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CORPORATION LAW

Atty. Romarico L. Gatchalian


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I. THE CORPORATION CODE (Batas Pambansa Blg. 68)

1. Sec. 1, Corp. Code

II. NATURE, ATTRIBUTES AND CLASSIFICATIONS OF CORPORATIONS

1. Definition of a Corporation

(a) Sec. 2, Corp. Code

2. Corporation as a Creature of Law

(a) Sec. 16, Art. XII, 1987 Phil. Constitution
(b) Art. 44-45, Civil Code

3. Attributes of Corporation
(a) Artificial Being
(1) Vasquez vs. Borja, 74 Phil, 560 (1944)


2. Nationality of Corporations

Serves as legal basis for subjecting the enterprise or its activities to the laws, the
economic and fiscal powers, and the various social and financial policies, of the state to
which it is supposed to belong
Principal Doctrine : Place of Incorporation Test
Other tests of corporate nationality :
o Control Test
o Investment Test and Grandfather Rule
o War-Time test
o Place of Principal Business Test

General Rule : The control test cannot overcome the place of incorporation test

a. Place of Incorporation Test

(1) Sec. 123, Corp. Code

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

(1) Exploitation of Natural Resources

1. Sec. 2, Art. XII, 1987 Phil. Constitution All lands of the public domain, waters, minerals,
coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or
timber, wildlife, flora and fauna, and other natural resources are owned by the State. With
the exception of agricultural lands, all other natural resources shall not be alienated. The
exploration, development, and utilization of natural resources shall be under the full control
and supervision of the State. The State may directly undertake such activities, or it may
enter into co-production, joint venture, or production-sharing agreements with Filipino
citizens, or corporations or associations at least sixty per centum of whose capital is owned
by such citizens. Such agreements may be for a period not exceeding twenty-five years,
renewable for not more than twenty-five years, and under such terms and conditions as
may be provided by law. In cases of water rights for irrigation, water supply fisheries, or
industrial uses other than the development of water power, beneficial use may be the
measure and limit of the grant. x x x
The policy of the State is to ensure that the exploitation of natural resources or the pursuit
of activities deemed to be of public or national interest are in the control of Filipinos.
A foreign corporation even though controlled by Filipino citizens would not be qualified to
exploit our natural resources.

(2) Ownership and Operation of the Public Utilities

1. Sec. 11, Art. XII, 1987 Phil. Constitution No franchise, certificate, or any other
form of authorization for the operation of a public utility shall be granted except
to citizens of the Philippines or to corporations or associations organized under the
laws of the Philippines at least sixty per centum of whose capital is owned by such
citizens, nor shall such franchise or right be granted except under the condition
that it shall be subject to amendment. Alteration, or repeal by the Congress when
the common good so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers of
such corporation or association must be citizens of the Philippines.

Expressly includes the place of incorporation test and requires that only domestic
corporations with at least 60% of the capital stock owned by Filipinos may own and
operate public utilities in the Philippines.

2. People vs. Quasha (93 Phil 333 1953)

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Facts :

William H. Quasha is a member of the Philippine bar, committed a crime of
falsification of a public and commercial document for causing it to appear that
Arsenio Baylon, a Filipino citizen, had subscribed to and was the owner of 60.005 %
of the subscribed capital stock of Pacific Airways Corp. (Pacific) when in reality
the money paid belongs to an American citizen whose name did not appear in the
article of incorporation.

To circumvent the constitutional mandate that no corp. shall be authorize to
operate as a public utility in the Philippines unless 60% of its capital stock is
owned by Filipinos.
He was found guilty after trial and sentenced to a term of imprisonment and a
fine. Quasha appealed to this Court.

Primary purpose: to carry on the business of a common carrier by air, land or
water
Baylon did not have the controlling vote because of the difference in voting power
between the preferred shares and the common shares

ART. 171. Falsification by public officer, employee, or notary or ecclesiastic minister.
The penalty of prision mayor and a fine not to exceed 5,000 pesos shall be imposed
upon any public officer, employee, or notary who, taking advantage of his official
position, shall falsify a document by committing any of the following acts:

3. Making untruthful statements in a narration of facts.

ART. 172. Falsification by private individuals and use of falsified documents. The
penalty of prision correccional in its medium and maximum period and a fine of not
more than 5,000 pesos shall be imposed upon:

1. Any private individual who shall commit any of the falsifications
enumerated in the next preceding article in any public or official document or
letter of exchange or any other kind of commercial document.

ISSUE: W/N Quasha should be criminally liable

HELD: NO. Acquitted.

Falsification consists in not disclosing in the articles of incorporation that
Baylon was a mere trustee (or dummy as the prosecution chooses to call him) of his
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Atty. Romarico L. Gatchalian
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American co-incorporators, thus giving the impression that Baylon was the owner
of the shares subscribed to by him

For the mere formation of the corporation such revelation was not essential,
and the Corporation Law does not require it

The moment for determining whether a corporation is entitled to operate as a
public utility is when it applies for a franchise, certificate, or any other form of
authorization for that purpose. That can be done after the corporation has already
come into being and not while it is still being formed.

So far as American citizens are concerned, the said act has ceased to be an
offense within the meaning of the law, so that defendant can no longer be held
criminally liable therefor.

Doctrine :
* The Constitution does not prohibit mere formation of a public utility corporation without
the required Filipino ownership. What is prohibited is the granting of a franchise or other
form of authorization for the operation of a public utility to a corporation already in
existence but without the requisite Filipino ownership. For mere formation of the
corporation, disclosure is not essential. Also, the Corporation Law does not require it. False
narration for not revealing a certain fact is not punishable if there is no legal obligation to
disclose the truth.

4. Gamboa vs. Teves, et al. G.R. No. 176579, June 28, 2011

FACTS

This is a petition to nullify the sale of shares of stock of Philippine
Telecommunications Investment Corporation (PTIC) by the government of the
Republic of the Philippines, acting through the Inter-Agency Privatization
Council (IPC), to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First
Pacific Company Limited (First Pacific), a Hong Kong-based investment
management and holding company and a shareholder of the Philippine Long
Distance Telephone Company (PLDT).

The petitioner questioned the sale on the ground that it also involved an
indirect sale of 12 million shares (or about 6.3 percent of the outstanding
common shares) of PLDT owned by PTIC to First Pacific. With the this sale, First
Pacifics common shareholdings in PLDT increased from 30.7 percent to 37
percent, thereby increasing the total common shareholdings of foreigners in
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PLDT to about 81.47%. This, according to the petitioner, violates Section 11,
Article XII of the 1987 Philippine Constitution which limits foreign ownership of
the capital of a public utility to not more than 40%.

ISSUE

Does the term capital in Section 11, Article XII of the Constitution refer to the
total common shares only, or to the total outstanding capital stock (combined
total of common and non-voting preferred shares) of PLDT, a public utility?

THE RULING

[The Court partly granted the petition and held that the term capital in Section 11,
Article XII of the Constitution refers only to shares of stock entitled to vote in the election
of directors of a public utility, or in the instant case, to the total common shares of PLDT.]

Section 11, Article XII (National Economy and Patrimony) of the 1987
Constitution mandates the Filipinization of public utilities, to wit:

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

The term capital in Section 11, Article XII of the Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus in the
present case only to common shares, and not to the total outstanding capital
stock comprising both common and non-voting preferred shares [of PLDT].

xxx xxx xxx
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Indisputably, one of the rights of a stockholder is the right to participate in the
control or management of the corporation. This is exercised through his vote in
the election of directors because it is the board of directors that controls or
manages the corporation. In the absence of provisions in the articles of
incorporation denying voting rights to preferred shares, preferred shares have
the same voting rights as common shares. However, preferred shareholders are
often excluded from any control, that is, deprived of the right to vote in the
election of directors and on other matters, on the theory that the preferred
shareholders are merely investors in the corporation for income in the same
manner as bondholders. xxx.

Considering that common shares have voting rights which translate to control,
as opposed to preferred shares which usually have no voting rights, the term
capital in Section 11, Article XII of the Constitution refers only to common
shares. However, if the preferred shares also have the right to vote in the
election of directors, then the term capital shall include such preferred shares
because the right to participate in the control or management of the
corporation is exercised through the right to vote in the election of directors. In
short, the term capital in Section 11, Article XII of the Constitution refers only
to shares of stock that can vote in the election of directors.

xxx xxx xxx

Mere legal title is insufficient to meet the 60 percent Filipino-owned capital
required in the Constitution. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, is
required. The legal and beneficial ownership of 60 percent of the outstanding
capital stock must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is considered as non-
Philippine national[s].

xxx xxx xxx

To construe broadly the term capital as the total outstanding capital stock,
including both common and non-voting preferred shares, grossly contravenes the
intent and letter of the Constitution that the State shall develop a self-reliant
and independent national economy effectively controlled by Filipinos. A broad
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definition unjustifiably disregards who owns the all-important voting stock,
which necessarily equates to control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term
capital. Let us assume that a corporation has 100 common shares owned by
foreigners and 1,000,000 non-voting preferred shares owned by Filipinos, with
both classes of share having a par value of one peso (P1.00) per share. Under
the broad definition of the term capital, such corporation would be considered
compliant with the 40 percent constitutional limit on foreign equity of public
utilities since the overwhelming majority, or more than 99.999 percent, of the
total outstanding capital stock is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have
voting rights in the election of directors, even if they hold only 100 shares. The
foreigners, with a minuscule equity of less than 0.001 percent, exercise control
over the public utility. On the other hand, the Filipinos, holding more than
99.999 percent of the equity, cannot vote in the election of directors and
hence, have no control over the public utility. This starkly circumvents the
intent of the framers of the Constitution, as well as the clear language of the
Constitution, to place the control of public utilities in the hands of Filipinos. It
also renders illusory the State policy of an independent national
economy effectively controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in
fact exists in the present case.

xxx xxx xxx

[O]nly holders of common shares can vote in the election of directors [of PLDT],
meaning only common shareholders exercise control over PLDT. Conversely,
holders of preferred shares, who have no voting rights in the election of
directors, do not have any control over PLDT. In fact, under PLDTs Articles of
Incorporation, holders of common shares have voting rights for all purposes,
while holders of preferred shares have no voting right for any purpose
whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a
majority of the common shares of PLDT. In fact, based on PLDTs 2010 General
Information Sheet (GIS), which is a document required to be submitted annually
to the Securities and Exchange Commission, foreigners hold 120,046,690
common shares of PLDT whereas Filipinos hold only 66,750,622 common
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shares. In other words, foreigners hold 64.27% of the total number of PLDTs
common shares, while Filipinos hold only 35.73%. Since holding a majority of the
common shares equates to control, it is clear that foreigners exercise control
over PLDT. Such amount of control unmistakably exceeds the allowable 40
percent limit on foreign ownership of public utilities expressly mandated in
Section 11, Article XII of the Constitution.

As shown in PLDTs 2010 GIS, as submitted to the SEC, the par value of PLDT
common shares is P5.00 per share, whereas the par value of preferred shares
is P10.00 per share. In other words, preferred shares have twice the par value of
common shares but cannot elect directors and have only 1/70 of the dividends
of common shares. Moreover, 99.44% of the preferred shares are owned by
Filipinos while foreigners own only a minuscule 0.56% of the preferred
shares. Worse, preferred shares constitute 77.85% of the authorized capital
stock of PLDT while common shares constitute only 22.15%. This undeniably
shows that beneficial interest in PLDT is not with the non-voting preferred
shares but with the common shares, blatantly violating the constitutional
requirement of 60 percent Filipino control and Filipino beneficial ownership in a
public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital
stock must rest in the hands of Filipinos in accordance with the constitutional
mandate. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is constitutionally required
for the States grant of authority to operate a public utility. The undisputed fact
that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting and
earn only 1/70 of the dividends that PLDT common shares earn, grossly violates
the constitutional requirement of 60 percent Filipino control and Filipino
beneficial ownership of a public utility.

In short, Filipinos hold less than 60 percent of the voting stock, and earn less
than 60 percent of the dividends, of PLDT. This directly contravenes the express
command in Section 11, Article XII of the Constitution that [n]o franchise,
certificate, or any other form of authorization for the operation of a public
utility shall be granted except to x x x corporations x x x organized under the
laws of the Philippines, at least sixty per centum of whose capital is owned by
such citizens x x x.

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class
of shares exercises the sole right to vote in the election of directors, and thus
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exercise control over PLDT; (2) Filipinos own only 35.73% of PLDTs common
shares, constituting a minority of the voting stock, and thus do not exercise
control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no
voting rights; (4) preferred shares earn only 1/70 of the dividends that common
shares earn; (5) preferred shares have twice the par value of common shares;
and (6) preferred shares constitute 77.85% of the authorized capital stock of
PLDT and common shares only 22.15%. This kind of ownership and control of a
public utility is a mockery of the Constitution.

Incidentally, the fact that PLDT common shares with a par value of P5.00 have a
current stock market value of P2,328.00 per share, while PLDT preferred shares
with a par value of P10.00 per share have a current stock market value ranging
from only P10.92 to P11.06 per share, is a glaring confirmation by the market
that control and beneficial ownership of PLDT rest with the common shares, not
with the preferred shares.

xxx xxx xxx

WHEREFORE, we PARTLY GRANT the petition and rule that the term capital in
Section 11, Article XII of the 1987 Constitution refers only to shares of stock
entitled to vote in the election of directors, and thus in the present case only to
common shares, and not to the total outstanding capital stock (common and
non-voting preferred shares). Respondent Chairperson of the Securities and
Exchange Commission is DIRECTED to apply this definition of the term capital in
determining the extent of allowable foreign ownership in respondent Philippine
Long Distance Telephone Company, and if there is a violation of Section 11,
Article XII of the Constitution, to impose the appropriate sanctions under the
law.


5. Gamboa vs. Teves, et al., Oct. 9, 2012
SC on PLDT ownership: Capital refers to controlling interest of a corporation

The Supreme Court, voting 10-3, has denied with finality the motions for
reconsideration of its June 28, 2011 decision that directed the SEC to investigate
the Philippine Long Distance Telephone Co. (PLDT) for possible violation of the
constitutional limit on foreign ownership in utilities.

In a 51-page resolution penned by Justice Carpio, the Court En Banc declared that
it no further pleadings shall be entertained in the case.
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The Court clarified that it did not decide, and in fact refrained from ruling on the
question of whether PLDT violated the 60-40 ownership requirement in favor of
Filipino citizens in Section 11, Article XII of the 1987 Constitution as such question
indisputably calls for a presentation and determination of evidence through a
hearing, which is generally outside the province of its jurisdiction, but well within
the SECs statutory powers. The Court thus limited its decision on the purely legal
and threshold issue on the definition of the term capital in Section 11, Article XII
of the Constitution and directed the SEC to apply such definition in determining
the exact percentage of foreign ownership in PLDT.

The Court found that from the deliberations of the Constitutional Commission, it
was clear that the term capital refers to controlling interest of a corporation.
The Court held: As we held in our 28 June 2011 Decision, to construe broadly the
term capital as the total outstanding capital stock, treated as a single class
regardless of the actual classification of shares, grossly contravenes the intent and
letter of the Constitution that the State shall develop a self-reliant and
independent national economy effectively controlled by Filipinos.

The Court further held that the PLDT is only an indispensable party insofar as
other issues, particularly factual questions are concerned.

It also held that SEC was properly impleaded in this case. It noted that SEC has
expressly manifested that it will abide by the Courts decision and defer to the
Courts definition of the term capital in Section II, Article XII of the Constitution.
Further, the SEC entered its special appearances in this case and argued during
the Oral Arguments, indicating its submission to the Courts jurisdiction. It Thus
the Court found that there exists no legal impediment against the proper and
immediate implementation of its directive to the SEC. For its part, PLDT must be
impleaded, and must necessarily be heard, in the proceedings before the SEC
where the factual issues will be thoroughly threshed out and resolved, added the
Court.

Thus, there is no dispute that it is only after the SEC has determined PLDTs
violation, if any exists at the time of the commencement of the administrative
case or investigation, that the SEC may impose the statutory sanctions against
PLDT. In other words, once the 28 June 2011 Decision becomes final, the SEC shall
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impose the appropriate sanctions only if it finds after due hearing that, at the
start of the administrative case or investigation, there is an existing violation of
Section 11, Article XII of the Constitution. Under prevailing jurisprudence, public
utilities that fail to comply with the nationality requirement under Section 11.
Article XII and RA 7042, the Foreign Investments Act of 1991 (FIA) can cure their
deficiencies prior to the start of the administrative case or investigation, the
Court ruled.

