Revised Bagtas Reviewer by Ve and Ocfe 2A

ATENEO DE MANILA LAW SCHOOL

OUTLINE ON PHILIPPINE Atty.

CESAR L. VILLANUEVA
CORPORATE LAW1
2ND SEMESTER, SY 2004-2005

I. HISTORICAL BACKGROUND

1. Philippine Corporate Law:2 Sort of Codification of American Corporate Law

Under American sovereignty, attention was drawn to the fact that there was no entity in
Spanish law exactly corresponding to the notion "corporation" in English and American law;
the Philippine Commission enacted the Corporation Law (Act No. 1459), to introduce the
American corporation into the Philippines as the standard commercial entity and to hasten the
day when the sociedad annima of the Spanish law would be obsolete. The statute is a sort of
codification of American Corporate Law. Harden v. Benguet Consolidated Mining, 58 Phil. 141
(1933).

2. The Corporation Law

The first corporate statute, the Corporation Law, or Act No. 1459, became effective on 1
April 1906. It had various piece-meal amendments during its 74-year history. It rapidly
became antiquated and not adapted to the changing times.

3. The Corporation Code

The Corporation Code (Batas Pambansa Blg. 68) took effect on 1 May 1980. It adopted
various corporate doctrines enunciated by the Supreme Court under the old Corporation Law.
It clarified the obligations of corporate directors and officers, expressed in statutory language
established principles and doctrines, and provided for a chapter on close corporations.

4. Proper Treatment of Philippine Corporate Law

Philippine Corporate Law comes from the common law system of the United States.
Therefore, although we have a Corporation Code that provides for statutory principles,
Corporate Law is essentially, and continues to be, the product of commercial developments.
Much of this development can be expected to happen in the world of commerce, and some
expressed jurisprudential rules that try to apply and adopt corporate principles into the
changing concepts and mechanism of the commercial world.

1Unless otherwise indicated, all references to sections pertain to The Corporation Code of the Philippines.
2The whole body of statutory and jurisprudential rules pertaining to corporations is referred to as "Corporate
Law" to differentiate it from the old statute known as "The Corporation Law," or Act No. 1459.
grant is conferred. A corporation will be formed only when 5 individual persons , as incorporators, agree to form a corporat
Revised Bagtas Reviewer by Ve and Ocfe 2A 3

Q. Why does the definition of a corporation involve a statement creature of the law?

A. To reiterate the fact that the corporation can only do acts given to it by the law. It is of limited
existence, outside its powers, it does not exist.

2. Tri-Level Existence of the Corporation

(a) AGGREGATION OF ASSETS AND RESOURCES physical assets of the corporation; the tangibles
( ex. in a grocery, the goods being sold)
II. CONCEPTS
(b) BUSINESS ENTERPRISE OR ECONOMIC UNIT the commercial venture; this includes not only the
See opening paragraphs of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No.
tangible assets but also the intangibles like goodwill created by the business
2, June 1994)
C) JURIDICAL ENTITY juridical existence as a person; the primary franchise granted by the state
1. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code)

Sec. 2 Corporation defined A corporation is an artificial being created by operation of law,

Q. Whyhaving
is thethe rights ofbetween
distinction successionthe and the
three powers
levels attributes and properties, expressly
important?
authorized by law or incident to its existence.
A. Each is important in its own way as there are consequences for each. The distinctions become
important and The
Art. 44(3) come into play
following when
are it comes
juridical to dealing
persons with corporation
Corporations, law What
partnerships are you selling
and associations for or
buyingprivate
(and their worth)
interest or will depend
purpose upon the
to which the particular
law grantslevel you choose.
a juridical EXAMPLE:
personality, If youand
separate merely
want todistinct
purchasefromthe assets
that andshareholder,
of each not the business,
partnera simple deed of sale would suffice and you will
or member.
not be liable for contingent liabilities. It will be different if you buy the business as an economic
concept.
Art. 45SEC Regulations
Juridical personsor mentioned
Bulk sales Law may and
in Nos.1 be applied.
2 of the preceding article are governed by laws
creating or recognizing them.

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

3. Relationships Involved in a Corporate Setting
Partnerships and associations for private interest or purpose are governed by the provisions
of
A ) this CodeENTITY
JURIDICAL concerning partnerships.
LEVEL, which views the State-corporation relationship
Art. 46 Juridical
- the persons may destroy
state cannot acquire and possess property
a corporation without of all kinds,due
observing as well as incur
process of law
obligations and bring civil or criminal actions, in conformity with the laws and regulations of
their organization.
(b) INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a contractual
Art. 1775 Association and societies, whose articles are kept secret among the members, and
relationship on four (4) levels:
wherein any pone of the members may contract in his own name with third persons, shall
have no juridical personality, and shall be governed by the provisions relating to co-ownership
Betweenthecorporationanditsagentsor
representatives to act in the real world, such as its
corporation is an artificial being created by operation of law. It has a personality separate
directors and its officers, which is governed also by the
and distinct from the persons composing it, as well as from any other legal entity to which it
Law on Agency
may be related. PNB v. Andrada Electric & Engring Co., 381 SCRA 244 (2002).

- an artificial being - aperson

Between theby lawcorporation
created andfiction
or by state; legal its shareholders or
members
- created by law its existence is dependent upon the onsent or grant of the state
EXCEPT corporation byestoppel
Between
andand among
de facto the shareholders in a common
corporation
venture

B) EXTRA-CORPORATE LEVEL, which views the relationship between the corporation and
third-parties or outsiders, essentially governed by Contract Law and Labor Law.

- most imporatant level, highest form of law in this level is contract law.

4. Theories on the Formation of Corporation:

-- the
the definition of a corporation
SC has looked is merely
upon the corp. a guide
not merely andartificial
as an does not really
being provide
but foran
more as the
basis of a corporation
AGGRUPATION OF PERSONS DOING BUSINESS or AN UNDERLYING ECONOMIC UNIT.

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

personality
Q. Why is it important bounded
to know bycorporation
that the forms of words in a charter,
is a juridical minute books & books of
person?
accounts.
A. To be able to know that the corporation is able to contract with others.
- The proposition that a corp. has an existence separate and distinct from its
 Tayag vs Benguet Consolidated, Inc. (26 SCRA 242)

membership has its limitations. (Separate existence is for a particular purpose.)

There can be no corp. existence w/o persons to compose it & there can be no
association w/o associates.

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

- corporation creature of the state

- limited no other privilege may be exercised beyond grant

To organize a corporation that could claim a juridical personality of its own and
transact business as such, is not a matter of absolute right but a privilege which may be
enjoyed only under such terms as the State may deem necessary to impose. cf. Ang Pue
& Co. v. Sec. of Commerce and Industry, 5 SCRA 645 (1962)

It is a basic postulate that before a corporation may acquire juridical personality, the
State must give its consent either in the form of a special law or a general enabling act,
and the procedure and conditions provided under the law for the acquisition of such
juridical personality must be complied with. Although the statutory grant to an association
of the powers to purchase, sell, lease and encumber property can only be construed the
grant of a juridical personality to such an association . . . nevertheless, the failure to
comply with the statutory procedure and conditions does not warrant a finding that such
association acquired a separate juridical personality, even when it adopts sets of
constitution and by-laws. International Express Travel & Tour Services, Inc. v. Court of
Appeals, 343 SCRA 674 (2000).

Since all corporations, big or small, must abide by the provisions of the Corporation
Code, then even a simple family corporation cannot claim an exemption nor can it have
rules and practices other than those established by law. Torres v. Court of Appeals, 278
SCRA 793 (1997).

FACTS:

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

- Renato Tayag, as ancilliary administrator in the Philippines, requested County Trust

to surrender to ancilliary administrator the stock certificates to satisfy the legitimate
claims of local creditors. However, County Trust refused.

- The lower court then presided by Judge Santos ruled that :

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

2. said certificates are cancelled

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

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

ISSUE: Whether or not Benguet properly pursued the appeal?

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

- the challenged order represents a response & express a policy arsing out of a
specific problem, addressed to the attainent of specific ends by the use of specific
remedies, w/ full & ample support from legal doctrines of weight and significance.
Formally adopts the concession theory; corp w/o imprimatur outside state grant.
wn set of by laws etc., the corp would still have to obey the order of the state by Ve and Ocfe 2A5virtue of a primary franchise given by the
state. AndRevised Bagtaspower of the state to grant it or not. But once grantedit is within the Reviewer
pplication of EET corp- as A disagreement ensued social & legal ancilliary and the domiciliary admin to who wsreality of the group as a
between the entity independent entitled therecognition
of state certificate &
of concession.
stocks

- The CFI ordered County Trust to produce and deposit the stocks with the court w/c
wasnt complied with Thus the order of the CFI.

- Benguet didnt dispute Tayags authority to gain control & possession of all the
he corp. life of its own tellsassets of themultiply profitably.Phil. corp. like every Juan and Maria given life by God acts on itsit to go and
decedent w/n the The
- Corporation is an artificial being created by operation of law. It owes it life to the
state its birth being purely dependent on its will.

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

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

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

- Corporate by-laws must yield to judicial order

- As a matter of fact, a corp. once it comes into being comes more often w/n the ken
of the judiciary than the other two coordinate branches. It institutes the appropriate
court action to enforce its right. Correlatively, it is not immune from judicial control
in those instances, where a duty under the law as ascertained in an appropriate legal
proceeding is cast upon it.

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

- juridical personality

- contractual relation between 5 or more individuals

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

A corporation is but an association of individuals, allowed to transact under an

assumed corporate name, and with a distinct legal personality. In organizing itself as a
collective body, it waives no constitutional immunities and perquisites appropriate to such
a body. PSE v. Court of Appeals, 281 SCRA 232 (1997).

Corporations are composed of natural persons and the legal fiction of a separate
corporate personality is not a shield for the commission of injustice and inequity, such as
to avoid the execution of the property of a sister company. Tan Boon Bee & Co., Inc. v.
Jarencio, 163 SCRA 205 (1988).
 5. Four Corporate Attributes Based on Section 2:

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

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

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

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

C) WITH RIGHT OF SUCCESSION (Strong Juridical Personality)

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

D) HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS

EXISTENCE (Creature of Limited Powers)

6. Advantages and Disadvantages of Corporate Form:

(a) Four Basic Advantageous Characteristics of Corporate Organization:

(i) STRONG LEGAL PERSONALITY

A corporation is an entity separate and distinct from its stockholders. While not
in fact and in reality a person, the law treats the corporation as though it were a
person by process of fiction or by regarding it as an artificial person distinct and
separate from its individual stockholders. Remo, Jr. v. IAC, 172 SCRA 405 (1989).

The transfer of the corporate assets to the stockholder is not in the nature of a
partition but is a conveyance from one party to another. aStockholders of F. Guanzon
and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).

STOCKHOLDERS OF F. GUANZON & SONS Inc. v REGISTER OF DEEDS

Facts:

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

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

Held:

The Supreme Court agrees with the Register of Deeds and the Land Registration Commission. A
corporation is a juridical person distinct from the members composing it. Properties registered in the
name of the corporation are owned by it as an entity separate and distinct from its members. While
shares of stock constitute personal property, they do not represent property of the corporation. The
corporation has property of its own which consist mainly of real estates. A share of stock only typifies
an aliquot part of the corporations property or the right to share in the proceeds to that extent when
distributed according to law and equity. But its holder is not the owner of any part of the capital nor
 Revised Bagtas Reviewer by Ve and Ocfe 2A7
is he entitled to the possession of any definite portion of its property or assets. The stockholder is not
a co-owner or tenant in common of the corporate property. Thus, the act of liquidation made by the
stockholders of the corporations assets cannot be considered as a partition of the community
property but rather a transference or conveyance of the title of its assets to the individual
stockholders in proportion to their stockholdings. Therefore, said transfer cannot be effected without
the corresponding deed of conveyance from the corporation to the stockholders.

(ii) CENTRALIZED MANAGEMENT

As can be gleaned from Sec. 23 of Corporation Code It is the board of directors

or trustees which exercises almost all the corporate powers in a corporation. Firme
v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003).

The exercise of the corporate powers of the corporation rest in the Board of
Directors save in those instances where the Corporation Code requires stockholders
approval for certain specific acts. Great Asian Sales Center Corp. v. Court of Appeals,
381 SCRA 557 (2002).

(iii) LIMITED LIABILITY TO INVESTORS AND OFFICERS

One of the advantages of the corporation is the limitation of an investors

liability to the amount of investment, which flows from the legal theory that a
corporate entity is separate and distinct from its stockholders. San Juan Structural
and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631 (1998).

It is hornbook law that corporate personality is a shield against personal liability

of its officersa corporate officer and his spouse cannot be made personally liable
under a trust receipt where he entered into and signed the contract clearly in his
official capacity. Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA
671 (2001).

Obligations incurred by the corporation acting through its directors, officers and
employees, are its sole liabilities. Malayang Samahan ng mga Manggagawa sa M.
Greenfield v. Ramos, 357 SCRA 77 (2001).

(iv) FREE TRANSFERABILITY OF UNITS OF OWNERSHIP FOR INVESTORS

Authority granted to corporations to regulate the transfer of its stock does not
empower the corporation to restrict the right of a stockholder to transfer his shares,
but merely authorizes the adoption of regulations as to the formalities and
procedure to be followed in effecting transfer. Thomson v. Court of Appeals, 298
SCRA 280 (1998).

(b) Disadvantages:

(i) Abuse of corporate management

(ii) Abuse of limited liability feature

(iii) High cost of maintenance

(iv) Double taxation

Advantages and Disadvantages of Corporate Form:

FourBasic Advantageous Disadvantages:

Characteristics of Corporate
Organization:

(i) Strong Legal Personality (i)Abuse of corporate

management
- entity attributable powers;
- thereis
- continuity of existence; severance of
controland
 having the right of ownership.
succession,the Control will be
deathofan vestedwith
individual the BoD, thus
stockholderdoes investors
not affect corporate have no say
existence over the use
oftheir
investment
notanatural andlittle
occurrence, exists voice in the
mainly because the conductof
law provides for it. the business
Thisiswhat
distinguishesthe
separatejuridical
personalityofa
corporation from a (ii) Abuse of limited liability
partnership.The feature
legal personality of
a corp is strong - thisfeature
because the law hadbeen
provides for the abusedand
right of succession, mayhurt
surviving even w/o innocent
thosewho creditors.
incorporatedit
whileina
partnershipthe
separatejuridical
(ii) Cost of maintenance
personalityis
extinguished upon - the formation
the death of a and
partner incorporation
ofacorp.
entails a lot of
difficulties
andcosts,
nodelectus particularly
personarum the
requirements
made by the
law so as to
(ii) Limited Liability of Investors ( provided qualifyfor
for by jurisprudence only) incorporation.
- the liability of an investor is
limited their investments
and investors cannot be held
accountable for more than
what they invested. (iv) Double taxation

- CLV: However there are a
lot of ways to circumvent the
lawandmakethe
shareholders liable for more
than his actual investment
(ex. A creditor requiring the
chairmn or president of the
company as a joint debtor of
the loan)
- A trade-off to the abdication
made by the investor of his
right to manage the property
he had invested in the
Dividends received by
individuals from domestic
corporations are subject to
final 10% tax for income
earned on or after 1
January 1998 (Sec. 24(B)
(2), 1997 NIRC)
Inter-corporate
dividendsbetween
domesticcorporations,
however, are not subject
to any income tax (Sec.
27(D)(4), 1997 NIRC)
 Revised Bagtas
company.Under property
law, a person exercises full
ownership over his property
but when he invests it in a
corporation,theowner
abdicated the six jus of
ownership
Reviewer by Ve and Ocfe 2A 9
In addition, there is re-
imposition of the 10%
improperly accumulated
earnings tax for holding
companies (Sec. 29, 1997
NIRC)

(iii) Free Transferability of shares

- Alegalrelationshipis
created which is more stable
for there are laws which
govern, and the corp. and
the stockholders are bound
by the law.

(iv) Centralized Management

- One of the advantages of a

corp. is the limitation of an
investors liability, this flows
from the legal theory that a
corp. entity is separate and
distinct from its stockholders

Q. Is a corp. in our jurisdiction given the feature of limited liability?

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

Q. Is limited liability a normal run of things?

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

Q. If limited liability as shown in a corporation setting good for the investors, does it mean that
delectus personarum is a bad thing?

A. No. It is good in one way, since persons are bound by the contracts they enter into.

7. COMPARED WITH OTHER BUSINESS MEDIA

4 Distribution of Risk, Profit and Control 3

a) Sole Proprietorships

Sole Proprietorship Corporation

Free from many requirements and Heavily regulated; a lot of

regulations in its operation requirements imposed for registration
and incorporation

Owner has full control of his business Control of business is done by the
and fiat. Just because the BoD are to be elected by the stockholders does not mean that the former derives its powers fro
BoD

Owner stands to lose more than Investors have limited liabilty

what he puts into the venture

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

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

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

Corporation Partnership

Separate legal personality Separate legal personality

Investors limited liability Contractual limited liability ( when a

limited partnership is created)

Free transfer of shares Transfer with consent of partner

Centralized management Every partner is agent

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

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

Q. What are the 2 types of partnerships?

A. Regular and Joint venture

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

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

Q. If limited liability is something that can be contracted in a partnership, why did the legislature put
such limited liability as an attribute of a corporation? If the feature of limited liability cots money
then why not take it out? Why not eave it up to the investors who can decide if they want limited
liability or not?

A. Even though limited liability will cost a lot of money, borrowing makes a lot more sense. If I have
 Pioneer insurance & Surety corp. vs. CA ( 175 SCRA 668)

Revised Bagtas Reviewer by Ve and Ocfe 2A11

P100M, it would beand foolish to
Maglana putfiled
all my eggsparty
a third in one basket (if
complaint the basket
claiming thatfalls,
they all
areeggs break).of
co-owners So, I
the
merely put P10M inaircraft.
one corporation andfiled
Pioneer later thenaborrow the
petition forP90M while
judicial the rest of
foreclosure myanmoney
and I pt for a
application
somewhere else. Ifwritthe of
corporation
preliminary fails, I do not lose
attachment all my
against P100M,
Lim, I lose only my
the Cervanteses, P10M. But if
BORMAHECO the
and
corp. succeeds andMaglana.
I get to pay my creditor, I retain the P10M plus the profits acquired from the
P90M paid up loan. This is the concept of LEVERAGING, using other peoples money to make a profit
for yourself. This is why borrowing is an integral part of corporate life and it is up to the creditors to
make a diligent In their of
- appraisal answer, the standing
the credit Cervanteses, BORMAHECO
of the corp. and Maglana alleged they were not
privy to the contracts signed by Lim.

- The RTC ruled in favor of Pioneer, holding Lim liable but dismissing the case as to the
other defendants. On appeal, the CA affirmed.
Q. What is the main distinction between a corporation and a partnership?

A. A corp. is an intermingling of corporation law and contract law. On the other hand, a partnership
ISSUE: whether
is purely or not the
a contractual Cervanteses,
relationship BORMAHECO
and so every time and Maglana
a partner are
dies, entitled
the to is
contract reimbursement
actually of
amounts given
extinguished. by Lim?

HELD:
Q. What is Corporation Law all about?
Lims assertions: The failure of respondents to incorporate, a de facto partnership
A. It is all about jurisprudence actually built around the 4 attributes of a corporation
among them was created, and that as a consequence of such relationship all must share in
the losses and/or gains of the venture in proportion to their contribution.

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

A. Pioneer Insurance
PRINCIPLES: Persons v. Court
who of Appeals,
attempt, 175
but fail, to SCRA
form a668 (1989); Lim
corporation andTong
whoLim v. Philippine
carry on businessFishing
under
Gearcorporate
the Industries, Inc.,occupy
name 317 SCRA
the 728 (1999).
position of PARTNERS INTER SE. Thus, where persons associate
themselves together under articles to purchase property to carry on a business, and their
organization is so defective as to come short of creating a corp. w/n the statute, they become in legal
effect partners inter se, and their rights as members of the company to the property acquired by the
company will be recognized.

