members of the board,
3. To be appointed by the board.
Vlason Enterprises v CA, 310 S 26
Sec 4 and 5 of the Rules of Court ideally requires a movant to address and serve on the counsel of the adverse Actions of Execom
party the notice of hearing of its motion. Service of a copy of a motion must contain a notice of the time and the place Said committee may act, by majority vote of all its members, on such specific matters within the
of hearing. There are, however, exceptions to the rule: Where a rigid application will result in a manifest failure or
competence of the board, as may be delegated to it in the by-laws or on a majority vote of the
miscarriage of justice, especially if a party successfully shows that the alleged defect in the questioned final and
executory judgment is not apparent on its face or from the recitals contained therein; Where the interest of substantial board.
justice will be served; Where the resolution of the motion is addressed solely to the sound and judicious discretion of the
court; Where the injustice to the adverse party is not commensurate to the degree of his failure to comply with Prohibited acts (powers that execom cannot exercise, asked in 2014 Bar Exam)
prescribed procedure 1. Approval of any action for which shareholders approval is also required;
In this case, Vlason was not informed of any cause of action against it. It was not validly summoned. Its 2. The filing of vacancies in the board;
vessels that it used for its salvaging business was levied upon and sold in execution to satisfy a supposed judgment
3. The amendment or repeal of by-laws or the adoption of new by-laws;
against it. To allow this to happen simply because of its failure to comply with the notice requirement would result into
manifest injustice. 4. The amendment or repeal of any resolution of the board which by its express terms is not so
amendable or repealable; and
Prime White Cement, IAC 220 S 103 5. A distribution of cash dividends to the shareholders.
The dealership agreement is not valid and unenforceable. Under the Corporation Law, which was then in Ma'am said not just cash dividends but other kinds of dividends as well.
force at the time the case arose, as well as under the present Corporation Code, all corporate powers shall be exercised
by the Board of Directors, except as otherwise provided by law. Although it cannot completely abdicate its power and Purpose of Execom
responsibility to act for the juridical entity, the Board may expressly delegate specific powers to its President or any of its To take off part of the work from the Board during the periods when the Board does not meet.
officers. Membership of Execom
In the absence of such express delegation, a contract entered into by its President, on behalf of the
Non-members of the Board may be appointed as members of the executive committee provided
corporation, may still bind the corporation if the board should ratify the same expressly or impliedly. Implied ratification
that there are at least 3 members of the Board therein.

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Other considerations Associated Bank (UOB) v Sps Ponstroller, 3 September 2009


Executive Committee is a governing body which functions as the board itself. The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly
Thus, membership therein shall be governed by the same law rules applicable to the board of bind a corporation. The power and responsibility todecide whether the corporation should enter into a contract that will
bind the corporation islodged in the board of directors. However, just as a natural person may authorize another to do
directors as provided in Section 35. (SEC Opinion, June 3, 1998)
certain acts for and on his behalf, the board may validly delegate some of its functions and powers to officers, committees
As a matter of business practice, the use of execom in many companies may reduce the directors to and agents. The authority of such individuals to bind the corporation is generally derived from law, corporate bylaws or
little more than a supervising and ratifying body authorization from the board, either expressly or impliedly, by habit, custom, or acquiescence, in the general course of
Section 35 recognizes an already existing corporate practice in the Philippines dictated by necessity business.The authority of a corporate officer or agent in dealing with third persons may be actual or apparent.
owing to the growing complexities of modern business, whereby the board of directors delegates to The doctrine of apparent authority, with special reference to banks, had long been recognized in this
an executive committee composed of some members of the board corporate powers to assure jurisdiction. Apparent authority is derived not merely from practice. Its existence 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
prompt and speedy action and solution to important matters without the need for a board meeting,
apparent authority to act in general, with which it clothes him; 2) the acquiescence in his acts of a particular nature, with
especially where such meetings cannot be readily be held. actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers. Accordingly, the authority
Thus, the committee directly manages the operations of the corporation between meetings of the to act for and to bind a corporation may be presumed from acts of recognition in other instances, wherein the power was
board, thereby reducing the work load of the latter. exercised without any objection from its board or shareholders.

DOCTRINE OF APPARENT AUTHORITY Acuna v Batac Producers, 20 S 526


Apparent or ostensible authority A perusal of the complaint reveals that it contains sufficient allegations indicating such approval or at least subsequent
ratification. On the first point note the following averments: that on May 9th the plaintiff met with each and all of the
- Apparent authority is naturally the same as and based upon the same principle as authority by
individual defendants (who constituted the entire Board of Directors) and discussed with them extensively the tentative
estoppel. agreement and he was made to understand that it was acceptable to them, except as to plaintiff's remuneration; that it
Purpose: To place the corporation in estoppel and hold the corporation and its officers solidarily bound. was finally agreed between plaintiff and all said Directors that his remuneration would be P0.30 per kilo (of tobacco); and
Requisites: that after the agreement was formally executed he was assured by said Directors that there would be no need of formal
a) Unauthorized person guilty of misrepresenting himself as an agent of a corporation with knowledge that approval by the Board. It should be noted in this connection that although the contract required such approval it did not
no such power exists specify just in what manner the same should be given.
On the question of ratification the complaint alleges that plaintiff delivered to the defendant corporation the
b) Corporation also has knowledge of such misrepresentation and acquiesce to the acts of its
sum of P20,000.00 as called for in the contract; that he rendered the services he was required to do; that he furnished said
unauthorized agent defendant 3,000 sacks at a cost of P6,000.00 and advanced to it the further sum of P5,000.00; and that he did all of these
c) Third person was misled by such misrepresentation things with the full knowledge, acquiescence and consent of each and all of the individual defendants who constitute
the Board of Directors of the defendant corporation. There is abundant authority in support of the proposition that
Corporation is bound by the acts of its unauthorized agent if an innocent third party relied on such ratification may be expressed or implied, and that implied ratification may take diverse forms, such as by silence or
misrepresentation in good faith. acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing
therefrom.
To estop the corporation from denying any liability from the acts of unauthorized agent.
The relationship is not a mere ordinary agency but involves a fiduciary relationship whereby the BOD
Board of Liquidators v Kalaw, 20 S987
or BOT should act for the welfare of the corporation and its stockholders
They were done with implied authority from the BOD. These previous contracts, it should be stressed, were
Banate v. Philippine Countryside, July 13, 2010 signed by Kalaw without prior authority from the board. Said contracts were known all along to the board members.
The decision of the trial court was utterly silent on the manner by which PCRB, as supposed principal, has "clothed" or Nothing was said by them. The aforesaid contracts stand to prove one thing. Obviously NACOCO board met the difficulties
"held out" its branch manager as having the power to enter into an agreement, as claimed by petitioners. No proof of attendant to forward sales by leaving the adoption of means to end, to the sound discretion of NACOCO's general
the course of business, usages and practices of the bank about, or knowledge that the board had or is presumed to manager Maximo M. Kalaw.
have of, its responsible officers acts regarding bank branch affairs, was ever adduced to establish the branch Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of
managers apparent authority to verbally alter the terms of mortgage contracts. Neither was there any allegation, much general practice, custom, and policy, the general manager may bind the company without formal authorization of the
less proof, that PCRB ratified Mondigos act or is estopped to make a contrary claim. board of directors. In varying language, existence of such authority is established, by proof of the course of business, the
Although a branch manager, within his field and as to third persons, is the general agent and is in general charge of the usages and practices of the company and by the knowledge which the board of directors has, or must be presumed to
corporation, with apparent authority commensurate with the ordinary business entrusted him and the usual course and have, of acts and doings of its subordinates in and about the affairs of the corporation.
conduct thereof, yet the power to modify or nullify corporate contracts remains generally in the board of directors. Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act or
Being a mere branch manager alone is insufficient to support the conclusion that Mondigo has been clothed with contract by its officers or others relates back to the time of the act or contract ratified, and is equivalent to original
"apparent authority" to verbally alter terms of written contracts, especially when viewed against the telling authority;" and that "[t]he corporation and the other party to the transaction are in precisely the same position as if the
circumstances of this case. In other words, the burden of proving the authority of Mondigo to alter or novate the act or contract had been authorized at the time." The language of one case is expressive: "The adoption or ratification of
mortgage contract has not been established. a contract by a corporation is nothing more nor less than the making of an original contract. The theory of corporate
ratification is predicated on the right of a corporation to contract, and any ratification or adoption is equivalent to a grant
Sargasso v. PPA, July 5, 2010 of prior authority.
Application of doctrine if government contract: The government is NOT bound by unauthorized acts of its agents, even
though within the apparent scope of their authority. Doctrine under law on agency: The power to affect the legal Francisco v GSIS, 7 S 577
relations of another person by transactions with third persons arising from the others manifestations to such third The terms of the offer were clear, and over the signature of defendant's general manager, Rodolfo Andal, plaintiff was
person38 such that the liability of the principal for the acts and contracts of his agent extends to those which are within informed telegraphically that her proposal had been accepted. There was nothing in the telegram that hinted at any
the apparent scope of the authority conferred on him, although no actual authority to do such acts or to make such anomaly, or gave ground to suspect its veracity, and the plaintiff, therefore, cannot be blamed for relying upon it. There
contracts has been conferred. Acts of principal, not agents is no denying that the telegram was within Andal's apparent authority, but the defense is that he did not sign it, but that it
It imposes liability, not as the result of the reality of a contractual relationship, but rather because of the actions of a was sent by the Board Secretary in his name and without his knowledge. Assuming this to be true, how was appellee to
principal or an employer in somehow misleading the public into believing that the relationship or the authority exists. know it? Corporate transactions would speedily come to a standstill were every person dealing with a corporation held
Apparent authority is determined only by the acts of the principal and not by the acts of the agent. duty-bound to disbelieve every act of its responsible officers, no matter how regular they should appear on their face
The principal is, therefore, not responsible where the agents own conduct and statements have created the apparent If a private corporation intentionally or negligently clothes its officers or agents with apparent power to
authority. perform acts for it, the corporation will be estopped to deny that such apparent authority is real, as to innocent third
In this case, not a single act of respondent, acting through its Board of Directors, was cited as having clothed its persons dealing in good faith with such officers or agents. Knowledge of facts acquired or possessed by an officer or agent
general manager with apparent authority to execute the contract with it.