The Court noted that the 1935, 1973, and 1987 Constitutions have the same 60
percent Filipino ownership and control requirement for public utilities like PLDT. It
ruled that any deviation from this requirement necessitates an amendment to the
Constitution as exemplified by the Parity Amendment.

The Court held that the 1987 Constitution reserves the ownership and operation of
public utilities exclusively to (1) Filipino citizens, or (2) corporations, or
associations at least 60 percent of whose capital is owned by Filipino citizens. In
other words, under Section 11, Article XII of the 1987 Constitution, to own and
operate a public utility a corporations capital must at least be 60 percent owned
by Philippine nationals, held the Court.

RA 7042, like all its predecessor statutes, clearly defines a Philippine national as
a Philippine citizen, or a domestic corporation at least 60% of the capital stock
outstanding and entitled to vote is owned by Philippine citizens, noted the Court.

The Court explained that the right to elect directors, coupled with beneficial
ownership, translates to effective control. The Court stressed that its assailed
decision declares that the 60 percent Filipino ownership required by the
Constitution to engage in certain economic activities applies not only to voting
control of the corporation, but also to the beneficial ownership of the
corporation. It further held that it was imperative that such requirement apply
uniformly and across the board to all classes of shares, regardless of nomenclature
and category, comprising the capital of a corporation. Under the Corporation
Code, capital stock consists of all classes of shares issued to stockholders, that is,
common shares as well as preferred shares, which may have different rights,
privileges or restriction as stated in the articles of incorporation.

The Court further explained that if a corporation, engaged in a partially
nationalized industry, issues a mixture of common and preferred non-voting
shares, at least 60 percent of the common shares and at least 60 percent of the
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preferred non-voting shares must be owned by Filipinos. In short, the 60-40
ownership requirement in favor of Filipino citizens must apply separately to each
class of shares, whether common, preferred non-voting, preferred voting or any
other class of shares.

In its June 28, 2011 decision, the Court ruled that the term capital in Section 11,
Article XII of the Constitution refers only to shares of stock entitled to vote in the
election of directors, and, in the present case, only to common shares and not to
the total outstanding capital stock comprising both common and non-voting
preferred shares.

The SEC was thus directed to apply the Courts definition of the term capital in
determining the extent of allowable foreign ownership in PLDT and to impose the
appropriate sanctions under the law if there is any violation of sec. 11, Art. XII of
the Constitution.

Justice Velasco in his dissenting opinion opined that PLDT should be given time to
undertake the necessary measures to make its capital structure compliant, and the
SEC should formulate appropriate guidelines and supervise the process. He added
that SEC should also adopt rules and regulations to implement the prospective
compliance by all affected companies with the new ruling on the interpretation of
Sec. 11, Art. XII of the Constitution.

For his part, Justice Abad opined that Sec. 11, Art. XII already provides limitations
on foreign participation in public utilities, hence, the Court need not add more by
further restricting the meaning of the term capital when none was intended by
the framers of the 1987 Constitution. He wrote that the authority to define
capital in the said provision belongs to Congress as part of its policy making
power. Granting otherwise, he opined that capital encompasses the entirety of a
corporations outstanding capital stock and that the Court can simply adopt such
interpretation of Constitution Commission by Fr. Joaquin Bernas and Dr. Bernardo
M. Villegas. (GR No. 176579, Gamboa v. Sec. Teves, October 9, 2012) Public
Information Office/Supreme Court

(3) Mass Media

1. Sec. 11, Art. XVI, 1987 Phil. Constitution

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(1) The ownership and management of mass media shall be limited to citizens
of the Philippines, or to corporations, cooperatives or associations, wholly-
owned and managed by such citizens.
The Congress shall regulate or prohibit monopolies in commercial mass media
when the public interest so requires. No combinations in restraint of trade or
unfair competition therein shall be allowed.
x x x
Mass Media : gathering, transmission of news, information, messages, signals and forms of
written, oral and all visual communication and shall embrace the print medium, radio,
television, films, movies, advertising in all its phases, and their business managerial.
It requires not only 100% Filipino ownership of the capital stock of the corporation, but also
100% Filipino management of the entity.
(4) Advertising Industry
1. Sec. 11, Art. XVI, 1987 Phil. Constitution

x x x (2) The advertising industry is impressed with public interest, and shall be
regulated by law for the protection of consumers and the promotion of the
general welfare.
Only Filipino citizens or corporations or associations at least seventy per
centum of the capital of which is owned by such citizens shall be allowed to
engage in the advertising industry.
The participation of foreign investors in the governing body of entities in
such industry shall be limited to their proportionate share in the capital
thereof, and all the executive and managing officers of such entities
must be citizens of the Philippines.


(c) Policy of Corporation Code on Control Test

(1) Sec. 140, Corp. Code
Stock ownership in certain corporations. Pursuant to the duties specified by Article
XIV of the Constitution, the National Economic and Development Authority shall, from
time to time, make a determination of whether the corporate vehicle has been used by
any corporation or by business or industry to frustrate the provisions thereof or of
applicable laws, and shall submit to the Batasang Pambansa, whenever deemed
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necessary, a report of its findings, including recommendations for their prevention or
correction.
Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations
declared by it to be vested with a public interest pursuant to the provisions of this
section, belonging to individuals or groups of individuals related to each other by
consanguinity or affinity or by close business interests, or whenever it is necessary to
achieve national objectives, prevent illegal monopolies or combinations in restraint or
trade, or to implement national economic policies declared in laws, rules and
regulations designed to promote the general welfare and foster economic development.
In recommending to the Batasang Pambansa corporations, businesses or industries to
be declared vested with a public interest and in formulating proposals for limitations on
stock ownership, the National Economic and Development Authority shall consider the
type and nature of the industry, the size of the enterprise, the economies of scale, the
geographic location, the extent of Filipino ownership, the labor intensity of the activity,
the export potential, as well as other factors which are germane to the realization and
promotion of business and industry.
(d) Investment Test and Grandfather Rule

Control Test : principal test of nationality of a corporation where the citizenship of the
controlling stockholders is used as the gauge to determine proportionately the nationality of
the target corporation.
The Place of Incorporation Test : where nationality of the target corporation is determined by
the country under whose laws it has been incorporated.
Grandfather Rule : as a sub-application under the control test, where various nationality tests
shall first be applied on the shareholders of the holding companies, to determine the
nationality of the equity in the target corporation, and thereby arrive at the nationality of such
target corporation
method by which the percentage of Filipino equity is computed, in a corporation
engaged in fully or partly nationalized areas of activities provided for under the
Constitution and other nationalization laws, in cases where corporate shareholders
are present in the situation, by attributing the nationality if the second or even
subsequent tier of ownership to determine the nationality of the corporate
shareholder
Three-level relationship:
Target company > grandson
Holding company > father
Person or entity holding shares in the holding company > grandfather
The nationality tests applies only to the target corporation
Example : AB Corporation and CD Corporation have equal interest in XYZ Company.
AB Corp. is 60% owned by Filipinos, while CD Corp. is 50% owned by Filipinos. By the
grandfather rule, AB Corp. would have a 30% Filipino interest in XYZ Co. (60% of
50%), while CD Corp. would have a 25% Filipino interest in XYZ Co. (50% of 50%).
Hence, the total Filipino interest is only 55%.
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(1) Redmont Consolidated Mines Corp. vs. McArthur Mining Corp., SEC En Banc Case No. 09-09-177
dated March 25, 2010

In a surprising opinion, the General Counsel of the Securities and Exchange
Commission held that the grandfather rule should be used in determining the
nationality of a corporation engaged in a partly nationalized activity instead of
the traditionally used control test. As stated in SEC-OGC Opinion No. 10-31
(December 9, 2010), Medusa Mining Ltd (MML) is an investor in a joint venture that
is the holder of a mineral production sharing agreement. It is in partnership with
PHILSAGA Mining Corp. (PHILSAGA), apparently a Filipino corporation. MML, a 100%
foreign corporation, owns 40 % of the joint venture, while PHILSAGA owns the
remaining 60% equity. Answering the question of MML on whether it has violated the
Constitution and other pertinent laws regarding foreign participation in
mining activities, the OGC said that:

We opine that we must look into the citizenship of the individual stockholders, i.e. natural
persons, of that investor-corporation in order to determine if the Constitutional and
statutory restrictions are complied with.

If the shares of stock of the immediate investor corporation is in turn held and controlled by
another corporation, then we must look into the citizenship of the individual stockholders of
the latter corporation. In other words, if there are layers of intervening corporations
investing in a mining joint venture, we must delve into the citizenship of the individual
stockholders of each corporation. This is the strict application of the grandfather rule, which
the Commission has been consistently applying prior to the 1990s.

This opinion, as admitted by then General Counsel Vernette G. Umali - Pacio, is in
contravention of the SECs prevailing policy of applying the control test. Under this
latter test, a legal fiction is created where if 60% of the shares of an investing
corporation are owned by Philippine citizens then all of the shares of the 100% of that
corporations share are considered Filipino owned for purposes of determining the
extent of foreign equity in an investee corporation engaging in an activity restricted
to Philippine citizens. The opinion defended its stand in this way:

Control test must not be applied in determining if a corporation satisfies the
Constitutions citizenship requirements in certain areas of activities
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Philippine citizenship is being unduly attributed to foreign individuals who own the rest of
the shares in a 60% Filipino equity corporation investing in another corporation. Thus,
applying the control test effectively circumvents the Constitutional mandate that
corporations engaging in certain activities must be 60%owned by Filipino citizens.

The words of the Constitution clearly provide that we must look at the citizenship of the
individual/natural person who ultimately owns and controls the shares of stocks of the
corporation engaging in the nationalized/partly-nationalized activity. In fact, the Mining Act
strictly adheres to the text of the Constitution and does not provide for the application of the
control test.

How to determine the nationality of a corporation

The Constitution and various laws reserve certain areas of activities to Philippine
citizens or to corporations that have a minimum percentage of Filipino ownership.

For example, with respect to corporations, ownership of land is limited to
corporations at least sixty per centum of whose capital is owned by Philippine
citizens.

If 60% of the capital of a Philippine corporation is owned by individuals who are
Philippine citizens, then there would be no issue on whether the Philippine
corporation is a Philippine national qualified to own land. On the other hand, an issue
would arise if 60% of the capital of the Philippine corporation is owned, in turn, by
another Philippine corporation that has foreign stockholders. If a Philippine
corporation has corporate stockholders, how does one determine whether such
Philippine corporation is a Philippine national? Two tests have been employed in the
Philippines: (a) the grandfather rule; and (b) the control test.

To illustrate how these tests are applied, lets take a Philippine corporation (called
Corporation X) with the following ownership structure:(a) non-Philippine citizens
own 40% of the capital stock outstanding and entitled to vote of Corporation X;

(b) another Philippine corporation (called Corporation Y) owns 60% of the capital
stock outstanding and entitled to vote of Corporation X.
(2) DOJ Opinion No. 18 dated Jan. 19, 1989
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. . . the Grandfather Rule, which was evolved and applied by the SEC in several cases, will not
apply in cases where the 60-40 Filipino-alien equity ownership in a particular natural resource
corporation is not in doubt. (underscoring supplied)
(e) War-Time Test

In times of war, the nationality of a private corporation is determined by the
character or citizenship of its controlling stockholders.

(1) Haw Pia vs. China Banking Corp., 80 Phil 604 (1948)

FACTS
Haw Pia had previously contracted a loan from China Banking Corporation in the
amount of P5,103.35, which, according to Haw Pia, had been completely paid, on
different occasions from 1942 to 1944 through Bank of Taiwan, Ltd., which was
appointed by the Japanese Military authorities as liquidator of China Banking Corp.
With this, Haw Pia instituted an action against China Banking Corp. to compel the
bank to execute a deed of cancellation of mortgage on the property used as security
for the loan and to deliver its title.

However, upon service of summons, China Banking Corp. demanded from Haw Pia for
the payment of the sum of its indebtedness with interests, which also constituted its
counter claim in its answer.

RTC rendered a decision in favor of China Banking Corp. on the basis that there was
no evidence to show that Bank of Taiwan was authorized by China Banking Corp. to
accept Haw Pia's payment and that Bank of Taiwan, as an agency of the Japanese
invading army, was not authorized under the international law to liquidate the
business of China Banking Corp. As such, Haw Pia's payment to Bank of Taiwan has
not extinguished his indebtedness to China Banking Corp.

ISSUE
Whether the Japanese Military Administration had authority to order the liquidation
of the business of China Banking Corp. and to appoint Bank of
Taiwan as liquidator authorized as such to accept payment

HELD
YES. Under international law, the Japanese Military authorities had power to order the
liquidation of China Banking Corp. and to appoint and authorize Bank of Taiwan as
liquidator to accept the payment in question, because such liquidation is not
confiscation of the properties of China Banking Corp., but a mere sequestration of its
assets which required its liquidation.

The sequestration or liquidation of enemy banks in occupied territories is authorized
expressly, not only by the US Army and Naval Manual of Military Government and Civil
Affairs, but also similar manuals of other countries, without violating Art. 46 or other
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articles of the Hague Regulations. They do not amount to an outright confiscation of
private property.

The purpose of such sequestration, as expounded in the Annual Report of the Office
of the Alien Custodian, is that enemy-owned property can be used to further the
interest of the enemy and to impede their war efforts. All enemy controlled assets
can be used to finance propaganda, espionage, and sabotage in these countries or in
countries friendly to their cause.

It is presumed that Japan, in sequestering and liquidating China Banking Corp., must
have acted in accordance, either with her own Manual of the Army and Navy and Civil
Affairs OR with her Trading with the Enemy Act, and even if not, it being permitted to
the Allied Nations, specially the US and England, to sequestrate, impound, and block
enemy properties found within their own domain or in enemy territories occupied
during the war by their armed forces, and it not being contrary to Hague Regulations
or international law, Japan had also the right to do the same in the Philippines by
virtue of the international law principle that "what is permitted to one belligerent is
also allowed to the other."

Taking these into consideration, it appears that Japan did not intend to confiscate or
appropriate the assets of said banks or the debts due them from their debtors.

The fact that the Japanese Military authorities failed to pay the enemy banks the
balance of the money collected by the Bank of Taiwan from the debtors of the said
banks, did not and could not change the sequestration by them of the bank's assets
during the war, into an outright confiscation thereof. It was physically impossible for
the Japanese Military authorities to do so because they were forcibly driven out of the
Philippines, following the readjustment of rights of private property on land seized by
the enemy provided by the Treaty of Versailles and other peace treaties entered into
at the close of WWI. The general principles underlying such arrangements are that the
owners of properties seized are entitled to receive compensation for the loss or
damage inflicted on their property by the emergency war measures taken by the
enemy.

Since Japan war notes were issued as legal tender, Japan was bound to indemnify the
aggrieved banks for the loss or damage on their property, in terms of Phil. Pesos of US
$. Since the Japanese Military Forces had power to sequestrate and impound the
assets of China Banking Corp. and to appoint Bank of Taiwan as liquidator, it follows
that payments of Haw Pia to Bank of Taiwan extinguished his obligations to China
Banking Corp.

3. Classifications of Corporations

(a) In relation to the State

(1) Public and Private Corporations
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Public Corporations
Those formed or organized for the government of a portion of the State.
Those created for political purposed connected with the public good in the
administration of the civil government.
Essentially municipal corporation, or those formed and organized by the
State for government
Being a mini-state, possess all three great powers of the government :
police power, power of eminent domain, and power of taxation.

Private Corporations
Those formed for some private purpose, benefit, aim, or end.
Divided into :
Stock Corporation
o Have a capital stock divided into shares and are authorized to
distribute to the holders of such shares dividends or allotments
of the surplus profit on the basis of the shares held.
Non-stock Corporation
o All other corporations

(2) Distinction between Public and Private Corporations

It does not mean that when the equity of a corporation is owned by the State or its
instrumentality, then it is a public corporation.
Distinction between public corporation and a private corporation is based on the
corporations creation.

1. National Coal vs. CIR, 46 Phil. 583 (1924)

Doctrine : Ownership of the government of the majority of the shares of a
corporation does not qualify such entity as a public corporation.

