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. CORPORATION LAW Atty. Romarico L. Gatchalian 2
2
CORPORATION LAW | Florence Renee R. Bacay
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)
CORPORATION LAW Atty. Romarico L. Gatchalian 3
3
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 4
4
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 5
5
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 6
6
CORPORATION LAW | Florence Renee R. Bacay
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 CORPORATION LAW Atty. Romarico L. Gatchalian 7
7
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 8
8
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 9
9
CORPORATION LAW | Florence Renee R. Bacay 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. CORPORATION LAW Atty. Romarico L. Gatchalian 10
10
CORPORATION LAW | Florence Renee R. Bacay
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 CORPORATION LAW Atty. Romarico L. Gatchalian 11
11
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 12
12
CORPORATION LAW | Florence Renee R. Bacay 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
CORPORATION LAW Atty. Romarico L. Gatchalian 13
13
CORPORATION LAW | Florence Renee R. Bacay (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 CORPORATION LAW Atty. Romarico L. Gatchalian 14
14
CORPORATION LAW | Florence Renee R. Bacay 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%. CORPORATION LAW Atty. Romarico L. Gatchalian 15
15
CORPORATION LAW | Florence Renee R. Bacay
(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 CORPORATION LAW Atty. Romarico L. Gatchalian 16
16
CORPORATION LAW | Florence Renee R. Bacay
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 CORPORATION LAW Atty. Romarico L. Gatchalian 17
17
CORPORATION LAW | Florence Renee R. Bacay . . . 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 CORPORATION LAW Atty. Romarico L. Gatchalian 18
18
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 19
19
CORPORATION LAW | Florence Renee R. Bacay
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. CORPORATION LAW Atty. Romarico L. Gatchalian 20
20
CORPORATION LAW | Florence Renee R. Bacay
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. CORPORATION LAW Atty. Romarico L. Gatchalian 21
21
CORPORATION LAW | Florence Renee R. Bacay
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 CORPORATION LAW Atty. Romarico L. Gatchalian 22
22
CORPORATION LAW | Florence Renee R. Bacay 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
CORPORATION LAW Atty. Romarico L. Gatchalian 23
23
CORPORATION LAW | Florence Renee R. Bacay 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. CORPORATION LAW Atty. Romarico L. Gatchalian 24
24
CORPORATION LAW | Florence Renee R. Bacay
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. CORPORATION LAW Atty. Romarico L. Gatchalian 25
25
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 26
26
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 27
27
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 28
28
CORPORATION LAW | Florence Renee R. Bacay 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. CORPORATION LAW Atty. Romarico L. Gatchalian 29
29
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 30
30
CORPORATION LAW | Florence Renee R. Bacay 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. CORPORATION LAW Atty. Romarico L. Gatchalian 31
31
CORPORATION LAW | Florence Renee R. Bacay
(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 CORPORATION LAW Atty. Romarico L. Gatchalian 32
32
CORPORATION LAW | Florence Renee R. Bacay 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
CORPORATION LAW Atty. Romarico L. Gatchalian 33
33
CORPORATION LAW | Florence Renee R. Bacay (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 CORPORATION LAW Atty. Romarico L. Gatchalian 34
34
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 35
35
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 36
36
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 37
37
CORPORATION LAW | Florence Renee R. Bacay 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)
CORPORATION LAW Atty. Romarico L. Gatchalian 38
38
CORPORATION LAW | Florence Renee R. Bacay
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 CORPORATION LAW Atty. Romarico L. Gatchalian 39
39
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 40
40
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 41
41
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 42
42
CORPORATION LAW | Florence Renee R. Bacay 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. CORPORATION LAW Atty. Romarico L. Gatchalian 43
43
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 44
44
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 45
45
CORPORATION LAW | Florence Renee R. Bacay 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.
CORPORATION LAW Atty. Romarico L. Gatchalian 46
46
CORPORATION LAW | Florence Renee R. Bacay
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. CORPORATION LAW Atty. Romarico L. Gatchalian 47
47
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 48
48
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 49
49
CORPORATION LAW | Florence Renee R. Bacay 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.
CORPORATION LAW Atty. Romarico L. Gatchalian 50
50
CORPORATION LAW | Florence Renee R. Bacay
(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.
CORPORATION LAW Atty. Romarico L. Gatchalian 51
51
CORPORATION LAW | Florence Renee R. Bacay 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. CORPORATION LAW Atty. Romarico L. Gatchalian 52
52
CORPORATION LAW | Florence Renee R. Bacay 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)
CORPORATION LAW Atty. Romarico L. Gatchalian 53
53
CORPORATION LAW | Florence Renee R. Bacay 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. CORPORATION LAW Atty. Romarico L. Gatchalian 54
54
CORPORATION LAW | Florence Renee R. Bacay
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 CORPORATION LAW Atty. Romarico L. Gatchalian 55
55
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 56
56
CORPORATION LAW | Florence Renee R. Bacay 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.
CORPORATION LAW Atty. Romarico L. Gatchalian 57
57
CORPORATION LAW | Florence Renee R. Bacay
(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 CORPORATION LAW Atty. Romarico L. Gatchalian 58
58
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 59
59
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 60
60
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 61
61
CORPORATION LAW | Florence Renee R. Bacay 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 CORPORATION LAW Atty. Romarico L. Gatchalian 62
62
CORPORATION LAW | Florence Renee R. Bacay 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 63
63
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)