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of a corporation in the course of his employment, and in relation to matters within the scope of his authority, is notice to Limitations on power
the corporation, whether he communicates such knowledge or not. 1. Ratification of the contract
Both managing and managed corporation: Majority votes of quorum of BOD + Majority votes of
Rural Bank v Ocfemia, 235 S 99 respective shareholders representing the OCS (not in joined session)
There was an apparent authority bestowed with Tena. The bank acknowledged, by its own acts or failure to act, the Interlocking interest: At least one stockholder represents interest in both managing and managed
authority of Fe S. Tena to enter into binding contracts. After the execution of the Deed of Sale, respondents occupied the
corporation and owns more than 30% ownership of either corporation
properties in dispute and paid the real estate taxes due thereon. If the bank management believed that it had title to the
property, it should have taken some measures to prevent the infringement or invasion of its title thereto and possession o Additional requirement: 2/3 votes of OCS of managed corporation
thereof. Interlocking directors: Majority of BOD in both corporations are one and the same.
Likewise, Tena had previously transacted business on behalf of the bank, and the latter had acknowledged o Additional requirement: 2/3 votes of OCS of managed corporation
her authority. A bank is liable to innocent third persons where representation is made in the course of its normal business 2. Period of the contract
by an agent like Manager Tena, even though such agent is abusing her authority. Clearly, persons dealing with her could GR: Must not exceed 5 years
not be blamed for believing that she was authorized to transact business for and on behalf of the bank.
XPN: Contracts which relate to the exploration, development, exploitation or utilization of natural
In this light, the bank is estopped from questioning the authority of the bank manager to enter into the contract
of sale. If a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent resources -> follow period as provided for by law
authority, it holds the agent out to the public as possessing the power to do those acts; thus, the corporation will, as against
anyone who has in good faith dealt with it through such agent, be estopped from denying the agents authority. 3. Managerial power under the contract
More so, the bank is in default for failing to answer the complaint of the Ocfemias within the reglamentary Delegation of entire supervision and control, prohibited: A management contract cannot
period without any justifiable excuse delegate entire supervision and control over the officers and business of a corporation to another
as this will contravene Section 23.
The board cannot surrender or abdicate its power and duty of supervision and control for
otherwise, it becomes a mere instrumentality of the management company.
Note: Some powers may not be delegated to the managing corporation e.g. amendment of the
AoI of the managed corporation

Rationale for Ratification Requirements on Part of Managed Corporation


That such a management contract is a deviation from the principle under Section 23 that the
ANOTHER MODE OF DELEGATION: MANAGEMENT CONTRACT corporate affairs shall be managed by the board of directors, and thereby a departure from such
Section 44. Power to enter into management contract. No corporation shall conclude a management an agreement would require the approval of the stockholders under the principle that it would vary
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
the contractual corporate arrangements, by allowing basically an outsider to involve itself in the
case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the management of corporate affairs.
purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing
and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled Rationale for Ratification Requirements on Part of Managing Corporation.
to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing That the management arrangement is a deviation from the principle also that the board of directors
corporation also constitute a majority of the members of the board of directors of the managed corporation, then the in the managing corporation assumed office with the understanding that they would devote their
management contract must be approved by the stockholders of the managed corporation owning at least two-thirds
(2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a
time and resources for the affairs of the corporation.
non-stock corporation. No management contract shall be entered into for a period longer than five years for any one
term.
Other considerations
The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to If management company: The ratificatory procedure should not therefore be applicable to a
manage or operate all or substantially all of the business of another corporation, whether such contracts are called corporation that is organized primarily as a management company, and its entering into a management
service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating
agreements which relate to the exploration, development, exploitation or utilization of natural resources may be
contract is clearly within the primary purpose of the corporation and in accordance with the contractual
entered into for such periods as may be provided by the pertinent laws or regulations understanding with the stockholders of such managing corporation. (Page 263 of CLVs Textbook)

Cases not covered by Section 44: When it comes to a management contract entered into by the
Management contract
managed corporation under the definition of Section 44, not with another corporation but with a
An agreement which a corporation delegates the management of its affairs to another corporation for a
certain period of time. partnership or an individual, the same would not be covered by and thereby need not comply with the
ratificatory requirements of Section 44. (Page 263 of CLVs Textbook)
Instead of employing other persons to manage the corporation's business, it employs another
corporation.
A corporation under management is bound by the acts of the managing corporation and is estopped to
deny its authority.
NO need for amendment of AoI K. THREE-FOLD DUTIES OF DIRECTORS AND OFFICERS: DILIGENCE, LOYALTY AND OBEDIENCE
Management contract with parent corporation DUTIES: BUSINESS JUDGMENT RULE
Valid. Unless otherwise provided in the Code, all corporate powers and prerogatives are vested directly in
Purpose: To provide more efficient operation and greater convenience to both. the BoD. Consequently, the rule has two consequences:
THUS, a holding company may, in some cases, intervene in the management and affairs of its a) The resolution, contracts, and transactions of the Board, cannot be overturned or set aside by the
subsidiaries or affiliates PROVIDED the management in those affairs will not affect the separate and stockholders or members and not even by the courts under the principle that business of the
continuing existence of the managed corporation. corporation has been left to the hands of the Board; and
When invalid: When there is fraud or bad faith b) Directors and duly authorized officers cannot be held personally liable for acts or contracts done
with the exercise of their business judgment.

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XPNs:
a) When the Corporation Code expressly provides otherwise; PERSONAL LIABILITIES OF DIRECTORS AND OTHER CORPORATE OFFICERS
b) When the Directors or officers acted with fraud, gross negligence or in bad faith; and Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to
c) When Directors or officers act against the corporation in conflict of interest situation. patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be
No court can, as an integral part of resolving the issues between squabbling stockholders, order the
liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members
corporation to undertake certain corporate acts, since it would be in violation of the business and other persons.
judgment rule. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the
Directors and officers who purport to act for the corporation, keep within the lawful scope of their corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability
authority and act in good faith, do not become liable, whether civilly or otherwise, for the upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation
consequences of their acts, which are properly attributed to the corporation alone.
MAIN DUTY: ACT AS AGENTS OF THE CORPORATION
The directors of a corporation are its agents GR: Cannot be held personally liable
Fiduciary relationship: They also occupy a fiduciary relationship to the corporation XPNs:
In the absence of malice, bad faith or specific provision of law, a director or officer of a corporation 1. Instances under Sec. 31
cannot be made personally liable for corporate liabilities. 2. Assents or votes for issuance of watered stocks or failed to object in writing
THREE-FOLD DUTIES 3. Expressly or impliedly assumes liability of corporation
1. Duty of obedience E.g. guaranty, suretyship, accommodation mortgages to secure corporation loans
2. Duty of diligence 4. By express provision of law
3. Duty of loyalty a) Labor Code: Bad faith and malice in dismissal of employee
Duty of obedience b) General Banking Act: Unsafe and unsound banking practice
The directors or trustees and officers to be elected shall perform the duties enjoined on them by law
and by the by-laws of the corporation. Liability of director
They cannot exceed the powers and authority limited by law, AoI, or by-laws; otherwise, they shall A director is liable if he:
be liable. Includes criminal liability of directors and officers of corporation, BUT there must be exact a) Willfully and knowingly vote for and assent to patently unlawful, acts of the corporation;
provision of statute holding them liable. b) Is guilty of gross negligence or bad faith in directing the affairs of the corporation; or
Examples: c) Will acquire any personal or pecuniary interest in conflict of duty. (Secs 31 and 34)
a) Monopoly, illegal restraints of combination of trades. DIRECTORS shall be liable.
b) General Banking Act: unsafe and unsound banking practices
c) Securities Regulation Code: insider trading (only to directors) or manipulation of security prices. SPI Technologies v Mapua, 7 April 2014
d) Other persons directly responsible of the crime can also be held liable Corporate officers; liability. On the issue of the solidary obligation of the corporate officers impleaded vis--vis the
Duty of diligence corporation for Mapuas illegal dismissal, [i]t is hornbook principle that personal liability of corporate directors, trustees or
Directors or trustee who: officers attaches only when: (a) they assent to a patently unlawful act of the
a) Willfully and knowingly vote for or assent to patently unlawful acts of the corporation corporation, or when they are guilty of bad faith or gross negligence in
directing its affairs, or when there is a conflict of interest resulting in
b) Guilty of gross negligence
damages to the corporation, its stockholders or other persons; (b) they consent to the issuance of watered down stocks
c) Guilty of bad faith in directing the affairs of the corporation or when, having knowledge of such issuance, do not forthwith file with the corporate secretary their written objection;
Shall be liable solidarily for all the damages resulting therefrom suffered by the corporation, its (c) they agree to hold themselves personally and solidarily liable with the corporation; or (d) they are made by specific
stockholders or members and other persons. provision of law personally answerable fo rtheir corporate action
Directors must possess not only prudence, knowledge, skills BUT also expertise
Relate to Sec. 31: Personal liability of directors if GROSS NEGLIGENCE or BAD FAITH. Heirs of Uy v International Exchange Bank, 13 February 2013
In relation to BJR: As long as there is honesty in making judgment even if not sound, or does not result to Personal liability of a director or officer. Before a director or officer of a corporation can be held personally liable for
profit then BOD cannot be held personally liable. corporate obligations, however, the following requisites must concur: (1) the complainant must allege in the complaint that
BJR not subject to judicial review: Business judgment of the Board cannot be subject to judicial review. the director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence
Degree of diligence of BOD: Depends on business and obligations engaged with. or bad faith; and (2) the complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith
THUS if common carrier, then extraordinary as well Considering that the only basis for holding Uy liable for the payment of the loan was proven to be a falsified document, there
was no sufficient justification for the RTC to have ruled that Uy should be held jointly and severally liable to iBank for the
unpaid loan of Hammer. Neither did the CA explain its affirmation of the RTCs ruling against Uy. The Court cannot give
credence to the simplistic declaration of the RTC that liability would attach directly to Uy for the sole reason that she was an
Duty of loyalty officer and stockholder of Hammer
Sec. 31(2): When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as Ever Electrical v Samahang MAnggagawa, 13 June 2012
to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the As a general rule, corporate officers should not be held solidarily liable with the corporation for separation pay for it is settled
corporation and must account for the profits which otherwise would have accrued to the corporation. that a corporationis invested by law with a personality separate and distinct from those of the persons composing it as well as
Instances of conflict of interest from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation
of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate
a) Self-dealing director (Section 32)
personality.
b) Fixing compensation of directors and officers (Section 30) A corporation is invested by law with a personality separate and distinct from those of the persons composing it
c) Interlocking directors (Section 33) as well as from that of any other legal entity to which it may be related. Corporate directors and officers become solidarily
d) Seizing corporate opportunity; Disloyalty (31,34) liable with the corporation for the termination of employees done with malice or bad faith. It stressed that bad faith
e) Using inside information (SRC Sections 3.8, 23.2, 61, 71.2) does not connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing
of wrong; it means breach of a known duty through some motive or interest or ill will; it partakes of the nature of fraud.