2. Cervantes vs. Auditor General, 91 Phil, 359 (1952)

Doctrine : A government-owned or controlled corporation when organized under
the Corporation Code is still a private corporation. But being a government-owned
or controlled corporation makes it liable for laws and provisions applicable to the
Government or its entities and subject to the control of the Government.

(3) Quasi-Public Corporations

Group of association that seems to be a cross between private corporations and
public corporations.
Usually cover school districts, water district, and the like.
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1. Marilao Water Consumers Assoc., Inc. vs. IAC, 201 SCRA 437 (1991)

(b) As to Place of Incorporation

(1) Domestic Corporations

One incorporated under the laws of the Philippines.

1. Sec. 123, Corp. Code

a foreign corporation is one formed, organized or existing under any
laws other than those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own country or State.

(2) Foreign Corporations

May be licensed by the SEC to do business in the Philippines only under the principle
of reciprocity.
Licensed by SEC to do business in the Philippines after securing a certificate of
authority from the Board of Investments and after complying with the conditions
for issuance of license on applicable forms, structural organizations and
capitalization.

(c) As to Legal Status

(1) De Jure Corporation

Full or substantial compliance with the requirements of an existing law permitting
organization of such corporations as by proper articles of incorporation duly
executed and filed.

(2) De Facto Corporation

Bona fide attempt to incorporate, colorable compliance with the statue and user
of corporate powers.

1. Sec. 20, Corp. Code

due incorporation of any corporation claiming in good faith to be a
corporation and its right to exercise corporate powers, shall not be
inquired into collaterally in any private suit of which such corporation may
be a party.
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2. Requisites for the existence of a de facto corporation
3. Rule 66, Rules of Court

Section 1. Action by Government against individuals. An action for the usurpation of a public
office, position or franchise may be commenced by a verified petition brought in the name of the
Republic of the Philippines against:
(a) A person who usurps, intrudes into, or unlawfully holds or exercises a public office, position or
franchise;
(b) A public officer who does or suffers an act which, by the provision of law, constitutes a
ground for the forfeiture of his office; or
(c) An association which acts as a corporation within the Philippines without being legally
incorporated or without lawful authority so to act. (1a)
Section 2. When Solicitor General or public prosecutor must commence action. The Solicitor
General or a public prosecutor, when directed by the President of the Philippines, or when upon
complaint or otherwise he has good reason to believe that any case specified in the preceding
section can be established by proof, must commence such action. (3a)
Section 3. When Solicitor General or public prosecutor may commence action with permission of
court. The Solicitor General or a public prosecutor may, with the permission of the court in
which the action is to be commenced, bring such an action at the request and upon the relation
of another person; but in such case the officer bringing it may first require an indemnity for the
expenses and costs of the action in an amount approved by and to be deposited in the court by
the person at whose request and upon whose relation the same is brought. (4a)
Section 4. When hearing had on application for permission to commence action. Upon
application for permission to commence such action in accordance with the next preceding
section, the court shall direct that notice be given to the respondent so that he may be heard in
opposition thereto; and if permission is granted, the court shall issue an order to that effect,
copies of which shall be served on all interested parties, and the petition shall then be filed
within the period ordered by the court. (5a)
Section 5. When an individual may commence such an action. A person claiming to be entitled
to a public office or position usurped or unlawfully held or exercised by another may bring an
action therefor in his own name. (6)
Section 6. Parties and contents of petition against usurpation. When the action is against a
person for usurping a public office, position or franchise, the petition shall set forth the name of
the person who claim to be entitled thereto, if any, with an averment of his right to the same and
that the respondent is unlawfully in possession thereof. All persons who claim to be entitled to
the public office, position or franchise may be made parties, and their respective rights to such
public office, position or franchise determined, in the same action. (7a)
Section 7. Venue. An action under the preceding six sections can be brought only in the
Supreme Court, the Court of Appeals, or in the Regional Trial Court exercising jurisdiction over
the territorial area where the respondent or any of the respondents resides, but when the
Solicitor General commences the action, it may be brought in a Regional Trial Court in the City of
Manila, in the Court of Appeals, or in the Supreme Court. (8a)
Section 8. Period for pleadings and proceedings may be reduced; action given precedence. The
court may reduce the period provided by these Rules for filing pleadings and for all other
proceedings in the action in order to secure the most expeditious determination of the matters
involved therein consistent with the rights of the parties. Such action may be given precedence
over any other civil matter pending in the court. (9a)
Section 9. Judgment where usurpation found. When the respondent is found guilty of usurping
into, intruding into, or unlawfully holding or exercising a public office, position or franchise,
judgment shall be rendered that such respondent be ousted and altogether excluded therefrom,
and that the petitioner or relator, as the case may be, recover his costs. Such further judgment
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may be rendered determining the respective rights in and to the public office, position or
franchise of all the parties to the action as justice requires. (10a)
Section 10. Rights of persons adjudged entitled to public office; delivery of books and
papers; damages. If judgment be rendered in favor of the person averred in the complaint to
be entitled to the public office he may, after taking the oath of office and executing any official
bond required by law, take upon himself the execution of the office, and may immediately
thereafter demand of the respondent all the books and papers in the respondent's custody or
control appertaining to the office to which the judgment relates. If the respondent refuses or
neglects to deliver any book or paper pursuant to such demand, he may be punished for
contempt as having disobeyed a lawful order of the court. The person adjudged entitled to the
office may also bring action against the respondent to recover the damages sustained by such
person by reason of the usurpation. (15a)
Section 11. Limitations. Nothing contained in this Rule shall be construed to authorize an
action against a public officer or employee for his ouster from office unless the same be
commenced within one (1) year after the cause of such ouster, or the right of the petitioner to
hold such office or position, arose, nor to authorize an action for damages in accordance with the
provisions of the next preceding section unless the same be commenced within one (1) year after
the entry of the judgment establishing the petitioner's right to the office in question. (16a)
Section 12. Judgment for costs. In an action brought in accordance with the provisions of this
Rule, the court may render judgment for costs against either the petitioner, the relator, or the
respondent, or the person or persons claiming to be a corporation, or may apportion the costs,
as justice requires. (17a)

(3) Corporation by Estoppel

A particular person or party, by estoppels or admission, be precluded from denying
its corporate existence.

1. Sec. 21, Corp. Code

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

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

(4) Corporation by Prescription

(d) As to Existence of Shares of Stock

(1) Stock Corporations

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Corporations which have a capital stock divided into shares and are authorized to
distribute to the holders dividends.

1. Sec. 3 & 43, Corp. Code

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

Section 43. Power to declare dividends. - The board of directors of a stock corporation
may declare dividends out of the unrestricted retained earnings which shall be payable
in cash, in property, or in stock to all stockholders on the basis of outstanding stock held
by them: Provided, That any cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription plus costs and expenses, while stock
dividends shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That no stock dividend shall be issued
without the approval of stockholders representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting duly called for the purpose.
Stock corporations are prohibited from retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital stock, except: (1) when justified by
definite corporate expansion projects or programs approved by the board of directors;
or (2) when the corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring dividends without its/his
consent, and such consent has not yet been secured; or (3) when it can be clearly shown
that such retention is necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for probable contingencies.
(2) Non-stock Corporations
1. Sec. 87 and 88, Corp. Code

Section 87. Definition. For the purposes of this Code, a non-stock corporation is one
where no part of its income is distributable as dividends to its members, trustees, or
officers, subject to the provisions of this Code on dissolution: Provided, That any profit
which a non-stock corporation may obtain as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the purpose or purposes
for which the corporation was organized, subject to the provisions of this Title.

The provisions governing stock corporation, when pertinent, shall be applicable to non-
stock corporations, except as may be covered by specific provisions of this Title.

Section 88. Purposes. Non-stock corporations may be formed or organized for
charitable, religious, educational, professional, cultural, fraternal, literary, scientific,
social, civic service, or similar purposes, like trade, industry, agricultural and like
chambers, or any combination thereof, subject to the special provisions of this Title
governing particular classes of non-stock corporations.
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2. CIR vs. Club Filipino, 5 SCRA321 (1962)

FACTS

Club Filipino owns and operates a club house, a sports complex, and a bar restaurant,
which is incident to the operation of the club and its gold course. The club is operated
mainly with funds derived from membership fees and dues. The BIR seeks to tax the said
restaurant as a business.

HELD

The Club was organized to develop and cultivate sports of all class and denomination for
the healthful recreation and entertainment of its stockholders and members. There was
in fact, no cash dividend distribution to its stockholders and whatever was derived on
retail from its bar and restaurants used were to defray its overhead expenses and to
improve its golf course.

For a stock corporation to exist, 2 requisites must be complied with:

(1) a capital stock divided into shares
(2) an authority to distribute to the holders of such shares, dividends or allotments of the
surplus profits on the basis of shares held.

In the case at bar, nowhere in the AOI or by-laws of Club Filipino could be found an
authority for the distribution of its dividends or surplus profits.

(f) As to Relationship of Management and Control

(1) Holding Company

One that controls another as a subsidiary or affiliate by the power to elect its
management
Hold stocks in other companies for purposes of control rather than for mere
investment

(2) Affiliate Company

Subject to common control of a mother or holding company and operated as part
of a system
Affiliate
o SEC : a person that directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with, the person
specified, through the ownership of voting shares, by contract, or otherwise.
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o Anti-Money Laundering Law : an entity at least 20% but not exceeding 50% of
the voting stock of which is owned by another company.
o Financial Rehabilitation & Insolvency Act of 2010 : a corporation that directly or
indirectly, through one or more intermediaries, is controlled by, or is under the
common control of another corporation.

(3) Parent and Subsidiary
Parent Company : When a corporation has a controlling financial interest in one or
more corporations ; the one having control
Subsidiary : an affiliate controlled by such person, directly or indirectly, through
one or more intermediaries

III. CORPORATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL
OF CORPORATE FICTION

1. Main Doctrine: Separate Juridical Personality

(a) Sec. 2, Corp. Code
(b) Traders Royal Bank vs. CA, 177 SCRA 789 (1989)
(c) National Power Corp. vs. CA, 273 SCRA 419 (1997)
(d) Liddell and Co. vs. CIR, 2 SCRA 632 (1961)
LIDDELL & CO., INC., petitioner-appellant, vs. THE COLLECTOR OF INTERNAL
REVENUE, respondent-appellee.

(G.R. No. L-9687, 30 June 1961)



This is an appeal from the decision of the Court of Tax Appeals imposing a tax deficiency
liability on Liddell & Co., Inc.



FACTS: The petitioner, Liddell & Co. Inc., (Liddell & Co. for short) is a domestic corporation
establish in the Philippines on February 1, 1946, with an authorized capital of P100,000
divided into 1000 share at P100 each. Of this authorized capital, 196 shares valued at
P19,600 were subscribed and paid by Frank Liddell while the other four shares were in the
name of Charles Kurz, E.J. Darras, Angel Manzano and Julian Serrano at one shares each. Its
purpose was to engage in the business of importing and retailing Oldsmobile and Chevrolet
passenger cars and GMC and Chevrolet trucks. After its incorporation, Lidell & Co. was able
to declare stock dividends, thereby increasing the issued capital stock of the said
corporation, which were duly approved by the Securities and Exchange Commission. There
has also been an agreement executed by Frank Lidell on one hand, and Messrs. Kurz,
Darras, Manzano and Serrano on the other, which was further supplemented by two other
agreements wherein Frank Liddell transferred to various employees of Liddell & Co. shares
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of stock. On the basis of the agreement, "40%" of the earnings available for dividends
accrued to Frank Liddell although at the time of the execution of said instrument, Frank
Liddell owned all of the shares in said corporation. From 1946 until November 22, 1948,
when the purpose clause of the Articles of Incorporation of Liddell & Co. Inc., was
amended so as to limit its business activities to importations of automobiles and trucks,
Liddell & Co. was engaged in business as an importer and at the same time retailer of
Oldsmobile and Chevrolet passenger cars and GMC and Chevrolet trucks. On December 20,
1948, the Liddell Motors, Inc. was organized and registered with the Securities and
Exchange Commission with an authorized capital stock of P100,000 of which P20,000 was
subscribed and paid for as follows: Irene Liddell wife of Frank Liddell 19,996 shares and
Messrs. Marcial P. Lichauco, E. K. Bromwell, V. E. del Rosario and Esmenia Silva, 1 share
each. At about the end of the year 1948, Messrs. Manzano, Kurz and Kernot resigned from
their respective positions in the Retail Dept. of Liddell & Co. and they were taken in and
employed by Liddell Motors, Inc. Beginning January, 1949, Liddell & Co. stopped retailing
cars and trucks; it conveyed them instead to Liddell Motors, Inc. which in turn sold the vehicles to
the public with a steep mark-up. Since then, Liddell & Co. paid sales taxes on
the basis of its sales to Liddell Motors Inc. considering said sales as its original sales.



PETITIONER-APPELLANT: Petitioner filed an appeal on the decision of the Court of Tax
Appeals affirming the position taken by the Collector of Internal Revenue.



RESPONDENT-APPELLEE: Upon review of the transactions between Liddell & Co. and Liddell
Motors, Inc. the Collector of Internal Revenue determined that the latter was but an alter
ego of Liddell & Co. Wherefore, he concluded, that for sales tax purposes, those sales
made by Liddell Motors, Inc. to the public were considered as the original sales of Liddell &
Co. Accordingly, the Collector of Internal Revenue assessed against Liddell & Co. a sales tax
deficiency, including surcharges. In the computation, the gross selling price of Liddell
Motors, Inc. to the general public from January 1, 1949 to September 15, 1950, was made
the basis without deducting from the selling price, the taxes already paid by Liddell & Co. in
its sales to the Liddell Motors Inc.



ISSUE: Whether or not Liddell Motors, Inc. is the alter ego of Liddell & Co. Inc.?



RULING: There are quite a series of conspicuous circumstances that militate against the
separate and distinct personality of Liddell Motors, Inc. from Liddell & Co. We notice that
the bulk of the business of Liddell & Co. was channeled through Liddell Motors, Inc. On the
other hand, Liddell Motors, Inc. pursued no activities except to secure cars, trucks, and
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spare parts from Liddell & Co. Inc. and then sell them to the general public. These sales of
vehicles by Liddell & Co. to Liddell Motors, Inc. for the most part were shown to have taken
place on the same day that Liddell Motors, Inc. sold such vehicles to the public. We may
even say that the cars and trucks merely touched the hands of Liddell Motors, Inc. as a
matter of formality.

It is of course accepted that the mere fact that one or more corporations are owned and
controlled by a single stockholder is not of itself sufficient ground for disregarding separate
corporate entities. Authorities support the rule that it is lawful to obtain a corporation
charter, even with a single substantial stockholder, to engage in a specific activity, and such
activity may co-exist with other private activities of the stockholder. If the corporation is a
substantial one, conducted lawfully and without fraud on another, its separate identity is
to be respected. Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. are
corporations owned and controlled by Frank Liddell directly or indirectly is not by itself
sufficient to justify the disregard of the separate corporate identity of one from the other.
There is, however, in this instant case, a peculiar consequence of the organization and
activities of Liddell Motors, Inc.

Under the law in force at the time of its incorporation the sales tax on original sales of cars
(sections 184, 185 and 186 of the National Internal Revenue Code), was progressive, i.e.
10% of the selling price of the car if it did not exceed P5000, and 15% of the price if more
than P5000 but not more than P7000, etc. This progressive rate of the sales tax naturally
would tempt the taxpayer to employ a way of reducing the price of the first sale. And
Liddell Motors, Inc. was the medium created by Liddell & Co. to reduce the price and the
tax liability.

As opined in the case of Gregory v. Helvering, "the legal right of a taxpayer to decrease the
amount of what otherwise would be his taxes, or altogether avoid them by means which
the law permits, cannot be doubted." But, as held in another case, "where a corporation is
a dummy, is unreal or a sham and serves no business purpose and is intended only as a
blind, the corporate form may be ignored for the law cannot countenance a form that is
bald and a mischievous fiction." Consistently with this view, the United States Supreme
Court held that "a taxpayer may gain advantage of doing business thru a corporation if he
pleases, but the revenue officers in proper cases, may disregard the separate corporate
entity where it serves but as a shield for tax evasion and treat the person who actually may
take the benefits of the transactions as the person accordingly taxable."