However, such a relationship does not exist, for ordinary persons cannot be made to assume
the relation of partners, as between themselves, when their purpose is that no partnership shall exist
and should be implied only when necessary to do justice between the parties: thus, one who takes
no part except to subscribe for stock in a proposed corporation which is never legally formed does
not become a partner with other subscribers who engage in business under the name of the
pretended corp., so as to be liable as such in an action for settlement of the alleged partnership and
Facts:
contribution.
- In 1965, Jacob S. Lim was engaged in the airline business as owner of Southern
- Airlines,
the a single
records showproprietorship.
that Lim received the amount of P151,000 representing the
participation of BORMAHECO and Maglana
- On May 17, 1965, he bought from Japan Domestic Airlines for the sale of 2 aircrafts
- and
it wasone set that
clear f necessary spare
Lim never parts for
intended the total
to form price
a corp of them
with $109,00. Both were
but they arrived in
duped
Manila
into giving their money

- no
On de
May,facto
22 corp.
1965,was created
Pioneer Insurance Corp, as surety executed and issued its surety
bond in behalf of Lim, principal, for the balance price for the aircrafts and spare
parts.
Q. In cases where there is a defective attempt to form a corp. which is the prevailing rule, a
- se
partnership inter Border Machinery
is created and Heavyby
or a corporation Equipment
estoppel?(BORMAHECO), the Cervanteses and
Constancia Maglana contributed some funds in the purchase of the above aircrafts
and
A. It depends wholly onspare parts. of
the extent Thethefunds were supposed
participation to be on
of the party their
whocontributions to anew
a claim is being mind. In
corporation
the case at bar, there proposed
was no intent on theby other
Lim toparties
expandtohis airline
enter intobusiness.They
a partnership executed
but a corporation.
indemnity
As to the Cervanteses agreements
& BORMAHECO, theyin favor
cannotofbe
Pioneer, one signed
considered to havebyentered
Maglana andinto
even the aother
jointly
partnership inter se, sincesigned
there SAL,
was noBORMAHECO
intention toand Cervantes:
do so and to bewhere they principally
held liable as such. agree and
bind themselves jointly and severally to indemnify pioneer.
But if it were the Cervanteses or BORMAHECO, who entered into the contracts using the
corporate name - and
Onactively
June 10,participated
1965 Lim forin SAL
the activities
executed ofin the corporation,
favor then
of Pioneer a they
deed are to be held
of chattel
liable as partners. mortgage as security for the suretyship in favor of Pioneer. The deed was duly
registered with the Manila RoD and with the Civil Aeronautics Administration.
Q. Why are we taking up Pioneer? Why were they not liable?
- Lim defaulted on his subsequent installments prompting JDA to request payment
A. Because Pioneer shows us that for a person to be liable as a partner, he should have actively
from the surety. Pioneer paid about P298,000
participated in the conduct of the business, the SC held in this case that to be able to be held liable
the person should- possess filed
Pioneer powers of management.
for an extra-judicial foreclosure of the mortgage but the Cervanteses
 Revised Bagtas Reviewer by Ve and Ocfe 2A 13

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

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

LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES

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

Held:

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

2.) Lim alleges that he was merely a LESSOR by showing the Contract of Lease and registration
papers of the boats, including F/B Lourdes where the nets were found As found by the
lower courts, the boats were registered to Lim only as security for the loan that was granted
to the partnership by the brother of Lim, which was not an uncommon practice. Aside from
the fact that it was absurd for Lim to sell the boats to pay the debt he did not incur, if needed
he was merely leasing the boats to Chua and Yao.

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

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

(c) Joint Ventures

Joint venture is an association of persons or companies jointly undertaking some

commercial enterprise; generally all contribute assets and share risks. It requires a
community of interest in the performance of the subject matter, a right to direct and
govern the policy in connection therewith, and duty, which may be altered by agreement
to share both in profit and losses. Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994).

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

A. A joint venture is by law a partnership because it follows the same definition as having two or
more persons binding themselves together under a common fund with the intention of dividing the
profits between themselves. Therefore, every joint venture is a partnership. The distinction between
the two is that a joint venture is for a limited purpose only while a partnership involves an
arrangement or an on-going concern.

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

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

Q. Does the requirement of registration needed in a partnership also required in a joint venture?

A. No. Only in a partnership is registration required (Art. 1772, Civil Code)

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

A cooperative is a duly registered association of persons, with a common bond of

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

Cooperatives are established to provide a strong social and economic organization to

ensure that the tenant-farmers will enjoy on a lasting basis the benefits of agrarian
reforms. Corpuz v. Grospe, 333 SCRA 425 (2000).

Cooperative Corporation

Separate Juridical Personality

Governedbyprinciplesof SH vote their percentage share of

democraticcontrolwherethe the stocks subscribed by them
members have equal voting rights
on a one-member-one vote principle

BoD manage the affairs of the coop. BoD is the repository of all powers
But it is the GA of full membership EXCEPT for acts where the Corp.
that exercises all the rights and Code requires concurrence or
performs all of the obligations of the
 Revised Bagtas Reviewer by Ve and Ocfe 2A 15
manager unless such manager formallyratification
coop. byright
transfers his the SH
to them. Bourns v. Carman, 7
Phil. 117 (1906).
Under the supervision of the coop. Under the Supervision of the SEC
Development Authority

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

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

e) Business Trusts (Article 1442, Civil Code)

Art. 1442

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

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

(f) Sociedades Annimas

A sociedad annima was considered a commercial partnership where upon the

execution of the public instrument in which its articles of agreement appear, and the
contribution of funds and personal property, becomes a juridical personan artificial
being, invisible, intangible, and existing only in contemplation of lawwith power to hold,
buy, and sell property, and to sue and be sueda corporationnot a general
copartnership nor a limited copartnership . . . The inscribing of its articles of agreement in
the commercial register was not necessary to make it a juridical persona corporation.
Such inscription only operated to show that it partook of the form of a commercial
corporation. Mead v. McCullough, 21 Phil. 95 (1911).

The sociedades annimas were introduced in Philippine jurisdiction on 1 December

1888 with the extension to Philippine territorial application of Articles 151 to 159 of the
Spanish Code of Commerce. Those articles contained the features of limited liability and
centralized management granted to a juridical entity. But they were more similar to the
English joint stock companies than the modern commercial corporations. Benguet
Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956).

Our Corporation Law recognizes the difference between sociedades annimas and
corporations and will not apply legal provisions pertaining to the latter to the former. Phil.
Product Co. v. Primateria Societe Anonyme, 15 SCRA 301 (1965).

III. NATURE AND ATTRIBUTES OF A CORPORATION

(g) Cuentas En Participacion
1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitution)
A cuentas en participacion as a sort of an accidental partnership constituted in such a
The manner
Congress that itsnot
shall existence
except was only known
by general to thosefor
law, provide whothehad an interest
formation, in the same,
organization or there
being no
regulation mutual corporations,
of private agreement between the partners, or
Government-owned and without acorporations
controlled corporate name may be
indicating
created to the public
or established in some
by special way that
charters there
in the were other
interest of thepeople
common besides
good andthe one whoto
subject
ostensibly
the test managed
of economic and conducted the business, governed under Article 239 of the Code
viability.
of Commerce.
P.D. 1717, which created New Agrix, Inc. violates the Constitution which prohibits the
formation
Thoseof who
a private corporation
contract with the by special
person legislative
under whose act
namewhich
the is neitherof
business owned
such nor
controlled by theofgovernment,
partnership since NDC was
cuentas en participacion merely required
is conducted, shall to extend
have only aa loan
rightto
ofthe new
action
corporation, and the
against such newand
person stocks
not of the corporation
against were to be
the other persons issued toand
interested, thetheoldlatter,
investors and
on the
stockholders
other hand,of the insolvent
shall have noAgrix
right upon proof
of action of their
against claims
third against
person whothe abolished
contracted with the
 Revised Bagtas Reviewer by Ve and Ocfe 2A 17
corporation. NDC v. Philippine Veterans Bank, 192 SCRA 257 (1990).

Congress cannot enact a law creating a private corporation with a special charter, and it
follows that Congress can create corporations with special charters only if such corporations
are government-owned or controlled. Feliciano v. Commission on Audit, 419 SCRA 363 (2004).

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

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

2. CORPORATION AS A PERSON:

(a) Entitled to Due Process

The due process clause is universal in its application to all persons without regard to
any differences of race, color, or nationality. Private corporations, likewise, are persons
within the scope of the guaranty insofar as their property is concerned. Smith Bell & Co. v.
Natividad, 40 Phil. 136, 144 (1920).

(b) Equal Protection Clause (Smith Bell & Co. v. Natividad, 40 Phil. 136 [1920]).

(c) Unreasonable Searches and Seizure

A corporation is protected by the constitutional guarantee against unreasonable
searches and seizures, but its officers have no cause of action to assail the legality of the
seizures, regardless of the amount of shares of stock or of the interest of each of them in
said corporation, and whatever the offices they hold therein may be, because the
corporation has a personality distinct and separate from those of said officers. Stonehill v.
Diokno, 20 SCRA 383 (1967).

A corporation is but an association of individuals under an assumed name and with a

distinct legal entity. In organizing itself as a collective body it waives no constitutional
immunities appropriate for such body. Its property cannot be taken without compensation;
can only be proceeded against by due process of law; and is protected against unlawful
discrimination. Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823, 837 (1971), quoting from
Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652.

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

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

However, a corporation is also entitled to protection against unreasonable searches

and seizures. This right however does not emanate from the grant of the State by way of
primary franchise but is sourced through the Theory of Enterprise Entity which recognizes that
regardless of Section 2 of the Corporation Code, a corporation is still for all intents and
purposes an association of individuals under an assumed name and with a distinct legal
personality. In organizing itself as a collective body, it waives no constitutional immunities for
such body. (1) Its properties cannot be taken without just compensation (2) it can only be
proceeded against by due process of law (3) it is protected against unlawful discrimination.
 Revised Bagtas Reviewer by Ve and Ocfe 2A19
to P2.80 per picul for a total
In the same line of reasoning, of P2,800. Such increase
although was agreed
a corporation to by
is a legal both aRita
fiction, and and
search Jacobo.
However, when itphysical
seizure involves was presented
intrusiontointo
the the
Board of Directors
premises of thefor approval, they
corporation, further increased
and therefore also
the amount
intrudes intotothe
P3.00 per picul.
personal Jacobo asked
and business for of
privacy thethe
reconsideration
stockholders orbut he was denied
members the
who compose
same.
it. It canThe
bematter
seen thatstoodtheasright
it was untilindividual
of the Jacobo informed
against Rita and PNB that
unreasonable he had
searches lost
and interestis
seizures
in pursuing
extended tothe deal. In the
corporations meantime,
upon whom theythe debt of Rita with the PNB matured. Since she had a
are members.
surety agreement with the Philippine American General Insurance Co. Inc. (Philamgen), the
latter paid her outstanding debt. Philamgen in turn demanded from Rita the amount which
they
(d) ButpaidNotthe bank. to
Entitled Instead of paying
Privilege Against the bank,
Self Rita claimed that she told Philamgen that she
incrimination
did not consider herself indebted to the bank since she had an agreement with Jacobo
Tuazon. ItWhen such wasthat
is elementary discontinued, she failed
the right against to realized thehas
self-incrimination income with whichtoshe
no application could
juridical
havepersons.
paid her Bataan
creditors. Philamgen
Shipyard filed a complaint
& Engineering v. PCGG, for150
the SCRA
collection of sum of money
181 (1987).
against Rita. Rita implicated PNB as a third party defendant claiming that her failure to pay
was due While an individual
to the may lawfully
fault or negligence refuse to answer incriminating questions unless
of PNB.
protected by an immunity statute, it does not follow that a corporation, vested with
special privileges and franchises, may refuse to show its hand when charged with an
abuse of such privilege. Hale v. Henkel, 201 U.S. 43 (1906); Wilson v. United States, 221
Issue: WON
U.S. 361PNB is liable
(1911); for States
United the damage caused
v. White, 322 to Rita.
U.S. 694 (1944).
Held:
Q: Why is a corporation entitled to equal protection but not the right against self-
incrimination?A: Any individual
There is no question is entitled
that Ritas failureto
toequal
utilizeprotection
her sugarwhether
quota was due to the
theydisapproval
be juridical of
or the
natural.
leaseThe corporation
by the Board of being in the
Directors of same class should
the petitioner, thusbe treated
PNB equally.
should be
However, the right to self-incrimation is not extended to corporation because:
held liable.

1. The
Theright is meant
Board tothe
justified prevent individuals
increase to P 3.00from
perhaving
picul by tosaying
lie under oath
that in order
it was to protect
the prevalent rate
hisatinterest.
that time.It isHowever,
to protect the individual
there was no prooffrom having
that to commit
any other perjury
person just toto
was willing keep
lease the
himself
sugar from
quota going to jail.ofHowever,
allotment Rita for aifprice
a corporation
higher than liesP2.80
underper
oath, who
picul. would
Just you bring
because there
to are
jail isolated
when in transactions
fact, a corporation
whereisthejust a legal
lease fiction.
price was P3.00 per picul does not mean that
there are always ready takers.
2. The corporation is subject to the reportorial requirements of the law. The corporation
being a mere creature of the State is subject to the whims of its Creator. The corporation
While PNB had the ultimate authority of approving or disapproving the proposed lease
powers
since are
the limited
quota was by law.
mortgaged to the bank, the latter certainly cannot escape its
responsibility of observing precaution and vigilance which the circumstances of the case
CLV:justly
Beatsdemanded
me! Perhaps such right or
in approving is attributable
disapprovingtothe
thelease
moral
ofdimension
said sugarof an individual, and
quota.
since the corporation is of an amoral personality, such right may not be attributable to it.

According
3. Practice
to Art. 19 of the Civil Code, [e]very person must in the exercise of his rights
of Profession
and the performance of his duties, act with justice, give everyone his due and observe
honesty and
Corporations good faith.
cannot engageThis thepractice
in the petitionerof failed to do. As
a profession a consequence,
since they lack the Art.
moral21 and
states,
[a]ny competence
technical person who willfully
requiredcauses
by thelossPRC.or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.
A corporation engaged in the selling of eyeglasses and which hires optometrists is not
engaged
On the in liability
the practice
of theofcorporation,
optometry. Samahan ng Optometrists
the court ruled v. AcebedoisInternational
that, [a] corporation civilly liable in
Corp.,
the270
sameSCRA 298 (1997);
manner Alfafara
as natural personsv. Acebedo
for torts,Optical
because Company,
generally 381 SCRA 293
speaking, the(2002).
rules
governing the liability of a principal or master for a tort committed by an agent or servant
arefor
4. Liability the same whether the principal or master be a natural person or artificial person. All of
Torts
the authorities agree that a principal or master is liable for every tort which he expressly
A directs
corporation is civilly liable
or authorizes, in the
and this same
is just as manner
true of aas natural persons
corporation as of afor torts, person.
natural becauseAthe
rulescorporation,
governing the liability
is liable of a principal
therefore, or master
whenever for a act
a tortuous tortiscommitted
committedbybyananagent oror
officer
servant
agentareunder
the same
expresswhether the or
direction principal
authorityor master
from the bestockholders
a natural person or a corporation,
or members acting as a
and body,
whether the servant
or generally, or agent
from be a natural
the directors as theorgoverning
artificial person.
body. That a principal or master is
liable for every tort which he expressly directs or authorizes, is just as true of a corporation as
a natural person. aPNB v. Court of Appeals, 83 SCRA 237 (1978).
NOTE: CLV tells us that it is clear from the ruling of the Court in this case that not every
tortuous act committed by an officer can be ascribed to the corporation as its liability, for it is
PNB v COURT OF APPEALS
reasonable to presume that in the granting of authority by the corporation to its agent, such a
grant
Facts: did not include a direction to commit tortuous acts against third parties. Only when the
corporation has expressly directed the commission of such tortuous act, would the damages
Rita Gueco
resulting Tapnio had
therefrom be an export sugar
ascribable to thequota of 1,000And
corporation. piculs
suchfora the agricultural
direction by theyear 1956-
corporation,
1957. Since, she
is manifested did by
either notits
need it, she
board agreed
adopting to allow Mr.
a resolution toJacobo Tuazon
such effect, astoinuse
thisthe said
case, orquota
for consideration
having of 2,500.
taken advantage of Her
suchsugar cannotact
a tortuous bethe
exported without
corporation, sugar quota
through allotments.
its board, expressly
Sometimes, however
or impliedly ratifies a planter
such an actharvests less sugar
or is estopped fromthan her quota
impugning suchsoanher excess quota is used
act.
by her mother who pays for it. This is her arrangement with Mr. Tuazon. At the time of the
agreement, she was indebted to PNB of San Fernando, Pampanga. Her indebtedness was
Our jurisprudence
known as a crop loanisand wanting as to the
was secured bydefinite
her sugarscope
crop,of and
corporate
since her tort.
quotaEssentially,
was mortgaged
tort
to PNB, consists in the violation
her arrangement of aTuazon
with Mr. right given
had toor be
theapproved
omission by of the
a duty imposed
bank. by law; a
Upon presentment
breach of a legal
of the lease duty. The the
arrangement, failure
PNBofbranch
the corporate
manageremployer
revised ittoby comply with the lease
increasing law-imposed
amount
duty under the Labor Code to grant separation pay to employees in case of cessation of
 operations constitutes tort and its stockholder who was actively engaged in the management
or operation of the business should be held personally liable. Sergio F. Naguiat v. NLRC, 269
SCRA 564 (1997).

Q: When is a corporation liable for tort?

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

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

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

Q: What is a derivative suit?

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

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

WEST COAST LIFE INS. CO. v HURD

Facts:

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

Issue: WON corporations can be held criminally liable.

Held:

No. While the courts have inherent powers which usually go with courts of general jurisdiction, it
was held that under circumstances of their creation, they have only such authority in criminal
matters as is expressly conferred upon them by statute or which is necessary to imply from such
authority in order to carry out fully and adequately the express authority conferred. The SC did
not feel that Courts have authority to created new procedure and new processes of criminal law.
Although, there are various penal laws in the Philippines which the corporation may violate, still
the SC does not believe that the courts are authorized to go to the extent of creating special
procedure and processes for the purpose of carrying out the penal statutes, when the legislative
itself has neglected to do so. This is true since the courts are creatures of the statute and have
only powers conferred upon them by statute. Philippines courts have no common law jurisdiction
 Revised Bagtas Reviewer by Ve and Ocfe 2A 21
even
or powers.
in the RPC making Sia criminally liable as the president of his company created a doubt that
must be ruled in his favor according to the maxim, that all doubts must be resolved in favor of the
accused.
PEOPLE v TAN BOON KONG
CONTRASTING THE THREE CASES
Facts:

During 1924, in Iloilo, Tan Boon Kong as manager of the Visayan General Supply Co. engaged in
In the case
the purchase of sale
and West,ofthe court
sugar, in effect
bayon, enunciated
copra, and otherthat for aproducts
native person to proceed
and criminally
as such must pay
against
internal a corporation,
revenue taxes upon it was necessary
is sales. thathe
However, express provisions
only declared 2.3of law be
million inenacted,
sales butspecifically
in
providing
actuality that a
the sales corporation
amounted maymillion,
to 2.5 be proceeded against
therefore failingcriminally
to declareand brought
for the to court.
purpose of taxation
about 200,000, not having paid the government 2,000 in taxes. Upon filing by the defendant of a
But since
demurrer, the alower
corporation is a legal
court judge fictionsaid
sustained thatmotion
cannoton
bethe
handcuffed
ground that andthe
brought to charged
offense court, the
mustcase of Tan Boon
be regarded Kong provided
as committed thatcorporation
by the since a corporation acts
and not its through its officers and agents,
officials.
any violation of law by any of the actors of the corporation in the conduct of its business
involves a violation of law, the correct rule is that all who participate in it are liable. In making
actors liable, the court here said attaching criminal liability to the fiction cannot be done
Issue: WON the defendant as manager may be held criminally liable.
since: (1) a corporation is only an artificial person (2) there is a lack of intent imputable to a
being since it lacks its own mind.
Held: Ruling reversed. Case remanded.