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efficiency of management. The general rule is that, in the absence of authority from the board of directors, no person, not
even its officers, can validly bind a corporation.
Harpoon v Francisco, 2 March 2011
In this case, the corporate by-laws of CMMCI explicitly empowered the President to enter into loans with third persons
Though the Court found that Respondent was illegally dismissed, it held that the President of the Petitioner
on behalf of the corporation without the necessity of a board resolution. By-laws of a corporation should be construed and
Corporation should not be held solidarily liable with Petitioner Corporation. Obligations incurred by corporate officers, acting
given effect according to the general rules governing the construction of contracts. They, as the self-imposed private laws of
as such corporate agents, are not theirs but the direct accountabilities of the corporation they represent. Thus, they should not
a corporation, have, when valid, substantially the same force and effect as laws of the corporation, as have the provisions of
be generally held jointly and solidarily liable with the corporation. The general rule is grounded on the theory that a corporation
its charter insofar as the corporation and the persons within it are concerned. They are in effect written into the charter and in
has a legal personality separate and distinct from the persons comprising it.
this sense; they become part of the fundamental law of the corporation. And the corporation and its directors (or trustees) and
As exceptions to the general rule, solidary liability may be imposed: (1) When directors and trustees or, in
officers are bound by and must comply with them.
appropriate cases, the officers of a corporation (a) vote for or assent to [patently] unlawful acts of the corporation; (b) act
The corporation is now estopped from denying the authority of its president to bind the former into contractual
in bad faith or with gross negligence in directing the corporate affairs; (c) are guilty of conflict of interest to the prejudice of
relations.
the corporation, its stockholders or members, and other persons; (2) When the director or officer has consented to the
issuance of watered stock or who, having knowledge thereof, did not forthwith file with the corporate secretary his written
objection thereto; (3) When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and David v National Federation of Labor Unions, 21 April 2009
solidarily liable with the corporation; (4) When a director, trustee or officer is made, by specific provision of law, personally It is improper to hold David liable for MAC's obligations to its employees. However, Article 212(e) of the Labor
liable for his corporate action. To warrant the piercing of the veil of corporate fiction, the officers bad faith or wrongdoing Code, by itself, does not make a corporate officer personally liable for the debts of the corporation because Section 31 of the
must be established clearly and convincingly as bad faith is never presumed. Corporation Code is still the governing law on personal liability of officers for the debts of the corporation. Section 31 of the
Corporation Code provides: Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal
Ty v NBI, 15 December 2010
or pecuniary interest in conflict with their duty as such directors, or trustees shall be liable jointly and severally for all damages
Only Arnel Ty may be held liable in his capacity as president of Omni, but not the other directors. The corporate
resulting therefrom suffered by the corporation, its stockholders or members and other persons.
powers of a corporation are reposed in the board of directors under the first paragraph of Sec. 23 of the Corporation Code, it
There was no showing of David willingly and knowingly voting for or assenting to patently unlawful acts of the corporation, or
is of common knowledge and practice that the board of directors is not directly engaged or charged with the running of the
that David was guilty of gross negligence or bad faith.
recurring business affairs of the corporation. Depending on the powers granted to them by the Articles of Incorporation, the
Also, the NLRC never gained jurisdiction over David for there was an invalid service of summons.
members of the board generally do not concern themselves with the day-to-day affairs of the corporation, except those
corporate officers who are charged with running the business of the corporation and are concomitantly members of the
board, like the President. Section 25of the Corporation Code requires the president of a corporation to be also a member of Soriano v People, BSP and PDIC, 30 June 2009
the board of directors. They committed grave abuse of discretion in the exercise of their duties. As aptly pointed out by the BSP in its memorandum,
there are differences between the two (2) offenses. A DOSRI violation consists in the failure to observe and comply with
procedural, reportorial or ceiling requirements prescribed by law in the grant of a loan to a director, officer, stockholder and
Queensland Tokyo Commodities v George, 8 September 2010
other related interests in the bank, i.e. lack of written approval of the majority of the directors of the bank and failure to enter
It recognized Mendoza and Collado as its brokers. Petitioners did not object to, and in fact recognized, Mendoza's appointment
such approval into corporate records and to transmit a copy thereof to the BSP supervising department. The elements of abuse
as respondent's attorney-in-fact. Collado, in behalf of QTCI, concluded the Customer's Agreement despite the fact that the
of confidence, deceit, fraud or false pretenses, and damage, which are essential to the prosecution for estafa, are not
appointed attorney-in-fact was not a licensed dealer. Worse, petitioners permitted Mendoza to handle respondent's account.
elements of a DOSRI violation. The filing of several charges against Soriano was, therefore, proper.
Doctrine dictates that a corporation is invested by law with a personality separate and distinct from those of the
persons composing it, such that, save for certain exceptions, corporate officers who entered into contracts in behalf of the
corporation cannot be held personally liable for the liabilities of the latter. Personal liability of a corporate director, trustee, or Cebu Country Club v Elizagaque, 542 S 65
officer, along (although not necessarily) with the corporation, may validly attach, as a rule, only when - (1) he assents to a There is bad faith among the members of the board. As shown by the records, the Board adopted a secret balloting known as
patently unlawful act of the corporation, or when he is guilty of bad faith or gross negligence in directing its affairs, or when the black ball system of voting wherein each member will drop a ball in the ballot box. A white ball represents conformity
there is a conflict of interest resulting in damages to the corporation, its stockholders, or other persons; (2) he consents to the to the admission of an applicant, while a black ball means disapproval. Pursuant to Section 3(c), as amended, cited above,
issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his a unanimous vote of the directors is required. When respondents application for proprietary membership was voted upon
written objection thereto; (3) he agrees to hold himself personally and solidarily liable with the corporation; or (4) he is made by during the Board meeting on July 30, 1997, the ballot box contained one (1) black ball. Thus, for lack of unanimity, his
a specific provision of law personally answerable for his corporate action. application was disapproved.
Romeo Lau, as president of [petitioner] QTCI, cannot feign innocence on the existence of these unlawful Obviously, the CCCI Board of Directors, under its Articles of Incorporation, has the right to approve or disapprove
activities within the company, especially so that Collado, himself a ranking officer of QTCI, is involved in the unlawful an application for proprietary membership. But such right should not be exercised arbitrarily.
execution of customers orders. Lau, being the chief operating officer, cannot escape the fact that had he exercised a It is thus clear that respondent was left groping in the dark wondering why his application was disapproved. He
modicum of care and discretion in supervising the operations of QTCI, he could have detected and prevented the unlawful was not even informed that a unanimous vote of the Board members was required. When he sent a letter for reconsideration
acts of Collado and Mendoza. and an inquiry whether there was an objection to his application, petitioners apparently ignored him. Certainly, respondent
did not deserve this kind of treatment. Having been designated by San Miguel Corporation as a special non-proprietary
member of CCCI, he should have been treated by petitioners with courtesy and civility. At the very least, they should have
Wensha Spa Center v Yung, 16 August 2010
informed him why his application was disapproved.
Xu is not liable together with the corporation. Elementary is the rule that a corporation is invested by law with a
The exercise of a right, though legal by itself, must nonetheless be in accordance with the proper norm. When
personality separate and distinct from those of the persons composing it and from that of any other legal entity to which it may
the right is exercised arbitrarily, unjustly or excessively and results in damage to another, a legal wrong is committed for which
be related. "Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a
the wrongdoer must be held responsible.
corporation is not of itself sufficient ground for disregarding the separate corporate personality."
In labor cases, corporate directors and officers may be held solidarily liable with the corporation for the termination
of employment only if done with malice or in bad faith.Bad faith does not connote bad judgment or negligence; it imports a Caltex Inc. v NLRC, 536 S 175
dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty through some Caltex failed to prove the necessity of the redundancy program. It is the rule that the characterization of an employees
motive or interest or ill will; it partakes of the nature of fraud. services as no longer necessary or sustainable, and therefore, properly terminable, is an exercise of business judgment on the
There is no finding of bad faith or malice on the part of Xu. There is, therefore, no justification for such a ruling. To part of the employer, and that the wisdom or soundness of such characterization or decision is not subject to discretionary
sustain such a finding, there should be an evidence on record that an officer or director acted maliciously or in bad faith in review. However, such characterization may be rejected if the same is found to be in violation of law or is arbitrary or malicious.
terminating the services of an employee.Moreover, the finding or indication that the dismissal was effected with malice or bad In the instant case, there was no substantial evidence presented by petitioner to justify private respondent's
faith should be stated in the decision itself. dismissal due to redundancy. As correctly found by the CA, petitioners evidence to show redundancy merely consisted of a
copy of petitioners letter to the DOLE informing the latter of its intention to implement a redundancy program and nothing
more. The letter which merely stated that petitioner undertook a review, restructuring and streamlining of its organization which
Cebu Mactan v Masahiro, 17 July 2009
resulted in consolidation, abolition and outsourcing of certain functions; and which resulted in identified and redundant
It is because Sugimotos actions are binding with CMMCI. A corporation, being a juridical entity, may act through its board of
positions instead of simplifying its business process restructuring, does not satisfy the requirement of substantial evidence, that
directors which exercises almost all corporate powers, lays down all corporate business policies, and is responsible for the
is, the amount of evidence which a reasonable mind might accept as adequate to justify a conclusion.