Thus, we repeat: to allow a taxpayer to deny tax liability on the ground that the sales were
made through another and distinct corporation when it is proved that the latter is virtually
owned by the former or that they are practically one and the same is to sanction a
circumvention of our tax laws


(e) Remo vs. IAC, 172 SCRA 405 (1989)

Nature: Petition for review, seeking the reversal of the decision of the Intermediate
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Appellate Court



Facts:On December, 1977, the board of directors of Akron Customs Brokerage Corporation,
of which petitioner Jose Remo, Jr. was a member, adopted a resolution authorizing the
purchase of thirteen (13) trucks for use in its business to be paid out of a loan the
corporation may secure from any lending institution.



Feliciano Coprada, as President and Chairman of Akron, purchased the 13 trucks from
private respondent for P525,000.00 as evidenced by a deed of absolute sale. In a side
agreement of the same date, the parties agreed on a downpayment of P50,000.00 and that
the balance of P475,000.00 to be paid within sixty (60) days from the date of the execution
of the agreement. The parties also agreed that until said balance is fully paid, the down
payment of P50,000.00 shall accrue as rentals of the 13 trucks; and failure of Akron to pay
the balance within the period of 60 days shall create a chattel mortgage lien covering said
cargo trucks and the parties may allow an extension of 30 days and thereafter private
respondent may ask for a revocation of the contract and the reconveyance of all said
trucks. The obligation is secured by a promissory note executed by Coprada in favor of
Akron. It is stated in the promissory note that the balance shall be paid from the proceeds
of a loan obtained from the Development Bank of the Philippines (DBP) within sixty (60)
days.

After the lapse of 90 days, private respondent tried to collect from Coprada but the latter
promised to pay only upon the release of the DBP loan. Private respondent sent Coprada a
letter of demand dated May 10, 1978. In his reply to the said letter, Coprada reiterated
that he was applying for a loan from the DBP from the proceeds of which payment of the
obligation shall be made.

Upon inquiry, private respondent found that no loan application was ever filed by Akron
with DBP. Coprada wrote private respondent begging for a grace period of until the end of
the month to pay the balance of the purchase price, promising that he will update the
rentals within the week; and in case he fails, then he will return the 13 units should private
respondent elect to get back the same. Private respondent, through counsel, wrote Akron
on August 1, 1978 demanding the return of the 13 trucks and the payment of P25,000.00
back rentals covering the period from June 1 to August 1, 1978. Coprada again asked for
another grace period stating as well that he is expecting the approval of his loan application from a
certain financing company, and that ten (10) trucks have been returned
to Bagbag, Novaliches.

In due time, private respondent filed a compliant for the recovery of P525,000.00 or the
return of the 13 trucks with damages against Akron and its officers and directors with the
then Court of First Instance of Rizal. Only petitioner answered the complaint denying any
participation in the transaction and alleging that Akron has a distinct corporate personality.
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He was, however, declared in default for his failure to attend the pre-trial. Petitioner on
the other hand, sold all his shares in Akron to Copranda. Akron thenafter changed its name
to Akron Transport International, Inc.

The trial court ruled in favor of private respondents, ordering petitioner to pay the
purchase price for the 13 trucks, rentals, attorney's fees and the cost of suit. On appeal,
the IAC reversed the decision of the trial court. However, on motion for reconsideration,
the IAC affirmed the appealed decision of the CFI.

Issue: Was the IAC correct in disregarding corporate fiction and holding petitioner
personally liable for the obligation of the Corporation?

Was the IAC correct in sanctioning the merger of the personality of the corporation with
that of the petitioner when the latter was held liable for the corporate debts?

Petitioner's contention: Akron has a distinct corporate personality. As such, he cannot be
held personally liable for the liabilities of the corporation.

Private respondent's contention: It is a victim of fraud, which merits the piercing of
corporate fiction

Held: Petitioner cannot be held personally liable. There is no basis to pierce the corporate
veil of Akron and hold petitioner personally liable for its obligation to private respondent.
While it is true that petitioner was still a member of the board of directors of Akron when a
resolution was adopted authorizing the purchase of 13 trucks, it does not appear that said
resolution was intended to defraud anyone and more particularly private respondent.

It was Coprada, President and Chairman of Akron, who negotiated with said respondent for
the purchase of 13 cargo trucks, who signed a promissory note to guarantee the payment
of the unpaid balance of the purchase price out of the proceeds of a loan he supposedly
sought from the DBP. The word "WE' in the said promissory note must refer to the
corporation which Coprada represented in the execution of the note and not its
stockholders or directors. Petitioner did not sign the said promissory note so he cannot be
personally bound thereby. It is Coprada who should account for the same and not
petitioner.

As to the amendment of the articles of incorporation of Akron thereby changing its name
to Akron Transport International, Inc., petitioner alleges that the change of corporate
name was in order to include trucking and container yard operations in its customs
brokerage of which private respondent was duly informed in a letter. 19 Indeed, the new
corporation confirmed and assumed the obligation of the old corporation. There is no
indication of an attempt on the part of Akron to evade payment of its obligation to private
respondent.

There is the fact that petitioner sold his shares in Akron to Coprada during the pendency of
the case. Since petitioner has no personal obligation to private respondent, it is his
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inherent right as a stockholder to dispose of his shares of stock anytime he so desires.



Ruling: WHEREFORE, the petition is GRANTED. The questioned resolution of the
Intermediate Appellate Court dated February 8,1984 is hereby set aside and its decision
dated June 30,1983 setting aside the decision of the trial court dated October 28, 1980
insofar as petitioner is concemed is hereby reinstated and affirmed, without costs.



(f) Umali vs. CA, 189 SCRA 529 (1990)


2. Appplication of Piercing Doctrine
(a) San Juan Structural and Steel Fabricators, Inc. vs. CA, 296 SCRA 631
(1998)

In 1989, San Juan Structural and Steel Fabricators, Inc. (San Juan) alleged that it entered into a
contract of sale with Motorich Sales Corporation (Motorich) through the latters treasurer, Nenita
Gruenberg. The subject of the sale was a parcel of land owned by Motorich. San Juan advanced
P100k to Nenita as earnest money.
On the day agreed upon on which Nenita was supposed to deliver the title of the land to Motorich,
Nenita did not show up. Nenita and Motorich did not heed the subsequent demand of San Juan to
comply with the contract hence San Juan sued Motorich. Motorich, in its defense, argued that it is
not bound by the acts of its treasurer, Nenita, since her act in contracting with San Juan was not
authorized by the corporate board.
San Juan raised the issue that Nenita was actually the wife of the President of Motorich; that
Nenita and her husband owns 98% of the corporations capital stocks; that as such, it is a close
corporation and that makes Nenita and the President as principal stockholders who do not need any
authorization from the corporate board; that in this case, the corporate veil may be properly
pierced.
ISSUE: Whether or not San Juan is correct.
HELD: No. Motorich is right in invoking that it is not bound by the acts of Nenita because her act in
entering into a contract with San Juan was not authorized by the board of directors of Motorich.
Nenita is however ordered to return the P100k.
There is no merit in the contention that the corporate veil should be pierced even though it is true
that Nenita and her husband own 98% of the capital stocks of Motorich. The corporate veil can only
be pierced if the corporate fiction is merely used by the incorporators to shield themselves against
liability for fraud, illegality or inequity committed on third persons. It is incumbent upon San Juan
to prove that Nenita or her husband is merely using Motorich to defraud San Juan. In this case
however, San Juan utterly failed to establish that Motorich was formed, or that it is operated, for
the purpose of shielding any alleged fraudulent or illegal activities of its officers or stockholders; or
that the said veil was used to conceal fraud, illegality or inequity at the expense of third persons
like San Juan.
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(b) Luxuria Homes, Inc. vs. CA, 302 SCRA 315 (1999)

Facts: Aida M. Posadas and her two (2) minor children co-owned a 1.6 hectare property in
Sucat,Muntinlupa, which was occupied by squatters. Posadas entered into negotiations with
Jaime T. Bravo
regarding the development of the said property into a residential subdivision. On 3 May 1989, she
authorized
Bravo to negotiate with the squatters to leave the said property. With a written authorization,
Bravo buckled
down to work and started negotiations with the squatters. Meanwhile, some 7 months later, on 11
December
1989, Posadas and her children, through a Deed of Assignment, assigned the said property to
Luxuria Homes,
Inc., purportedly for organizational and tax avoidance purposes. Bravo signed as one of the
witnesses to the
execution of the Deed of Assignment and the Articles of Incorporation of Luxuria Homes,
Inc. Then
sometime in 1992, the harmonious and congenial relationship of Posadas and Bravo turned sour
when the
former supposedly could not accept the management contracts to develop the 1.6 hectare
property into a
residential subdivision, the latter was proposing. In retaliation, Bravo demanded payment
for services
rendered in connection with the development of the land. In his statement of account dated 21
August 1991,
Bravo demanded the payment of P1,708,489.00 for various services rendered, i.e., relocation of
squatters,
preparation of the architectural design and site development plan, survey and fencing. Posadas
refused to pay
the amount demanded. Thus, in September 1992, James Builder Construction and Jaime T. Bravo
instituted a
complaint for specific performance before the trial court against Posadas and Luxuria Homes, Inc.
On 27
September 1993, the trial court declared Posadas in default and allowed James Builder
Construction and
Bravo to present their evidence ex-parte. On 8 March 1994, it ordered Posadas, jointly and in
solidum with
Luxuria Homes, Inc., to pay Bravo, et. al. the balance of the payment for the various services
performed by
them in the total amount of P1,708,489.00; actual damages incurred for the construction
of the
warehouse/bunks, and for the material used in the total sum of P1,500.000.00; moral and
exemplary damages
of P500.000.00; Attorney's fee of P50,000.00; and cost of this proceedings. The court also directed
Posadas as
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the Representative of the Corporation Luxuria Homes, Incorporated, to execute the management
contract she
committed to do, also in consideration of the various undertakings that Bravo rendered for her.
Luxuria Homes and Posadas appealed to the Court of Appeals. The appellate court affirmed with
modification
the decision of the trial court. The appellate court deleted the award of moral damages on the
ground that
James Builder Construction is a corporation and hence could not experience physical suffering and
mental
anguish. It also reduced the award of exemplary damages. Luxuria Homes' and Posadas'
motion for
reconsideration, prompting them to file the petition for review before the Supreme Court.
Issue: Whether Luxuria Homes, Inc., was a party to the transactions entered into by Posadas with
Bravo and
James Builder Construction and thus could be held jointly and severally with Posadas.
Held: It cannot be said then that the incorporation of Luxuria Homes and the eventual transfer of
the subject
property to it were in fraud of Bravo and James Builder Construction as such were done with
the full
knowledge of Bravo himself, as evidenced by the Deed of Assignment dated 11 December 1989
and the
Articles of Incorporation of Luxuria Homes, Inc., issued 26 January 1990 were both signed by Bravo
himself
as witness. Further, Posadas is not the majority stockholder of Luxuria Homes, Inc. The
Articles of
Incorporation of Luxuria Homes, Inc., clearly show that Posadas owns approximately 33% only of
the capital
stock. Hence, Posadas cannot be considered as an alter ego of Luxuria Homes, Inc. To disregard the
separate
juridical personality of a corporation, the wrongdoing must be clearly and convincingly established.
It cannot
be presumed. Bravo, et. al. failed to show proof that Posadas acted in bad faith, and consequently
that Luxuria
Homes, Inc., was a party to any of the supposed transactions, not even to the agreement to
negotiate with and
relocate the squatters, it cannot be held liable, nay jointly and in solidum, to pay Bravo, et. al.
Hence, since it
was Posadas who contracted Bravo to render the subject services, only she is liable to pay the
amounts
adjudged by the Court.


(c) Traders Royal Bank vs. CA, 269 SCRA 601 (1997)

3. Nature and Consequences of Piercing Doctrine

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(a) Res Judicata

(1) Koppel (Phil.), Inc. vs. Yatco, G.R. No. L-47673, Oct. 10, 1946



(2) Tantongco vs. Kaisahan ng mga Manggagawa sa La Campana and
CIR, 106 Phil. 199 (1959)

The present case is a petition for Certiorari and prohibition with prayer for the issuance of
a writ of preliminary injunction to prohibit the respondent Court of Industrial Relations
from proceeding with the hearing of the contempt proceedings.



FACTS La Campana Starch Factory and La Campana Coffee Factory (La Campana for
Brevity) are two separate entities run by a single management under the leadership of
Ramon Tantongco. Kaisahan ng mga Manggagawa sa La Campana (Kaisahan for brevity), on
the other hand, is a labor union with members from the two companies. Sometime in June, 1951,
representatives of Kaisahan approached the management of La Campana to demand
higher wages and more benefits. A deadlock ensued since none of the parties is willing to
give concessions. The dispute was certified to the Court of Industrial Relations (CIR). La
Campana filed a motion to dismiss before the CIR claiming that the CIR has no jurisdiction
because only those from the coffee factory were presenting the demands there were only
14 employees in said factory. This was done in light of the requirement that at least 31
employees should present the demands. The motion was denied by the CIR. According to
the CIR, the Kaisahan was the one that presented the demands and not just the workers in
the coffee factory. The Supreme Court affirmed the order of the CIR citing that although
the two entities are separate, there is only one management. The entire membership of
the Kaisahan is therefore to be counted and not simply those employed in the coffee
factory. Additional incidental cases were filed by Kaisahan before the CIR including a
petition for the reinstatement of some employees. Ramon Tantongco died some time in
1956. The administrator of the estate of Ramon Tantongco, herein petitioner Ricardo
Tantongco, was ordered included as respondent in the cases pending before the CIR. The
CIR rendered a decision on the incidental cases and ordered the reinstatement of the
dismissed employees. When the employees reported to work, the management refused
them admittance. Kaisahan then filed a petition to cite the management in contempt
before the CIR. Hence this petition.



CONTENTIONS Petitioner: The two companies ceased to exist upon the death of Ramon
Tantongco. The Supreme Court held in GR No. L-5677 that La Campana and Ramon
Tantongco are one based on the doctrine of piercing the veil of corporate existence.
Therefore, the death of Ramon Tantongco meant the death of La Campana. Since La
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Campana already ceased to exist, the CIR no longer has jurisdiction over it. The claims
should have been filed with the probate court.

Defendant: La Campana continues to exist despite the death of Ramon Tantongco. The CIR
therefore has jurisdiction when it rendered its decision on the incidental cases. The non-
compliance by La Campana therefore amounted to contempt of court.



ISSUE

WON La Campana ceased to exist upon the death of Ramon Tantongco;

WON the Doctrine of Piercing the Veil of Corporate Existence applies to the present case;
and
WON the contempt of court proceedings in the CIR should proceed.


RULING The Supreme Court DENIED the Petition for Certiorari and Prohibition. It ruled that
La Camapana continued to exist despite the death of Ramon Tantongco. It further ruled
that the Doctrine of Piercing the Veil of Corporate Existence is not applicable in the present
case. Finally, it allowed the CIR to proceed with the contempt hearing.


1 and 2

The death of Ramon Tantongco did not end the existence of La Campana. The Supreme
Court applied the Doctrine of Piercing the Veil of Corporate Existence in GR no. L-5677 to
avoid the use of technicality to defeat the jurisdiction of the CIR. In the said case, the Court
determined that although La Campana are two separate companies, they are being
managed by only one management. Furthermore, the workers of both factories were
interchangeably assigned. In the present case, however, the Court ruled that despite the
obvious fact that La Campana was run by the same people, they still are two different
companies with separate personalities from Ramon Tantongco. La Campana was owned
not only by Ramon but others as well including Ricardo Tantongco. Lastly, the Court ruled
that petitioner is under estoppel and cannot claim that La Campana and Ramon are one
and the same since he has represented La Campana as separate entities in numerous
dealings.



3. Ricardo Tantongco should still face the contempt proceedings because under Section 6
of Commonwealth Act No. 143, In case the employer (or landlord) committing any such
violation or contempt is an association or corporation, the manager or the person who has
the charge of the management of the business of the association or corporation and the
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officers of directors thereof who have ordered or authorized the violation of contempt
shall be liable. . . . Since Tantongco is the General Manager of La Campana, he is still
obliged to appear at the contempt proceedings.