The To
apply
court the
held doctrine
that of separate
the judge erred in juridical
sustainingpersonality
the motion would allowitcriminals
because to use
is contrary to a the
great
corporation as a shield or cloak to hide their criminal activities behind such.
weight of authority. The court pointed out that, a corporation can act only through its officers and
agents where the business itself involves a violation law, the correct rule is that all who
However,
participate the
in it areliability of officers
criminally liable. were
In thedelineated in case
present case, Tan of Sia Kong
Boon whereallegedly
the courtmade
held athat the
false
responsible
return officer
for purposes is personally
of taxation of theliable
totalisamount
personally liable
of sales forfor crimes
year 1924. committed by the
As such, the filing of
falsecorporation only in a asituation
returns constitutes violationwhere
of law.the
Him corporation
being the wasauthordirectly
of therequired by must
illegal act law tobedoheld
an act
in a given manner, and the same law makes the person who fails to perform the act in the
liable.
prescribed manner expressly liable criminally.

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

The Art.
facts102
reveal that
of the in 1963,
RPC: the accused
Subsidiary Jose Sia
civil liability was the general
of innkeepers, manager ofand
tavern-keepers Metal
proprietors of

Manufacturing Company
establishments of the Philippines
In default of the persons engaged in the
criminally manufacturing
liable, innkeepers,oftavern-keepers
steel office and
equipment.
any other When the or
person company was inshall
corporations need beofcivilly
raw materials
liable for to be imported
crimes committedfrom inabroad,
their Sia
applied for a letter ofincredit
establishments, to import
all cases wheresteel sheetsof
a violation from Tokyo, Japan,
municipal the application
ordinances being or
or some general
directed to Continental
special Bank shall
police regulation and washaveopened in the amount
been committed of $18,300.
by them or theirAccording
employees. to the
Continental Bank, the delivery of the steel sheets was only permitted upon the execution of the
trust receipt. While according to Sia, the steel sheets were already delivered and were even
converted Innkeepers are also
to equipment beforesubsidiarily liable for
the trust receipt thesigned
was restitution of goods
by him. taken
However, by robbery
there is no or
theftthat
question within their
when thehouses
bill of from guests
exchange lodgingdue,
became therein, or for
neither thethe payment
accused nor of
histhe value made
company
therefore,
payments, provided
despite demandsthat of
suchtheguests
bank. shall have notified
On appeal, in advance
Sia contends the
that he innkeeper
should not be himself,
held or
the person representing him, of the deposit of such goods within the inn; and shall
liable.
furthermore have followed the directions which such innkeeper or his representative may
have given them with respect to the care of and vigilance over such goods. No liability shall
attach in case of robbery with violence against or intimidation of persons unless committed
Issue: WON petitioner Sia may be liable for the crime charged, having acted only for and in behalf
by the innkeepers employees.
of his company.

Held:
Art. 103 of the RPC: Subsidiary civil liability of other persons The subsidiary liability
NO. established in the next
The Court disputed the preceding
reliance ofarticle
the lowershallcourt
also and
apply thetoCA
employers, teachers,
on the general persons
principle and
that for
corporations
a crime committed engaged in any kindthe
by a corporation, of industry
responsible for felonies committed
officers thereof wouldby personally
their servants,
bearpupils,
the
workmen,
criminal apprentices,
liability, as enunciatedor employees
in Tan Boon in Kong.
the discharge
The latterof provides
duties. that: [t]he corporation was
directly required by law to do an act in a given manner and the same law makes the person who
fails toNo criminal
perform suit
the actcan lie against
in the prescribedan accused who is a corporation.
manner expressly Times,
liable criminally. Inc.
The v. Reyes, 39of
performance
SCRA
an act is an303 (1971). directly imposed by the law on the corporation. Since it is a responsible
obligation
officer or officers of the corporations who actually perform the act for the corporation, they must
When a
of necessity becriminal
the ones statute forbids
to assume thethe corporation
criminal itself
liability; from doing
otherwise this an act, the
liability prohibition
as created by the
extends
law would beto the board
illusory, andofthedirectors,
deterrent and to each
effect of thedirector separately and individually. People v.
law, negated.
Concepcion, 44 Phil. 129 (1922).

While
The Court it is truethat
concluded thatthe
a criminal case
cited case can not
does onlyfall
besquarely
filed against
with the
the officers and not against
circumstances
the corporation
surrounding Sia since itself, it does
the act not to
alleged follow
be athat theiscorporation
crime cannot be a real-party-in-interest
not in the performance of an act directly
for the
ordained bypurpose
law to be of performed
bringing a by civil
the action for malicious
corporation. The actprosecution
is imposed forbythe
thedamages
agreementincurred
of the
by the
parties corporation
in pursuit of thefor the criminal
business. proceedings
The intention of thebrought
partiesagainst its officer.
is therefore Cometa
a factor v. Court of
determinant of
Appeals,
whether 301or
a crime SCRA 459
a civil (1999). alone is committed. The absence of a provision of the law
obligation
 Revised Bagtas Reviewer by Ve and Ocfe 2A23
Q: Why can the corporation be held liable for tortuous acts done by its agent but not for
criminal acts done outside its authority?
A: Crime is not within the corporate contemplation while negligence is. Negligence could be
part of every transaction. It is an integral part of corporate transactions. For as long as people
comprise the corporation, it is within the contemplation of every corporate act.

6. Recovery of Moral and Other Damages

A corporation, being an artificial person, cannot experience physical sufferings, mental

anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are
basis for moral damages under Art. 2217 of the Civil Code. However, a corporation may have
a good reputation which, if besmirched, may be a ground for the award of moral damages.
Mambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968); APT v. Court of
Appeals, 300 SCRA 579 (1998).

A corporation, being an artificial person and having existence only in legal contemplation,
has no feelings, emotions nor senses; therefore, it cannot experience physical suffering and
mental anguish. Mental suffering can be experienced only by one having a nervous system
and it flows from real ills, sorrows, and griefs of lifeall of which cannot be suffered by an
artificial person. Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993); LBC Express, Inc. v.
Court of Appeals, 236 SCRA 602 (1994); Acme Shoe, Rubber & Plastic Corp. v. Court of
Appeals, 260 SCRA 714 (1996); Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997);
NPC v. Philipp Brothers Oceanic, Inc., 369 SCRA 629 (2001).

The statement in People v. Manero and Mambulao Lumber Co. v. PNB, that a corporation
may recover moral damages if it has a good reputation that is debased, resulting in social
humiliation is an obiter dictum. Recovery of a corporation would be under Articles 19, 20 and
21 of the Civil Code, but which requires a clear proof of malice or bad faith. ABS-CBN
Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999).

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

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

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

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

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

Situation #1: 51% Filipino 49% Japanese Under the control test, the nationality
cannot be determined because for a group of stockholders to exercise control over a
corporation it is required by the Corporation Code that they at least control 60% of the
corporation. Why 60%? Because under the Corporation Code for a group of persons
to incorporate a corporation, at least 5 persons are required by law. A majority of the 5
is 3 and converting it into percent, one gets 60%. We can say that in fact 51% is
majority but in a group of 5 people 51% is 2 & 1/5, there really is no 1/5 of a person.

Situation #2: 60% Filipino 40% Japanese Under the control test, this is considered a
 Filipino corporation.

3.) Principal place of business applied to determine whether a State has jurisdiction over the
existence and legal character of a corporation, its capacity or powers, internal organizations,
capital structure, rights and liabilities of directors.

Q: Do all three tests apply in the Philippines?

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

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

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

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

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

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

EXCEPTIONS: TEST OF CONTROLLING OWNERSHIP also applies in:

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

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

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

corporations declared by it to be vested with a public interest pursuant to the
provisions of this section, belonging to the individuals or groups of individuals related
to each other by consanguinity or affinity or by close business interests, or whenever it
is necessary to achieve national objectives, prevent illegal monopolies or combinations
in restrain or trade, to implement national economic policies declared in laws, rules
and regulations designed to promote the general welfare and foster economic
development.
 Revised Bagtas Reviewer by Ve and Ocfe 2A25
In recommending to the Batasang
was registered as property Pambansa
owner. It is createdcorporations, business or
not only to administer industries
the to be
temporalities
declared vested
of the church with a public
or religious interest
society whereand
theincorporator
formulating proposals
belongs, butfor limitations
also on
to hold and
stock ownership, the National Economic and Development
transmit the same to his successor in said officer. 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 incumbent administrator is not the actual owner of the land but the constituents
the export potential, as well as the other factors which are germane to the realization
or those that make up the church, thus it is their nationality that has to be taken into
and promotion of business and industry.
consideration. The corporation sole only holds the property in trust for the benefit of
the Roman Catholic faithful.
Sec. 2 Art. XII
Dissenting
All opinion
lands ofby theJustice
publicJBL Reyes waters,
domain, In requiring corporations
minerals, or association
coal, petroleum and other to mineral
have
60% of their capital
oils, all forces owned by Filipino
of potential citizens,
energy, the constitution
fisheries, manifestly
forests or timber, disregarded
wildlife, flora andthe fauna
corporateandfiction
otheri.e. the juridical
natural resourcespersonality
are owned of such
by thecorporation
State. Withorthe associations.
exception of It went
agricultural
behind the corporate
lands, all other entity and resources
national looked at theshallnatural
under persons that composed
the full control it, and of the
and supervision
demanded that a clear majority in interest (60%) should be Filipino.
State. The State may directly undertake such activities or it may enter into Since under theco-rules
governing corporation
production, sole,
joint the members
venture, of the religiousagreements
or production-sharing association with
cannot overrule
Filipino or or
citizens,
overridecorporations
the decisionsorofassociations
the sole corporator, then it would be wrong to conclude
at least sixty percentum of whose capital is owned that the
by
control of the citizens.
such corporation Suchsole would be may
agreements in thebemembers of the
for a period notreligious
exceeding association.
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,
NOTE: The Roman Catholic Church is a corporation by prescription, with acknowledged
fisheries, or industrial uses other than the development of water power, beneficial use
juridical personality inasmuch as it is an institution which antedated almost a thousand years
may be the measure and limit of the grant.
any other personality in Europe, and which existed when Grecian eloquence still flourished in
Antioch and when idiots were still worshipped in the temple of Mecca. Since it is a corporation
by prescription, it has no nationality, and hence, the nationality test does not apply. (But refer
to below.) The State shall protect the nations marine wealth in its archipelagic waters, territorial
sea, and exclusive economic zone, and reserve its use and enjoyment exclusively to
Filipino citizens.
Q: Why is this case relevant to us?
A: It is relevant because while it tells us that a corporation sole is not subject to the
nationalityThetest,
Congress
it mustmay, by law,qualified
be further allow small-scale
to mean that utilization
this is of
thenatural resources
case only insofarby asFilipino
the
citizens,
control test as well asNationality
is concerned. cooperative fish farming,
is irrelevant withas
insofar priority to subsistence
this test is concerned. fishermen
However,and it
fishworkers in rivers, lakes, bays and lagoons
becomes relevant when the place of incorporation comes into play since the case never
sought to touch the place of incorporation test.
The President may enter into agreements with foreign-owned corporations involving
either technical or financial assistance for large-scale exploration, development and
utilization of minerals, petroleum and other mineral oils according to the general terms
and conditions provided by law, based on real contributions to the economic growth
The registration of the donation of land to an unincorporated religious organization,
and general welfare of the country. In such agreements, the State shall promote the
whose trustees are foreigners, would violate constitutional prohibition and the refusal
development and use of local scientific and technical resources.
would not be in violation of the freedom of religion clause. The fact that the religious
association has no capital stock does not suffice to escape the constitutional inhibition,
since The
it isPresident
admittedshall
thatnotify the Congress
its members are of of everynationality.
foreign contract entered
. . and into in accordance
the spirit of the
with this demands
Constitution provision that
withinin thirty days from
the absence its execution.
of capital stock, the controlling membership
should be composed of Filipino citizens. Register of Deeds of Rizal v. Ung Sui Si Temple,
ROMAN 97 CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO v THE LRC
Phil. 58 (1955).
Facts:
(b) Public Utilities (Sec. 11, Art. XII, Constitution; aPeople v. Quasha, 93 Phil. 333)
Mateo Rodis, a Filipino citizen and resident of Davao, executed a deed of sale of a parcel of
land located in the same city in favor of the Roman Catholic Administrator of Davao, a
Sec. 11 Art. XII
corporation sole organized and existing in accordance with Philippine laws. The incumbent
No franchise, certificate or any other form of authorization for the operation of public
administrator is Msgr. Clovis Thibault, a Canadian citizen. When the deed was presented to
utility shall be granted except to citizens of the Philippines or to corporations or
the Register of Deeds for registration, it required them to submit an affidavit stating that the
associations organized under the laws of the Philippines at least sixty per centum of
ownership of the corporation is 60% Filipino citizens as required under the Constitution.
whose capital is owned by such citizens, nor shall such franchise, certificate or
Roman Catholic stated that it was a corporation sole (meaning only one incorporator) and that
authorization be exclusive in character or for a longer period than fifty years. Neither
the totality of the Catholic population in Davao would become the owner of the property.
shall any such franchise or right be granted except under the condition that it shall be
Register of Deeds doubted this and submitted the case for en consulta in the Land
subject to amendment, alteration or repeal by the Congress when the common good
Registration Commission. LRC ruled that the requirement of the Constitution must be followed
so requires. The State shall encourage equity participation in public utilities by the
and since the 60% cannot be complied with, the registration should be denied. Hence, this
general public. The participation of foreign investors in the governing body of any
appeal.
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.
Issue: WON the Roman Catholic Apostolic Church, being a corporation sole, can lawfully
acquire lands in the Philippines.
NOTE:
Held: YES. Stock ownership must at least be 60% Filipino but management must be 100%
Filipino for such corporation to operate in industries concerning public utilities.
Corporation sole a special form of corporation usually associated with the clergy
designed to facilitate the exercise of the functions of ownership of the church which
 Revised Bagtas Reviewer by Ve and Ocfe 2A 27

PEOPLE v QUASHA

Facts:

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

Held:

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

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

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

Q: Why are we studying Quasha?

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

CLV: Note that while Quasha makes such doctrinal pronouncements, in practice, this is not the
case. SEC will refuse to register the Articles of Incorporation if it is not 60% owned by Filipinos.
In fact, Quasha lied in order to have the articles registered.
 The primary franchise, that is, the right to exist as such, is vested in the individuals
who compose the corporation and not in the corporation itself and cannot be conveyed in
the absence of a legislative authority so to do. The special or secondary franchises are
vested in the corporation and may ordinarily be conveyed or mortgaged under a general
power granted to a corporation to dispose of its property, except such special or
secondary franchises as are charged with a public use. J.R.S. Business Corp. v. Imperial
Insurance, 11 SCRA 634 (1964).

The Constitution requires a franchise for the operation of a public utility; however, it
does not require a franchise before one can own the facilities needed to operate a public
utility so long as it does not operate them to serve the public. There is a clear distinction
between operation of a public utility and the ownership of the facilities and equipment
used to serve the public. aTatad v.Garcia, Jr., 243 SCRA 436 (1995).

TATAD v GARCIA

Facts

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

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

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

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

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

Held: No.

It is to be noted that what the private respondents own are the rail tracks, rolling stocks like
the coaches, rail stations, terminals and power plant, which do not fall under public utility.
While a franchise is needed to operate these facilities to serve the public, they do not by
themselves constitute a public utility. What constitutes a public utility is not their ownership
but their use to the public. While the Constitution requires a franchise for the operation of
 Revised Bagtas Reviewer by Ve and Ocfe 2A29
public utility, it does not however require
1999, citing Allied Broadcasting, a franchise
Inc. v. before one can Commission,
Federal Communications own the facilities
435 needed
F. 2d
to operate
70). a public utility so long as it does not operate them to serve the public. There must
be a clear distinction between the operation of a public utility and the ownership of the
facilitiesThe
andNational
equipments used to serve theCommission
Telecommunications public. The which
right to operate and
regulates a public utility may
supervises the

exist independently and separately from the ownership of the facilities without operating
cable television industry in the Philippines under Sec. 2 of EO 436 series of 1997 has
them as provided
a public utility, or conversely,
under the one mayCircular
NTC Memorandum operateNo.
a public
8-9-95utility
underwithout owning
item 920(a) the
thereof
facilitiesprovides
used to serve the public.
that [c]able TV operations shall be governed by E.L. No. 205 series of 1987.
If CATV operators offer public telecommunications services, they shall be treated just
like public telecommunications industry.
In the case, while private respondent is the owner of the facilities necessary to operate the
MRT, it admits that it is not enfranchised to operate a public utility. In view of the incapacity,
private Under DOJ opinion
respondent No. 95
EDSA Corp. andseries
DOTCofagreed
1999, the
thatSecretary of Justice
on completion date,taking itsrespondent
private cue from
Allied
will deliver Broadcasting
possession of theInc.
LRTv.system
Federalby
Communications
way of lease of Commission 435 which
25 years, during F.2d 70period
DOTC shallconsidered
operate CATV as aasform
the same of mass
common media,
carrier andwhich must
private thereforeshall
respondent be owned
provideand
the
technicalmanaged by Filipinos,
maintenance or corporations,
and repair cooperatives or associations, wholly-owned and
services to DOTC.
managed by Filipino citizens pursuant to the mandate of the Constitution.
In sum, private respondent will not run the light rail vehicles and collect fees from the riding
(d) Advertising
public. Business
It will have no dealings with (Sec.
the 11(2),
public Art.
and XVI, 1987 Constitution)
the public will have no right to demand any
services from it. A mere owner and lessor of the facilities used by a public utility is not a
Sec.
public 11(2)
utility. Art. the
Even XVI mere formation of a public utility corporation does not ipso facto
characterize
The advertising industry as
the corporation one operating
is impressed withapublic
publicinterest
utility. The
and moment for determining
shall be regulated by lawthe
for
requisite Filipino nationality is when the entity applies for
the protection of consumers and promotion of the general welfare. a franchise certificate or any other
form of authorization for that purpose.
Only Filipino citizens or corporations or associations at least seventy percentum of the
capital
Q: How does ofthe
which
case is of
owned by such
Quasha differcitizens
from the shall
casebeofallowed
Tatad? to engage in the advertising
industry.
A: Quasha tells us that we have to look at the secondary franchise, i.e. to whom such is given
while Tatad tells us that it does not matter to whom the franchise is given but what matters is
whoThe participation
actually operatesofthe foreign
utility.investors in case
The latter the governing body
tells us that of entities
restrictions in not
are suchonindustry
the assets
of the corporations but on the enterprise itself, thus control determines nationalityexecutive
shall be limited to their proportionate share in the capital thereof, and all the and not
and managing officers
the beneficiaries.CLV: of such entities
The Constitution mustthe
restricts be citizens
juridical of the Philippines.
person as it controls the
enterprise. Note, that assets are different from the juridical person and from the business
Only Filipino
enterprise itself. citizens or corporations or associations at least seventy percent of the capital
shall be allowed to engage in the advertising industry. It also provides that the
participation of foreign investors in the governing body shall be limited to their
(c) Mass Media
proportionate (Sec.
share 11(1),
in the Art. thereof,
capital XVI, 1987 Constitution)
and all the executive and managing officers of
such entities must be citizens of the Philippines.
Sec. 11(1) Art. XVI
(e) War-Time Test (Filipinas
The ownership andCompania
management de Seguros
of mass v. Christern,
media shall Huenefeld & Co.,
be limited to Inc.,of
citizens 89the
Phil. 54 [1951]; Davis
Philippines, or toWinship v. Philippine
corporations, Trust Co.,
cooperatives or 90 Phil. 744 [1952];
associations, Haw Piaand
wholly-owned v. China
Banking Corp., 80
managed byPhil.
such604 [1948]).
citizens.