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Petitioner failed to demonstrate the superfluity of private respondents position as there was nothing in the DBP v CA, 16 August 2001
records that would establish any concrete and real factors recognized by law and relevant jurisprudence, such as overhiring Their actions are mandated under the law. Where the corporations have directors and officers in common, there may be
of workers, decreased volume of business, or dropping of a particular product line or service activity previously manufactured circumstances under which their interest as officers in one company may disqualify them in equity from representing both
or undertaken by the enterprise, which were adopted by petitioner in implementing the redundancy program. corporations in transactions between the two. Thus, where one corporation was insolvent and indebted to another, it has been
held that the directors of the creditor corporation were disqualified, by reason of self-interest, from acting as directors of the
Atrium Management v CA, 353 S 23 debtor corporation in the authorization of a mortgage or deed of trust to the former to secure such indebtedness In the same
manner that when the corporation is insolvent, its directors who are its creditors cannot secure to themselves any advantage
Due to negligence. Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of Hi-Cement were
or preference over other creditors. They cannot thus take advantage of their fiduciary relation and deal directly with
authorized to issue the checks. However, Ms. de Leon was negligent when she signed the confirmation letter requested by Mr.
themselves, to the injury of others in equal right.
Yap of Atrium and Mr. Henry of E.T. Henry for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was
Directors of insolvent corporation, who are creditors of the company, can not secure to themselves
aware that the checks were strictly endorsed for deposit only to the payee's account and not to be further negotiated. What
any preference or advantage over other creditors in the payment of their claims. It is not good morals or good law. The
is more, the confirmation letter contained a clause that was not true, that is, "that the checks issued to E.T. Henry were in
governing body of officers thereof are charged with the duty of conducting its affairs strictly in the interest of its existing
payment of Hydro oil bought by Hi-Cement from E.T. Henry". Her negligence resulted in damage to the corporation. Hence,
creditors, and it would be a breach of such trust for them to undertake to give any one of its members any advantage over
Ms. de Leon may be held personally liable therefor.
any other creditors in securing the payment of his debts in preference to all others. When validity of these mortgages, to
"Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation
secure debts upon which the directors were indorsers, was questioned by other creditors of the corporation, they should have
may so validly attach, as a rule, only when: He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or
been classed as instruments rendered void by the legal principle which prevents directors of an insolvent corporation from
gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or
giving themselves a preference over outside creditors.
other persons; He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file
with the corporate secretary his written objection thereto; He agrees to hold himself personally and solidarily liable with the
corporation; or He is made, by a specific provision of law, to personally answer for his corporate action. AHS Phils v CA, 257 S 319
However, as to the claim of Atrium, it cannot be upheld because it is not a holder of the check in due course Corporate officers are not personally liable for money claims of discharged corporate employees unless they
due to the fact that the same was crossed in favor of E.T. Henry, and therefore only payable to the latters account. acted with evident malice and bad faith in terminating their employment. In the case at bar, while petitioners Amistoso and
Halili may have had a hand in the relief of respondent. Bayani, there are no indications of malice and bad faith on their part.
ARB Construction v CA, 332 S 426 We take exception to the conclusion of respondent Court of Appeals that "the manner by which Halili and Amistoso acted is
characterized by bad faith and malice, thus binding them personally liable to plaintiff-appellee,'' On the contrary it is
He merely acted within his capacity as an officer of the corporation. It is basic that a corporation is invested by
apparent that the relief order was a business judgment on the part of the officers, with the best interest of the corporation in
law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity
mind, based on their opinion that respondent Bayani had failed to perform the duties expected of him. Hence both the trial
to which it may be related. As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders
court and respondent Court of Appeals committed a reversible error in holding petitioners Amistoso and Halili jointly and
or those of the legal entities to which it may be connected and vice versa. However, the veil of corporate fiction may be
solidarily liable with Petitioner Corporation.
pierced when it is used as a shield to further an end subversive of justice; or for purposes that could not have been intended
by the law that created it; or to defeat public convenience, justify wrong, protect fraud, or defend crime; or to perpetuate
deception; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. Complex Electronics v NLRC, 310 S 403
On the basis hereof, petitioner Molina could not be held jointly and severally liable for any obligation which It is settled that in the absence of malice or bad faith, a stockholder or an officer of a corporation cannot be
petitioner ARBC may be held accountable for, absent any proof of bad faith or malice on his part. Corollarily, it is also incorrect made personally liable for corporate liabilities. The fact that the pull-out of the machinery, equipment and materials was
on the part of the Court of Appeals to conclude that there was a sufficient cause of action against Molina as to make him effected during nighttime is not per se an indicia of bad faith on the part of respondent Qua since he had no other recourse,
personally liable for his actuations as Vice President for Operations of ARBC. and the same was dictated by the prevailing mood of unrest as the laborers were already vandalizing the equipment, bent on
picketing the company premises and threats to lock out the company officers were being made. Such acts of respondent
Lim v CA, 323 S 102 Qua were, in fact, made pursuant to the demands of Complex's customers who were already alarmed by the pending labor
dispute and imminent strike to be stage by the laborers, to have their equipment, machinery and materials pull out of Complex.
They hold separate personalities from the deceased. In as much as the real properties included in the inventory of the estate
As such, these acts were merely done pursuant to his official functions and were not, in any way, made with evident bad faith.
of the late Pastor Y. Lim are in the possession of and are registered in the name of private respondent corporations, which under
As to the juridical personality of the corporations, Ionics may be engaged in the same business as that of
the law possess a personality separate and distinct from their stockholders, and in the absence of any cogency to shred the
Complex, but this fact alone is not enough reason to pierce the veil of corporate fiction of the corporation. Well-settled is the
veil of corporate fiction, the presumption of conclusiveness of said titles in favor of private respondents should stand
rule that a corporation has a personality separate and distinct from that of its officers and stockholders. Likewise, mere
undisturbed.
ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of
Notwithstanding that the real properties were duly registered under the Torrens system in the name of private
itself sufficient ground for disregarding the separate corporate personality
respondents, and as such were to be afforded the presumptive conclusiveness of title, the probate court obviously opted to
shut its eyes to this gleamy fact and still proceeded to issue the impugned orders.
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a Crisologo Jose v CA, 15 September 1989
corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate personalities. The provision of the Negotiable Instruments Law 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, does not
Francisco v Mejia, 14 August 2001 include nor apply to corporations which are accommodation parties. This is because the issue or indorsement of negotiable
paper by a corporation without consideration and for the accommodation of another is ultra vires. Hence, one who has taken
The totality of the circumstances appertaining conduce to the inevitable conclusion that petitioner Francisco
the instrument with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only
acted in bad faith. The events leading up to the loss by the Gutierrez estate of its mortgage security attest to this. It has been
an accommodation party.
established that Cardale failed to comply with its obligation to pay the balance of the purchase price for the four parcels of
By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable
land it bought from Gutierrez. This prompted Gutierrez to file an action for rescission of the Deed of Sale with Mortgage, but the
paper in the name of the corporation for the accommodation of a third person only if specifically authorized to do so.. Since
case dragged on for about fourteen years when Cardale, as represented by Francisco, who was Vice-President and Treasurer
such accommodation paper cannot thus be enforced against the corporation, especially since it is not involved in any aspect
of the same, lost interest in completing its presentation of evidence
of the corporate business or operations, the inescapable conclusion in law and in logic is that the signatories thereof shall be
That Merryland acquired the property at the public auction only serves to shed more light upon Franciscos
personally liable therefor, as well as the consequences arising from their acts in connection therewith.
fraudulent purposes. Based on the findings of the Court of Appeals, Francisco is the controlling stockholder and President of
Instead, Jose should direct her claim against Baares and Santos. Santos, however, is exculpated from criminal
Merryland. Thus, aside from the instrumental role she played as an officer of Cardale, in evading that corporations legitimate
liability under BP 22 for he successfully and legally consigned the amount of the check with the Court within the reglamentary
obligations to Gutierrez, it appears that Franciscos actions were also oriented towards securing advantages for another
period.
corporation in which she had a substantial interest.
Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the
legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders FCY CONSTRUCTION GROUP and FRANCIS YU vs. COURT OF APPEALS, 324 S 270
may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The members or FCY has a separate juridical entity from that of Francis. Francis Yu cannot be made liable in his individual capacity if he indeed
stockholders of the corporation will be considered as the corporation, that is, liability will attach directly to the officers and entered into and signed the contract in his official capacity as President, in the absence of stipulation to that effect, due to
stockholders. the personality of the corporation being separate and distinct from the persons composing it. However, while Yu cannot be

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held solidarily liable with petitioner corporation merely because he is the President thereof and was involved in the transactions peculiar situations or valid grounds can exist to warrant, albeit done sparingly, the disregard of its independent being and the
with private corporation, there exists instances when corporate officers may be held personally liable for corporate acts. lifting of the corporate veil. The Court also has collated the settled instances when, without necessarily piercing the veil of
Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation corporate fiction, personal civil liability can also be said to lawfully attach to a corporate director, trustee or officer.
may so validly attach, as a rule. The attendance of these circumstances, however, cannot be determined at this stage and The case of petitioner is way off these exceptional instances. It is not even shown that petitioner has
should properly be threshed out during the trial on the merits. Also, there was no fraud on the part of FCY in the performance had a direct hand in the dismissal of private respondent enough to attribute to him (petitioner) a patently unlawful act while
of its obligations with Ley, therefore rendering attachment as improper. acting for the corporation. It is undisputed that the termination of petitioner's employment has, instead, been due,
collectively, to the need for a further mitigation of losses, the onset of the rainy season, the insurgency problem in Sorsogon
and the lack of funds to further support the mining operation in Gatbo.
LLAMADOvs. COURT OF APPEALS, 270 S 423
He is mere act of signing the check held him liable under BP 22. Where the check is drawn by a corporation, company or entity,
the person or persons who actually signed the check in behalf of such drawer shall be liable under this Act. Sia v People, 121 S 655
The bank is transacting with Metal Manufacturing and not with him. The case cited by the Court of Appeals in support of its
stand - Tan Boon Kong case, supra - may however not be squarely applicable to the instant case in that the corporation was
MAM REALTY CORPORATION v NLRC, 244 S 797 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
A corporation, being a juridical entity, may act only through its directors, officers and employees. Obligations incurred by them, the prescribed manner expressly liable criminally. The performance of the act is an obligation directly imposed by the law on
acting as such corporate agents, are not theirs but the direct accountabilities of the corporation they represent. True, solidarily the corporation. Since it is a responsible officer or officers of the corporation who actually perform the act for the corporation,
liabilities may at times be incurred but only when exceptional circumstances. In labor cases, for instance, the Court has held they must of necessity be the ones to assume the criminal liability; otherwise this liability as created by the law would be illusory,
corporate directors and officers solidarily liable with the corporation for the termination of employment of employees done and the deterrent effect of the law, negated.
with malice or in bad faith. In the present case, a distinction is to be found with the Tan Boon Kong case in that the act alleged
In the case at bench, there is nothing substantial on record that can justify, prescinding from the foregoing, 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
petitioner Centeno's solidary liability with the corporation. Nothing states that he acted in bad faith. imposed by agreement of parties, as a practice observed in the usual pursuit of a business or a commercial transaction. The
Although the Court found that there is an employer-employee relationship between Balbastro and offense may arise, if at all, from the peculiar terms and condition agreed upon by the parties to the transaction, not by direct
MAM Realty, the case was remanded to NLRC for the recomputation of Balbastros monetary awards, such as backwages provision of the law. The intention of the parties, therefore, is a factor determinant of whether a crime was committed or
and wage differentials. whether a civil obligation alone intended by the parties. With this explanation, the distinction adverted to between the Tan
Boon Kong case and the case at bar should come out clear and meaningful. In the absence of an express provision of law
making the petitioner liable for the criminal offense committed by the corporation of which he is a president as in fact there is
Naguiat v NLRC, 269 S 564 no such provisions in the Revised Penal Code under which petitioner is being prosecuted, the existence of a criminal liability
As provided for under the fifth paragraph of Section 100 of the Corporation Code specifically imposes personal liability upon on his part may not be said to be beyond any doubt. In all criminal prosecutions, the existence of criminal liability for which
the stockholder actively managing or operating the business and affairs of the close corporation. the accused is made answerable must be clear and certain. The maxim that all doubts must be resolved in favor of the
In fact, in posting the surety bond required by this Court for the issuance of a temporary restraining order enjoining accused is always of compelling force in the prosecution of offenses.
the execution of the assailed NLRC Resolutions, only Sergio F. Naguiat, in his individual and personal capacity, principally bound
himself to comply with the obligation thereunder, i.e., "to guarantee the payment to private respondents of any damages
which they may incur by reason of the issuance of a temporary restraining order sought, if it should be finally adjudged that
Tramat Mercantile v CA, 238 S 14
said principals were not entitled thereto. It is an error to hold David Ong jointly and severally liable with TRAMAT to de la Cuesta under the questioned transaction. Ong
The Court here finds no application to the rule that a corporate officer cannot be held solidarily liable with a had acted, not in his personal capacity, but as an officer of a corporation, TRAMAT, with a distinct and separate personality.
corporation in the absence of evidence that he had acted in bad faith or with malice. In the present case, Sergio Naguiat is As such, it should only be the corporation, not the person acting for and on its behalf, that properly could be made liable
held solidarily liable for corporate tort because he had actively engaged in the management and operation of CFTI, a close thereon.
corporation. Tramat, however, should be held liable for the unpaid tractor because at the time of the purchase, the appellants
did not reveal to the appellee the true purpose for which the tractor would be used. Granting that the appellants informed the
appellee that they would be reselling the unit to the MWSS, an entity admittedly not engaged in farming, and that they ordered
Progress Homes v NLRC, 269 S 564 the tractor without the power tiller, an indispensable accessory if the tractor would be used in farming, these in themselves
It amounted to grave abuse of discretion. The Court has held that corporate directors and officers are solidarily liable with the would not constitute the required implied notice to the appellee as seller.
corporation for the termination of employment of employees only if the termination is done with malice or in bad faith.
The Labor Arbiter's decision failed to disclose why Almeda was made personally liable. There appears no evidence
on record that he acted maliciously or in bad faith in terminating the services of private respondents. Almeda, therefore, should
not have been made personally answerable for the payment of private respondents' salaries. SELF DEALING DIRECTOR
The decision of the Labor Arbiter and the NLRC, however, should be set aside because of denial of due process Section 32. Dealings of directors, trustees or officers with the corporation. A contract of the corporation
on the part of Progress Homes. with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the
following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract was approved was not
REAHS Corp. V NLRC, 271 S 247 necessary to constitute a quorum for such meeting;
They acted in bad faith in dismissing the respondents. As a general rule established by legal fiction, the corporation has a 2. That the vote of such director or trustee was not necessary for the approval of the contract;
personality separate and distinct from its officers, stockholders and members. Hence, officers of a corporation are not personally 3. That the contract is fair and reasonable under the circumstances; and
liable for their official acts unless it is shown that they have exceeded their authority. This fictional veil, however, can be pierced 4. That in case of an officer, the contract has been previously authorized by the board of directors. Where any of the
by the very same law which created it when "the notion of the legal entity is used as a means to perpetrate fraud, an illegal first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee,
act, as a vehicle for the evasion of an existing obligation, and to confuse legitimate issues". Under the Labor Code, for instance, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding
when a corporation violates a provision declared to be penal in nature, the penalty shall be imposed upon the guilty officer or capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full
officers of the corporation. disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That
In the case at bar, the thrust of petitioners' arguments was aimed at confining liability solely to the the contract is fair and reasonable under the circumstances.
corporation, as if the entity were an automaton designed to perform functions at the push of a button. The issue, however, is
not limited to payment of separation pay under Article 283 but also payment of labor standard benefits such as
underpayment of wages, holiday pay and 13th month pay to two of the private respondents. While there is no sufficient
Contracts of self-dealing director
evidence to conclude that petitioners have indiscriminately stopped the entity's business, at the same time, petitioners have Instance where a director of a corporation personally enter into contract with the same
opted to abstain from presenting sufficient evidence to establish the serious and adverse financial condition of the company corporation.
These contracts are VOIDABLE at the instance of the corporation because entered into with undue
Santos v NLRC, 254 S 673 influence.
It was not proven that they acted in bad faith. A corporation is a juridical entity with legal personality separate and distinct Important: The mere possibility of undue influence is what the law seeks to avert.
from those acting for and in its behalf and, in general, from the people comprising it. Nevertheless, being a mere fiction of law, Can be avoided by fulfilling all the conditions: (if these are present then there is a valid contract)