(b) To Prevent Fraud or Wrong and for No Other Purpose

(1) Umali vs. CA, 189 SCRA 529 (1990)

Mauricia Castillo was the administratrix in charge over a parcel of land left be Felipe Castillo. Said
land was mortgaged to the Development Bank of the Philippines and was about to be foreclosed
but then Mauricias nephew, Santiago Rivera, proposed that they convert the land into 4
subdivisions so that they can raise the necessary money to avoid foreclosure. Mauricia agreed.
Rivera sought to develop said land through his company, Slobec Realty Corporation (SRC), of which
he was also the president. SRC then contracted with Bormaheco, Inc. for the purchase of one
tractor. Bormaheco agreed to sell the tractor on an installment basis. At the same time, SRC
mortgaged said tractor to Bormaheco as security just in case SRC will default. As additional
security, Mauricia and other family members executed a surety agreement whereby in case of
default in paying said tractor, the Insurance Corporation of the Philippines (ICP) shall pay the
balance. The surety bond agreement between Mauricia and ICP was secured by Mauricias parcel of
land (same land to be developed).
SRC defaulted in paying said tractor. Bormaheco foreclosed the tractor but it wasnt enough hence
ICP paid the deficiency. ICP then foreclosed the property of Mauricia. ICP later sold said property
to Philippine Machinery Parts Manufacturing Corporation (PMPMC). PMPMC then demanded Mauricia
et al to vacate the premises of said property.
While all this was going on, Mauricia died. Her successor-administratrix, Buenaflor Umali,
questioned the foreclosure made by ICP. Umali alleged that all the transactions are void and
simulated hence they were defrauded; that through Bormahecos machinations, Mauricia was
fooled into entering into a surety agreement with ICP; that Bormaheco even made the premium
payments to ICP for said surety bond; that the president of Bormaheco is a director of PMPMC; that
the counsel who assisted in all the transactions, Atty. Martin De Guzman, was the legal counsel of
ICP, Bormaheco, and PMPMC.
ISSUE: Whether or not the veil of corporate fiction should be pierced.
HELD: No. There is no clear showing of fraud in this case. The mere fact that Bormaheco paid said
premium payments to ICP does not constitute fraud per se. As it turned out, Bormaheco is an agent
of ICP. SRC, through Rivera, agreed that part of the payment of the mortgage shall be paid for the
insurance. Naturally, when Rivera was paying some portions of the mortgage to Bormaheco,
Bormaheco is applying some parts thereof for the payment of the premium and this was agreed
upon beforehand.
Further, piercing the veil of corporate fiction is not the proper remedy in order that the
foreclosure conducted by ICP be declared a nullity. The nullity may be attacked directly without
disregarding the separate identity of the corporations involved. Further still, Umali et al are not
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enforcing a claim against the individual members of the corporations. They are not claiming said
members to be liable. Umali et al are merely questioning the validity of the foreclosure.
The veil of corporate fiction cant be pierced also by the simple reason that the businesses of two
or more corporations are interrelated, absent sufficient showing that the corporate entity was
purposely used as a shield to defraud creditors and third persons of their rights. In this case, there
is no justification for disregarding their separate personalities.

(2) Boyer-Roxas vs. CA, 211 SCRA 470 (1992)

Petition to review the decision and resolution of the Court of Appeals affirming the earlier
decision of the RTC-Laguna in the consolidated civil cases involving petitioners and private
respondent Heirs of Eugenia V. Roxas, Inc. (HEIRS), a corporation.



FACTS: HEIRS filed two separate complaints for recovery of possession with the RTC-
Laguna against herein petitioners, praying for the ejectment of petitioners from buildings
inside the Hidden Valley Springs Resort, allegedly owned by respondent
corporation. HEIRS alleged that (1) Rebecca Roxas is in possession of two houses built at
the expense of HEIRS, and that her occupancy on the said houses was only upon the
tolerance of the corporation; and (2) Guillermo Roxas occupies a house which was built at
the expense of the corporation during the time when Guillermos father was still living and
was the general manager of the corporation, and that Guillermos possession over the
house and lot was only upon the tolerance of the corporation. In their separate answers,
petitioners traversed the allegations stating that they are heirs of Eugenia V. Roxas, and
therefore, co-owners of the Hidden Valley Springs Resort; and as co-owners of the
property, they have the right to stay within its premises.

RTC-Laguna decided in favor of HEIRS. On appeal, the decision of the RTC was
affirmed. Hence, the petition.

ISSUE:Did the CA err when it refused to pierce the veil of corporate fiction over HEIRS and
maintain the petitioners in their possession and/or occupancy of the subject premises
considering that petitioners are owners of aliquot part of the properties of HEIRS?

HELD:NO. The petitioners maintain that their possession of the questioned properties
must be respected in view of their ownership of an aliquot portion of all the properties of
the respondent corporation being stockholders thereof. They propose that the veil of corporate
fiction be pierced, considering the circumstances under which the respondent
corporation was formed.

Originally, the questioned properties belonged to Eugenia V. Roxas. After her death, the
heirs of Eugenia V. Roxas, among them the petitioners herein, decided to form a
corporation Heirs of Eugenia V. Roxas, Incorporated (private respondent herein) with
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the inherited properties as capital of the corporation. The corporation was incorporated on
December 4, 1962 with the primary purpose of engaging in agriculture to develop the
inherited properties. The Articles of Incorporation of the respondent corporation were
amended in 1971 to allow it to engage in the resort business. Accordingly, the corporation
put up a resort known as Hidden Valley Springs Resort where the questioned properties
are located. These facts, however, do not justify the position taken by the petitioners.

The respondent is a bona fide corporation. As such, it has a juridical personality of its own
separate from the members composing it. There is no dispute that title over the
questioned land where the Hidden Valley Springs Resort is located is registered in the
name of the corporation. The records also show that the staff house being occupied by
petitioner Rebecca Boyer-Roxas and the recreation hall which was later on converted into
a residential house occupied by petitioner Guillermo Roxas are owned by the respondent
corporation. Regarding properties owned by a corporation, we stated in the case
ofStockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, (6 SCRA 373
[1962]):

xxx xxx xxx

. . . Properties registered in the name of the corporation are owned by it as an entity
separate and distinct from its members. While shares of stock constitute personal
property, they do not represent property of the corporation. The corporation has property
of its own which consists chiefly of real estate (Nelson v. Owen, 113 Ala., 372, 21 So. 75;
Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). A share of stock only typifies an aliquot part
of the corporation's property, or the right to share in its proceeds to that extent when
distributed according to law and equity (Hall & Faley v. Alabama Terminal, 173 Ala., 398, 56
So. 235), but its holder is not the owner of any part of the capital of the corporation
(Bradley v. Bauder, 36 Ohio St., 28). Nor is he entitled to the possession of any definite
portion of its property or assets (Gottfried V. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio
St., 474). The stockholder is not a co-owner or tenant in common of the corporate property
(Harton v. Johnston, 166 Ala., 317, 51 So. 992). (at pp. 375-376)

The petitioners point out that their occupancy of the staff house which was later used as
the residence of Eriberto Roxas, husband of petitioner Rebecca Boyer-Roxas and the
recreation hall which was converted into a residential house were with the blessings of
Eufrocino Roxas, the deceased husband of Eugenia V. Roxas, who was the majority and
controlling stockholder of the corporation. In his lifetime, Eufrocino Roxas together with
Eriberto Roxas, the husband of petitioner Rebecca Boyer-Roxas, and the father of petitioner
Guillermo Roxas managed the corporation. The Board of Directors did not object
to such an arrangement. The petitioners argue that . . . the authority thus given by
Eufrocino Roxas for the conversion of the recreation hall into a residential house can no
longer be questioned by the stockholders of the private respondent and/or its board of
directors for they impliedly but no leas explicitly delegated such authority to said Eufrocino
Roxas. (Rollo, p. 12)


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Again, we must emphasize that the respondent corporation has a distinct personality
separate from its members. The corporation transacts its business only through its officers
or agents. (Western Agro Industrial Corporation v. Court of Appeals, supra). Whatever
authority these officers or agents may have is derived from the board of directors or other
governing body unless conferred by the charter of the corporation. An officer's power as
an agent of the corporation must be sought from the statute, charter, the by-laws or in a
delegation of authority to such officer, from the acts of the board of directors, formally
expressed or implied from a habit or custom of doing business. (Vicente v. Geraldez, 52
SCRA 210 [1973])



In the present case, the record shows that Eufrocino V. Roxas who then controlled the
management of the corporation, being the majority stockholder, consented to the
petitioners' stay within the questioned properties. Specifically, Eufrocino Roxas gave his
consent to the conversion of the recreation hall to a residential house, now occupied by
petitioner Guillermo Roxas. The Board of Directors did not object to the actions of
Eufrocino Roxas. The petitioners were allowed to stay within the questioned properties
until August 27, 1983, when the Board of Directors approved a Resolution ejecting the
petitioners.



We find nothing irregular in the adoption of the Resolution by the Board of Directors. The
petitioners' stay within the questioned properties was merely by tolerance of the
respondent corporation in deference to the wishes of Eufrocino Roxas, who during his
lifetime, controlled and managed the corporation. Eufrocino Roxas' actions could not have
bound the corporation forever. The petitioners have not cited any provision of the
corporation by-laws or any resolution or act of the Board of Directors which authorized
Eufrocino Roxas to allow them to stay within the company premises forever. We rule that
in the absence of any existing contract between the petitioners and the respondent
corporation, the corporation may elect to eject the petitioners at any time it wishes for the
benefit and interest of the respondent corporation.


(3) Union Bank vs. CA, 290 SCRA 198 (1998)
(c) Judicial Prerogative

(1) Cruz vs. Dalisay, 152 SCRA 482 (1987)

DOCTRINE:

Commercial Law; Corporation. Piercing the veil of corporate entity;A corporation ha a
personality distinct and separate from its individual stockholders or members; Sheriff
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usurped a power that belonged to the court when he chose to pierce the veil of corporate
entity.

FACTS:

In a sworn complaint, Adelio Cruz charged Quiterio Dalisay, Senior Deputy Sheriff of
Manila, with malfeasance in office, corrupt practices and serious irregularities allegedly
committed as follows:

1.
Respondent sheriff attached and/or levied the money belonging to complainant
Cuz when he was not himself the judgment debtor in the final judgment of NLRC
NCR Case sought to be enforced but rather the company known as Qualitrans
Limousine Service, Inc. a duly registered corporation, and

2.
Respondent likewise caused the service of the alias writ of execution UPON
COMPLAINANT who is a resident of Pasay despite knowledge that his territorial
jurisdiction covers Manila only and does not extend to Pasay City.

In his comments, respondent Dalisay explained that when he garnished complainants
cash deposit at the Philtrust bank, he was merely performing a ministerial duty. While it is
true that said writ was addressed to Qualitrans Limousine Service Inc, yet it is also a fact
that complainant had executed an affidavit before the Pasay City assistant fiscal stating
that he is the owner/ president of said corporation and because of that declaration, the counsel for
the plaintiff in the labor case advised him to serve notice of garnishment on the
Philtrust bank.





ISSUE:

whether or not the sheriff committed an act that pierced the veil of corporate entity of
Qualitrans?

HELD: YES.

We hold that respondents actuation in enforcing a judgment against complainant who is
not the judgment in the case calls for disciplinary action. Considering the ministerial nature
of his duty in enforcing writs of execution, what is incumbent upon him is to ensure that
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only that portion of a decision ordained or decreed in the dispositive part should be the
subject of execution. No more, no less.

The tenor of the NLRC judgment and the implementing writ is clear enough. It directed
Qualitrans Limousine Service Inc to reinstate the discharged employees and pay them
full backwages. Respondent however, chose to pierce the veil of corporate entity
usurping a power belonging to the court and assumed improvidently that since the
complainant is the owner/president of Qualitrans Limousine Service, Inc. they are one
and the same.

It is a well-settled doctrine both in law and in equity that as a legal entity, a corporation
has a personality distinct and separate from its individual stockholders or members. The
mere fact that one is president of a corporation does not render the property he owns or
possesses the property of the corporation, since the president, as individual, and the
corporation are separate entities.

ACCORDINGLY, we find Respondent Deputy Sheriff Dalisay NEGLIGENT in the enforcement
of the writ of execution in NLRC Case no. 8-12389-91; and a fine equivalent to 3 months
salary is hereby imposed with a stern warning that the commission of the same or similar
offense in the future will merit a heavier penalty.


4. Classification of Piercing Cases

(a) Fraud Cases

(1) Piercing Doctrine Cannot be Employed to Commit Fraud
1. Gregorio Araneta, Inc. vs. Tuason de Paterno and Vidal, 91 Phil. 786 (1952)


FACTS:
Paz Tuason de Paterno is the registered owner of certain portions (approximately 40,703
square meters) of a big block of residential land in the district of Santa Mesa, Manila. The land
was subdivided into city lots most of which were occupied by lessees who had contracts of lease
which were to expire on December 31, 1952. A salient stipulation in the contracts was that in the
event the owner and lessor should decide to sell the property the lessees were to be given
priority over other buyers if they should desire to buy their leaseholds. Smaller lots were
occupied by tenants without formal contract.
In 1940 and 1941 Paz De Paterno obtained from Jose Vidal several loans amounting to
P90,098 and constituted a first mortgage on the aforesaid property to secure the debt. In
January and April, 1943, she obtained additional loans of P30,000 and P20,000 upon the
same security. In each of these two, the previous contract of mortgage was renewed and the
amounts received were consolidated. In the first novated contract the time of payment was fixed
at two years and in the second and last at four years.
1943- Paz decided to sell the entire property for P400,000 and entered into
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negotiations with Gregorio Araneta, Inc. They executed a contract called "Promesa de
Compra y Venta" or Promise to Buy and Sell (Exhibit 1). The contract indicated that
subject to the preferred right of the lessees and that of Jose Vidal as mortgagee, Paz De Paterno
would sell to Gregorio Araneta, Inc. and the latter would buy for the said amount of P400,000 the
entire estate under these terms.
Letters were sent the lessees giving them until August 31, 1943, an option to buy the lots
they occupied. Some of the lessees bought their part of the property and were given their deeds
of conveyance. De Paterno and Araneta executed a deed of absolute deed of sale (Exhibit A)
over Lots 1, 8-16 and 18 which have an aggregate area of 14,810.20 square meters with the
exclusion of the lots sold to tenants and those which were mortgaged to Vidal.
A day before the execution of the said deed of absolute sale, a day after the signing of the
agreement to buy and sell between De Paterno and Araneta, De Paterno had offered to Vidal the
check for P143,150 to settle her mortgage obligation. Vidal refused to receive that check or to
cancel the mortgage, contending that by the separate agreement before, payment of mortgage
was not to be effected totally or partially before the end of four years from April, 1943. This
prompted De Paterno to file an action against Vidal but this never came to trial and the record
and the checks were destroyed during the war operations.
Araneta then, filed an action against De Paterno to compel the latter to deliver to him a
clear title to the lots and a deed of cancellation of Vidals mortgage. Vidal filed a cross-claim
against De Paterno for the foreclosure of the mortgage.


st
ISSUE: Whether or not there had been an absolute deed of sale between Araneta and De
Paterno
HELD: Yes. There was an absolute sale between Paterno and Araneta. Exhibit A (Deed
of Sale) is valid and enforceable.
RATIO:
The contemplated execution of an absolute deed of sale was not contingent on the
cancellation of Vidal's mortgage therefore, there was no need to settle the mortgage first. The
agreement only provided that such deed of absolute sale should be executed upon the
determination of the specific lots to be sold to Araneta. The said lots became definite when the
tenants option to buy expired.