In Filipinas Compania
The Congress deregulate
shall Segurosorv.prohibit
Christern, Huenefeldin&commercial
monopolies Co., Inc., the Court
mass held when
media that in
timestheofpublic
war, the nationality
interest of a private
so requires. corporationinisrestraint
No combination determined by the
of trade character or
or unfair
citizenship of its shall
competition controlling stockholders The court considered the juridical entity as an
be allowed.
enemy based on the fact that the majority of the stockholders of the respondent
corporation
Mass media wereincludes
Germanthe subjects.
gathering,It ruled that the control
transmission of news,test was applicable
information, only in
messages,
war-time.
signalsIt and
refused
formstheofsole application
written, oral and ofall
the placecommunication
visual of incorporation test
and during
shall the war-
embrace the
timeprint
to determine
medium, the nationality
radio, television,of films,
an enemymovies,corporation.
advertising in all its phases and their
business managerial. It does not include commercial telecommunications because
such isTest
(f) Investment a public
as toutility.
Philippine Nationals (Sec. 3(a) & (b), R.A. 7042, Foreign
Investments Act of 1991)
The Constitutional requirements are much stricter for it requires that socks are 100%
Under Sec. 3a
Filipino of the
owned FIAmanaged.
and of 1991, the term Philippine national as it refers to a corporate
entity shall mean a corporation organized under the laws of the Philippines of which at
Sources:
least 60%P.D. 36, amended
percent by P.D.s
of the capital 191
stock and 197; DOJ
outstanding andOpinion
entitledNo.
to 120, s. owned
vote is of 1982; Sec.
and 2,
held
P.D. 576;
by citizens SECPhilippines.
of the Opinion, 24NOTE:
MarchIn 1983; DOJ Opinion
this aspect, FIA is163,
mores.liberal
1973; than
SEC Opinion, 15
the Constitution
which July
did1991, XXV SEC
not specify as Q what B
toUARTERLY type of, share
ULLETIN (No. 4December, 1991), at p. 31.
the 60% Filipino-ownership requirement
pertained to. FIA, in this aspect, only referred to voting shares.
Cable Industry: Cable TV operations shall be governed by E.O. No. 205, s. 1987. If
CATV operators offer public telecommunications services, they shall be treated just like a
However, it provides that were
public telecommunications a corporation
entity. (NTC Memo and its non-Filipino
Circular stockholders own stocks
No. 8-9-95)
in a SEC-registered enterprise, at least 60% of the capital stock outstanding and entitled
to vote of both corporations must be owned and held by citizens of the Philippines and at
Cable TV as a form of mass media which must, therefore, be owned and managed by
least 60% of the members of the Board of Directors of both corporations must be citizens
Filipino citizens, or corporations, cooperatives or associations, wholly-owned and managed
of the Philippines, in order that a corporation shall be considered a Philippine national. The
by Filipino citizens pursuant to the mandate of the Constitution. (DOJ Opinion No. 95, s.
law therefore limits the test to voting shares, but however makes it more stringent when it
 Revised Bagtas Reviewer by Ve and Ocfe 2A31
comes to actual control by making a double 60% rule requirement as to both holding and
held company, as well as their Board of Directors.

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

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

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

(g) Grandfather Rule (Opinion of DOJ No. 18, s. 1989, 19 January 1989; SEC Opinion, 6
November 1989, XXIV SEC QUARTERLY BULLETIN (No. 1- March 1990); SEC Opinion, 14
December 1989, XXIV SEC QUARTERLY BULLETIN (No. 2 -June 1990)

Shares belonging to corporations or partnerships at least 60% of the capital of which is

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

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

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

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

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

Q: When is the GFR applied?

A: The GFR is applied in cases where the corporation has corporate stockholders with alien
stockholdings, otherwise, if the rule is not applied, the presence of such corporate
srockholders could diminish the effective control of Filipinos.
 Revised Bagtas Reviewer by Ve and Ocfe 2A 33
reduced offering
SITUATION #1at P0.70/share.
Silahis International Hotel, the capital stock of which is 69% owned by
another corporation Hotel Properties Inc. and 31% owned by Filipinos. Hotel Properties in
Palting,
turnet.al filed
is 53% with the SEC
alien-owned an47%
and opposition to said registration
Filipino-owned. on thethe
The SEC through following grounds:
GFR stated that(1)
the tie-up
Silahisbetween SJP, aHotel
International Panamanian corporation
can engage in partlyand SJO, a domestic
nationalized business corporation
because theviolates
Filipino
the Constitution,
equity in saidthe Corp. Lawisand
corporation the Petroleum
63.43% Act of 1949
while the foreign (2)inthe
equity issuer
said is not licensed
corporation is 36.57%.to
transact business in the Philippines (3) the sale of shares is fraudulent (4) the issuer is based
on unsound business principles (sic).

SJP claimed that INTERNATIONAL

SILAHIS it was a business enterprise enjoying parity rights, with respect to mineral
HOTEL
resources in the Philippines, which may be exercised pursuant to the Laurel-Langley
Agreement,Hotel through a medium,
Properties Inc. the SJO. It contends that giving SJO financial assistance
69% did
1.) 53% Foreign
constitute transaction of business in the Philippines.
47% Filipino
SJO is a domestic corporation 90% of which is owned by SJP, a Panamanian Corp. the majority
interest Filipino
of whichstockholdings
is owned by Oil Investments, Inc. 31%another Panamanian Corp. The latter is in
turn owned by Pantepec Oil Co. & PanCoastal Petroleum, both organized and existing under
the laws47/100
of Venezuela.
(Hotel Properties) x 69 = 32.43 + 31 (remaining Filipino
stockholdings in Silahis)
Under the Constitution, the exploitation of natural resources shall be limited to citizens of the
TOTAL:
Philippines or to63.43%
corporations or associations at least 60% of the capital of which is owned by
such citizens. However, this right was earlier extended to US citizens by virtue of the Parity
Agreement. Said US citizens can either directly or indirectly own or control the business
enterprise.
SITUATION #2 Whether or not there may be an investment made by Pinoy Inc. in Mass
Media which requires 100% Filipino ownership. Pinoy Inc. is 40% owned by Pedro, a
Held:Filipino, while 60% is owned by ABC, Inc. ABC on the other hand, is a corporation
San registered
Jose Petroleumin theisPhilippines
not entitled60% of which
to Parity is owned
Rights: (1) It by Maria,
is not a Filipino,
owned while 40%
or controlled is by
directly
owned by George, a German.
US citizens because it is owned and controlled by Panamanian corporation; (2) Neither can it
be said that it is indirectly owned and controlled by US citizens because the controlling
Q:
corporation
Can Pinoy, is Inc.
in turn
enter
ownedinto the
by two
operation
Venezuelan
of a television
corporations;
station?
(3) Although the two
A:
Venezuelan
In this situation,
corporations
is the claim
GFR istoapplied
be ownedstraight;
by stockholders
Pinoy, Inc. would
residingbeindisqualified
the US, there
since
is no
24%
of
showing
Pinoy is
that
owned
said bystockholders
George. But were
under
US the
citizens;
present
(4) investment
Even granting regime
that of
these
the Philippines,
stockholdersthe
FIA
are provides
US citizens,
thatit corporations
is still necessary
which toare
establish
60% owned
that their
by Filipino
different
citizens
statesshall
allowbeFilipino
considered of
Philippine
corporationsnationality.
and citizens It is to
defined
engage under
in the
said
exploitation
law that forof the
natural
purposes
resources.
of investment
However,suchtherea is
corporation
no such proof of to60%
this;
Filipino
(5) The and
word
40%indirectly
foreign equity
shouldisnot
allowed
be unduly
to invest
stretched
in a corporation
in application.
engaged in a nationalized sector.

Q: Why are we studying Palting?

Q: Does
A: It this notPalting
is because contradict the verythe
enunciated provisions
doctrineof thefor
that Constitution?
a corporation to comply to the
A: It does not because
nationalization the main
requirements purpose
of the of such provision
Constitution, the equityofrequirements
the law is to establishing
spur investments
the
into the Philippine economy. What it specifically prohibits is for a corporation
nationality of the controlling interest in the corporation should not be stretched with
to aabsurdity.
foreign
equity to engageofinthe
The application nationalized industries.
GFR to determine theNote the difference
nationality in the use
of the ultimate of terms,
controller namely
of a subject
to engage as opposed to to invest. Engaging in
corporation cannot go beyond the level of what is reasonable.nationalized industries involve direct
participation in the exploitation or use of natural resources or entry into protected industries
vested with public interest. This is what is prohibited from being entered into by non-
(h) Special Classifications (Sec. 140)
nationals.
Sec. 140 Stock ownership in certain corporations Pursuant to the duties specified by
Q: WhenArticle
shouldXIVtheofGFR
thebe
Constitution,
applied? the National Economic Development Authority shall,
from
A: It should betime to time,
applied when make
two a determination
requisites of whether
are met: (1) whenthe corporate
there vehicle
is involved has been
a nationalized
or partlyused by any corporation
nationalized of by business
sector of Philippine economy or industry to frustrate
and (2) when the
there is provisions
tierring, thereof
meaning the
or ofisapplicable
corporation partly-ownedlaws,byand shall corporation.
another submit to the Batasang Pambansa, whenever deemed
necessary, a report of its findings, including recommendations for their prevention or
correction.
Up to what level do you apply the grandfather rule? (aPalting v. San Jose
Petroleum Inc., 18 SCRA 924 [1966])
Maximum limits may be set by the Batasang Pambansa for stockholdings in
PALTING corporations
v. SAN JOSE PETROLEUM
declared by it to be vested with a public interest pursuant to the
provisions of this section, belonging to the individuals or groups of individuals related
Facts:
to each other by consanguinity or affinity or by close business interests, or whenever it
San JoseisPetroleum
necessaryfiledto achieve
with thenational objectives,
SEC a sworn prevent
registration illegal monopolies
statement or combinations
for the registration and
licensinginfor
restrain
sale inorhetrade, to implement
Philippine national
voting trust economic
certificate policies declared
representing 2 million in laws,of
shares rules
its
and regulations
capital stock designed
of a par value to promote
of $0.35/share the general
at P1/share. welfare
It was and that
alleged foster economic
the proceeds
development.
thereof will be used to finance the operations of San Jose Oil Co. which has 14 petroleum
exploration concessions in various provinces. It was expressly conditioned that instead of
stock certificates, registered or bearer-voting trust certificates from voting trustees
In recommending
(Americans) will be given. toSanthe Batasang
Jose Pambansa
Petroleum amended corporations, business
the application from orP2Mindustries
to P5M atto be
declared vested with a public interest and in formulating proposals for limitations on
 stock ownership, the National Economic and Development Authority shall consider the
type and nature of the industry, the size of the enterprise, the economies of scale, the
geographic location, the extent of Filipino ownership, the labor intensity of the activity,
the export potential, as well as the other factors which are germane to the realization
and promotion of business and industry.

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

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

IV. A. MAIN DOCTRINE: A CORPORATION HAS A PERSONALITY SEPARATE AND DISTINCT FROM ITS
STOCKHOLDERS OR MEMBERS

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

Sec. 2 Corporation defined A corporation is an artificial being created by operation of

law, having the right of succession, and the powers, attributes, and properties expressly
authorized by law or incident to its existence.

Article 44 The following are juridical persons:

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

(3) corporations, partnerships and associations for private interest or purpose

to which the law grants a juridical personality, separate and distinct from that
of each shareholder, partner or member.

2. Importance of Protecting Main Doctrine:

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

FROM WHICH ATTRIBUTE OF THE CORPORATION DOES THE DOCTRINE OF PIERCING THE
 Revised Bagtas Reviewer by Ve and Ocfe 2A 35
VEIL OF CORPORATE FICTION FOCUS ON?

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

creation of statute under Sec. 23 of the Corporation Code Compared to partnerships,
partnerships have mutual agency under delectus personarum. Mutual agency is more of a
natural occurrence since here the partner is a co-owner of the assets of the partnership,
maintaining his control over his property. In property law, there is what is called the seven
juses of ownership. In partnership however, a partner retains all this seven juses, albeit as
a co-owner, through mutual agency. However, in a corporation, a stockholder abdicates
his jus dispossidendi, jus abutendi, etc. as to the property he is placing inside a
corporation retaining only to himself his jus fruendi, as to the dividends of his stocks. This
is unnatural since a person is entitled to full use, enjoyment or dispossession of his
property. But since under the Corporation Code, centralized management is provided
therefore it is the means by which a corporation acts and conducts it business. As such,
the piercing doctrine is not directed at the attribute of centralized management, because
in most instances, investors in a corporation hand the management of the business of the
corporation to professionals. To do away with the central management would place the
investors who had taken no active part in the conduct of the corporation to be liable as
partners with mutual agency.

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

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

CLV: In viewing the main doctrine of separate juridical personality as to the piercing doctrine,
the main doctrine actually pertains to equity. Equity refers to the part of the rights or interest
an individual has in a corporation. Equity is comprised of two main parts which is (1)
enterprise and (2)assets. It is the enterprise or the conduct of the business which in effect
undermines equity. Assets are those brought in by the stockholders during the formation of
the corporation or may have been acquired during its existence. They are inanimate objects
that require human intervention to move or be used. Thus, it can be said that it is not the
assets that undermine equity which bring about piercing. When an enterprise is conducted in
fraud or in perpetuation of a wrong the equity of the corporation is undermined. Since, a
corporation must act through its agents, so the corporation being the principal, commissions
these agents to act under that special commission. If an agent acts beyond the commission of
the principal (as provided under its by-laws) it is the actor that should be held liable not the
corporation, since the corporation for all of its juridical existence is still abstract and a
corporeal actor acts for it. Also a corporation cannot undermine equity, only the actors. So
when these actors undermine equity, they lose limited liability and may be held liable.
Therefore, the basis of piercing is on the enterprise not on equity or its assets. Piercing
regulates the enterprise of the corporation.
 A corporation, upon coming into existence, is invested by law with a personality separate
and distinct from those persons composing it as well as from any other legal entity to which
it may be related. This separate and distinct personality is, however, merely a fiction
created by law for conveyance and to promote the ends of justice. LBP v. Court of Appeals,
364 SCRA 375 (2001).

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

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

SAN JUAN STRUCTURAL AND STEEL FABRICATORS v. CA

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

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

Held:

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

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

3. Applications:
 Revised Bagtas Reviewer by Ve and Ocfe 2A 37
(a) Majority Equity Ownership and Interlocking Directorship:
property which is owned by the corporation as a distinct legal person. Good Earth
Emporium, Inc. v. CA, 194 SCRA 544 (1991).
Ownership of a majority of capital stock and the fact that majority of directors of a
corporation
The mere are
factthe directors
that of another
one is president ofcorporation creates
the corporation nonot
does employer-employee
render the property
relationship
he with the latter's
owns or possesses employees.
the property of theaDBP v. NLRC,since
corporation, 186 SCRA 841 (1990)
that president, as an
individual, and the corporation are separate entities. Cruz v. Dalisay, 152 SCRA 487
(1987); Booc v. Bantuas, 354 SCRA 279 (2001).

DBP v NLRC
It is hornbook law that corporate personality is a shield against personal liability of
its officersa corporate officer and his spouse cannot be made personally liable under
a trust receipt where he entered into and signed the contract clearly in his official
Facts: capacity. Intestate Estate of Alexander T. Ty v. Court of Appeals, 356 SCRA 61 (2001);
Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001).
Philippine Smelter Corporation obtained a loan in 1983 from DBP to finance its iron smelting
and steel manufacturing business. To secure the loan, PSC mortgaged to DBP real properties
and (c)
chattels withBetween
Dealings its President Marceloand
Corporation as co-obligor
Stockholders:Because of this DBP became the majority
stockholder of PSC with stockholdings of P 31M out of P 60 M subscribed and paid up capital
The fact
stock and took overthat themanagement.
PSCs majority stockholder
PSC failedhadtoused his own
pay and DBP money
foreclosedto payon part
the of the
mortgagedloanrealties
of the corporation
and chattels.cannot be used
40 alleged as the
unpaid basis to pierce.
employees It is understandable
filed a petition for involuntary
that
insolvency inathe
shareholder
RTC against would
PSC want to help
and DBP. Saidhis corporation
employees andemployed
were in the process, assure that
by Olecram
his stakes
Mining Corp., in the said corporation
Jose Panganiban Ice Plant and areCold
secured.
Storage,LBP v. Court
Inc. of Appeals,
all impleaded 364 SCRA 375
as co-
(2001).
respondent. They filed another complaint with the DOLE against PSC for non-payment of
salaries, 13th month pay, incentive leave and separation pay. DBP was impleaded because the
employeesUse considered DBP as stockholders
of a controlling the parent companyinitials of
in PSC. Since thename
the corporate DBP was thesufficient
is not biggest
creditor reason
of PSC, to it held
piercemajority of stockveil,
the corporate andsince
involved in management
by that practice alone through
does itBoard
meanof that the
Directors, DBP
said was considered
corporation to be
is merely by the employees
a dummy as their
of the individual employer. DBP
stockholder. was invoked
A corporation may
absenceassume
of E-E relationship in its Answer.
any name provided The labor
it is lawful, andarbiter
there isheld DBP as
nothing liable
illegal in for unpaid
a corporation
wages due to PSCs
acquiring theforeclosure
name or as which it caused
in this case, the asinitials
foreclosing
of onecreditor. NLRC sustained
of its shareholders. LBPthis,
v.
hence, this
Courtpetition.
of Appeals, 364 SCRA 375 (2001).

The mere fact that a stockholder sells his shares of stock in the corporation during
Held: the pendency of a collection case against the corporation, does not make such
stockholder personally liable for the corporate debt, since the disposing stockholder
DBP as foreclosing creditor
has no personal could not
obligation to be
theheld liableand
creditor, for unpaid
it is thewages,
inherentetc. of the
right employees of
of the
PSC. Thestockholder
fact that DBP is a majority
to dispose of hisstockholder of PSC
shares of stock and PSC
anytime he are from DBP
so desires. does Jr.
Remo, notv. IAC,
sufficiently
172indicate
SCRA 405the(1989);
existence
PNBofv.an E-E relationship
Ritratto between
Group, Inc., 362 SCRAthe 216
terminated
(2001). employees of
PSC and DBP. Said workers have no cause of action against DBP and the labor arbiter does
not have jurisdiction to take cognizance of said case.
Just because two foreign companies came from the same country and closely
worked together on certain projects would the conclusion arise that one was the
Hence, ownership
conduit of of
thea other,
majority of piercing
thus capital stock andofthe
the veil fact the fiction.
corporate majority of directors
Marubeni Corp.of v.
a
corporation are362
Lirag, theSCRA
directors
620 of another corporation creates no E-E relationship with the
(2001).
latters employees.
The creation by DBP as the mother company of the three mining
corporations to manage and operate the assets acquired in the foreclosure
sale lest
Merethey deteriorate
ownership by a from
singlenon-use and lose
stockholder or by their value,corporation
another does not of all or nearly
indicate
all of the capital stock of a corporation is not of itself sufficientofground
fraud or wrongdoing and will not constitute application the for disregarding
piercing doctrine.
the separate DBP v. Court
corporate of Appeals,
personality. Sunio363 SCRA, 307
v. NLRC 127 (2001).
SCRA 390 (1984); Asionics
The facts that
Philippines, two
Inc. v. corporations
NLRC, 290 SCRA may164be sister
(1998); companies,
Francisco v. and that 362
Mejia, theySCRA 738
may be sharing
(2001); personnel
Matutina and Wood
Integrated resources, without
Products, Inc.more,
v. CA,is263
insufficient
SCRA 490 to(1996); Manila
prove that their separate corporate
Hotel Corp. v. NLRC, 343 SCRA 1 (2000). personalities are being used to defeat
public convenience, justify wrong, protect fraud, or defend crime. Padilla v.
Court of Appeals, 370 SCRA 208 (2001). [CLV: In past decisions, such situation
wouldMere substantial
generally warrantidentity of incorporators
alter-ego piercing.] of two corporations does not necessarily
imply
(d) On fraud, nor
Privileges warrant
Enjoyed: Thethe
taxpiercing
exemptionof the veil of
clause in corporate
the charter fiction. In the absence of
of a corporation
clear be
cannot andextended
convincing evidence
to nor enjoyed to by
show that
even itsthe corporate
controlling personalitiesManila
stockholders. were used
Gas to
perpetuate
Corp. fraud,
v. Collector or circumvent
of Internal Revenue,the 62
law, the895
Phil. corporations
(1936). are to be rightly treated as
distinct and separate from each other. Laguio v. NLRC, 262 SCRA 715 (1996).