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a) The presence of such director/trustee in the board meeting approving the contract was not
necessary to constitute a quorum for such meeting; The requisites for the approval of a contract with a self dealing director was not satisfied. A director of a
corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. In case his interests conflict with
b) The vote of such director/trustee in the board meeting approving the contract was not
those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors
necessary for the approval of the contract; are committed to seek the maximum amount of profits for the corporation. This trust relationship "is not a matter of statutory or
c) The contract is fair and reasonable under the circumstances; technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and
d) In case of an officer, there was previous authorization by the BOD/BOT. hence of the property interests of the stockholders."
Remedies to avoid annulment (summary) A director's contract with his corporation is not in all instances void or voidable. If the contract is fair and reasonable
under the circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse interest is made.
Granting arguendo that the "dealership agreement" involved here would be valid and enforceable
1. Presence of the self-dealing director is not necessary to constitute quorum in the meeting of the dealing of if entered into with a person other than a director or officer of the corporation, the fact that the other party to the contract
the contract. was a Director and Auditor of the petitioner corporation changes the whole situation. First of all, the contract was neither fair
2. Vote of the self-dealing director is not necessary for the approval of the contract nor reasonable. The "dealership agreement" entered into in July, 1969, was to sell and supply to respondent Te 20,000 bags of
3. Call for a stockholders or members meeting. In that meeting, self-dealing director must prepare full, fair, white cement per month, for five years starting September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a
honest disclosure of the adverse interest. Then if ratified by 2/3 of OCS or members businessman himself and must have known, or at least must be presumed to know, that at that time, prices of commodities in
general, and white cement in particular, were not stable and were expected to rise. At the time of the contract, petitioner
Note: In any of the three remedies, contract must be FAIR and REASONABLE. Otherwise, Court may
corporation had not even commenced the manufacture of white cement, the reason why delivery was not to begin until 14
annul. months later. He must have known that within that period of six years, there would be a considerable rise in the price of white
Other considerations cement. In fact, respondent Te's own Memorandum shows that in September, 1970, the price per bag was P14.50, and by the
o Sec. 32 does not require that the corporation suffers injury or damage as a result of the middle of 1975, it was already P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to allow for
contract. an increase in price mutually acceptable to the parties. Instead, the price was pegged at P9.70 per bag for the whole five
o Sec. 32 fails to specify whether the vote of the self-dealing director or trustee shall be counted years of the contract. Fairness on his part as a director of the corporation from whom he was to buy the cement, would
require such a provision.
in the meeting for the ratification of the contract.
o Ma'am said that if the self-dealing director owns more than 2/3 of the OCS, the remedy for the
stockholders is to exclude the share of the self-dealing director in the total OCS which serves as
basis for the 2/3 vote requirement. CONTRACTS BETWEEN CORPORATIONS WITH INTERLOCKING DIRECTORS
Example: If the self-dealing director owns 70% of the OCS, then the 2/3 vote requirement Section 33. Contracts between corporations with interlocking directors. Except in cases of fraud, and provided the
contract is fair and reasonable under the circumstances, a contract between two or more corporations having
shall be reckoned from the 30%. Thus 2/3 of 30% OCS is required; otherwise, the self-
interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking
dealing director will just vote in his favor. director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall
be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned.
Cojuangco v Republic, 12 April 2011 Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for
purposes of interlocking directors
The funds are in fact loaned from UCPB, which was organized as a depositary of the coconut levy funds of the corporation.
Also, the Government failed to adduce substantial evidence linking Cojuangco to the use of Marcos ill-gotten wealth. Contracts between corporations with interlocking directors
All these judicial pronouncements demand two concurring elements to be present before assets or properties were Interlocking director - one who sits on the Board of two or more corporations simultaneously.
considered as ill-gotten wealth, namely: (a) they must have originated from the government itself, and (b) they must have
Status of contract: Valid, provided that there is no fraud and the contract is fair and reasonable under the
been taken by former President Marcos, his immediate family, relatives, and close associates by illegal means.
But settling the sources and the kinds of assets and property covered by E.O. No. 1 and related issuances did not circumstances.
complete the definition of ill-gotten wealth. The further requirement was that the assets and property should have been When rules on self dealing directors applicable: When interlocking director's interest in one corporation is
amassed by former President Marcos, his immediate family, relatives, and close associates both here and abroad. In this regard, SUBSTANTIAL and in the second corporation NOMINAL.
identifying former President Marcos, his immediate family, and relatives was not difficult, but identifying other persons who might Important: In this case, the INTERLOCKING director is also a SELF-DEALING director.
be the close associates of former President Marcos presented an inherent difficulty, because it was not fair and just to include Substantial: Stockholdings exceed 20% of OCS (>20)
within the term close associates everyone who had had any association with President Marcos, his immediate family, and
Nominal: Stockholdings do not exceed 20% of OCS (<=20)
relatives.
It does not suffice, as in this case, that the respondent is or was a government official or employee during the If condition satisfied, then remedies enumerated under self-dealing directors must be satisfied.
administration of former Pres. Marcos. There must be a prima facie showing that the respondent unlawfully accumulated wealth Contract voidable at whose instance: At the instance of the corporation where the share of the self-dealing,
by virtue of his close association or relation with former Pres. Marcos and/or his wife. This is so because otherwise the interlocking director is NOMINAL.
respondents case will fall under existing general laws and procedures on the matter. Applicability: It applies to transactions between corporations with interlocking directors and NOT when the
corporation allegedly prejudiced a third party, not one of the corporations with interlocking director.
By-laws prohibiting interlocking directors, VALID: By-laws which prohibit a director of a corporation from serving
Mead v McCullough, 21 P 95 at the same time as a director of a competing corporation is VALID and REASONABLE.

While a corporation remains solvent, there is no reason why a director or officer, by the authority of a majority of the Palting v San Jose Petroleum, 18 S 924
stockholders or board of managers, may not deal with the corporation, loan it money or buy property from it, in like manner as
a stranger. So long as a purely private corporation remains solvent, its directors are agents or trustees for the stockholders. They
It does not have the required percentage of Filipino capital to validly exercise its business in the Philippines. In the two lists
owe no duties or obligations to others. But the moment such a corporation becomes insolvent, its directors are trustees of all
of stockholders, there is no indication of the citizenship of these stockholders, or of the total number of authorized stocks of
the creditors, whether they are members of the corporation or not, and must manage its property and assets with strict regard
each corporation for the purpose of determining the corresponding percentage of these listed stockholders in relation to the
to their interest; and if they are themselves creditors while the insolvent corporation is under their management, they will not be
respective capital stock of said corporation.
permitted to secure to themselves by purchasing the corporate property or otherwise any personal advantage over the other
These provisions are in direct opposition to the corporation law and corporate practices in this country. These
creditors. Nevertheless, a director or officer may in good faith and for an adequate consideration purchase from a majority of
provisions alone would outlaw any corporation locally organized or doing business in this jurisdiction. Consider the unique and
the directors or stockholders the property even of an insolvent corporation, and a sale thus made to him is valid and binding
unusual provision that no contract or transaction between the company and any other association or corporation shall be
upon the minority.
affected except in case of fraud, by the fact that any of the directors or officers of the company may be interested in or are
directors or officers of such other association or corporation; and that none of such contracts or transactions of this company
Prime White Cement v IAC, 220 S 103 with any person or persons, firms, associations or corporations shall be affected by the fact that any director or officer of this
company is a party to or has an interest in such contract or transaction or has any connection with such person or persons,