Vidal's mortgage was not an obstacle to the sale. An amount had been set aside to take
care of it, and the parties, it would appear, were confident that the suit against the mortgagee
would succeed.
The charge that Araneta was in a rush in the sale of the lands cannot be gleaned from the
facts. The fact that simultaneously with the agreement with Araneta, similar deeds were given
the lessees who had elected to buy their leaseholds, which comprise an area about twice as big
as the lots described in said agreement, and the further fact that the sale to the lessees have
never been questioned and the proceeds thereof have been received by the defendant, should
add to dispel any suspicion of bad faith on the part of the plaintiff.
If anyone was in a hurry it could have been the defendant. De Paterno was pressed for
cash and that the payment of the mortgage was only an incident, or a necessary means to
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effectuate the sale. She could have settled her mortgage obligation merely by selling a portion of
her estate. Araneta and de Paterno were at perfect liberty to make a new agreement different
from or even contrary to the provisions of the promise to buy and sell. The validity of the
subsequent sale must of necessity depend on what it said and not on the provisions of the
promise to buy and sell.
2
nd
ISSUE: Whether or not De Paterno can claim fraud as defense.
Held: No.
Ratio:
De Paterno alleges that her attorneys, Attorneys Salvador Araneta and J. Antonio Araneta
who had drawn Exhibit A (deed of sale), did not inform her or had misinformed her about the
contents of the deed and that it was in English, thats why she did not read it. She would not
have affixed her signature in a one-sided contract. She alleges that the discrepancies in Exhibit 1
and Exhibit A are evidence of fraud.
SC: there were two documents involved in the case. One was the Promise to Buy and Sell (Exhibit
1) and the Absolute Deed of Sale (Exhibit A).
The first provision which was not in Exhibit 1 but was in Exhibit A:
The provision that 10 per cent of the purchase price should be paid only after Vidal's
mortgage should have been cancelled is not onerous or unusual. The stipulation that a vendee
should withhold a relatively small portion of the purchase price before all the impediments to the
final consummation of the sale had been removed is valid. The tenants who had bought their lots
had been granted the privilege to deduct as much as 40 per cent of the stipulated price pending
discharge of the mortgage, although his percentage was later reduced to 10 as in the case of
Gregorio Araneta, Inc. It has also been that the validity of the sales to the tenants has not been
contested; that these sales embraced in the aggregate 24,245.40 square meters for P260,916.68
as compared to 14,811.20 square meters sold to Gregorio Araneta, Inc. for P139,083.32.
The second stipulation in Exhibit A which had no counterpart in Exhibit 1 was that by which
Gregorio Araneta Inc. would hold Paz Tuason liable for the lost checks and which, as stated,
appeared to be at the root of the whole trouble between the plaintiff and the defendant.
In view of the foregoing liquidation, the Vendor acknowledges fully and
unconditionally, having received the sum of P125,174.99 of the present legal currency and
hereby expressly declares that she will not hold the Vendee responsible for any loss that
she might suffer due to the fact that two of the checks paid to her by the Vendee were
used in favor of Jose Vidal and the latter has, up to the present time, not yet collected the
same.
SC: It is difficult to believe that the defendant was deceived into signing Exhibit A. Intelligent
and well educated who had been managing her affairs, she had an able attorney who was
assisting her in the suit against Vidal, a case which was instituted precisely to carry into effect
Exhibit A or Exhibit 1, and a son who is leading citizen and a business-man and knew the English
language very well if she did not. If the defendant signed Exhibit A without being apprised of its
import, it can hardly be conceived that she did not have her attorney or her son read it to her
afterward. She denied the existence of Exhibit A at first and afterwards, alleged fraud in its
execution. It would look as if she gambled on the chance that no signed copy of the deed had
been saved from the war.
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3
rd
ISSUE: Whether or not there was an agent-principal relationship between Jose
Araneta (president of Gregorio Araneta, Inc.) and de Paterno.
Held: No. Jose Araneta was not an agent within the meaning of article 1459. He was nothing
more than a go-between or middleman between the defendant and the purchaser, bringing them
together to make the contract themselves.
Exhibit 1 is decisive of the defendant's assertion. In paragraph 8 of Exhibit 1 Jose Araneta
was referred to as defendant's agent or broker "who acts in this transaction" and who as such
was to receive a commission of 5 per cent although the commission was to be charged to the
purchasers. In in paragraph 13 the defendant promised, in consideration of Jose Araneta's
services rendered to her, to assign to him all her right, title and interest to and in certain lots not
embraced in the sales to Gregorio Araneta, Inc. or the tenants.
However, there is no denying that Gregorio Araneta, Inc. entered into the contract for
itself and for its benefit as a corporation. There is no pretense, nor is there reason to suppose,
that if Paz Tuason had known Jose Araneta to Gregorio Araneta, Inc's president, which she knew,
she would not have gone ahead with the deal. . From her point of view and from the point of
view of public interest, it would have made no difference, except for the brokerage fee, whether
Gregorio Araneta, Inc. or Jose Araneta was the purchaser.
Assuming that Jose Araneta and Gregorio Araneta, Inc. were identical and that the acts of
one where the acts of the other, the relation between the defendant and Jose Araneta did not fall
within the purview of article 1459 of the Spanish Civil Code. In Article 1709, an agent is one who
accepts another's representation to perform in his name certain acts of more or less
transcendency. Another interpretation says that the agent's incapacity to buy his principal's
property rests in the fact that the agent and the principal form one juridicial person. To come
under the prohibition, the agent must be in a fiduciary with his principal.
Jose Araneta was not authorized to make a binding contract for the defendant. He was not
to sell and he did not sell the defendant's property. He was to look for a buyer and the owner
herself was to make, and did make, the sale.
Furthermore, the fact that Attys. Salvador and Araneta and J. Antonio Araneta drew
Exhibits 1 and A, undertook to write the letters to the tenants and the deeds of sale to the latter,
and charged the defendant the corresponding fees for all this work, did not themselves prove
that they were the seller's attorneys. These letters and documents were wrapped up with the
contemplated sale in which Gregorio Araneta, Inc. was interested, and could very well have been
written by Attorneys Araneta and Araneta in furtherance of Gregorio Araneta's own interest.
Granting that Attorney Araneta and Araneta were attorneys for the defendant, yet they were not
forbidden to buy the property in question. Attorneys are only prohibited from buying their client's
property which is the subject of litigation. (Art. 1459, No. 5, Spanish Civil Code.) The questioned
sale was effected before the subject thereof became involved in the present action. There was
already at the time of the sale a litigation over this property between the defendant and Vidal,
but Attys. Salvador Araneta and J. Antonio Araneta were not her attorneys in that case.
(the other issues are not relevant to agency).
The Court dispensed with all the issues as follows:
The contract of sale Exhibit A was valid and enforceable, but the loss of the checks
for P143,150 and P12,932.61 and invalidation of the corresponding deposit is to be borne
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by the buyer. Gregorio Araneta, Inc. the value of these checks as well as the several payments
made by Paz Tuason to Gregorio Araneta, Inc. shall be deducted from the sum
of P190,000 which the buyer advanced to the seller on the execution of Exhibit
1.chanroblesvirtualawlibrary chanrobles virtual law library
The buyer shall be entitled to the rents on the land which was the subject of the
sale, rents which may have been collected by Paz Tuason after the date of the
sale.chanroblesvirtualawlibrary chanrobles virtual law library
Paz Tuason shall pay Jose Vidal the amount of the mortgage and the stipulated
interest up to October 20,1943, plus the penalty of P30,000, provided that the loans
obtained during the Japanese occupation shall be reduced according to the Ballantyne
scale of payment, and provided that the date basis of the computation as to the penalty is
the date of the filing of the suit against Vidal.chanroblesvirtualawlibrary chanrobles virtual
law library
Paz Tuason shall pay the amount that shall have been found due under the
contracts of mortgage within 90 days from the time the court's judgment upon the
liquidation shall have become final, otherwise the property mortgaged shall be ordered
sold provided by law.chanroblesvirtualawlibrary chanrobles virtual law library
Vidal's mortgage is superior to the purchaser's right under Exhibit A, which is
hereby declared subject to said mortgage. Should Gregorio Araneta, Inc. be forced to pay
the mortgage, it will be subrogated to the right of the
mortgagee.chanroblesvirtualawlibrary chanrobles virtual law library
This case will be remanded to the court of origin with instruction to hold a rehearing
for the purpose of liquidation as herein provided. The court also shall hear and decide all
other controversies relative to the liquidation which may have been overlooked at this
decision, in a manner not inconsistent with the above findings and judgment


(2) Corporate Fiction Must Be Employed to Commit Fraud
1. Umali vs. CA, 189 SCRA 529 (1990)

(3) Tax Evasion Case
1. CIR vs. Norton and Harrison, 11 SCRA 714 (1964)

Plaintiffs filed a collection action against X Corporation. Upon execution of the court's decision, X
Corporation was found
to be without assets. Thereafter, plaintiffs filed an action against its present and past stockholder
Y Corporation which
owned substantially all of the stocks of X corporation. The two corporations have the same board
of directors and Y
Corporation financed the operations of X corporation. May Y Corporation be held liable for the
debts of X Corporation?
Why?

A: Yes, Y Corporation may be held liable for the debts of X Corporation. The doctrine of piercing
the veil of corporation
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fiction applies to this case. The two corporations have the same board of directors and Y
Corporation owned
substantially all of the stocks of X Corporation, which facts justify the conclusion that the latter is
merely an extension of
the personality of the former, and that the former controls the policies of the latter. Added to this
is the fact that Y Corporation controls the finances of X Corporation which is merely an adjunct,
business conduit or alter ego of Y
Corporation.

(4) Alter-Ego Elements
1. NAMARCO vs. Associated Finance Co. 19 SCRA 962 (1967)

ASSOCIATED, a domestic corporation, through its President, appellee Francisco Sycip,
entered into an agreement to exchange sugar with NAMARCO, represented by its then
General Manager, Benjamin Estrella, whereby the former would deliver to the latter
22,516 bags (each weighing 100 pounds) of "Victorias" and/or "National" refined sugar in
exchange for 7,732.71 bags of "Busilak" and 17,285.08 piculs of "Pasumil" raw sugar
belonging to NAMARCO, both agreeing to pay liquidated damages equivalent to 20% of the
contractual value of the sugar should either party fail to comply with the terms and conditions
stipulated (Exhibit A). Pursuant thereto, on May 19,1958, NAMARCO delivered
to ASSOCIATED 7,732.71 bars of "Busilak" and 17,285.08 piculs of "Pasumil" domestic raw
sugar. As ASSOCIATED failed to deliver to NAMARCO the 22,516 bags of "Victoria" and/or
"National" refined sugar agreed upon, the latter, on January 12, 1959, demanded in writing
from the ASSOCIATED either (a) immediate delivery thereof before January 20, or (b)
payment of its equivalent cash value amounting to P372,639.80.



As ASSOCIATED refused to deliver the raw sugar or pay for the refund sugar delivered to it,
inspite of repeated demands therefore, NAMARCO instituted the present action in the
lower court to recover the sum of P403,514.28 in payment of the raw sugar received by
defendants from it; P80,702.86 as liquidated damages; P10,000.00 as attorneys fees,
expenses of litigation and exemplary damages, with legal interest thereon from the filing of
the complaint until fully paid.



In their amended answer defendants, by way of affirmative defenses, alleged that the
correct value of the sugar delivered by NAMARCO to them was P259,451.09 or P13.30 per
bag of 100 lbs. weight (quedan basis) and not P403,514.28 as claimed by NAMARCO. As
counterclaim they prayed for the award of P500,000.00 as moral damages, P100,000.00 as
exemplary damages and P10,000.00 as attorneys fee.


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ISSUE:The only issue to be resolved is whether, upon the facts found by the trial court,
Francisco Sycip may be held liable, jointly and severally with his co-defendant, for the sums
of money adjudged in favor of NAMARCO.



RULING:The foregoing facts, fully established by the evidence, can lead to no other
conclusion than that Sycip was guilty of fraud because through false representations he
succeeded in including NAMARCO to enter into the aforesaid exchange agreement, with
full knowledge, on his part, of the fact that ASSOCIATED whom he represented and over
whose business and affairs he had absolute control, was in no position to comply with the
obligation it had assumed. Consequently, he cannot now seek refuge behind the general
principle that a corporation has a personality distinct and separate from that of its
stockholders and that the latter are not personally liable for the corporate obligations. To
the contrary, upon the proven facts, we feel perfectly justified in piercing the veil of
corporate fiction and in holding Sycip personally liable, jointly and severally with his co-
defendant, for the sums of money adjudged in favor of appellant. It is settled law in this
and other jurisdictions that when the corporation is the mere alter ego of a person, the
corporate fiction may be disregarded; the same being true when the corporation is controlled, and
its affairs are so conducted as to make it merely an instrumentality, agency
or conduit of another.



(5) Evasion of Lawful Obligations
1. Palacio vs. Fely Transportation Co., 5 SCRA 1011 (1962)

Fely Company hired Carillo as a driver. Carillo run over Mario Palacio, son of Plaintiff. Mario
Palacio suffered a fracture
on his leg.
Palacio filed this case to recover expenses that he allegedly incurred.
In a previous case, the driver Carillo was found guilty of reckless imprudence and ordered to pay
500 in damages.
A motion to dismiss was filed by Fely Corp on 1. No cause of action and 2. Cause is barred by prior
judgment.
The CFI dismissed the case and held that the person subsidiarily liable is Isabel Calingasan, the
employer.
SC reverses. Calingasan and Fely Corp are subsidiary liable.
Calingasan and Fely Corp are to be regarded as the same person.
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The purpose of the corp was to evade his subsidiary civil liability. And thus the corp should not be
heard to say that it
has a personality separate and distinct from its members when 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 to justice.



2. Villa Rey Transit, Inc. vs. Ferrer, 25 SCRA 845 (1968)

Facts: Jose M. Villarama was an operator of a bus transportation, Villa Rey Transit, with
certificates of public convenience granted by the Public Service Commission (PSC) in Cases
Nos. 44213 and 104651, authorizing him to operate 32 units on various routes or lines
from Pangasinan to Manila, and vice-versa. On January 8, 1959, he sold the
aforementioned two certificates of public convenience to the Pangasinan Transportation
Company, Inc. (Pantranco), for P350,000.00 with the condition that Villarama "shall not for
a period of 10 years from the date of this sale, apply for any TPU service identical or
competing with the buyer."

Barely three months thereafter, on March 6, 1959: a corporation, Villa Rey Transit,
Inc. (Corporation) was organized; Natividad R. Villarama (wife of Jose M. Villarama) was
one of the incorporators, and the brother and sister-in-law of Jose M. Villarama subscribed
to the stock. Natividad also became the treasurer of the corporation. On March 10, 1959
the corporation was registered with the SEC. On April 7, 1959, the Corporation bought five
certificates of public convenience, forty-nine buses, tools and equipment from one
Valentin Fernando. They immediately applied with the PSC for its approval, praying for
provisional authority to operate the service. On May 19, 1959, the PSC granted the
provisional permit prayed for. Before the PSC could take final action on said application for
approval of sale, however, the Sheriff of Manila, on July 7, 1959, levied on two of the five
certificates of public convenience involved therein, pursuant to a writ of execution issued
by the Court of First Instance of Pangasinan, in favor of Eusebio Ferrer, judgment creditor,
against Valentin Fernando. On July 16, 1959, a public sale was conducted, with Ferrer as
the highest bidder.



Ferrer sold the two certificates of public convenience to Pantranco, which submitted the
sale for approval to the PSC and prayed for provisional authority to operate on the basis of the said
certificates. Both the applications of the Corporation and Pantranco were set for
joint hearing.

The PSC issued an order disposing that during the pendency of the cases Pantranco
shall be the one to operate provisionally the service The Corporation elevated the matter
to the Supreme Court. On November 4, 1959, the Corporation filed in the Court of First
Instance of Manila, a complaint for the annulment of the sheriff's sale to Ferrer, the latters
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sale to Pantranco and PSC decision regarding the issue.

Ferrer and Pantranco averred that the Corporation had no valid title to the certificates in
question because the contract pursuant to which it acquired them from Fernando was
subject to a suspensive condition, the approval of the PSC, has not yet been fulfilled. Thus
they believed that their purchase through the sheriff afforded them a better right.

Pantranco, filed a third-party complaint against Jose M. Villarama, alleging that Villarama
and the Corporation, are one and the same; that Villarama and/or the Corporation was
disqualified from operating the two certificates in question by virtue of the agreement
between Villarama and Pantranco, stipulating that Villarama "shall not for a period of 10
years from the date of this sale, apply for any TPU service identical or competing with the
buyer."

The CFI ruled in favor of the Corporation and Villarama. It held that the sheriffs sale
was void, that the Corporation was the lawful owner of the certificates and ordering Ferrer
and Pantranco to pay attorneys fees. It also held that Villarama and the corporation were
separate and distinct entities.

Issues: (1) Whether the agreement that Villarama "SHALL NOT FOR A PERIOD OF 10 YEARS
FROM THE DATE OF THIS SALE, APPLY FOR ANY TPU SERVICE IDENTICAL OR COMPETING
WITH THE BUYER," apply to new lines only or does it include existing lines?;

(2) Assuming that said stipulation covers all kinds of lines, is such stipulation valid and
enforceable?;

(3) In the affirmative, that said stipulation is valid, did it bind the Corporation?