Having interlocking
(e) Obligations and Debts: directors,
Corporatecorporate officers
debt or credit andthe
is not shareholders is not
debt or credit enough
of the
justification to pierce the veil of corporate fiction in the absence of fraud or
stockholder nor is the stockholder's debt or credit that of the corporation. Traders other
public
Royal policy
Bank considerations.
v. Court of Appeals,Velarde v. Lopez,
177 SCRA 419 SCRA 422 (2004); Sesbreno v.
789 (1989).
Court of Appeals, 222 SCRA 466 (1993).
A corporation has no legal standing to file a suit for recovery of certain parcels of
(b) Being Corporate
land owned Officer:
by its membersBeingin an officer
their or stockholder
individual capacity,of a corporation
even does not
when the corporation is
byorganized
itself make
forone's property
the benefit of also of the corporation,
the members. and vice-versa,
Sulo ng Bayan forInc.,
v. Araneta, they72are
SCRA 347
separate entities, and that shareholders are in no legal sense the owners of corporate
 Revised Bagtas Reviewer by Ve and Ocfe 2A 39
Held: (1976).

The CBCI isStockholders have instrument

not a negotiable no personality to intervene
because it lacks inthea words
collection case covering
of negotiability. the
It is
payable loans
only toofFilriters
the corporation since thebyinterest
and the transfer of shareholders
a non-owner in corporate
i.e. Philfinance, to TRB property
should haveis
purelyon
put the latter inchoate.
guard asSaw v. CA,
to the title195 SCRA 740 (1991);
of Philfinance to dispose andofvice-versa
the CBCI.Francisco
Also the Motors
Corp.
assignment ofv. Court of
Filriters Appeals, 309
toPhilfinance wasSCRA 72 (1999).
fictitious as the same is without consideration and
was contrary to the rules of CB Circular 70 which provides that any assignment shall not be
The
valid unless majority
made stockholder
by the registeredcannot
owner be held personality
in person or by a dulyliable for the attorneys
authorized fees in
representative
charged by merely
writing. Philfinance a lawyer for representing
borrowed the CBCI thefromcorporation. Laperal
Filriters a sister Dev. Corp.
corporation tov.guarantee
Court of
financingAppeals, 223 SCRA 261 (1993).
corporations.

Even when the foreclosure on the corporate assets was wrongful done,
The doctrine of piecing
stockholders havethe no
corporate
standing veil
to is an equitable
recover remedy which
for themselves moral may only be
damages; awarded it
otherwise,
in cases would
when the corporate
amount to thefiction is used to
appropriation by,defeat
and thepublic convenience,
distribution justify
to, such wrong, of
stockholders
protect fraud
part oforthe
defend crime or where
corporations assets abefore
corporation is a mereofalter
the dissolution the ego or business
corporation and conduit
the
of a person. It requires
liquidation the
of its court
debts to liabilities.
and see through APTthe
v. protective shroud 300
Court of Appeals, which exempts
SCRA its
579 (1998).
stockholders from liabilities that ordinarily, they could be subject to or distinguishes one
corporation from a seemingly separate one, were it not for the existing corporate fiction. The
The obligations of a stockholder in one corporation cannot be offset from the
court must be sure that the corporate fiction was misused.. It is the protection of innocent 3 rd
obligation of the stockholder in a second corporation, since the corporation has a
parties dealing with corporate entity that the law seeks to protect by this doctrine. In this
separate juridical personality. CKH Industrial and Dev. Corp v. Court of Appeals, 272
case, other than the allegation that Filriters is 90% owned by Philfinance and the identity of
SCRA 333 (1997).
one shall be maintained as to the other, there is nothing else which could lead the court under
the circumstances to disregard their separate corporate personalities. There is no showing
that TRB was
B. PIERCING defrauded at all when it acquired the subject certificate of indebtedness from
THE VEIL OF CORPORATE FICTION:
Philfinance.
1. Source of Incantation: United States v. Milwaukee Refrigerator Transit Co., 142 Fed.
247 (1905).
The The
fact notion
that Philfinance owns
of corporate a majority
entity will be share
pierced in or
Filriters is not by
disregarded itself
and the aindividuals
ground to disregard
their independent corporate entities. In Liddel & Co. Inc. v. CIR mere ownership
composing it will be treated as identical if the corporate entity is being used as byaacloak
single
or
stockholder or by or
cover for fraud another corporation
illegality; of all or nearly
as a justification all of the
for a wrong; capital
or as stock
an alter of an
ego, a corporation
adjunct, or is
a
not itself a sufficient
business conduit for reason to disregard
the sole benefit of the
the fiction of separate
stockholders. Gochancorporate personalities.
v. Young, 354 SCRA 207
(2001); DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001).
TRB being a commercial bank which deals with corporate entities with circumstances showing
that the agents are acting in excess of corporate authority may not hold the corporation
2. Nature
liable. ThisofisDoctrine
only fair(aTraders Royal
as everyone Bank
must in v.
theCourt of Appeals,
exercise 269 SCRA
of his rights and in15 [1997])
the performance of
his duties, act with justice, give everyone his due and observe honesty and good faith.

When the legal fiction of separate corporate personality is abused, such as when the
same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the
corporate veil. Francisco v. Mejia, 362 SCRA 738 (2001).

Piercing the veil of corporation fiction is warranted only in cases when the separate legal
entity isROYAL
TRADERS used to defeat
BANK public convenience,
v COURT OF APPEALS justify wrong, protect fraud, or defend crime,
such that in the case of two corporations, the law will regard the corporation as merged into
Facts:
one. Velarde v. Lopez, 419 SCRA 422 (2004).
Filriters Guaranty Assurance Corporation (Filriters) is the registered owner of Central Bank
The legal
Certificate fiction of separate
of Indebtedness (CBCI)corporate
with a face existence
value ofis500,000.
not at allSuchtimes invincible
was and the to
then transferred
same may
Philippine be pierced Finance
Underwriters when employed
Corporation as a(Philfinance)
means to perpetrate a fraud, confuse
under a Detached legitimate
Assignment.
issues, or used as a vehicle to promote unfair objectives or to
Philfinance entered into a repurchase agreement with Traders Royal Bank over the CBCI shield an otherwise blatant
violation
whereby of the
TRB buysprohibition
the CBCI and against forum-shopping.
Philfinance While it
will repurchase it on
is settled
April 27,that
1981 thefor
piercing of
the corporate
519,361.11 Uponveil thehas to beof
default done with caution,
Philfinance this corporate
TRB sought to register fiction may be
the CBCI disregarded
in its name. CB
when necessary
refused to register in the
and interestthe
transfer of CBCI
justice.
due Rovels
to theEnterprises,
adverse claim Inc.ofv.Filriters.
Ocampo, 391 SCRA 176
(Filriters
(2002). the defense that Alfredo Banaria Senior VP of Filriters without any board
interjected
resolution, knowledge or consent of the board of directors executed the detached assignment
The naturein favor
of theofpiercing
Philfinance. Subsequently,
doctrine is to disregardAlberto
the Fabella,
separateSenior VP personality
juridical Comptrollerof and Pilar Jacobe
a corporation
Senior
and to hold theVP Treasury,
actors or theofstockholders
Filriters and of of the
Philfinance
corporationexecuted
liable similar
for a wrongformscommitted
transferring or the
a CBCI
to TRB. As
liability avoided. In such the transfers
our lessons were nulllaw,
in corporation andwe void.)
distinguish the cause of the piercing because it
would explain of piercing is properly done. The Supreme Court does not go into an explanation or
direct attribution as to cause of the piercing which at times cause confusion, so to clarify matters we
classify the
TRBpiercing
then went caseto into three
the RTC ofnamely:
Manila and (1) fraud (2)mandamus
filed for alter ego and (3) remedy.
to compel CB to register.
Petitioner argued that the CBCI was a negotiable instrument and that it was a holder in due
course.
In the cases It alsothe
of fraud, contended
piercing that
is donePhilfinance
becauseowned there is90% of Filriters
a wrong equityTherefore,
committed. and the two a person
behind thecorporations
wrong must have
be identical
held liable officers,
which in this demanding are
a corporation the the
application
directors, of since
the doctrine of piecing
the corporation
the veil
acts through of corporate
them. A piercingfiction
of theas to give validity
corporate to thecases
veil in fraud transfer of the
is for the purpose
CBCI. of making the
directors directly liable. In fraud cases, the SC looks into the circumstances of the case searching for
Issue: WON the doctrine of piercing the veil of corporate fiction applicable in this case.
 Revised Bagtas Reviewer by Ve and Ocfe 2A41
elements
through the Insurance Corporation An
of malice or evil motive. absence
of the of such
Philippines a an evil Bond
Surety motive, the courts
in favor will not allow
of Counter-Guaranty with
piercing. An example
REM executed would
by Rivera be the case
as president of TRB and
of Slobec v. CAthe
where the Court
Castillos did not allow
as mortgagors andpiercing
ICP as because
there was noThe
mortgagee. injury caused. Tractorwas
Caterpillar Also in the delivered
Umali case,
to the court did not allow piercing because the main
Slobec.
intent was to annul a real estate mortgage under an allegation of fraud and not to hold the Directors
liable. In both cases, piecing was not the proper remedy, even if fraud was actually alleged because
Meanwhile for violation of the terms and the conditions of the Counter-Guaranty Agreement, the
the fraud committed was not attributed directly to the acts of the agents of the corporation.
properties of the Castillos was foreclosed by ICP. As the highest bidder, a Certificate of Sale was
issued in its favor and TCTs over the parcels of land were issued by the Register of Deeds in favor of
ICP. The mortgagors had one year from the registration of the sale to redeem the property but they
In alter ego cases, the allegation does not go into fraud or malicious intent but a disrespect for the
failed to do so. ICP consolidated its ownership over the parcels of land. Later on ICP sold to Philippine
corporate fiction. Here, the corporation is being used as a conduit or front for the activities of a
Machinery Parts Mfg. Co. the parcels of land and by virtue of said sale, PM transferred unto itself the
person, whether natural or juridical, in order to avoid liability or gain advantage over another without
title of the lots. PM parts through its President, Cervantes sent a letter to the Castillos to vacate the
really employing fraud. Here, if piercing is allowed then the corporate existence of the conduit
property. The Castillos refused to do so. Subsequently, Umali the administratix of the properties of
corporation is disregarded and the person or corporation behind the corporation shall be considered
Castillos filed an action for annulment of titles. They countered that all the transaction starting from
as one and the liability of one is the liability of the other. The main intent here is not to make the
the Agreement of Counter-Guaranty with REM are void for being entered into in fraud. They seek to
board of directors of the conduit corporation liable but to make the corporation behind the existence
pierce the veil of corporate entity of Bormaheco, ICP and PM Parts alleging that these corporations
of the conduit liable. It is the objective of the Corporation Code to foster public convenience in
employed fraud in causing the foreclosure and subsequent sale of their land. The lower court ruled in
sanctioning the creation of a corporation not as a means or private convenience where it is to be
favor of Umali. This was reversed by the CA.
used by other corporations or individuals as a means to circumvent liability or cause a disruption of
normal business practice in dealing with corporations.

Held:
Equity subdivision is the catch-all subdivision. If not fraud or alter ego, the court may grant piercing
The SCequitable
as an is not convinced
remedy, that the contract
but such entered
is usually into
resorted toby
asthe partiesinare
a reason fraudulent.
consonance with fraud or alter
ego cases. As such it is of purely judicial discretion.
Under the doctrine of piecing the veil of corporate entity, when valid ground exists , the following
effects would be produced: (1) legal fiction that a corporation is an entity with a juridical personality
The threeand
separate cases may appear
distinct from itstogether
members inor
one application:may be disregarded (2) in such cases, the
stockholders
corporation will be considered as a mere association of person (3) the members or stockholders of
FRAUD to prevent wrong
the corporation will be considered as the corporation, making them liable directly. It is only
applicable when corporate fiction is: (1) used to defeat public convenience, justify wrong, protect
fraud, or defend crime (2) made as a shield to confuse legitimate issued (3) where a corporation is
PIERCING
the DOCTRINE
mere alter ALTER of
ego or business conduit EGO disrespect
a person for the
(4) where thecorporate fiction
corporation is soand to defeat
organized andpublic
convenience
controlled and its affairs are so conducted as to make it merely an instrumentality., agency , conduit
or adjunct of another corporation.

EQUITY to do justice
The SC is of the opinion that piecing the veil is not the proper remedy in order that the foreclosure
proceedings Themay be declared
application a nullity
of the doctrine under
to a the circumstances
particular case does in the
not case
deny at bar.
the Petitioners
corporation ofare
legal
merely seeking the declaration
personality for any and ofallthe nullity of
purposes, the
but foreclosure
only sale, which
for the particular relief may
transaction orbe obtained
instance for
without having to disregard
which such doctrinethe
wasaforesaid
applied. corporate fiction attaching to the respondent corporations.
Petitioners also fail to establish by clear and convincing evidence that private respondents were
purposely formed and operated, with the sole intention of defrauding the latter. The facts showed
that the surety of ICP is Remedy:
(a) Equitable good onlyThefor doctrine
12 months therefore
of piercing the
the surety had
corporate veilalready expired. The
is an equitable doctrine
failure of ICP developed
to give notice renders ICP to have no right to foreclosure. In this
to address situations where the separate corporate personality case, piercing
of a need not
be resorted to.corporation is abused or used for wrongful purposes. aPNB v. Ritratto Group, Inc., 362
SCRA 216 (2001).
Q: Why is Umali seeking to pierce the corporate entity?
A: Umali is(b) Remedy
seeking of Last
to have theResort: Piercing
veil pierced the corporate
because it wouldveil is remedy
have of last
shown that theresort and entered
contracts is not
available
into were fictitious andwhen other remedies
simulated, there beingareastill available.
fraudulent aUmali
intent v. Court
on the of Bormaheco,
part of Appeals, 189ICP
SCRA
&
529 (1990).
PM parts to acquire the property of Umali through the foreclosure of the mortgage by ICP. However,
the court belied such allegation because the mere fact that the business of two or more corporations
UMALI v. COURT is
are interrelated OF APPEALS
not a justification for disregarding their separate personalities, absent a sufficient
showing that the corporate entity was purposely used as a shield to defraud creditors and third
Facts:
persons of their rights.
The Castillo family is the owner of a parcel of land which was given as security for a loan from the
DBP.
Q: WhyForare
failure to pay the
we studying amortization, foreclosure of the property was initiated. This was made
Umali?
known
A: The allegations made bythe
to Santiago Rivera, nephew
Umali were of plaintiff
based Mauricia
on fraud andMeer vda.
yet the De Castillo
main objectiveandof president
the suit wasof to
Slobec
annul theRealty Dev. Corp.
foreclosure Rivera
of the proposed
mortgage. ThetoCourt
themfound
the conversion
no reasoninto a subdivision
to pierce since thelotmain
of the four
objective
parcels
was notof in land adjacentwith
consonance to the
themortgaged
remedy of property to araise
piercing in the
fraud money.
case wouldThe
do,Castillos
which wasagreed so athe
to hold
MOA
Boardwas executedliable.
of Directors between Slobec
Piercing is represented by Rivera
not allowed unless the and the Castillos.
remedy sought is Rivera
to make obliged himself
the officer or
to pay the
another Castillos P70T
corporation after the
pecuniary execution
liable of thedebts.
for corporate contract and P400T after the property had been
converted into a subdivision. Rivera armed with the agreement approached Cervantes, president of
Bormaheco and bought a Caterpillar Tractor with P50T down payment and the balance of P180T
Q: What in
payable if itinstallments.
was based on alter through
Slobec ego? Rivera executed in favor of Bormaheco a chattel mortgage
A: The
over probative
the factor show
said equipment that no for
as security alter
theego existed
unpaid since there
balance. was no
As further disrespect
security, Slobecof the corporate
obtained
fiction, the corporations each having its own way of conducting business. Even if it may be that they
compliment one another in their business conduct, it does not form enough basis for their
 Revised Bagtas Reviewer by Ve and Ocfe 2A 43
circumvention of any liability.

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

INDOPHIL TEXTILE MILL WORKERS UNION v CALICA

Facts:

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

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

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

Held:

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

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

LA CAMPANA COFFEE FACTORY v KAISAHAN NG MANGGAGAWA

Facts:

Tan Tong since 1932 has been engaged in the buying and selling gawgaw under the trade
name La Campana Gawgaw Packing. In 1950, Tan Tong and members of his family organized
the family corporation. La Campana Coffee Factory with its principal office located in Gawgaw
Packing. Prior to said information, Tan Tong entered into a CBA with the labor union of La
Campana Gawgaw. Later on, his employees formed Kaisahan ng mga Manggagawa ng La
Campana with an authorization from the DOLE to become an affiliate of the larger union.
 Revised Bagtas Reviewer by Ve and Ocfe 2A45
Piercing is not available
Kaisahan with 66 members presented when personal
a demandobligations
for higher of an individual
wages and more are to be enforced
privileges to La
Campanaagainst
Starch theand
corporation (?) Robledo
Coffee Factory. v. NLRC,was
The demand 238notSCRA 52 (1994).
granted and the DOLE certified the
issue to the CIR. La Campana filed a motion to dismiss alleging that the action was directed
against twoThe rationale
different behind
entities piercing
with distincta corporations
personalities.identity
This was in denied,
a given hence
case isthisto remove
petition.
the barrier between the corporation from the persons comprising it to thwart the
fraudulent and illegal schemes of those who use the corporate personality as a shield for
Held: undertaking certain proscribed activities. However, in the case at bar, instead of holding
certain individuals or person responsible for an alleged corporate act, the situation has
La Compana Gawgawbeen reversed. It is the petitioner
and La Campana Factory are as a corporation
operating underwhichoneissingle
beingmanagement
ordered to answer or as for
the personal
one business though with two liability
tradeofnames.
certainThe individual directors,
coffee factory is aofficers and incorporators
corporation and by legal concerned.
fiction,
Hence,
an entity separate anditapart
appears from tothe
us that
personsthe doctrine
composing hasitbeen
namely,turned
Tan upside
Tong and downhis because
family. of its
erroneous
However, the concept of invocation.
separate corporateaFrancisco Motors Corp.
personality cannot v Court of Appeals,
be extended 309 SCRA
to a point beyond 72 (1999).
reason and policy when invoked in support of an end subversive of this policy and will be disregarded
by the courts.
Piercing doctrine is meant to prevent fraud, and cannot be employed when the net
result would be to perpetrate fraud or a wrong. Gregorio Araneta, Inc. v. Tuason de
Paterno and
A subsidiary Vidal, 91
company Phil.is786
which (1952).
created merely as an agent for the latter may sometimes
be regarded as identical with the parent corporation especially if the stockholders or officers
of the twoThe theory of corporate
corporations entity was
are substantially not
the same meant to promote
or their systems unfair objectives
of operation or
unified. The
otherwise,
facts showed thatnortheyto had
shield
one them. Villanuevaone
management, v. Adre, 172
payroll SCRA 876
prepared by (1989).
the same person,
laborers were interchangeable, there is only one entity as shown by the signboard ad in
(d) Basis
trucks, packagesMust andBe Clear Evidence:
delivery forms and To disregard
the samethe separate
place juridical personality of a
of business.
corporation, it is elementary that the wrongdoing cannot be presumed and must be
clearly and convincingly established. The organization of the corporation at the time
Thewhen
attemptthe relationship
to make thebetweentwo factoriesthe landowner
appear asand twothe developer
separate were still
businesses whencordial cannot
in reality
theybeareused as a basis
but one, is but to hold the
a device tocorporation
defeat the ends liableoflater
the onlawfor
and the obligations
should not beofpermitted
the to
landowner to the developer under the mere allegation that the corporation is being used
prevail.
to evade the performance of obligation by one of its major stockholders. Luxuria
Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999).
WHY PIERCE? So that La Campana cannot evade the jurisdiction of CIR since La Campana Gawgaw
has only 14 employees and only 5 are members of Kaisahan.
The mere assertion by a Filipino litigant against the existence of a tandem
between two Japanese corporations cannot be the basis for piercing, which can only be
CONTRASTINGappliedTHE TWO by CASES
showing wrongdoing by clear and convincing evidence. Marubeni Corp. v.
Lirag, 362 SCRA 620 (2001).
Q: Why did the court not also pierce Indophil Acrylic and declare that it is a mere alter ego of Indophil
when in fact the same circumstances
To disregard in La juridical
the separate Campana exist?
personality of a corporation, the wrongdoing must
A: It may seembe that the facts
clearly and circumstances
and convincingly are nearly
established. the same
It cannot between In
be presumed. the two
this cases
case, thebut the
Court
remedies are different.
finds thatLa theCampana
Remington sought
failed thetoprotection
discharge of itsseparate
burden ofjuridical
provingpersonality
bad faith on sothe
as it
part
may not fall under the jurisdiction
of Marinduque Mining of and
the CIR, there being
its transferees inathe
clear intent toand
mortgage be foreclosure
excused from the subject
of the
coverage of Labor Laws which
properties conferred
to justify the CIRs
the piercing jurisdiction
of the corporateover veil.the
DBP issue at hand.
v. Court Although
of Appeals, there
363 SCRA
was no intent to 307defraud,
(2001).the creation of La Campana Coffee Factory was meant to excuse itself from
CIR jurisdiction. However, in Indophil the facts of the case show that there was no clear showing that
Indophil meant to use Acrylic as a means of circumventing Labor Laws. Altough the CBA between
The party
Indophil and its union providesseeking
that for
anythe piercing of
expansion of Indophils
the corporate veil haswould
operations the burden
also beofcovered
presenting by
the CBA, Acrylic clear
is an and convincing
altogether evidence
different to justify
business. Whattheshowed
setting that
asidethere
of thewasseparate
no intentcorporate
by
personality
Indophil or Acrylic rule. PNB
to circumvent v. Andrada
labor laws is when Electric & Engineering
Acrylic entered into Co., 381 with
a CBA SCRAits244 own (2002).
employees. There was clear independence of action between the relation of Indophil and Acrylic as to
Application of
their respective employees, theconstituting
each doctrine of piercing the corporate
its own bargaining unit.veil should be done with caution.
A court should be mindful of the milieu where it is to be applied. It must be certain that
the corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. The wrongdoing must be clearly
and convincingly established; it cannot be presumed. Otherwise, an injustice that was
Q: Could Indophil be considered as have superseded La Campana?
never unintended may result from an erroneous application. PNB v. Andrada Electric &
A: CLV pointed out that were no mention of La Campana in the ruling in Indophil whether in support
Engineering Co., 381 SCRA 244 (2002).
or in contravention of this doctrine. It can be seen that actually there are no points where Indophil
had substantially changed the ruling in La Campana. La Campana, in fact is being cited in cases
decided by(e) the
NotSCApplicable
after Indophil, in the same
to Theorizing: way that
Piercing Indophil
of the veil ofcontinues
corporatetofictionbe cited. The
is not criteria
allowed
that when it when
is established that under
it is resorted between two corporations
a theory of co-ownership whichtohave one
justify set of managers
continued use and or board
of directors; possession
that there is bya stockholders
common stock of ownership of both corporations;
corporate properties. aBoyer-Roxas similarity
v. Court of of
keeping
Appeals,
corporate books and in470
211 SCRA conducting
(1992). their businesses are mere probative factors that are to be
considered when the corporate mask may be lifted and the corporate veil pierced. It does not mean
that if these factors exist, piercing is automatically required. There is for one no hard and fast rule
The piercing doctrine is an equitable remedy available only to persons outside the
that can be laid down. So that in La Campana, the factors weighed heavily for piercing and in
corporation. It cannot be availed of stockholders within the corporation forming part of the
Indophil, against piercing.
corporation. In comparison, CLV uses the Story of the Wall. This wall is the main doctrine,
designed both to protect the stockholders by virtue of the attribute of limited liability and to
hide from prying eyes the inner workings of the corporation. Stockholders are inside these
walls. Piercing the veil of corporate fiction is like a battering ram that creates a hole through
this wall to allow third persons to look into the corporation to see if there is a wrong
committed inside those walls. A stockholder being inside the fort are afforded other remedies,
they have intra-corporate remedies to avail of.

The piercing doctrine cannot be availed of to dislodge from SECs jurisdiction a

petition for suspension of payments filed under P.D. 902-A, on the ground that the
petitioning individuals should be treated as the real petitioners to the exclusion of the
petitioning corporate debtor. The doctrine of piercing the veil of corporate fiction
heavily relied upon by the petitioner is entirely misplaced, as said doctrine only applies
when such corporate fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime. Union Bank v. Court of Appeals, 290 SCRA 198 (1998).

(f) Applicable to Third-Parties:

That respondents are not stockholders of the sister corporations does not make
them non-parties to this case, since it is alleged that the sister corporations are mere
alter egos of the directors-petitioners, and that the sister corporations acquired the
properties sought to be reconveyed to FGSRC in violation of directors-petitioners
fiduciary duty to FGSRC. The notion of corporate entity will be pierced and the
individuals composing it will be treated as identical if the corporate entity is being used
as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego,
an adjunct, or a business conduit for the sole benefit of the stockholders. aGochan v.
Young, 354 SCRA 207 (2001).

(g) Piercing is a power belonging to the court and cannot be assumed improvidently by a
sheriff (?). Cruz v. Dalisay, 152 SCRA 482 (1987).

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

(a) Application of the doctrine to a particular case does not deny the corporation of legal
personality for any and all purposes, but only for the particular transaction or instance,
or the particular obligation for which the doctrine was applied. Koppel (Phil.) Inc. v.
Yatco, 77 Phil. 496 (1946); Tantoco v. Kaisahan ng Mga Manggagawa sa La Campana,
106 Phil. 198 (1959); Francisco v. Mejia, 362 SCRA 738 (2001).

(b) Classification of Piercing Cases:

Rundown on Piercing Application: This Court pierced the corporate veil to ward
off a judgment credit, to avoid inclusion of corporate assets as part of the estate of the
decedent, to escape liability arising for a debt, or to perpetuate fraud and/or confuse
legitimate issues either to promote or to shield unfair objectives to cover up an
otherwise blatant violation of the prohibition against forum shopping. Only is these and
similar instances may the veil be pierced and disregarded. PNB v. Andrada Electric &
Engineering Co., 381 SCRA 244 (2002).

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

(ii) Alter-ego Piercing: When corporate entity merely a farce since the corporation
is merely the alter ego, business conduit, or instrumentality of
a person or another entity

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

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

4. Fraud Cases:

When the legal fiction of the separate corporate personality is abused, such as when the
same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the
corporate veil. aFrancisco v. Mejia, 362 SCRA 738 (2001).

In accordance with the foregoing rule, this Court has disregarded the separate
 Revised Bagtas Reviewer by Ve and Ocfe 2A47
personality of the corporation were the corporate entity was used to escape liability to third
parties. In this case, however, we do not find any fraud on the part of the Marinduque
Mining and its transferees to warrant the piercing of the corporate veil. DBP v. Court of
Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001).

a) Acts by Controlling Shareholder: Where a stockholder, who has absolute control

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

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

Where the corporation is used as a means to appropriate a property by fraud which

property was later resold to the controlling stockholders, then piercing should be
allowed. Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000).

(b) Avoidance of Taxes: The plea to pierce the veil of corporate fiction on the allegation
that the corporations true purpose is to avoid payment by the incorporating spouses of
the estate taxes on the properties transferred to the corporations: With regard to
their claim that Ellice and Margo were meant to be used as mere tools for the
avoidance of estate taxes, suffice it to say that the legal right of a taxpayer to reduce
the amount of what otherwise could be his taxes or altogether avoid them, by means
which the law permits, cannot be doubted. Gala v. Ellice Agro-Industrial Corp., 418
SCRA 431 (2003).

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

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

When used to avoid a contractual commitment against non-competition. aVilla Rey

Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).

(e) Avoiding Legal Restrictions:

The corporate veil cannot be used to shield an otherwise blatant violation of the
prohibition against forum-shopping. Shareholders, whether suing as the majority in
direct actions or as the minority in a derivative suit, cannot be allowed to trifle with
court processes, particularly where the corporation itself has not been remiss in
vigorously prosecuting or defending corporate causes and in using and applying
remedies available to it. First Philippine International Bank v. Court of Appeals, 252
SCRA 259 (1996).

(d) Parent-Subsidiary Relations; Affiliates: (Commissioner of Internal Revenue

v. Norton and Harrison, 11 SCRA 704, [1954]; Tomas Lao Construction v. NLRC, 278
SCRA 716 [1997]).

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

A: In cases of parent-subsidiary relations, it is necessary that the factual circumstances be
considered in order to distinguish between a case of fraud or alter ego. There may be an
inordinate showing of alter ego elements but that does not necessarily make it an alter ego
case. Therefore, alter ego in fraud cases must be distinguished from pure alter ego. In fraud
cases, the alter ego concept pertains to employing the corporation even for a single
transaction to do evil while in pure alter ego cases, the courts go into systematic findings of
utter disregard and disrespect of the separate juridical personality of the corporation.

(e) Guiding Principles in Fraud Cases:

4Why is there inordinate showing of alter-ego elements? 3

There must have been fraud or an evil motive in the affected

transaction, and the mere proof of control of the corporation by
itself would not authorize piercing; and

The main action should seek for the enforcement of pecuniary

claims pertaining to the corporation against corporate officers or
stockholders.

5. Alter-Ego Cases:

(a) Factual Basis: The question of whether a corporation is a mere alter ego is a purely
one of fact, and the burden is on the party who alleges it. PNB v. Andrada Electric &
Engineering Co., 381 SCRA 244 (2002); MR Holdings,Ltd. V. Bajar, 380 SCRA 617
(2002); Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); Concept Builders, Inc.
v. NLRC, 257 SCRA 149 (1996).

(b) Using Corporation as Conduit or Alter Ego:

Where the capital stock is owned by one person and it functions only for the benefit
of such individual owner, the corporation and the individual should be deemed the
same. aArnold v. Willets and Patterson, Ltd., 44 Phil. 634 (1923).

When corporation is merely an adjunct, business conduit or alter ego of another

corporation, the fiction of separate and distinct corporation entities should be
disregarded. Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988).

Where a debtor registers his residence to a family corporation in exchange of

shares of stock and continues to live therein, then the separate juridical personality
may be disregarded. PBCom v. CA, 195 SCRA 567 (1991).

Neither has it been alleged or proven that Merryland is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency
conduit or adjunct of Cardale. Even assuming that the businesses of Cardale and
Merryland are interrelated, this alone is not justification for disregarding their separate
personalities, absent any showing that Merryland was purposely used as a shield to
defraud creditors and third persons of their rights. Francisco v. Mejia, 362 SCRA 738
(2001).

Use of nominees to man the corporation for the benefit of the controlling
stockholder. Marvel Building v. David, 9 Phil. 376 (1951).

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

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

Where two business enterprises are owned, conducted, and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third persons,
disregard the legal fiction that two corporations are distinct entities and treat them as
identical. Sibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992).

Where corporate fiction was used to perpetrate social injustice or as a vehicle to

evade obligations or confuse the legitimate issues (as in this case where the actions of
management of the two corporations created confusion as to the proper employer of
claimants), it would be discarded and the two corporations would be merged as one.
Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).

Mixing of personal accounts with corporate bank deposit accounts. Ramirez

 Revised Bagtas Reviewer by Ve and Ocfe 2A 49
Telephone Corp. v. Bank of America, 29 SCRA 191 (1969).

(d) Avoidance of taxes: aYutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160
(1961); Liddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961).

YUTIVO & SONS INC. v CTA

Facts:
Yutivo is a domestic corporation engaged in the importation and sale of hardware supplies and
equipment. It bought a number of cars and trucks from General Motors Overseas Corporation. GM
paid sales tax on original sales on the basis of its selling price to Yutivo. Yutivo paid no further tax on
its sales to the public. Southern Motors was then organized to engage in the business of selling cars,
trucks, and spare parts with capital stock of 10,000 shares, 2,500 of which were subscribed in equal
proportion by the children of Yutivos incorporators. Under this set-up, Yutivo would purchase the
cars and tucks from GM then sell the same to SM which in turn sold them to the general public. Then
GM withdrew its operations from the Philippines. Yutivo took over the importation of trucks and cars.
It likewise continued to have the previous arrangement of selling exclusively to SM which in turn paid
no such sales tax on its sales to the general public. The CIR made an assessment upon Yutivo and
demanded a sum representing deficiency sales tax plus surcharges claiming that the taxable sales
were the retail sales should be between SM to the general public and not the sale at wholesale made
by Yutivo to SM since the two were one and the same corporation, SM being a mere subsidiary of
Yutivo. CTA affirmed such a ruling and further stated that there was no legitimate purpose in the
organization of SM apparently organized to evade the payment of taxes and that it was owned
and controlled by Yutivo and is a mere branch, adjunct, conduit, instrumentality or alter ego of
Yutivo.

Issue: WON SM is a mere alter ego of Yutivo meant to defraud government of lawful tax revenues?

Held:

SM was not organized for the purpose of defrauding the government of lawful tax revenues because:

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

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

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

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

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

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

Q: Can tax avoidance not be considered as a crime thus perpetuated in fraud rather than an alter
ego case?A: The Court had in this case ruled as to the legitimacy of a
corporation to act as to seek means to decrease its tax liability. The difference between Yutivo and
Tan Boon Kong is that in the latter, the court found evidence that Tan Boon Kong acted beyond the
scope of his authority. In the former, evidence was seen to be insufficient as to establish a willful
desire to evade taxes.
 Revised Bagtas Reviewer by Ve and Ocfe 2A 51
to be bound by the separate juridical entity;
(e) Thinly-capitalized corporations: aMcConnel v. CA, 1 SCRA 722 (1961).
Piercing in alter ego cases may prevail even when no monetary
The fact that a corporation has no adequate capital enough basis for piercing. Such
claims
pronouncement limits the advantage of are sought
creating to be enforced
a corporation. Foragainst theinstockholders
example, cases whereor
leveraging is undertaken which isofficers of theascorporation.
considered a legitimate business practice.

(f) Parent-subsidiary;
(i) Distinction BetweenAffiliated Companies:
Fraud Piercing Koppel (Phil.),
and Alter-ego Inc.aLipat
Piercing: v. Yatco, 77 Phil. 97
v. Pacific
(1946); PHIVIDEC v. Court of Appeals,
Banking Corp., 402 SCRA 339 (2003). 181 SCRA 669 (1990).

The person who invokes the doctrine must always be the injured party.
6. Equity Cases:
Absence of proof that control over a corporation is being used by a mother
(a) When usedtotocommit
company confusefraud
legitimate issues.
or wrong, Telephone
there would beEngineering
no basis to and Service
disregard Co., Inc.
their
V.separate
WCC, 104 SCRA 354
juridical (1981).
personalities. Ramoso v. Court of Appeals, 347 SCRA 463 (2000);
Guatson Intl Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990).
(b) When used to raise technicalities. Emilio Cano Ent. v. CIR, 13 SCRA 291 (1965).
If used to perform legitimate functions, a subsidiarys separate existence shall be
7. Due Process Clause
respected, and the liability of the parent corporation as well as the subsidiary will be
confined to those arising in their respective businesses. Even when the parent
(a) Need to bringagreed
corporation a new to
case
theagainst
terms tothe officer.aaPadilla
support standbyv.credit
Courtagreement
of Appeals,in370 SCRA
favor of the
208 (2001); McConnel v. Court of Appeals, 1 SCRA 723 (1961).
subsidiary, does not mean that its personality has merged with that of the subsidiary.
MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).
A suit against individual shareholders in a corporation is not a suit against the
corporation. Failure to implead the corporations as defendants and merely annexing a
(g) Summary
list of suchofcorporations
Probative Factors:
to the aConcept
complaints Builders, Inc. v.of
is a violation NLRC, 257 SCRA
due process for149
it would in
(1996);
effectPNB v. Ritratto Group,
be disregarding Inc., 362
their distinct SCRA
and 216 (2001);
separate Velarde
personality v. Lopez,
without 419 SCRA
a hearing. PCGG
422v. (2004).
Sandiganbayan, 365 SCRA 538 (2001).

CONCEPT BUILDERS Inc. v NLRC

Although both lower courts found sufficient basis for the conclusion that PKA and
Phoenix Omega were one and the same, and the former is merely a conduit of the
Facts:
other the Supreme Court held void the application of a writ of execution on a judgment
Concept Buildersheld only against
is engaged in thePKA, since the business.
construction RTC obtained no jurisdiction
Private respondentsover are the person by
employed of the
Phoenix
company as laborers, Omega which
carpenters was never
and riggers. summoned
In November of as formal
1981, partyrespondents
private to the case.were
The general
served
individual noticesprinciple is that no
of termination by person shall beIt affected
the company. by any
stated that theirproceedings
contract had toalready
which he is a
expired.
stranger,
The NLRC discovered that and strangers
the project forto a case
which theyarewere
not bound by the
hired was not judgment renderedInbyaddition
yet even finished. the
court.
to this, Concept had to Padilla v. Court of Appeals,
hire subcontractors whose 370worksSCRA
are 208 (2001).
the same as private respondents. A writ
of execution was issued which was partially satisfied through the garnishment of money from MWSS
which is a debtor of Concept and the balance was to be collected from Concept directly. But the
(b) When corporate officers are sued in their official capacity when the corporation was
sheriff reported that when the writ was to be served the guard on duty refused it on the ground that
not made a party, the corporation is not denied due process. Emilio Cano Enterprises
Concept no longer owned the premises and was now occupied by Hydro Pipes, which had the same
v. CIR, 13 SCRA 291 (1965).
Board of Directors as Concept.
(c) Provided that evidential basis has been adduced during trial to apply the piercing
doctrine. aJacinto v. Court of Appeals, 198 SCRA 211 (1991); Arcilla v. Court of
Held:
Appeals, 215 SCRA 120 (1992).
The veil may be pierced when it its just the alter ego of a person of another corporation.

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

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

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

(h) Guiding Principles in Alter-Ego Cases:

Doctrine applies even in the absence of evil intent, because of
the direct violation of a central corporate law principle of
separating ownership from management;

Doctrine in such cased is based on estoppel: if stockholders do

not respect the separate entity, others cannot also be expected
V. xCLASSIFICATIONS OF CORPORATIONS

1. In Relation to the State:

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

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

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

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

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

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

A corporation is created by operation of law under the Corporation Code while a

government corporation is normally created by special law referred to often as a charter.
Bliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271 (1994).

The test to determine whether a corporation is government owned or controlled, or

private in nature is simple. Is it created by its own charter for the exercise of a public
function, or by incorporation under the general corporation law? Those with special
charters are government corporations subject to its provisions, and its employees are
under the jurisdiction of the Civil Service Commission, and are compulsory members of
the GSIS. Camparedondo v. NLRC, 312 SCRA 47 (1999)

While public benefit and public welfare may be attributable to the operation of the
Bases Conversion and Development Authority (BCDA), yet it is certain that the functions it
performs are basically proprietary in naturethe promotion of economic and social
development of Central Luzon, particularly, and the countrys goal for enhancement.
Therefore, the rule that prescription does not run against the State will not apply to BCDA,
it being said that when title of the Republic has been divested, its grantees, although
artificial bodies of its own creation, are in the same category as ordinary persons.
Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001).

Although Boy Scouts of the Philippines does not receive any monetary or financial
subsidy from the Government, and its funds and assets are not considered government in
nature and not subject to audit by the COA, the fact that it received a special charter from
the government, that its governing board are appointed by the Government, and that its
purpose are of public character, for they pertain to the educational, civic and social
development of the youth which constitute a very substantial and important part of the
nation, it is not a public corporation in the same sense that municipal corporation or local
governments are public corporation since its does not govern a portion of the state, but it
 Revised Bagtas Reviewer by Ve and Ocfe 2A53
also does not have proprietary functions in the same sense that the functions or activities
of government-owned or controlled corporations, is may still be considered as such, or
under the 1987 Administrative Code as an instrumentality of the Government, and it
employees are subject to the Civil Service Law. Boy Scouts of the Philippines v. NLRC, 196
SCRA 176 (1991).