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firms, associations or corporations: and that any and all persons who may become directors or officers of this company are SMC is merely protecting its interest from Gokongwei, who owns companies in direct competition with SMCs business. Although
hereby relieved of all responsibility which they would otherwise incur by reason of any contract entered into which this company in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt
either for their own benefit, or for the benefit of any person, firm, association or corporation in which they may be interested. that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents
entrusted with the management of the corporation for the collective benefit of the stockholders, they occupy a fiduciary
relation, and in this sense the relation is one of trust. It springs from the fact that directors have the control and guidance of
corporate affairs and property; hence of the property interests of the stockholders. Equity recognizes that stockholders are the
proprietors of the corporate interests and are ultimately the only beneficiaries thereof
DBP v CA, 363 S 307 It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is
Their actions are mandated under the law. Where the corporations have directors and officers in common, there may be also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as director
circumstances under which their interest as officers in one company may disqualify them in equity from representing both to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the
corporations in transactions between the two. Thus, where one corporation was insolvent and indebted to another, it has been questioned amendment of the by-laws was made.
held that the directors of the creditor corporation were disqualified, by reason of self-interest, from acting as directors of the Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not
debtor corporation in the authorization of a mortgage or deed of trust to the former to secure such indebtedness In the same impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the
manner that when the corporation is insolvent, its directors who are its creditors cannot secure to themselves any advantage performance of his corporation duties above his personal concerns.
or preference over other creditors. They cannot thus take advantage of their fiduciary relation and deal directly with
themselves, to the injury of others in equal right. If they do, equity will set aside the transaction at the suit of creditors of the
corporation or their representatives, without reference to the question of any actual fraudulent intent on the part of the Strong v Repide, 41 S 947
directors, for the right of the creditors does not depend upon fraud in fact, but upon the violation of the fiduciary relation to The Court ruled that there is no relationship of a fiduaciary nature exists between a director and a shareholder in a
the directors. business corporation. There are cases, however, where, by reason of special facts, such duty of a director to disclose to a
Directors of insolvent corporation, who are creditors of the company, can not secure to themselves any preference shareholder the knowledge which he may possess regarding the value of the shares of the company before he purchases
or advantage over other creditors in the payment of their claims. It is not good morals or good law. The governing body of any from a shareholder. Some special facts are present in this case such as the fact the Repide is not only a director of the
officers thereof are charged with the duty of conducting its affairs strictly in the interest of its existing creditors, and it would be corporation but an owner of three-fourths shares of its stock. He was the chief negotiator for the sale of all the lands and was
a breach of such trust for them to undertake to give any one of its members any advantage over any other creditors in securing acting substantially as the agent of the shareholders by reason of his ownership of the shares. Thus, a purchase of stock in a
the payment of his debts in preference to all others. corporation by a director and owner of three-fourths of the entire capital stock, who was also administrator general of the
company and engaged in the negotiations which finally led to the sale of companys lands to the government at a price
which greatly enhanced the value of the stock, was fraudulent as procured by insidious machination where he employed an
agent to make the purchase, concealing both his identity as purchaser and his knowledge of the state of the negotiations
DISLOYALTY and their probable successful result
Section 34. Disloyalty of a director. Where a director, by virtue of his office, acquires for himself a business opportunity which
should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the
latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or
LIABILITY FOR WATERED STOCKS
representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the Section 65. Liability of directors for watered stocks. Any director or officer of a corporation consenting to the
fact that the director risked his own funds in the venture. issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other
than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his
Doctrine of corporate opportunity objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the
If there is presented to a corporate officer or director a business opportunity which: stockholder concerned to the corporation and its creditors for the difference between the fair value received
a) Corporation is financially able to undertake; at the time of issuance of the stock and the par or issued value of the same.
b) From its nature, is in line with corporations business and is of practically advantage to it; and
c) One in which the corporation has an interest or a reasonable expectancy. Watered stocks, explained
By embracing the opportunity, the self-interest of the officer or director will be brought into conflict with Definition: Shares issued and fully-paid when in fact the consideration agreed to and accepted by the
that of his corporation. Hence, the law does not permit him to seize the opportunity even if he will use directors of the corporation was something known to be much less than the par value or issued value of the
his own funds in the venture. shares.
Important: There must be misuse of confidential corporate information in favor of such director. As to corporation: The issuance of watered stock is not merely ultra vires but is illegal per se as it is a violation
If he seizes the opportunity thereby obtaining profits to the expense of the corporation, he must of Sec. 62.
account all the profits by refunding the same to the corporation unless the act has been ratified by a The term has also been defined as stocks issued by a corporation for which it has in fact intentionally or
vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital knowingly received or agreed to receive nothing at all from them or less than their par value whether in
stock. money, or in property or in service.
Sec. 34 is silent on whether the disloyal director shall be allowed to vote his shares in ratification of his Water, meaning: "water" in the stock refers to the difference between the fair market value at the same time of
act. the issuance of the stock (not at the time of discovery of the inadequate consideration or at the time of
Such ratification is not available in Sec. 31. demand for payment) and the par or issued value of said stock.
Sections 31 and 34 contain the doctrine of corporate opportunity. In case of such conflict-of-interests, Subsequent increase in the value of the property used in paying the stock does not do away with the
and the director acts against the good of the corporation, he shall be accountable for the profits he "water" in the stock. The existence of such "water" is determined at the time of the issuance of the stock.
obtained, even if he had risked his own funds.
Injunction is also proper for the closure of the business itself because there was fraud, but NOT Watered stock includes:
confiscation of the assets, equipment and other properties of the corporation because the same is 1. Bonus share: Issued without consideration
tantamount to violation of due process. 2. Discount share Issued as fully paid when the corporation has received a lesser sum of money than
its par or issued value
When doctrine not applicable 3. Issued for a consideration other than actual cash, such as property or services, the fair valuation
1. Director engaged in a distinct enterprise of the same general class of business in good faith of which is less than the par or issued value; or
2. Opportunity is one which is not essential to the corporation's business 4. Issued as stock dividend when there are no sufficient retained earnings or surplus
3. Director or officer does not exploit opportunity by employment of company's resources
4. If the corporation is unable to acquire the opportunity Prohibition on ORIGINAL issue only
Gokongwei Jr. v SEC, 89 S 336

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Rule: The prohibition to issue watered stock refers only to the original issue of stocks BUT NOT to subsequent b) Restitution
transfer of such stocks by the corporation c) Other reliefs
Hence, it arises only in a transaction between the corporation and a subscriber.
Any subsequent appreciation in value of the shares will not cure the defect. Who may file?
Reason: The liability for watered stocks arises from the time the stocks are issued. 1. Stockholder, if private injury
2. Third party, in cases of unauthorized contracts
Persons primarily liable 3. Corporation in a direct or derivative suit
1. Consenting director or officer
Liability is solidary with the participating stockholder Derivative suit
An action brought by minority shareholders in the name of the corporation to redress wrongs
2. Subscriber committed against the corporation, for which the directors refuse to sue. It is a remedy designed by equity
The holder of the watered stock shall be liable to the corporation and its creditors for the difference and has been the principal defense of the minority shareholders against abuses by the majority. Western
between the fair values received at the time of issuance of the stock and the par or issued value of Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).
the same. Those brought by one or more stockholders/members in the name and on behalf of the corporation
The holder of watered stock cannot escape liability by transferring the same to an irresponsible to redress wrongs committed against it, or protect/vindicate corporate rights whenever the officials of the
person or to a bona fide purchaser corporation refuse to sue, or the ones to be sued has control of the corporation.

Lirag Textile Mills v SS, 31 August 1987 Requisites of Derivative Actions


It failed to comply with its contractual stipulations. The Purchase Agreement is, indeed, a debt instrument. Its terms and SECTION 1. Derivative action. - A stockholder or member may bring an action in the name of a
conditions unmistakably show that the parties intended the repurchase of the preferred shares on the respective scheduled corporation or association, as the case may be, provided, that:
dates to be an absolute obligation which does not depend upon the financial ability of petitioner corporation. This absolute
He was a stockholder or member at the time the acts or transactions subject of the action
obligation on the part of petitioner corporation is made manifest by the fact that a surety was required to see to it that the
obligation is fulfilled in the event of the principal debtor's inability to do so. The unconditional undertaking of petitioner (1) occurred and at the time the action was filed;
corporation to redeem the preferred shares at the specified dates constitutes a debt which is defined "as an obligation to pay He exerted all reasonable efforts, and alleges the same with particularity in the complaint,
money at some fixed future time, or at a time which becomes definite and fixed by acts of either party and which they expressly to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
or impliedly, agree to perform in the contract. (2) governing the corporation or partnership to obtain the relief he desires;
A stockholder sinks or swims with the corporation and there is no obligation to return the value of his shares by
means of repurchase if the corporation incurs losses and financial reverses, much less guarantee such repurchase through a
(3) No appraisal rights are available for the act or acts complained of; and
surety. (4) The suit is not a nuisance or harassment suit.

General discussions about derivative suit (based on cases)


Nava v Peers Marketing, 25 Novembe 1976 Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with
Theres no certificate of stock issued in favor of Po. Shares of stock may be transferred by delivery to the transferee of the its board of directors or trustees. But an individual stockholder may be permitted to institute a derivative suit
certificate properly indorsed. "Title may be vested in the transferee by delivery of the certificate with a written assignment or in behalf of the corporation in order to protect or vindicate corporate rights whenever the officials of the
indorsement thereof" There should be compliance with the mode of transfer prescribed by law.
corporation refuse to sue, or when a demand upon them to file the necessary action would be futile
The usual practice is for the stockholder to sign the form on the back of the stock certificate. The certificate may
thereafter be transferred from one person to another. If the holder of the certificate desires to assume the legal rights of a because they are the ones to be sued, or because they hold control of the corporation. In such actions, the
shareholder to enable him to vote at corporate elections and to receive dividends, he fills up the blanks in the form by inserting corporation is the real-party-in-interest while the suing stockholder, in behalf of the corporation, is only a
his own name as transferee. Then he delivers the certificate to the secretary of the corporation so that the transfer may be nominal party. (Filipinas Port Services, Inc. v. Go (2007)
entered in the corporation's books. The certificate is then surrendered and a new one issued to the transferee.
That procedure cannot be followed in the instant case because, as already noted, the twenty shares in question Purpose of derivative suit: To allow the stockholders/member to enforce rights which are derivative
are not covered by any certificate of stock in Po's name. Moreover, the corporation has a claim on the said shares for the
(secondary) in nature, i.e., to enforce a corporate cause of action. (R.N. Symaco Trading Corp. v.
unpaid balance of Po's subscription. A stock subscription is a subsisting liability from the time the subscription is made. The
subscriber is as much bound to pay his subscription as he would be to pay any other debt. The right of the corporation to Santos (2005)
demand payment is no less incontestable. Real party in interest: It is a settled is the doctrine that in a derivative suit, the corporation is the real party in
In this case no stock certificate was issued to Po. Without the stock certificate, which is the evidence of ownership interest while the stockholder filing suit for the corporations behalf is only nominal party. The
of corporate stock, the assignment of corporate shares is effective only between the parties to the transaction. corporation should be included as a party in the suit. Hornilla v. Salunat, 405 SCRA 220 (2003).

Who may bring the suit


DERIVATIVE SUIT Since the ones to be sued are the directors/officers of the corporation itself, a stockholder, like
petitioner Cruz, may validly institute a derivative suit to vindicate the alleged corporate injury, in which case
DERIVATIVE SUIT: REMEDIES TO ENFORE PERSONAL LIABILITY Enforcement of liability of directors or officers Cruz is only a nominal party while Filport is the real-party-in-interest. (Filipinas Port Services, Inc. v. Go (2007)
1. Administrative Under Section 36 of the Corporation Code, in relation to Section 23, where a corporation is an
a) Removal by stockholders or government regulators injured party, its power to sue is lodged with its board of directors or trustees. An individual stockholder is
b) Administrative fine or penalties by SEC or other government regulators permitted to institute a derivative suit in behalf of the corporation wherein he holds
c) GBA: Removal by Monetary Board stocks in order to protect to vindicate corporate rights, whenever officials of the corporation refuse
2. Criminal to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing
Applicable crime under RPC and/or special laws stockholder is regarded as a nominal party, with the corporation as the real party in interest. (Chua v. CA,
2004)
3. Civil In the absence of a special authority from the Board of Directors to institute a derivative suit for and
a) Damages in behalf of the corporation, the president or managing director is disqualified by law to sue in her own