Held: Although Villarama was not a stockholder or an incorporator, his wife was an
incorporator and also the treasurer of the Corporation. The evidence proved that
Villarama had actual control of the funds of the Corporation and appeared as the actual
owner and treasurer. In fact the funds of the Corporation were deposited in his personal
account. The initial cash capitalization of P105,000 was mostly financed by Villaram
through an P85,000 personal check he issued himself. The trucks of the Corporation were
also purchased with his personal checks. Gasoline purchases were made in his name. His
personal accounts were also paid by the Corporation. Villarama himself admitted that he
mingled the corporate funds with his own money.

The foregoing circumstances are strong persuasive evidence showing that Villarama
has been too much involved in the affairs of the Corporation to altogether negative the
claim that he was only a part-time general manager. The interference of Villarama in the
complex affairs of the corporation, and particularly its finances, are much too inconsistent
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with the ends and purposes of the Corporation law, which, precisely, seeks to separate
personal responsibilities from corporate undertakings. It is the very essence of
incorporation that the acts and conduct of the corporation be carried out in its own
corporate name because it has its own personality.

When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the circumvention of statutes, the
achievement or perfection of a monopoly or generally the perpetration of knavery or
crime, the veil with which the law covers and isolates the corporation from the members
or stockholders who compose it will be lifted to allow for its consideration merely as an
aggregation of individuals.

We hold that the preponderance of evidence have shown that the Villa Rey Transit, Inc. is
an alter ego of Jose M. Villarama. The rule is that a seller or promisor may not make use
of a corporate entity as a means of evading the obligation of his covenant. Where the
Corporation is substantially the alter ego of the covenantor to the restrictive agreement, it
can be enjoined from competing with the covenantee.

We hold the restrictive clause in the contract entered into by the latter and Pantranco is
also enforceable and binding against the said Corporation. As We read the disputed
clause, it is evident from the context thereof that the intention of the parties was to
eliminate the seller as a competitor of the buyer for ten years along the lines of operation
covered by the certificates of public convenience subject of their transaction.

The rule became well established that if the restraint was limited to "a certain time" and
within "a certain place," such contracts were valid and not "against the benefit of the
state." We find that although it is in the nature of an agreement suppressing competition,
it is, however, merely ancillary or incidental to the main agreement which is that of sale.
The suppression or restraint is only partial or limited: first, in scope, it refers only to
application for TPU by the seller in competition with the lines sold to the buyer; second, in
duration, it is only for ten (10) years; and third, with respect to situs or territory, the
restraint is only along the lines covered by the certificates sold. In view of these limitations,
coupled with the consideration of P350,000.00 for just two certificates of public
convenience, and considering, furthermore, that the disputed stipulation is only incidental
to a main agreement, the same is reasonable and it is not harmful nor obnoxious to public
service. The evils of monopoly are farfetched here. There can be no danger of price
controls or deterioration of the service because of the close supervision of the Public
Service Commission.

However, the sale between Fernando and the Corporation is valid, such that the rightful
ownership of the disputed certificates still belongs to the plaintiff being the prior purchaser
in good faith and for value thereof. In view of the ancient rule of caveat emptor prevailing
in this jurisdiction, what was acquired by Ferrer in the sheriff's sale was only the right
which Fernando, judgment debtor, had in the certificates of public convenience on the day
of the sale.

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(6) Liability of Officers
1. Palay, Inc. vs. Clave, 124 SCRA 638 (1983)

Facts:
- Albert Onstott as President of Palay, Inc., executed a contract to sell a parcel of
land located in Crestview Heights Subdivision in Antipolo, Rizal in favor of
Nazario Dumpit.
- The contract provided for automatic extrajudicial rescission upon default in
payment of any monthly installment after the lapse of 90 days from the expiration
of the grace period of one month without need of notice and forfeiture of
installments paid.
- Nazario Dumpit paid the downpayment and several installments but defaulted
later however.
- Almost 6 years later, Dumpit wrote the petitioner offering to update all his
overdue accounts with interest and seeking its written consent to the assignment
of his rights to a certain Lourdes Dizon.
- Petitioner replied informing Dumpit that his contract to sell had long been
rescinded pursuant to the automatic extrajudicial rescission provision of the
contract and that the lot had already been resold.
- Thereafter, Dumpit filed a complaint with the national Housing Authority
questioning the validity of the rescission and for reconveyance.
- National Housing Authority found the rescission void in the absence of either
judicial or notarial demand and ordered petitioner and Albert Onstott, in his
capacity as the President of corporation to jointly and severally be liable for
refund.
- On appeal to the Office of the President, Presidential Executive Assistant Jacobo
Clave, respondent, affirmed the resolution of NHA.
- Hence, this petititon.

ISSUE:
1. Whether or not the contract was validly rescinded? NO.
2. Whether or not the president of the corporation can be made jointly and severally
liable with the corporation? No.

HELD:

When a real estate corporation extrajudicially rescinded a contract to sell but failed to
fulfill its obligation under the same contract to deliver a substitute lot or refund the
purchase price, the president of the corporation cannot be held liable even where he
appears to be the controlling stockholder absent sufficient proof that he used the
corporation to defraud defaulting lot buyer. Mere ownership by a single stockholder or
by another corporation of all or nearly all capital stock of corporation not sufficient
ground for disregarding corporate personality.

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Although it is true that judicial action for rescission of contract to sell is not necessary
where contract provides for its revocation and cancellation for violation of any of its terms and
conditions, it shall be with a written notice sent to defaulter informing hi, of the
rescission.
- No notice was sent to Dumpit.

No badges of Fraud was found on the part of Albert Onstott.
- He did not use the corporation to defraud private respondent.
terms and conditions, it shall be with a written notice sent to defaulter informing hi, of the
rescission.
- No notice was sent to Dumpit.

No badges of Fraud was found on the part of Albert Onstott.
- He did not use the corporation to defraud private respondent.


2. Paradise Sauna Management Corp. vs. Ng, 181 SCRA 719 (1990)
3. Rustan Pulp & Paper Mills, Inc. vs. IAC, 214 SCRA 665 (1992)

(7) Rules in Labor Cases
1. Maglutac vs. NLRC, 189 SCRA 767 (1990)

FACTS: Jose M. Maglutac was employed by Commart (Phils.), Inc sometime in February, 1980 and
rose to become the
Manager of its Energy Equipment Sales. On October 3, 1984, he received a notice of termination
signed by Joaquin S.
Cenzon, Vice-President General Manager and Corporate Secretary of CMS International, a
corporation controlled by
Commart.
Thereafter, Jose Maglutac filed a complaint for illegal dismissal against Commart and Jesus T.
Maglutac, President and
Chairman of the Board of Directors of Commart. The complainant alleged that his dismissal was
part of a vendetta drive
against his parents who dared to expose the massive and fraudulent diversion of company funds to
the company
presidents private accounts, stressing that complainants efficiency and effectiveness were never
put to question when
very suddenly he received his notice of termination.
Commart and Jesus T. Maglutac, on the other hand, justified the dismissal for lack of trust and
confidence brought
about by complainant and his familys establishment of a company, MM International, in direct
competition with
Commart.
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Both parties filed their respective motions for reconsideration of the decision of the NLRC.
Commart and Jesus T.
Maglutac questioned the NLRCs finding that the complainant was dismissed without just cause. For
his part,
complainant questioned the decision insofar as it deleted the award of moral and exemplary
damages and the non-
holding of a joint and several liability of Jesus T. Maglutac and Commart.
ISSUE: (2) RESPONDENT NATIONAL LABOR RELATIONS COMMISSION COMMITTED GRAVE ABUSE OF
DISCRETION AND
CONTRAVENED EXISTING LAWS AND JURISPRUDENCE IN HOLDING THAT RESPONDENT JESUS T.
MAGLUTAC SHOULD
NOT HAVE BEEN HELD LIABLE IN SOLIDUM WITH THE RESPONDENT CORPORATION FOR HE IS MERELY
A NOMINAL
PARTY TO THE CASE AND MADE SO ONLY IN HIS CAPACITY AS PRESIDENT AND CHAIRMAN OF THE
BOARD OF DIRECTORS
OF RESPONDENT CORPORATION, AND SIMPLY CANNOT BE HELD LIABLE FOR HIS CORPORATE ACT.

From the findings of the Labor Arbiter as affirmed by the NLRC, there is sufficient basis for an
award of moral and
exemplary damages in the instant case. The alleged loss of trust and confidence on complainant
because of his familys
establishment of MM International, a company allegedly in direct competition with Commart.
Moreover, the complainant was dismissed without due process. His dismissal was made effective
immediately and he
was not given an opportunity to present his side.
Where the employees dismissal was effected without procedural fairness, an award of exemplary
damages in her favor
can only be justified if her dismissal was affected in a wanton, oppressive or malevolent manner.
The same circumstances obtain in the instant case in the light of the manifestation of Commart
that it had become
insolvent and that it had suspended operations.
Moreover, not only was Jesus T. Maglutac the most ranking officer of Commart at the time of the
termination of the
complainant, it was likewise found that he had a direct hand in the latters dismissal. The Labor
Arbiter therefore,
correctly ruled that Jesus T. Maglutac was jointly and severally liable with Commart.




(8) Probative Factors
1. Concept Builders, Inc. vs. NLRC, 257 SCRA 149 (1996)

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FACTSConcept Builders, Inc., a domestic corporation, with principal office at 355 Maysan
Road, Valenzuela, Metro Manila, is engaged in the construction business. Private
respondents were employed by said company as laborers, carpenters and riggers.On
November, 1981, private respondents were served individual written notices of
termination of employment by petitioner, effective on November 30, 1981, stating that
their contracts of employment had expired and the project in which they were hired had
been completed.However they found that at the time of the termination of their
employment, the project in which they were hired had not yet been finished and
completed. Concept Builders had to engage the services of sub-contractors whose workers
performed the functions of private respondents.Private respondents filed a complaint for
illegal dismissal, unfair labor practice and non-payment of their legal holiday pay, overtime
pay and thirteenth-month pay against petitioner. The Labor Arbiter rendered judgment
ordering reinstatement and payment of back wages. The NLRC dismissed the motion for
reconsideration filed by Concept Builders, on the ground that it had become final and executory. A
writ of execution was issued. It was partially satisfied through garnishment of
sums from petitioner's debtor, the Metropolitan Waterworks and Sewerage Authority. An
alias writ was issued to satisfy the balance and the reinstatement of private respondents. It
could not be served, because the petitioner no longer occupied the premises. Another alias
writ was issued, which again could not be served because the employees claimed they
were employees of Hydro Pipes Philippines, Inc. and that the properties to be levied upon
were owned by the said corporation. Private respondents filed a "Motion for Issuance of a
Break-Open Order," alleging that HPPI and Concept Builders were owned by the same
incorporator/stockholders. They also alleged that petitioner temporarily suspended its
business operations in order to evade its legal obligations to them and that private
respondents were willing to post an indemnity bond to answer for any damages which
petitioner and HPPI may suffer because of the issuance of the break-open order. The Labor
Arbiter issued an Order which denied private respondents' motion for break-open order.
On appeal, the NLRC issued the break-open order. Concept Builders motion for
reconsideration was denied.

ISSUE Did the NLRC commit grave abuse of discretion when it issued a "break-open
order" to the sheriff to be enforced against personal property found in the premises of
petitioner's sister company?

HELD No

It is a fundamental principle of corporation law that a corporation is an entity separate
and distinct from its stockholders and from other corporations to which it may be
connected. But, this separate and distinct personality of a corporation is merely a fiction
created by law for convenience and to promote justice. So, when the notion of separate
juridical personality is used to defeat public convenience, justify wrong, protect fraud or
defend crime, or is used as a device to defeat the labor laws, this separate personality of
the corporation may be disregarded or the veil of corporate fiction pierced. This is true
likewise when the corporation is merely an adjunct, a business conduit or an alter ego of
another corporation.
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The test in determining the applicability of the doctrine of piercing the veil of corporate
fiction is as follows:

1.
Control, not mere majority or complete stock control, but complete domination,
not only of finances but of policy and business practice 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 its own;

2.
Such control must have been used by the defendant to commit fraud or wrong,
to perpetuate the violation of a statutory or other positive legal duty or
dishonest and unjust act in contravention of plaintiff's legal rights; and

3.
The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.
The absence of any one of these elements prevents "piercing the corporate veil." In
applying the "instrumentality" or "alter ego" doctrine, the courts are concerned with
reality and not form, with how the corporation operated and the individual defendant's
relationship to that operation.



In this case, the NLRC noted that, while petitioner claimed that it ceased its business
operations on April 29, 1986, it filed an Information Sheet with the SEC on May 15, 1987,
stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the
other hand, HPPI, the third-party claimant, submitted on the same day, a similar
information sheet stating that its office address is at 355 Maysan Road, Valenzuela, Metro
Manila.

Both information sheets were filed by the same Virgilio O. Casio as the corporate
secretary of both corporations. It would also not be amiss to note that both corporations
had the same president, the same board of directors, the same corporate officers, and
substantially the same subscribers.

Clearly, petitioner ceased its business operations in order to evade the payment to private
respondents of back wages and to bar their reinstatement to their former positions. HPPI
is obviously a business conduit of petitioner corporation and its emergence was skillfully
orchestrated to avoid the financial liability that already attached to petitioner
corporation.

In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property
subject of the execution, private respondents had no other recourse but to apply for a
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break-open order after the third-party claim of HPPI was dismissed for lack of merit by the
NLRC. This is in consonance with Section 3, Rule VII of the NLRC Manual of Execution of
Judgment.

Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the
break-open order issued by the Labor Arbiter.




(b) Alter Ego Cases

(1) Manner of Operating Corporate Business
1. Arnold vs. Willits and Patterson, Ltd., 44 Phil. 634 (1923)

Facts: C. D. Willits and I. L. Patterson were partners doing business in San Francisco, California,
under the name of
Willits & Patterson. The plaintiff was then in San Francisco, and as a result of negotiations the
plaintiff and the firm
entered into a written contract, known in the record as Exhibit A, by which the plaintiff was
employed as the agent of
the firm in the Philippine Islands for certain purposes for the period of five years at a minimum
salary of $200 per
month and travelling expenses. The plaintiff returned to Manila and entered on the discharge of his
duties under the
contract. Meanwhile Patterson retired from the firm and Willits became the sole owner of its
assets. For convenience
of operation and to serve his own purpose, Willits organized a corporation under the laws of
California with its
principal office at San Francisco, in and by which he subscribed for, and became the exclusive
owner of all the
capital stock except a few shares for organization purposes only, and the name of the firm was
used as the name of
the corporation. A short time after that Willits came to Manila and organized a corporation here
known as Willits &
Patterson, Ltd., in and to which he again subscribed for all of the capital stock except the nominal
shares necessary
to qualify the directors.
A dispute arose between the plaintiff and the firm as to the construction of Exhibit A as to the
amount which
plaintiff should receive for his services. At the time that Willits was in Manila and while to all
intents and purposes he
was the sole owner of the stock of corporations, there was a conference between him and the
plaintiff over the
disputed construction of Exhibit A. As a result of which another instrument, known in the record as
Exhibit B, was
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prepared in the form of a letter which the plaintiff addressed to Willits at Manila on November 10,
1919, the purpose
of which was to more clearly define and specify the compensation which the plaintiff was to
receive for his services.
Willits received and confirmed this letter by signing the name of Willits & Patterson, By C.d.
Willits.
The San Francisco corporation became involved in financial trouble, and all of its assets were
turned over to
a "creditors' committee." January 10, 1922, the plaintiff brought this action to recover from the
defendant the sum of
P106, 277.50 with legal interest and costs, and written instruments known in the record as Exhibits
A and B were
attached to, and made a part of, the complaint. For answer, the defendant admits the formal parts
of the complaint,
the execution of Exhibit A and denies each and every other allegation, except as specifically
admitted, and alleges
that what is known as Exhibit B was signed by Willits without the authority of the defendant
corporation or the firm of
Willits & Patterson, and that it is not an agreement which was ever entered into with the plaintiff
by the defendant or
the firm. The lower court rendered judgment in favor of the defendant as prayed for in its
counterclaim, from which
the plaintiff appeals, contending that the trial court erred in not holding that the contract between
the parties is that
which is embodied in Exhibits A and B, and that the defendant assumed all partnership obligations,
and in failing to
render judgment for the plaintiff, as prayed for, and in dismissing his complaint, and denying
plaintiff's motion for a
new trial.
Issue: Is the contract entered into by the firm or by Willits with the plaintiff binds the corporation?
Held: Yes
Where the plaintiff entered upon the discharge of his duties under a contract with the firm of
Willits & Patterson, and
the firm organized a corporation, which took over all of its assets and continued to conduct the
business of the firm
as a corporation and which dealt with and treated the plaintiff as its agent, the corporation is
bound by the contract
which the firm made with the plaintiff.
Where the plaintiff entered into a contract made by Willits in his own name, and Willits is the
owner of all the capital
stock of the corporation, and the corporation deals with the plaintiff as its agent under the
contract, the contract
which Willits made with the plaintiff becomes a contract between the plaintiff and the
corporation, and the
corporation is bound by the contract.