But being a GOCC makes it liable for laws and provisions applicable to the Government
or its entities and subject to the control of the Government. Cervantes v. Auditor General,
91 Phil. 359 (1952).

Beyond cavil, a GOCC has a personality of its own, distinct and separate from that of
the government, and the intervention in a transaction of the Office of the President
through the Executive Secretary does not change the independent existence of a
government entity as it deals with another government entity. PUP v. Court of Appeals,
368 SCRA 691 (2001).

The doctrine that employees of GOCCs, whether created by special law or formed as
subsidiaries under the general corporation law are governed by the Civil Service Law and
not by the Labor Code, has been supplanted by the 1987 Constitution. The present
doctrine in determining whether a GOCC is subject to the Civil Service Law is the manner
of its creation, such that government corporations created by special charter are subject
the Civil Service Law, while those incorporated under the general corporation law are
governed by the Labor Code. PNOC-Energy Development Corp. v. NLRC, 201 SCRA 487
(1991); Davao City Water District v. Civil Service Commission, 201 SCRA 593 (1991).

Section 31 of Corporation Code (Liability of Directors and Officers) is applicable to

corporations which have been organized by special charters since Sec. 4 of Corporation
Code renders the provisions supplementarily applicable to all corporations, including those
with special or individual charters, such as cooperatives organized under P.D. 269, so long
as those provisions are not inconsistent with such charters. Benguet Electric Cooperative,
Inc. v. NLRC, 209 SCRA 55 (1992).

Water districts can validly exists as corporate entities under PD 198, and provided they
are government-owned or controlled, and their board of directors and other personnel are
government employees subject to civil service laws and anti-graft laws. Feliciano v.
Commission on Audit, 419 SCRA 363 (2004).

2. As to Place of Incorporation:
(a) Domestic Corporation
- incorporated in the Philippines

(b) Foreign Corporation (Sec. 123)

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

- incorporated in another country and that country grants the same rights to Filipinos in
terms of doing business there; it shall have the right to transact business in the Philippines
after it shall have obtained a license to transact business in this country in accordance
with this code & a certificate of authority from the appropriate government agency ( SEC
license after obtaining BOI certificate )

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

Religious corporations shall be governed by this Chapter and by the

general provisions on non-stock corporations insofar as they may be
applicable.

Section 116. Religious societies. - Any religious society or religious

order, or any diocese, synod, or district organization of any religious
denomination, sect or church, unless forbidden by the constitution,
rules, regulations, or discipline of the religious denomination, sect or
church of which it is a part, or by competent authority, may, upon
written consent and/or by an affirmative vote at a meeting called for
the purpose of at least two-thirds (2/3) of its membership, incorporate
for the administration of its temporalities or for the management of its
affairs, properties and estate by filing with the Securities and Exchange
Commission, articles of incorporation verified by the affidavit of the
presiding elder, secretary, or clerk or other member of such religious
society or religious order, or diocese, synod, or district organization of
the religious denomination, sect or church, setting forth the following:

1. That the religious society or religious order, or diocese, synod, or

district organization is a religious organization of a religious
denomination, sect or church;

2. That at least two-thirds (2/3) of its membership have given their

written consent or have voted to incorporate, at a duly convened
meeting of the body;

3. That the incorporation of the religious society or religious order, or

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

4. That the religious society or religious order, or diocese, synod, or

district organization desires to incorporate for the administration of its
affairs, properties and estate;

5. The place where the principal office of the corporation is to be

established and located, which place must be within the Philippines;
and

The names, nationalities, and residences of the trustees elected by

the religious society or religious order, or the diocese, synod, or district
organization to serve for the first year or such other period as may be
prescribed by the laws of the religious society or religious order, or of
the diocese, synod, or district organization, the board of trustees to be
not less than five (5) nor more than fifteen (15). (160a)

Since in matters purely ecclesiastical the decisions of the proper church tribunals are
conclusive upon the civil tribunals, then a church member who is expelled from the
membership by the church authorities, or a priest or minister who is by them deprived of his
sacred office, is without remedy in the civil courts. Long v. Basa, 366 SCRA 113 (2001).
 Revised Bagtas Reviewer by Ve and Ocfe 2A 55
(c) Educational Corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)

Section 106. Incorporation. - Educational corporations shall be

governed by special laws and by the general provisions of this Code.
(n)

Section 107. Pre-requisites to incorporation. - Except upon favorable

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

Section 108. Board of trustees. - Trustees of educational institutions

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

Unless otherwise provided in the articles of incorporation on the by-

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

For institutions organized as stock corporations, the number and

term of directors shall be governed by the provisions on stock
corporations. (169a)

(d) Charitable, Scientific or Vocational Corporations

(e) Business Corporation

4. As to Number of Members:
(a) Aggregate Corporation
(b) Corporation Sole (Secs. 110 to 115; Roman Catholic Apostolic Administrator of Davao,
Inc. v. LRC and the Register of Deeds of Davao City, 102 Phil. 596 [1957]).

Section 110. Corporation sole. - For the purpose of administering and

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

Section 111. Articles of incorporation. - In order to become a

corporation sole, the chief archbishop, bishop, priest, minister, rabbi or
presiding elder of any religious denomination, sect or church must file
with the Securities and Exchange Commission articles of incorporation
setting forth the following:

1. That he is the chief archbishop, bishop, priest, minister, rabbi or

presiding elder of his religious denomination, sect or church and that
he desires to become a corporation sole;

2. That the rules, regulations and discipline of his religious

denomination, sect or church are not inconsistent with his becoming a
corporation sole and do not forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi or
presiding elder, he is charged with the administration of the
temporalities and the management of the affairs, estate and properties
of his religious denomination, sect or church within his territorial
jurisdiction, describing such territorial jurisdiction;

4. The manner in which any vacancy occurring in the office of chief

archbishop, bishop, priest, minister, rabbi of presiding elder is required
to be filled, according to the rules, regulations or discipline of the
religious denomination, sect or church to which he belongs; and

5. The place where the principal office of the corporation sole is to be

established and located, which place must be within the Philippines.

The articles of incorporation may include any other provision not

contrary to law for the regulation of the affairs of the corporation. (n)

Section 112. Submission of the articles of incorporation. - The articles

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

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

Section 113. Acquisition and alienation of property. - Any corporation

sole may purchase and hold real estate and personal property for its
church, charitable, benevolent or educational purposes, and may
receive bequests or gifts for such purposes. Such corporation may sell
or mortgage real property held by it by obtaining an order for that
purpose from the Court of First Instance of the province where the
property is situated upon proof made to the satisfaction of the court
that notice of the application for leave to sell or mortgage has been
given by publication or otherwise in such manner and for such time as
said court may have directed, and that it is to the interest of the
corporation that leave to sell or mortgage should be granted. The
application for leave to sell or mortgage must be made by petition,
duly verified, by the chief archbishop, bishop, priest, minister, rabbi or
presiding elder acting as corporation sole, and may be opposed by any
member of the religious denomination, sect or church represented by
the corporation sole: Provided, That in cases where the rules,
regulations and discipline of the religious denomination, sect or church,
religious society or order concerned represented by such corporation
sole regulate the method of acquiring, holding, selling and mortgaging
real estate and personal property, such rules, regulations and
discipline shall control, and the intervention of the courts shall not be
necessary. (159a)
 Revised Bagtas Reviewer by Ve and Ocfe 2A 57
Section 114. Filling
Section 21. Corporationof vacancies.
by estoppel. - The successors
- All persons whoin office of any
assume to chief
act
archbishop, bishop,
as a corporation priest,itminister,
knowing rabbi authority
to be without or presiding
to doelder in a be
so shall
corporation sole shall
liable as general become
partners the
for all corporation
debts, sole
liabilities andondamages
their accession
incurred
to
or office
arisingand shall
as a be thereof:
result permitted to transact
Provided, business
however, Thataswhen
suchany
on the
such
filing with the
ostensible Securities
corporation is and
suedExchange Commission
on any transaction of a copy
entered by itofastheir
a
commission,
corporation or certificate
on any tortof election,
committed or by
letters
it as of appointment,
such, it shall notduly
be
certified
allowed to byuse
anyas notary public.
a defense its lack of corporate personality.

During
On whoany vacancy
assumes an in the office
obligation toof
anchief archbishop,
ostensible bishop,as
corporation priest,
such,
minister, rabbi
cannot resist or presidingthereof
performance elder ofon
any
thereligious
ground denomination,
that there was sect or
in fact
church
no incorporated as a corporation sole, the person or persons
corporation.
authorized and empowered by the rules, regulations or discipline of the
religious denomination, sect or church represented by the corporation
Q. Why is there piercing in a de facto
sole to administer thecorporation?
temporalities and manage the affairs, estate and
A. Piercing is allowed because
properties thecorporation
of the intention ofsole
the during
law is to protect
the theshall
vacancy contracts entered
exercise all into by the
corporation. the powers and authority of the corporation sole during such vacancy.
(158a)

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

Section 115. Dissolution. - A corporation sole may be dissolved and its
Sec. 3 Classes
affairs of Corporation
settled Corporations
voluntarily formed
by submitting orSecurities
to the organizedand
under this Code may be
Exchange
stock or Commission
non-stock corporations. Corporations
a verified declaration which have capital stock divided into shares
of dissolution.
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
The declaration
are non-stock of dissolution shall set forth:
corporations.

1. The name of the corporation;

Sec. 5 Corporations and incorporators, stockholders and members Corporators are those
who compose
2. Theareason
corporation, whetherand
for dissolution as stockholders
winding up; or as members. Incorporators are those
stockholders or members mentioned in the articles of incorporation as originally forming and
composing the corporation and who are signatories thereof.
3. The authorization for the dissolution of the corporation by the
particular religious denomination, sect or church;
Corporators in a non-stock corporation are called stockholders or shareholders. Corporators in
a non-stock corporation
4. The names and areaddresses
called members.
of the persons who are to supervise the
(a) Stockwinding
Corporation
up of the affairs of the corporation.
(b) Non-Stock Corporation
Upon approval of such declaration of dissolution by the Securities and
Exchange Commission, the corporation shall cease to carry on its
operations except for the purpose of winding up its affairs.

The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982) and Republic v. Iglesia ni
Cristo, 127 SCRA 687 (1984), that a corporation sole is disqualified to acquire/hold
alienable lands of the public domain, because of the constitutional prohibition qualifying
only individuals to acquire land and the provision under the Public Land Act which applied
only to Filipino citizens or natural persons, has been expressly overturned in Director of
Land v. IAC, 146 SCRA 509 (1986).3

5. As to Legal Status:

(a) De Jure Corporation

(b) De Facto Corporation (Sec. 20)

Section 20. De facto corporations. - The due incorporation of any

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

(c) Corporation by Estoppel (Sec. 21)

3Overturning affirmed in Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984); Republic v. IAC, 168
SCRA 165 (1988).
 Revised Bagtas Reviewer by Ve and Ocfe 2A 59

VI. CORPORATE CONTRACT LAW

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

INTRODUCTION: Corporate Contract Law contracts shaped by corporate law.

Form v. substance substance prevails

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

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

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

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

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

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

1. Pre-Incorporation Contracts

(a) Who Are Promoters?

Promoter is a person who, acting alone or with others, takes initiative in founding and
organizing the business or enterprise of the issuer and receives consideration therefor.
(Sec. 3.10, Securities Regulation Code [R.A. 8799])

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

Q: At the promoters stage there is no juridical personality until the SEC issues the certificate of
incorporation. Until the certificate is issued, the stage of the de facto corporation has not yet
been reached. Prior to the de facto corporation stage what then is the status of the contract
entered into by a promoter for and in behalf of the person or agent who had undertaken the
transaction?
A: Unenforceable. It is not binding upon the corporation because it has not given consent to the
authority of the person or agent who had undertaken the transaction.
 Q: How can ratification be done?
A: Ratification can be done in two ways: (1) express ratification a mere board resolution
making the corporation liable by accepting the contract and (2) implied ratification by
accepting of benefits

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

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

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

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

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

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

CAGAYAN FISHING DEVELOPMENT CO. INC. v. TEODORO SANDIKO

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

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

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

1.) A corporation should have full and complete organization and existence as an entity before it can
enter into any kind of contract or transact any business. A corporation until organized has no being,
franchises or faculties nor do those engaged in bringing it into being have no power to bind it by
contract, unless so authorized by the charter.
 Revised Bagtas Reviewer by Ve and Ocfe 2A61
2.) The contract entered into was not between Tabora and the corporation instead it was between
Tabora, as owner and Tabora, wife, plus others, as promoters of a corporation, since the corporation
was still non-existent. These promoters could not have acted as agents for a projected corporation
since that which had no legal existence could have no agent. Although a corporation has no life until
organized, it does not mean that under no circumstances may the act of promoters of a corporation
be ratified by the corporation if and when subsequently organized. But said doctrine of ratification is
not applicable here.

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

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

Q: Why are we studying Cagayan?

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

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

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

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

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

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

Held: Decision affirmed.

 Revised Bagtas Reviewer by Ve and Ocfe 2A63
contract (just as an ordinary
Under the law, before any CPC may stockholder
be granted, after a corporation
three has already
requisites must been(1)
be present: incorporated
citizen of the
cannotorbethe
Philippines held
USliable for more that
or a corporation, beyond his investment).
co-partnership, association or joint-stock co. constituted and
CLV: Remember
organized underthat once of
the laws a corporation is formed,
the Philippines, 60% atitleast
usually follows
of the stockthat all promoters
or paid up capital contracts
of which get
ratified
belongsbecause thecitizens
entirely to corporation
of theactually arises
Philippines or out
the of
US;these contracts.capable
(2) financially The corporation usuallythe
of undertaking has no
choice.
service; (3) prove that the operation of the public service proposed will promote public interest. is
It rarely rejects the contracts for such would be commercial suicide. Once the corporation
formed, the promoters contract of the corporation (if the latter accepts) and not the promoters. This
is why the promoter, once the corporation accepts, escapes liability. Remember that a promoter in a
Petitioner
promoterscontend
contractthat until
signs nota in
corporation
his own namehas come into being,
but always for andbyinthe issuance
behalf of theofcorporation.
a certificate of
incorporation by the SEC, it cannot enter into any contract as a corporation and that its application
was null and void for being done prior to said issuance.
Q: What are the three theories in pre-incorporation contracts?
Its contention that Morong Electric, at the moment of application and grant of franchise did not yet
have a legal
Theory personalitysince
#1 Therefore, is correct. The legal
a promoters existence
contract of Morong
is really Electric began
the promoters own, upon issuance
the only reasonofwhy
the
certificate of incorporation
the corporation, before said
once it is organized time, the
becomes incorporators
liable is when the cannot be considered
corporation adopts itasasde itsfacto
own. The
corporation.real contract theory is one of the three theories by which to validate a contract prior to
promoters
incorporation.
But the fact that Morong Electric at the moment of the application and grant of franchise was
granted#2
Theory does not2render
The nd theorytheasfranchise
adopted invalid because Morong
by Jurisprudence is whatlater obtained
is termed as aitscontinuing
certificateoffer.
of The
incorporation
continuing and
offer accepted
that exists asthetofranchise
the time in of accordance
the issuancewith thecertificate
of the terms andof conditions thereof.
incorporation. AndWhile
if it
a franchise
is accepted,cannot
then thetake effect
offer meansuntilthe
theacceptance,
grantee corporation
and thereisarises
organized, the franchise, may,
a contract.
nevertheless be applied for before the company is fully organized.
Theory #3 Once the promoter enters into a contract for and in behalf of a non-existent principal,
the
The promoter becomes
incorporation personally
of Morong and itsliable like an agent
acceptance of thewho acts without
franchise as shownauthority from the
by its action principal.
in prosecuting
The contract entered
the application intothe
filed with then is valid
PSC for theunless the agent
approval of saidacted without
franchise, notauthority. But it is
only perfected a possible
contract for
the contract
between the to be adopted
Municipality ofby the principal
Morong and Morongby accepting
Electric. it.

In allThe
CLV: threetheory
instances,
used here
therebyis the
deemed
SC totovalidate
be a valid
the contract
contract of is the
a valid
continuing
offer. Thatoffer
is theory.
the basis A grant
of theof
the franchise
promoters contract
according soto
that
thetheSC,people
prior towill
thebetime
willing
thattothe
riskcorporation
without much actually
fear,existed
investingis like
theira
conditional
money into grant
a venture
that prior
will be
toeffective
the incorporation
upon the of corporations
a company becoming
or a corporation.
a legal entity. Prior to that, it
is merely a continuing offer (on the part of the government).
Q: Promoter v. Agent
CARAM A: The
Jr. v promoters
CA are not the corporation itself, and although they may be regarded, for
certain purposes as sustaining to the corporation a relationship similar to that of an agent,
Facts:strictly
Baretto and Garcia
speaking theycontracted
cannot be the services
regarded as of plaintiff
such, thereArellano
being attothat
prepare
time anoproject
existingstudy for
the organization
principal. of Filipinas Orient Airways. For failure to pay such services, Arellano sued the
corporation,
Q: Promoter v. Baretto
Trustee and Garcia and petitioner Fermin and Rosa Caram as stockholders. They were
held solidarily is
A: A promoter liable
alsowith their co-defendants.
sometimes Hence, But
likened to a trustee. this apetition.
trustee is supposed to be entirely
disinterested, while persons engaged in promotion expect to receive and seek to obtain a liberal
award or Canson
Peitioner profit forclaims
their initiative.
that said decision finds no support because they were mere investors in the
corporation later created. They should not be held solidarily liable with the corporation, who has a
separate juridical personality.
3. De Facto Corporation (Sec. 20)
Held: Petition granted.
Sec. 20 De Facto Corporations The due incorporation of any corporation claiming in good
faith were
The services to be acquired
a corporation under
by virtue of this
the Code,
request and
of its right and
Baretto to exercise
Garcia so corporate powers,
that a report canshall
be not
representedbe inquired into collaterally
to financiers. Petitionersinare
anynot private
reallysuit to which
involved such
in the corporation
initial steps that may be aled
finally party. Such
to the
inquiry
incorporation ofmay be made
Filipinas Orient byAirways
the Solicitor
whichGeneral in a directed
were being quo warranto proceeding.
by Baretto. Petitioners were
merely among the financiers whose interest was to be invited and who were persuaded to invest in
the airline.
Every corporation is deemed de jure until proven otherwise.

There wasDeno
Jure Corporation
showing formed
that Filipinas wasin accordance with law; perfectly
a fictitious corporation and did incorporated; consequences:
not have a separate juridical
separate
personality juridical
to justify makingpersonality and perfect
the petitioner, liability.
as principal stockholders, responsible for its obligations.
As a bona fide corporation, Filipinas should alone be liable for its corporate acts as duly authorized by
Deand
its officers Facto Corporation
directors. Thus, petitioner
formed also in accordance
could not have beenwithpersonally
law but falls short
liable forofthe
thecompensation
requirements
claimed provided by law. Such is awarded a separate juridical personality, it may thus enter into
by Arellano.
contracts, it may sue and be sued (note: third parties may sue the corporation, incorporators
may sue but the corporation cannot sue). Note also that such has imperfect liability only
CLV: Thethecase triedwill
actors to distinguish participation
be held liable. of a promoter
In proceeding fromcompliance
against such, that of a promotee,
with due in a venture
process must
that actually becomes a corporation late on. Not every person, who participates in a venture that will
be had.
later become a corporation is a promoter.

TheQ:doctrine
How do ofyou
dedistinguish
facto corporation
a participation
applies of
as atopromoter
the first level
from relationship
that of a promotee
(as between
who acts
the
together
State andtocorporations)
form a corporation?
and also to the third level of relationship (as between third persons
A: The
and corporations).
promotees are
If itmerely
primarily
passive
concerns
investors.
the first
A plan
level,iswhy
given
does
to them
it draw and
itsifvitality
they like
fromit, the
they
invest.
third level?
Promoters
Because
arewithout
the active
such,participants.
transactionsTheyshallfound
haveand
no effect
they organize
but with thesuch,
corporation.
despite the
According
defects, thetocontracts
Caram only arethe
valid
promoters
and enforceable.
should beBut liable.
because
The SCof held
its primary
that a mere
relationpromotee
to the
(those
first level,
whothird
merely
persons
subscribe
cannotto question
the sharesthe
oflegal
stock) personality
should notofbesuch
helddeliable
factoforcorporation.
a promoters
 Only the State through a quo warranto proceeding may do such.