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name. The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the Sps. Roberto and Rachel Ang took over the active management of [SMBI]. Through the employment of sugar
Board that exercises its corporate powers and not in the president or officer thereof. Bitong v. Court of coated words, they were able to successfully manipulate the stocks sharings between themselves at 50-50 under the condition
Appeals, 292 SCRA 503 (1998). that the procedures mandated by the Corporation Code on increase of capital stock be strictly observed (valid Board
Meeting). No such meeting of the Board to increase capital stock materialized. It was more of an accommodation to buy
A minority stockholder and member of the board has no power or authority to sue on the peace.
corporations behalf. Nor can we uphold this as a derivative suit, since it is required that the minority Juanito claimed that payments to Nancy and Theodore ceased sometime after 2006. On 24 November 2008,
stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a Nancy and Theodore, through their counsel here in the Philippines, sent a demand letter to "Spouses Juanito L. Ang/Anecita L.
derivative cause of action on behalf of the corporation and all other stockholders similarly situated who Ang and Spouses Roberto L. Ang/Rachel L. Ang" for payment of the principal amounting to $1,000,000.00 plus interest at ten
may wish to join him in the suit. There is no showing that petitioner has complied with the foregoing percent (10%) per annum, for a total of $2,585,577.37 within ten days from receipt of the letter. 12 Roberto and Rachel then
requisites. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001). sent a letter to Nancy and Theodores counsel on 5 January 2009, saying that they are not complying with the demand letter
because they have not personally contracted a loan from Nancy and Theodore.
When must be stockholder: The relators must be stockholders both at time of occurrence of the events
constituting the cause of action and at the time of the filing of the derivative suit. Gochan v. Young, 354 Held:
SCRA 207 (2001); Pascual v. Orozco, 19 Phil. 83 (1911). The Complaint is not a derivative suit. A derivative suit is an action brought by a stockholder on behalf of the corporation to
A minority stockholder can file a derivative suit against the president for diverting corporate income enforce corporate rights against the corporations directors, officers or other insiders. Under Sections 23 and 36 of the
to his personal accounts. Commart (Phils.) Inc. v. SEC, 198 SCRA 73 (1991). Corporation Code, the directors or officers, as provided under the by-laws, have the right to decide whether or not a
A lawyer engaged as counsel for a corporation cannot represent members of the same corporation should sue. Since these directors or officers will never be willing to sue themselves, or impugn their wrongful or
fraudulent decisions, stockholders are permitted by law to bring an action in the name of the corporation to hold these
corporations board of directors in a derivative suit brought against them. To do so would be tantamount to directors and officers accountable. In derivative suits, the real party ininterest is the corporation, while the stockholder is a mere
representing conflicting interests, which is prohibited by the Code of Professional Responsibility. Hornilla v. nominal party.
Salunat, 405 SCRA 220 (2003).

Exhaustion of Intra-corporate remedies. Villamor jr. v Umale, 24 September 2014


A derivative suit to question the validity of the foreclosure of the mortgage on corporate assets can Respondent Balmores' action in the trial court is not a derivative suit
be filed without prior demand upon the Board of Directors where the legality of the constitution of A derivative suit is an action filed by stockholders to enforce a corporate action.56 It is an exception to the general rule that
the Board lies at the center of the issues. DBP v. Pundogar, 218 SCRA 118 (1993). the corporation's power to sue57 is exercised only by the board of directors or trustees.
Individual stockholders may be allowed to sue on behalf of the corporation whenever the directors or officers of the
Nature of Relief corporation refuse to sue to vindicate the rights of the corporation or are the ones to be sued and are in control of the
corporation.59 It is allowed when the "directors [or officers] are guilty of breach of . . . trust, [and] not of mere error of
In a derivative suit, any monetary benefits under the decision of the court shall pertain to the corporation
judgment."60 In derivative suits, the real party in interest is the corporation, and the suing stockholder is a mere nominal
and not to the stockholders or members. (R.N. Symaco Trading Corp. v. Santos, 2005) party.
The allegations of injury to the relators can co-exist with those pertaining to the corporation, and does not Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies (Interim Rules) provides the five (5)
disqualify them from filing a derivative suit on behalf of the corporation. It merely gives rise to an requisites63 for filing derivative suits:
additional cause of action for damages against the erring directors. Gochan v. Young, 354 SCRA 207
(2001). SECTION 1. Derivative action. - A stockholder or member may bring an action in the name of a corporation or association, as
the case may be, provided, that:
In a derivative action, the real party in interest is the corporation itself, not the shareholders who actually
(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time
instituted it. A suit to enforce preemptive rights in a corporation is not a derivative suit, and therefore a the action was filed;
temporary restraining order enjoining a person from representing the corporation will not bar such action, (2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies
because it is instituted on behalf and for the benefit of the shareholder, not the corporation. Lim v. Lim-Yu, available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain
352 SCRA 216 (2001). the relief he desires;
Appointment of receiver can be an ancillary remedy in a derivative suit. Chase v. CFI of Manila, 18 SCRA (3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
602 (1966)
Common action in a derivative suit In case of nuisance or harassment suit, the court shall forthwith dismiss the case
1. Damages Respondent Balmores' action in the trial court failed to satisfy all the requisites of a derivative suit.
2. Annulment of contract An allegation that appraisal rights were not available for the acts complained of is another requisite for filing derivative suits
3. Action for mandamus to compel director to perform duties under Rule 8, Section 1(3) of the Interim Rules.
4. Action for injunction to restrain director from doing acts harmful to corporation
Section 81 of the Corporation Code provides the instances of appraisal right:chanRoblesvirtualLawlibrary

NO prejudicial question in DS
Pendency of derivative suit cannot suspend a criminal case arising from the same act SEC. 81. Instances of appraisal right. Any stockholder of a corporation shah1 have the right to dissent and demand
payment of the fair value of his shares in the following instances:
Consolidation of personal and derivative suit 1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any
VALID, for as long as the personal injury and that of caused by the corporation arose from the same stockholders or class of shares, or of authorizing preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term of corporate existence;
acts. 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the
To avoid splitting of cause of action corporate property and assets as provided in this Code; and
3. In case of merger or consolidation.
Order of dissolution of corporation, improper
Court, in derivative suit, cannot order dissolution of corporation Legaspi Towers 300 v MAuer et al, 18 July 2012
Reason: Dissolution is contrary to the purpose of a derivative suit A derivative suit must be differentiated from individual and representative or class suits, thus:

Ang v Ang, 19 June 2013 Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors or other persons may be
Facts: classified into individual suits, class suits, and derivative suits. Where a stockholder or member is denied the right of inspection,

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his suit would be individual because the wrong is done to him personally and not to the other stockholders or the corporation. moved that their case be set for pre-trial. Attempts to again amicably settle the dispute between the parties before the
Where the wrong is done to a group of stockholders, as where preferred stockholders' rights are violated, a class or Court of Appeals were unsuccessful.
representative suit will be proper for the protection of all stockholders belonging to the same group. But where the acts
complained of constitute a wrong to the corporation itself, the cause of action belongs to the corporation and not to the
Gochan v Yooung, 12 March 2001
individual stockholder or member. Although in most every case of wrong to the corporation, each stockholder is necessarily
Where corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence, and the
affected because the value of his interest therein would be impaired, this fact of itself is not sufficient to give him an
corporation is unable or unwilling to institute suit to remedy the wrong, a single stockholder may institute that suit, suing on
individual cause of action since the corporation is a person distinct and separate from him, and can and should itself sue the
behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done
wrongdoer. Otherwise, not only would the theory of separate entity be violated, but there would be multiplicity of suits as well
directly to the corporation and indirectly to the stockholders.
as a violation of the priority rights of creditors. Furthermore, there is the difficulty of determining the amount of damages that
In the present case, the Complaint alleges all the components of a derivative suit. The allegations of injury to the
should be paid to each individual stockholder.
Spouses Uy can coexist with those pertaining to the corporation. The personal injury suffered by the spouses cannot disqualify
them from filing a derivative suit on behalf of the corporation. It merely gives rise to an additional cause of action for damages
However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees themselves, a
against the erring directors. This cause of action is also included in the Complaint filed before the SEC.
stockholder or member may find that he has no redress because the former are vested by law with the right to decide
The Spouses Uy have the capacity to file a derivative suit in behalf of and for the benefit of the corporation. The
whether or not the corporation should sue, and they will never be willing to sue themselves. The corporation would thus be
reason is that, as earlier discussed, the allegations of the Complaint make them out as stockholders at the time the questioned
helpless to seek remedy. Because of the frequent occurrence of such a situation, the common law gradually recognized the
transaction occurred, as well as at the time the action was filed and during the pendency of the action.
right of a stockholder to sue on behalf of a corporation in what eventually became known as a "derivative suit." It has been
As to the Intestate Estate of John Young, Sr., permitting an executor or administrator to represent or to bring suits
proven to be an effective remedy of the minority against the abuses of management. Thus, an individual stockholder is
on behalf of the deceased, do not prohibit the heirs from representing the deceased. These rules are easily applicable to cases
permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate
in which an administrator has already been appointed. But no rule categorically addresses the situation in which special
corporate rights, whenever officials of the corporation refuse to sue or are the ones to be sued or hold the control of the
proceedings for the settlement of an estate have already been instituted, yet no administrator has been appointed. In such
corporation. In such actions, the suing stockholder is regarded as the nominal party, with the corporation as the party-in-
instances, the heirs cannot be expected to wait for the appointment of an administrator; then wait further to see if the
interest
administrator appointed would care enough to file a suit to protect the rights and the interests of the deceased; and in the
meantime do nothing while the rights and the properties of the decedent are violated or dissipated.