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(2) Tax Avoidance Cases
1. Marvel Building vs. David, 94 Phil. 470 (1992)

Marvel Building Corporation was incorporated in February 12, 1947 wherein its articles
of incorporation contained a capital stock of P 2,000,000.00 of which majority of its
stockholders are Maria B. Castro(President), Amado A. Yatco, Segundo Esguerra and Maximo
Cristobal(Secretary-Treasurer) from the total of eleven(11) stockholders. During the existence
of the corporation, it acquired assets including buildings, namely, Aguinaldo Building, Wise
Building and Dewey Boulevard-Padre Faura Mansion. Towards the end of year 1948, internal
revenue examiners discovered that from the 11 stock certificates, all of it were endorsed in the
bank by the subscribers, except the one subscribed by Maria B. Castro. They also discovered
that there were no business meeting held by the board of directors, no by-laws and that the
corporation never had any reports of their transactions or affairs. As a result, Secretary of
Finance recommended the collection of war profit taxes assessed against Maria B. Castro in the
amount of P3,593,950.78 and seize the three(3) buildings named above.
Plaintiff(Marvel Building Corporation) filed a complaint for the release of the seized
property contending that said property are owned by the corporation and not solely by Maria
Castro. The trial court ruled in favor of plantiff and enjoin Collector of Internal Revenue from
selling the same. Collector of Internal Revenue appealed, and CA ruled that trial court failed to
show that Maria B. Castro is not the true owner of all the stock certificates of the corporation,
therefore confiscation of the property against the corporation is justified. Hence this petition
arise.
Issue: Whether or not Maria B. Castro is the sole owner of all the stocks of Marvel Corporation
and the other stockholders are mere dummies?
Held:
Yes. Maria B. Castro is the sole and exclusive owner of all the shares of stock of the
Marvel Building Corporation and that the other partners are her dummies. Section 89, Rule 123
of the Rules of Court and section 42 of the Provisional law for the application of the Penal Code,
applies in this case pursuant to circumstantial evidence as the basis of judgment.
In general the evidence offered by the plaintiffs is testimonial and direct evidence, easy
of fabrication; that offered by defendant, documentary and circumstantial, not only difficult
of
fabrication but in most cases found in the possession of plaintiffs. The circumstantial evidence is
not only convincing; it is conclusive. The existence of endorsed certificates, discovered by the
internal revenue agents between 1948 and 1949 in the possession of the Secretary-Treasurer,
the fact that twenty-five certificates were signed by the president of the corporation, for no
justifiable reason, the fact that two sets of certificates were issued, the undisputed fact that
Maria B. Castro had made enormous profits and, therefore, had a motive to hide them to evade
the payment of taxes, the fact that the other subscribers had no incomes of sufficient magnitude
to justify their big subscriptions, the fact that the subscriptions were not receipted for and
deposited by the treasurer in the name of the corporation but were kept by Maria B. Castro
herself, the fact that the stockholders or the directors never appeared to have ever met to
discuss the business of the corporation, the fact that Maria B. Castro advanced big sums of
money to the corporation without any previous arrangement or accounting, and the fact that the
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books of accounts were kept as if they belonged to Maria B. Castro alone these facts are of
patent and potent significance. This implied that Maria B. Castro would not have asked them to
endorse their stock certificates, or be keeping these in her possession, if they were really the
owners. They never would have consented that Maria B. Castro keep the funds without receipts
or accounting, nor that she manages the business without their knowledge or concurrence, were
they owners of the stocks in their own rights. Each and every one of the facts all set forth above,
in the same manner, is inconsistent with the claim that the stockholders, other than Maria B.
Castro, own their shares in their own right.
On the other hand, each and every one of them, and all of them, can point to no other
conclusion than that Maria B. Castro was the sole and exclusive owner of the shares and that
they were only her dummies.

2. Liddell and Co. vs. CIR, 2 SCRA 632 (1961)

(3) Forum-Shopping
1. First Philippine International Bank vs. CA, 252 SCRA 259 (1996)

Producers Bank (now called First Philippine International Bank), which has been under
conservatorship since 1984, is the owner of 6 parcels of
land. The Bank had an agreement with Demetrio Demetria and Jose Janolo for the two to purchase
the parcels of land for a purchase price of P5.5
million pesos. The said agreement was made by Demetria and Janolo with the Banks manager,
Mercurio Rivera. Later however, the Bank,
through its conservator, Leonida Encarnacion, sought the repudiation of the agreement as it
alleged that Rivera was not authorized to enter into
such an agreement, hence there was no valid contract of sale. Subsequently, Demetria and Janolo
sued Producers Bank. The regional trial court
ruled in favor of Demetria et al. The Bank filed an appeal with the Court of Appeals.
Meanwhile, Henry Co, who holds 80% shares of stocks with the said Bank, filed a motion for
intervention with the trial court. The trial court
denied the motion since the trial has been concluded already and the case is now pending appeal.
Subsequently, Co, assisted by ACCRA law
office, filed a separate civil case against Carlos Ejercito as successor-in-interest (assignee) of
Demetria and Janolo seeking to have the purported
contract of sale be declared unenforceable against the Bank. Ejercito et al argued that the second
case constitutes forum shopping.
ISSUE: Whether or not there is forum shopping.
HELD: Yes. There is forum shopping because there is identity of interest and parties between the
first case and the second case. There is identity
of interest because both cases sought to have the agreement, which involves the same property, be
declared unenforceable as against the Bank.
There is identity of parties even though the first case is in the name of the bank as defendant, and
the second case is in the name of Henry Co as
plaintiff. There is still forum shopping here because Henry Co essentially represents the bank. Both
cases aim to have the bank escape liability
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from the agreement it entered into with Demetria et al.
The Supreme Court also discussed that to combat forum shopping, which originated as a concept in
international law, the principle of forum non
conveniens was developed. The doctrine of forum non conveniens provides that a court, in conflicts
of law cases, may refuse impositions on its
jurisdiction where it is not the most convenient or available forum and the parties are not
precluded from seeking remedies elsewhere.
**Forum Shopping: occurs when a party attempts to have his action tried in a particular court or
jurisdiction where he feels he will receive the
most favorable judgment or verdict.
Facts:

The private respondent own several parcels of land located in Quezon City for which he is the
registered owner. He secured loans from L and R
corporations and executed deeds of mortgage over the parcels of land for the security of the same.
Upon the maturity of said loans, the firm
initiated an extrajudicial foreclosure of the properties in question after private respondent failed
to pay until maturity. The private respondent filed
a complaint for injunction over the said foreclosure and for redemption of the parcels of land. Two
years after the filing of the petition, private
respondent and L and R corporation entered into a compromise agreement that renders the former
to be insured another year for the said
properties. Included in the stipulations were the attorneys fees amounting to Php 100,000.00. The
private respondent however, remained to be in
turmoil when it came to finances and was apparently unable to pay and secure the attorneys fees,
more so the redemption liability. Relief was
discussed by petitioner and private respondent executed a document to redeem the parcels of land
and to register the same to his name.

Allegations were made by the private respondent claiming the parcels of land to his name but
without prior notice, the properties were already
registered under the petitioners name. The private respondent calls for a review and for the court
to act on the said adverse claim by petitioner on
said certificates for the properties consolidated by the redemption price he paid for said
properties. The private respondent filed a suit for the
annulment of judgment in the Court of appeals which ruled over the same.


Issue: whether the petitioner is on solid ground on the reacquisition over the said properties.

Ruling:
By Atty. Canlas' own account, "due to lack of paying capacity of respondent Herrera, no financing
entity was willing to extend him any loan with
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which to pay the redemption price of his mortgaged properties and petitioner's P100,000.00
attorney's fees awarded in the Compromise
Judgment," a development that should have tempered his demand for his fees. For obvious reasons,
he placed his interests over and above those
of his client, in opposition to his oath to "conduct himself as a lawyer ... with all good fidelity ... to
[his] clients." The Court finds the occasion fit
to stress that lawyering is not a moneymaking venture and lawyers are not merchants, a
fundamental standard that has, as a matter of judicial
notice, eluded not a few law advocates. The petitioner's efforts partaking of a shakedown" of his
own client are not becoming of a lawyer and
certainly, do not speak well of his fealty to his oath to "delay no man for money."
We are not, however, condoning the private respondent's own shortcomings. In condemning Atty.
Canlas monetarily, we cannot overlook the fact
that the private respondent has not settled his liability for payment of the properties. To hold Atty.
Canlas alone liable for damages is to enrich
said respondent at the expense of his lawyer. The parties must then set off their obligations
against the other.


(4) Parent-Subsidiary Relationship
1. Phividec vs. CA, 181 SCRA 669 (1990)

(5) Affiliated Companies
1. Azcor Mfg., Inc. vs. NLRC, 303 SCRA 26 (1999)

Piercing the Veil of Corporate Fiction to prevent evasion of obligations or confuse the legitimate
issues
Facts: Capulso filed with the Labor Arbiter a complaint for constructive illegal dismissal. He
alleged that he worked for
Azcor as ceramics worker for more than 2 years. Then, due to asthma, he filed a leave of absence.
Upon returning to
work, he was not permitted to do so. He later on amended his complaint and impleaded Filipinas
Paso as additional
respondent.
On the other hand, Azcor contends that Capulso validly resigned from the company, as evidenced
by a letter of
resignation, for which Capulso then sought employment from Filipinas Paso, from which he also
resigned. The Labor
Arbiter dismissed the case. On appeal to the NLRC, it adjudged in favor of Capulso holding
Filipinas Paso and Azcor
solidarily liable. Hence, this petition with the SC.
Issue: Whether or not Filipinas Paso may be held jointly and severally liable with Azcor for back
wages of Capulso.
Held: Yes. The doctrine that a corporation is a legal entity or a person in law distinct from the
persons composing it is
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merely a legal fiction for purposes of convenience and to subserve the ends of justice. This fiction
cannot be extended
to a point beyond its reason and policy. Where, as in this case, the corporate fiction was used as a
means to perpetrate
a social injustice or as a vehicle to evade obligations or confuse the legitimate issues, it would be
discarded and the 2
corporations would be merged as one, the first being merely considered as the instrumentality,
agency, conduit, or
adjunct of the other.
In the case at bar, there was much confusion as to the identity of Capulsos employer, but, for
sure, it was Filipinas Paso
and Azcors own making. First, Capulso had no knowledge that he was already working under
Filipinas Paso since he
continued to retain his Azcor ID. Second, his pay slips contained the name of Azcor giving the
impression that Azcor was
paying his salary. Third, he was paid the same salary and he performed the same kind of job, in
the same work area, in
the same location, using the same tools and under the same supervisor.

(c) Equity Cases
(1) Telephone Engineering and Service Co., Inc. vs. Workmens Compensation Commission,
104 SCRA 354 (1981)

Petitioner is a domestic corporation engaged in the business of manufacturing
telephone equipment. It has a sister company, the Utilities Management Corporation
(UMACOR), with offices in the same location. UMACOR is also under the management
of Jose Luis Santiago.
UMACOR employed the late Pacifica L. Gatus as Purchasing Agent. Then was detailed
with petitioner company. He reported back to UMACOR and after 2 years he contracted
illness and died of "liver cirrhosis with malignant degeneration."
Respondent Leonila S. Gatus, filed a "Notice and Claim for Compensation" with
Workmen's Compensation Commission sub-office, alleging therein that her deceased
husband was an employee of TESCO, and that he died of liver cirrhosis. On August 9,
1967, and Office wrote petitioner transmitting the Notice and for Compensation, and
requiring it to submit an Employer's Report of Accident or Sickness pursuant to Section
37 of the Workmen's Compensation Act (Act No. 3428). An "Employer's Report of
Accident or Sickness" was thus submitted with UMACOR indicated as the employer of
the deceased. The Report was signed by Jose Luis Santiago. In answer, the employer
stated that it would not controvert the claim for compensation, and admitted that the
deceased employee contracted illness "in regular occupation." On the basis of this
Report, the Acting Referee awarded death benefits plus burial expenses in favor of the
heirs of Gatus.
TESCO filed its "Motion for Reconsideration and/or Petition to Set Aside Award"
alleging as grounds therefor, that the admission made in the "Employer's Report of
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Accident or Sickness" was due to honest mistake and/or excusable negligence on its
part, and that the illness for which compensation is sought is not an occupational
disease, hence, not compensable under the law. The Motion for Reconsideration was
denied. Meanwhile, the Provincial Sheriff of Rizal levied on and attached the properties
of TESCO and scheduled the sale of the same at public auction. Thus petition for
"Certiorari with Preliminary Injunction" seeking to annul the award and to enjoin the
Sheriff from levying and selling its properties at public auction.
ISSUE: Whether or not TESCO is liable for the death claim of the deceased.

HELD:
Viewed in the light of these criteria, we note that it is only in this Petition before us that
petitioner denied, for the first time, the employer-employee relationship. Although
respect for the corporate personality as such, is the general rule, there are exceptions.
In appropriate cases, the veil of corporate fiction may be pierced as when the same is
made as a shield to confuse the legitimate issues. While, indeed, jurisdiction cannot be
conferred by acts or omission of the parties, TESCO'S denial at this stage that it is the
employer of the deceased is obviously an afterthought, a devise to defeat the law and
evade its obligations. This denial also constitutes a change of theory on appeal which is
not allowed in this jurisdiction. Moreover, issues not raised before the Workmen's
Compensation Commission cannot be raised for the first time on appeal. For that
matter, a factual question may not be raised for the first time on appeal to the Supreme
Court.
20

WHEREFORE, this Petition is hereby dismissed

(2) Emilio Cano Enterprises vs. CIR, 13 SCRA 291 (1965)

Honorata Cruz was terminated by Emilio Cano Enterprises, Inc. (ECEI). She then filed a complaint
for unfair labor practice against Emilio Cano, in his capacity as president and proprietor, and
Rodolfo Cano, in his capacity as manager. Cruz won and the Court of Industrial Relations (CIR)
ordered the Canos to reinstate Cruz plus pay her backwages with interest. The Canos appealed to
the CIR en banc but while on appeal Emilio died. The Canos lost on appeal and an order of
execution was levied against ECEIs property. ECEI filed an ex parte motion to quash the writ as
ECEI avers that it is a corporation with a separate and distinct personality from the Canos. Their
motion was denied and ECEI filed a petition for certiorari with the Supreme Court.
ISSUE: Whether or not the judgment of the Court of Industrial Relations is correct.
HELD: Yes. This is an instance where the corporation and its members can be considered as one.
ECEI is a close family corporation the incorporators are members of the Cano family. Further, the
Canos were sued in their capacity as officers of ECEI not in their private capacity. Having been
sued officially their connection with the case must be deemed to be impressed with the
representation of the corporation. The judgment against the Canos has a direct bearing to ECEI.
Verily, the order against them is in effect against the corporation. Further still, even if this
technicality be strictly observed, what will simply happen is for this case to be remanded, change
CORPORATION LAW
Atty. Romarico L. Gatchalian
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CORPORATION LAW | Florence Renee R. Bacay
the name of the party, but the judgment will still be the same there can be no real benefit and
will only subversive to the ends of justice. In this case, to hold ECEI liable is not to ignore the legal
fiction but merely to give meaning to the principle that such fiction cannot be invoked if its
purpose is to use it as a shield to further an end subversive of justice.

(3) A.D. Santos vs. Vasquez, 22 SCRA 1158 (1968)

5. Piercing Doctrine and Due Process Clause

(a) Pabalan vs. NLRC, 184 SCRA 495 (1990)
(b) EPG Construction Co., Inc. vs. CA, 210 SCRA 230 (1992)

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