Lisam Enterprises v BDO, 23 April 2012


Western Institute v Salas, 278 S 216
The courts should be liberal in allowing amendments to pleadings to avoid a multiplicity of suits and in order that the real
Facts:
controversies between the parties are presented, their rights determined, and the case decided on the merits without
The minority stockholders of WIT, sometime on June 1, 1986 in the principal office of WIT at La Paz, Iloilo City, a Special Board
unnecessary delay. This liberality is greatest in the early stages of a lawsuit, especially in this case where the amendment was
Meeting was held. In attendance were other members of the Board including one of the petitioners Reginald Villasis. Prior to
made before the trial of the case, thereby giving the petitioners all the time allowed by law to answer and to prepare for trial.
aforesaid Special Board Meeting, copies of notice thereof, dated May 24, 1986, were distributed to all Board Members,
The Court enumerated the requisites for filing a derivative suit, as follows: a) the party bringing the suit should be a
regarding the compensation of the schools officers, which was eventually passed.
shareholder as of the time of the act or transaction complained of, the number of his shares not being material; b) he has tried
A few years later, that is, on March 13, 1991, petitioners Homero Villasis, Prestod Villasis, Reginald Villasis and Dimas
to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter
Enriquez filed an affidavit-complaint against private respondents before the Office of the City Prosecutor of Iloilo, as a result of
has failed or refused to heed his plea; and c) the cause of action actually devolves on the corporation, the wrongdoing or
which two (2) separate criminal informations, one for falsification of a public document under Article 171 of the Revised Penal
harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit.
Code and the other for estafa under Article 315, par. 1(b) of the RPC, were filed before Branch 33 of the Regional Trial Court
A reading of the amended complaint will reveal that all the foregoing requisites had been alleged therein.
of Iloilo City. The charge for falsification of public document was anchored on the private respondents' submission of WIT's
Hence, the amended complaint remedied the defect in the original complaint and now sufficiently states a cause of action
income statement for the fiscal year 1985-1986 with the Securities and Exchange Commission (SEC) reflecting therein the
disbursement of corporate funds for the compensation of private respondents based on Resolution No. 4, series of 1986, making
it appear that the same was passed by the board on March 30, 1986, when in truth, the same was actually passed on June 1,
STRADE v Radstock & PNCC, 4 December 2009 1986, a date not covered by the corporation's fiscal year 1985-1986 (beginning May 1, 1985 and ending April 30, 1986).
Sison has legal standing to challenge the Compromise Agreement. Although there was no allegation that Sison filed the case WIT questioned the legal standing of the petitioners to sue on its behalf, claiming it did not give them authority to
as a derivative suit in the name of PNCC, it could be fairly deduced that Sison was assailing the Compromise Agreement as a do do. Petitioner, however, contended that the case is a derivative suit.
stockholder of PNCC. Held:
A derivative action is a suit by a stockholder to enforce a corporate cause of action. Under the Corporation Code, A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs committed
where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. However, an individual against it, for which the directors refuse to sue. It is a remedy designed by equity and has been the principal defense of the
stockholder may file a derivative suit on behalf of the corporation to protect or vindicate corporate rights whenever the officials minority shareholders against abuses by the majority. Here, however, the case is not a derivative suit but is merely an appeal
of the corporation refuse to sue, or are the ones to be sued, or hold control of the corporation. In such actions, the corporation on the civil aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for estafa and falsification of public
is the real party-in-interest while the suing stockholder, on behalf of the corporation, is only a nominal party. document. Among the basic requirements for a derivative suit to prosper is that the minority shareholder who is suing for and
In this case, the PNCC Board cannot conceivably be expected to attack the validity of the Compromise on behalf of the corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of
Agreement since the PNCC Board itself approved the Compromise Agreement. In fact, the PNCC Board steadfastly defends action on behalf of the corporation and all other shareholders similarly situated who wish to join. This is necessary to vest
the Compromise Agreement for allegedly being advantageous to PNCC. jurisdiction upon the tribunal in line with the rule that it is the allegations in the complaint that vests jurisdiction upon the court
or quasi-judicial body concerned over the subject matter and nature of the action. This was not complied with by the
petitioners either in their complaint before the court a quo nor in the instant petition which, in part, merely states that "this is a
Yu v Yukayguan, 18 June 2009 petition for review on certiorari on pure questions of law to set aside a portion of the RTC decision in Criminal Cases Nos. 37097
The general rule is that where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. and 37098" since the trial court's judgment of acquittal failed to impose any civil liability against the private respondents. By no
Nonetheless, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds amount of equity considerations, if at all deserved, can a mere appeal on the civil aspect of a criminal case be treated as a
stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones derivative suit.
to be sued, or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with
the corporation as the real party in interest. A derivative action is a suit by a shareholder to enforce a corporate cause of
action. The corporation is a necessary party to the suit. And the relief which is granted is a judgment against a third person in First International Bank v CA, 252 S 259
favor of the corporation. An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order
Glaringly, a derivative suit is fundamentally distinct and independent from liquidation proceedings. They are to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or
neither part of each other nor the necessary consequence of the other. There is totally no justification for the Court of Appeals hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation
to convert what was supposedly a derivative suit instituted by respondents, on their own behalf and on behalf of Winchester, as the real party in interest.
Inc. against petitioners, to a proceeding for the liquidation of Winchester, Inc. In the face of the damaging admissions taken from the complaint, petitioners, quite strangely, sought to deny that
While it may be true that the parties earlier reached an amicable settlement, in which they agreed to already the Second Case was a derivative suit, reasoning that it was brought, not by the minority shareholders, but by Henry Co et al.,
distribute the assets of Winchester, Inc., and in effect liquidate said corporation, it must be pointed out that respondents who not only own, hold or control over 80% of the outstanding capital stock, but also constitute the majority in the Board of
themselves repudiated said amicable settlement before the RTC, even after the same had been partially implemented; and Directors of petitioner Bank. That being so, then they really represent the Bank. So, whether they sued derivatively or directly,
there is undeniably an identity of interests/entity represented.

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could respondent conclude that the directors were remiss in their duty to protect the corporation property and business. The
Commart Phils v SEC, 198 S 73 fraud consisted in importing finished textile instead of raw cotton for the textile mill; the fraud, therefore, was committed by the
A derivative suit has been the principal defense of the minority shareholder against abuses by the majority. It is a manager of the business and was consented to by the directors, evidently beyond reach of respondent as treasurer for that
period.
remedy designed by equity for those situations where the management, through fraud, neglect of duty, or other cause,
The directors permitted the fraudulent transaction to go unpunished and nothing appears to have been done to
declines to take the proper and necessary steps to assert the corporation's rights. Indeed, to grant to Commart the light of
withdrawing or dismissing the suit, at the instance of majority stockholders and directors who themselves are the persons alleged remove the erring purchasing managers. In a way the appointment of a receiver may have been thought of by the court
below so that the dollar allocation for raw material may be revived and the textile mill placed on an operating basis
to have committed breaches of trust against the interest of the corporation, would be to emasculate the right of minority
stockholders to seek redress for the corporation. To consider the Notice of Dismissal filed by Commart as quashing the complaint
filed by Alice Maglutac in favor of the corporation would be to defeat the very nature and function of a derivative suit and Pascual v Orozco, 19 P 84
render the right to institute the action illusory.
This action was brought by the plaintiff Pascual, in his own right as a stockholder of the bank, for the benefit of the
Chase v Buencamino, 136 S 367 bank, and all the other stockholders thereof. The Banco Espaol-Filipino is a banking corporation, constituted as such by royal
The case is of derivative in nature, therefore, it was filed for the benefit of the corporation. The Court grant a decree of the Crown of Spain in the year 1854, the original grant having been subsequently extended and modified by royal
decree of July 14, 1897, and by Act No. 1790 of the Philippine Commission.
dissolution because the action is a derivative one for the benefit of Amparts and not for the personal benefit of Chase, and
It is alleged in the amended complaint that the only compensation contemplated or provided for the managing
Amparts can not be benefited by its extinction; as to the ouster of Dr. Buencamino from management, it should not be
forgotten that Dr. Buencamino is not only a manager, but is in fact 2/3 owner of Amparts and to oust him from management officers of the bank was a certain per cent of the net profits resulting from the bank's operations, as set forth in article 30 of its
reformed charter or statutes.
would amount to his disenfranchisement as owner of the majority of the enterprise apart from the fact that it is also
The gist of the first and second causes of action is as follows: The defendants constitute a majority of the present
established in the proofs that Amparts is already picking up and has been a going concern after Cranker left unto him the
direction of its affairs; the Court therefore having in mind all these finds that the solution most equitable and just would be to board of directors of the bank, who alone can authorize an action against them in the name of the corporation. It appears
limit its decision to imposing a monetary judgment upon the guilty parties for the benefit of Amparts that during the years 1903, 1904, 1905, and 1907 the defendants and appellees, without the knowledge, consent, or
acquiescence of the stockholders, deducted their respective compensation from the gross income instead of from the net
profits of the bank, thereby defrauding the bank and its stockholders of approximately P20,000 per annum.
SMC v Kahn, 11 August 1989 The second cause of action sets forth that defendants' and appellees' immediate predecessors in office in the bank during the
The Court ruled that it is claimed that since de los Angeles 20 shares represent only .00001644% of the total number of years 1899, 1900, 1901, and 1902, committed the same illegality as to their compensation as is charged against the defendants
outstanding shares (1 21,645,860), he cannot be deemed to fairly and adequately represent the interests of the minority themselves. In the four years immediately following the year 1902, the defendants and appellees were the only officials or
stockholders. The implicit argument that a stockholder, to be considered as qualified to bring a derivative suit, must hold a representatives of the bank who could and should investigate and take action in regard to the sums of money thus fraudulently
substantial or significant block of stock finds no support whatever in the law. The requisites for a derivative suit are as follows: appropriated by their predecessors. They were the only persons interested in the bank who knew of the fraudulent
(a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of his appropriation by their predecessors.
shares not being material; (b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of The court below sustained the demurrer as to the first and second causes of action on the ground that in actions of this
directors for the appropriate relief but the latter has failed or refused to heed his plea; and (c) the cause of action actually character the plaintiff must aver in his complaint that he was the owner of stock in the corporation at the time of the
devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the occurrences complained of, or else that the stock has since devolved upon him by operation of law.
particular stockholder bringing the suit.
The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a ISSUE: Whether or not the petitioner has a cause of action to file a derivative suit.
derivative action for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his own behalf,
or for the protection or vindication of his own particular right, or the redress of a wrong committed against him, individually, RULING:
but in behalf and for the benefit of the corporation. YES.As to the first cause of action: In suits of this character the corporation itself and not the plaintiff stockholder is
the real party in interest. The rights of the individual stockholder are merged into that of the corporation. It is a universally
Everett v Asia Banking, 49 P 512 recognized doctrine that a stockholder in a corporation has no title legal or equitable to the corporate property; that both of
these are in the corporation itself for the benefit of all the stockholders.So it is clear that the plaintiff, by reason of the fact that
he is a stockholder in the bank (corporation) has a right to maintain a suit for and on behalf of the bank, but the extent of such
Invoking the well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to the
a right must depend upon when, how, and for what purpose he acquired the shares which he now owns.
corporation, but that the action must be brought by the Board of Directors, the appellees argue and the court below held
As to the Second cause of action: It affirmatively appears from the complaint that the plaintiff was not a
that the corporation Teal and Company is a necessary party plaintiff and that the plaintiff stockholders, not having made
stockholder during any of the time in question in this second cause of action. Upon the question whether or not a stockholder
any demand on the Board to bring the action, are not the proper parties plaintiff. But, like most rules, the rule in question has
can maintain a suit of this character upon a cause of action pertaining to the corporation when it appears that he was not a
its exceptions. It is alleged in the complaint and, consequently, admitted through the demurrer that the corporation Teal and
stockholder at the time of the occurrence of the acts complained of and upon which the action is based, the authorities do
Company is under the complete control of the principal defendants in the case, and, in these circumstances, it is obvious that
not agree.
a demand upon the Board of Directors to institute an action and prosecute the same effectively would have been useless,
and the law does not require litigants to perform useless acts.
The conclusion of the court below that the plaintiffs, not being stockholders in the Philippine Motors Corporation,
had no legal right to proceed against that corporation in the manner suggested in the complaint evidently rest upon a
misconception of the character of the action. In this proceeding it was necessary for the plaintiffs to set forth in full the history
of the various transactions which eventually led to the alleged loss of their property and, in making a full disclosure, references
to the Philippine Motors Corporation appear to have been inevitable. It is to be noted that the plaintiffs seek no judgment
against the corporation itself at this stage of the proceedings.

Gamboa v Victoriano, 90 S 40
An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order
to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or
hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation
as the real party in interest. 12 In the case at bar, however, the plaintiffs are alleging and vindicating their own individual interests
or prejudice, and not that of the corporation. At any rate, it is yet too early in the proceedings since the issues have not been
joined. Besides, misjoinder of parties is not a ground to dismiss an action.

Reyes v Tan, 3 S 198


The claim that respondent Justiniani did not take steps to remedy the illegal importation for a period of two years is without
merit. During that period of time respondent had the right to assume and expect that the directors would remedy the
anomalous situation of the corporation brought about by their own wrong doing. Only after such period of time had elapsed

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