Not all corporations which lack elements are de facto corporations.

Elements for Existence of De Facto Corporation:

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

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

The above is need to prove reliance in good faith.

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

Issuance of certificate of incorporation minimum requirement under this number.

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

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

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

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

ARNOLD HALL v. PICCIO

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

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

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

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

The section on de facto corporations does not apply in this case: (1) First, Far Eastern Lumber, even
its stockholders, may not probably claim in good faith to be a corporation not having obtained the
certificate of incorporation. Thus the immunity of collateral attack granted to corporations claiming in
 Revised Bagtas Reviewer by Ve and Ocfe 2A65
good faith to be a corporation does not apply here. (2) Second, this suit is not one in which the
corporation is a party. This is a litigation between stockholders of the alleged corporation for the
purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in
a private suit for its dissolution between stockholders, without intervention of the State.

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

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

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

If the other party knows of the non-existence of the corporation there is no estoppel.

3. Corporation by Estoppel (Sec. 21; aSalvatierra v. Garlitos, 103 Phil. 757 [1958]; aAlbert v.
University Publishing Co., 13 SCRA 84 [1965]; Asia Banking Corp. v. Standard Products, 46
Phil. 145 [1924]; Madrigal Shipping Co., v. Ogilvie, 55 O.G. No. 35, p. 7331)

Sec. 21 Corporation by estoppel All persons who assume to act as a corporation knowing it to
be without authority to do shall be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided, however, that when any such ostensible
corporation is sued on any transaction entered by it as a corporation or any tort committed by it
as such, it shall not be allowed to use as a defense its lack of corporate personality.

SALVATIERRA v. GARLITOS

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

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

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

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

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

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

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

ALBERT v. UNIVERSITY PUBLISHING CO.

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

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

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

Held:

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

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

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

(a) Nature of Doctrine

Founded on principles of equity and designed to prevent injustice and unfairness, the
doctrine applies when persons assume to form a corporation and exercise corporate
 Revised Bagtas Reviewer by Ve and Ocfe 2A67
functions and enter into business relations with third persons. Where no third person is
involved in the conflict, there is no corporation by estoppel. A failed consolidation
Facts: Antoniotherefore
Chua andcannot
Peterresult
Yao onin behalf
a consolidated
of Oceancorporation
Quest Fishing by Co.
estoppel.
entered Lozano
into av. De Los with
contract
Phil. Fishing Santos, 274 SCRA
Gear Industries 452
Inc. for(1997)
the purchase of fishing nets and floats. They claimed that they
were a fishing venture with Lim Tong Lim who was however not a signatory to the contract. They
failed to pay and so PFGI
A party filed challenge
cannot a collectionthecase with a prayed
personality of thefor a writas
plaintiff of apreliminary attachment.
duly organized
The case was filed against Chua, Yao and Lim because it was found that Ocean
corporation after having acknowledged same when entering into the contract with Quest was a non-
the
existent corporation as such
plaintiff as shown by the certification
corporation from SEC. Chua
for the transportation admitted
of its liabilityOhta
merchandise. and Dev.
Yao waived
Co. v.
his right to cross-examine
Steamship Pompey,and present
49 Phil.evidence because
117 (1926). 4
he failed to appear while Lim filed a
counterclaim and a cross-claim. Court granted the writ of attachment and ordered the Auction Sale
of the F/B Lourdes which was previously attached. Trial court ruled that PFGI was entitled to the Writ
and Chua, YaoAand person who accepts
Lim were employment
jointly liable in an
as general unincorporated charitable association is
partners.
estopped from alleging its lack of juridical personality. Christian Childrens Fund v. NLRC,
174 SCRA 681 (1989).
Held:
One who deals with an organization which is not duly incorporated is not estopped to
4.) Lim was deny its corporate
contesting thatexistence
the CA ruled when thathisthere
purpose
was isa not to avoid in
partnership liability. aIntl Express
the Compromise
Agreement Travel andv. Court of Appeals,
alleges that he had 343no SCRA
direct674 (2000).
participation in the negotiations and was merely
leasing F/B Lourdes to Chua and Yao Facts found by the TC and CA showed that there was
INTERNATIONAL
a partnership EXPRESS
formed TRAVEL
by thev.three
CA of them. They initially purchased two boats through a loan
from Lims brother and as security, was placed in the name of Lim Tong Lim. The repairs and
Facts: Philippine
supplies were Football Federation
shouldered got tickets
by Chua and Yao. from petitioner
A civil case wastravelfiledagency
by Chuafor and
the SEA games and
Yao against Lim
trips tofor
China and
nullity ofBrisbane.
commercial Twodocuments,
partial payments were made.
reformation Petitioners
of contracts wrote to Kahn
and declaration (presidentof
of ownership
of the federation) demanding
fishing boatswhich wasthesettled
completion of the
amicably. In payment. Federation,
the Compromise throughitProject
Agreement, Gintong
was revealed
Alay paid
thatthe theyamount
intended of Pto
31,000.
pay the Then
loanKahn
fromissued
Jesus Lima personal
by sellingcheck
the for
boatsP 50,000.
and to After
dividethat,
among no
furtherthem
payments were made.
the excess or loss. Therefore it was clear that a partnership existed which was not solely
based on the agreement. It was merely an embodiment of the relationship among parties.
Petitioner then sued Kahn in his personal capacity and as president of the federation for the unpaid
balance for the purchased tickets as Kahn allegedly guaranteed the said obligation. Kahn maintained
that 5.)
he Lim
did not guarantee
alleges that hethe waspayment
merely abut merely
LESSOR byacted
showingas antheagent of the
Contract ofFederation
Lease and which has a
registration
separate and distinct
papers juridical
of the boats, personality.
including F/B Lourdes where the nets were found As found by the
lower courts, the boats were registered to Lim only as security for the loan that was granted
RTC: Kahn
to the is personally
partnershipliable by thebecause
brotherneither
of Lim,the travel
which was agency
not annor Kahn adduce
uncommon any evidence
practice. Aside from
provingthe thefact
corporate
that it was existence
absurdoffor the
Lim federation.
to sell theBeing
boatsthe president,
to pay the debt its he
corporate existence
did not incur, is
if needed
within he
thewasknowledge of Kahnthe
merely leasing andboats
couldto have
Chua easily denied specifically the assertions of petitioner
and Yao.
that it is a mere sports association. Voluntary unincorporated associations have no power to enter
into, or to ratify, a contract. The contract entered into by its officers or agents in behalf of the
6.) Lim contests
association his liability
is not binding by sayingagainst
or enforceable that only those who
it. Agents anddealt
officersin the name ofliable.
personally the ostensible
CA:
corporation should be held liable. His name was not in any of the contracts and never dealt
reversed.
with PFGI Sec. 21 All persons who assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for all debts, liabilities and damages
Held: RA 3135 and
incurred PD 604asrecognized
or arising the juridical
a result thereof; Provided existence
however of that
national
when sports associations.
any such ostensible The
power corporation
to adopt a constitution,
is sued, on any raise funds, acquire
transaction enteredproperty,
by it asetc. indicate that
a corporation orthe
antassociations
tort committed may
acquireby juridical
it as such,personality. However,
it shall not be allowedsuchto does
use not
as aautomatically
defense its lack takeofplace by the
corporate passage ofEven
personality. the
laws. Before a corporation
if the ostensible may acquire
corporate entity juridical
is provenpersonality, the stateamust
to be non-existent, partygive
mayits beconsent
estopped either
fromin
the form of a special
denying law or aexistence
its corporate general enabling
because act. Nowhere can it association
an unincorporated be found in has the no2 above
personality
mentioned laws any
and would provision creating
be incompetent to actthe andPhilippine
appropriate Football Federation.
for itself the power and attributes of a
corporation as provided by law. It cannot create agents or confer authority on another to act
Before onan its behalf.
entity mayThus, those whoas
be considered acta or purport
national to actassociation,
sports as its representatives
such entitydo mustso without
be recognized
by the authority
accrediting and at their ownrisk.
organizations Clearly,
Philippine Lim benefited
Amateur Athleticfrom the use(RA
Federation of the netsand
3135) found
Dept. inside
of
Youth and Sports Development (PD 604). Although a copy of the constitution of the federationthe
F/B Lourdes which was proved to be an asset of the partnership. He in fact questioned was
attachment
presented in court,because
thye same it has
doeseffectively
not proveinterfered
that it had with therecognized.
been use of the vessel.
Therefore,Thoughthe federation
is not atechnically,
national sports he did not directly
association act on
within thebehalf
purview of the corporation,
of the laws and that however,
Kahn by reaping the
is personally
benefits
responsible for of
thethe contract entered into by persons he previously had an existing relationship
obligation.
with, he is deemed part of said association and is covered by the doctrine of corporation by
estoppel.
Under the law on estoppel including that under Sec. 21 of Corporation Code, those
acting on behalf of an ostensible corporation and those benefited by it, knowing it to be
without valid existence, are held liable as general partners. aLim Tong Lim v. Philippine
Fishing Gear Industries, Inc., 317 SCRA 728 (1999).
CLV: Pioneer case actors who knew of corporations non-existence are liable as general partners
while actors who did not know are liable as limited partners, passive investors are not liable; Lim
teaches us that even passive investors should be held liable provided they benefited from such
transactions.
LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES

4The same principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil. 1 [1911] but that case
pertained to a commercial partnership which required registration in the registry under the terms of the Code of
(b) Two Levels: (i) With Fraud; and (ii) Without Fraud
Commerce).
 Revised Bagtas Reviewer by Ve and Ocfe 2A69
When the incorporators
agreement will effectively result represent themselves distribution
in the unauthorized to be officers
of of
thethe corporation
capital assets which
and
was never
property of theduly registered
corporation, with the
thereby SEC, and
violation theengage
TFD andinthe
theCorp.
nameCode,
of thesince
purported
the rescission
of a corporation
subscriptioninagreement
illegal recruitment,
is not onethey areinstances
of the estoppedwhen
from distribution
claiming that of they areassets
capital not liable
and
as corporate
property officers under
of the corporation Sec. 25 of Corporation Code which provides that all persons
is allowed.
who assume to act as a corporation knowing it to be without authority to do so shall be
liable as general partners for all the debts, liabilities and damages incurred or arising as a
result thereof. People v. Garcia, 271 SCRA 621 (1997); People v. Pineda, G.R. No. 117010,
18 April 1997 (unpub).

4. TRUST FUND DOCTRINE

Under the trust fund doctrine, the capital stock, property and other assets of the
corporation are regarded as equity in trust for the payment of the corporate creditors.
Seeof
Comm. VILLANUEVA
Internal, "The Trustv.Fund
Revenue Doctrine
Court Under
of Appeals, Philippine
301 SCRA 152 Corporate
(1999). Setting," 31
ATENEO L.J. (No. 1, Feb. 1987).
The trust fund doctrine considers the subscribed capital stock as a trust fund for the
The capital stock of the corporation especially its unpaid subscriptions is a trust fund for
payment of the debts of the corporation, to which the creditors may look for satisfaction.
the benefit of the general creditors of the corporation.
Until the liquidation of the corporation, no part of the subscribed capital stock may be
turned over or released to the stockholder (except in the redemption of the redeemable
a) Commercial/Common Law Premise: Equity versus Debts (Art. 2236, Civil Code)
shares) without violating this principle. Thus dividends must never impair the subscribed
capital stock;
Art. 2236 The subscription commitments
debtor is liable cannot bepresent
with all his property, condoned
andorfuture,
remitted; norfulfillment
for the can the of
corporation buysubject
his obligations, its owntoshares using the subscribed
the exceptions provided bycapital
law. as the consideration therefore.
NTC v. Court of Appeals, 311 SCRA 508 (1999).
b) Nature of Doctrine: aOng Yong v. Tiu, 401 SCRA 1 (2003).

ONG YONGThe requirement

v. TIU of unrestricted retained earnings to cover the shares is based on the
trust fund doctrine which means that the capital stock, property and other assets of a
Facts: In 1994, the construction
corporation of theas
are regarded Masagana
equtiy inCitimall
trust forinthe
Pasay City by
payment ofFirst Landlink
corporate Asia
creditors. The
Development Corporation
reason is that (FLADC)
creditorsowned by the Tiu are
of a corporation family was threatened
preferred by the foreclosure
over the stockholders in the by the
PNB for theirP 190 M debt.
distribution In order toassets.
of corporate stave off the can
There threat
be the Tiu family together
no distribution of assetswith the Ong
among the
family agreed to restructure
stockholders FLADC
without and
first created
paying a pre-subscription
corporate agreement
creditors. Hence, and each were
any disposition to
of corporate
maintain equal shareholdings.
funds to the prejudiceThe of Ong family invested
creditors is null anda total
void. sum
Boman of PEnvironmental
190 M to the corporation
Dev. Corp. v.
while the TiuCA,
family
167included
SCRA 540 several
(1988). real estate properties as added capital for the restructured
corporation. The Ong and Tiu families now owned 1,000,000 shares each of FLADC. After all the
debts were paid, the peace between Ong and Tiu did not last. Tiu claimed rescission based on
c) To
substantial Purchase
breach by OngOwnuponShares
the(Secs. 8, 41, 43 and
pre-subscription 122, last Ong,
agreement. paragraph;
on thePhil.
otherTrust
handCo. v.
maintained
that it wasRivera,
Tiu who44committed
Phil. 469 [1923];
the breachSteinberg
becausev. Velasco,
one of the 52properties
Phil. 953 [1929])
that they were supposed to
include in the agreement was in fact already in the real estate owned by FLADC. The SEC approved
Sec.
the rescission 8 Redeemable
(both parties wereShares
return toRedeemable
status quo, shares
P 190 Mmay be issued
to the by the
Ong family andcorporation
all the when
expressly
remaining FLADC assetsso to
provided
the Tiu in the articles
family, of incorporation.
which included the nowThey maymall
finished be purchased or taken
valued at more thanup
by the corporation upon the expiration of
P 1B) and the CA affirmed the decision with slight modifications. a fixed period, regardless of the existence of
unrestricted retained earnings in the books of the corporation, and upon such terms and
conditions as may be stated in the articles of incorporation, which terms and conditions
must also be stated in the certificate of stock representing said shares.
Held:
Sec. 41 the
1.) Is rescission Power to acquire
proper remedy ownfor shares A stock corporation
an intra-corporate dispute shall
No, thehave the powerCode,
Corporation to
purchase
SEC rules or acquire
and even its own
the Rules shares
of Court for a legitimate
provide corporate
for appropriate purpose or
and adequate purposes,
intra-corporate
including
remedies, otherbut
thannotrescission,
limited toin the followinglike
situations cases:
this.Provided,
Rescission that the corporation
is certainly not onehasof them,
unrestricted
specially retained
if the party askingearnings
for it hasinnoitslegal
books to cover the
personality shares
to do to be purchased
so (because or
it is a corporation,
acquired:
Tiu family is not(1)
thetocorporation)
eliminate fractional shares arisingof
and the requirements out oflaw
the stock dividends;
therefore have (2) to been
not collect or
met. Acompromise an indebtedness
contrary doctrine will tread on to extremely
the corporation, arising
dangerous out ofbecause
ground unpaid subscription, in a
it will allow just
delinquencyfor
any stockholder, sale,
justand
aboutto purchase
any real or delinquent
imaginedshared
offense,sold during said
to demand sale; and
rescission of 3)
histo pay
dissenting
subscription andor withdrawing
call stockholders
for the distribution of some entitled
part to
of the payment
corporatefor theirto
assets shares under the
him without
provisions
complying of this
with the Code.
requirements of the Corp. Code.

Sec. rescission
2.) Granting 43 Power to is adeclare
properdividends
remedy, does Theitboard ofthe
violate directors
TFD of
Yesa itstock corporation
will violate may
the TFD
declare
and the dividends
procedures out ofdistribution
for valid the unrestricted retained
of assets earningsunder
and property whichthe shall be payable
Corp. Code. The in cash,
in property,
TFD provides that or in stock to to
subscription allthe
stockholders
capital stockon of
thea basis of outstanding
corporation constitute stock heldtoby
a fund them:
which
Provided,
the creditors That
have any cash
a right dividends
to look for the due on delinquent
satisfaction of theirstocks shall
claims. Thefirst be applied
doctrine is the to the
unpaid
underlying balanceinon
principle the
the subscription
procedure plusdistribution
for the costs and expenses, while stock
of capital assets, in thedividends
Corp. Code shall
whichbe withheld
allows from the delinquent
the distribution of corporatestockholder untilinhis
capital only unpaid
three subscription
instances: is fully paid:of
(1) amendments
Provided
the Articles further, That no
of Incorporation stock dividend
to reduce shall becapital
the authorized issuedstock
without the approval
(requires of
Board Resolution
stockholders representing
and stockholderss meeting) (2) not less than
purchase two-thirds of
of redeemable the outstanding
shares capital stock at a
by the corporation,
regular
regardless of or
thespecial
existence meeting duly calledretained
of unrestricted for that earnings
purpose. and (3) dissolution and eventual
liquidation of the corporation. In the instant case, the rescission of the pre-subscription

Stock corporations are prohibited from retaining surplus profits in excess of one hundred
 Revised Bagtas Reviewer by Ve and Ocfe 2A71
(100%) per cent of their paid-in capital stock, except: (1) when justified by definite
corporate expansion projects or programs approved by the board of directors; or (2) when
the corporation is prohibited under any loan agreement with any financial institution or
creditor, whether local or foreign, from declaring dividends without his/her consent and
such consent has not yet been secured; or (3) when it can be clearly shown that such
retention is necessary under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies.

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

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

Upon the winding up of corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated to the city
or municipality where such assets are located.

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

(d) Rescission of Subscription Agreement Based on Breach

The violation of terms embodied in a subscription agreement, with are personal

commitments, do not constitute legal ground to rescind the subscription agreement
since such would violate the Trust Fund Doctrine and the procedures for the valid
distribution of assets and property under the Corporation Code. In the instant case,
the rescission of the Pre-Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and property of the corporation, thereby
violating the Trust Fund Doctrine and the Corporation Code, since the rescission of a
subscription agreement is not one of the instances when distribution of capital assets
and property of the corporation is allowed. Ong Yong v. Tiu, 401 SCRA 1 (2003).

(e) Distribution of Corporate Assets

The distribution of corporate assets and property cannot be made to depend on the
whims and caprices of the stockholders, officers or directors of the corporation, or even,
for that matter, on the earnest desire of the court a quo to prevent further squabbles and
future litigations unless the indispensable conditions and procedures for the protection of
the corporate creditors are followed. Otherwise, the corporate peace laudably hoped for
by the court will remain nothing but a dream because this time, it will be the creditors
turn to engage in squabbles and litigations should the court order an unlawful
distribution in blatant disregard of the Trust Fund Doctrine. Ong Yong v. Tiu, 401 SCRA 1
(2003).

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

Statutory references: (1) Sec. 122 of the Corp. Code governing dissolution of corporations and
 their liquidation when it provides that except by decrease of capital stock and as otherwise
allowed by this Code, no corporation shall distribute any of its assets or property except upon
lawful dissolution and after payment of all its debts and liabilities. (2) SEC Rules governing
Redeemable and Treasury Shares expressly adopts the doctrine as follows, the outstanding
capital stock of a corporation, including unpaid subscriptions, shall constitute a trust fund for
the benefit of its creditors which shall not be returned to the stockholders by repurchase of
shares or otherwise, except in the manner as provided for under the Corporation Code and
this rules.

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

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

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

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

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

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

Funds received by a corporation to cover subscription payment on increase in authorized capital

stock prior to approval thereof of the SEC would not be covered by the TFD. As a TF, this money is
still withdrawable by any of the subscribers at any time before issuance of the corresponding shares
of stock, unless there is a pre-subscription to the contrary.

VII. ARTICLES OF INCORPORATION

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

The article of incorporation is:

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

a.) Between the corporation and the state (because it is under the AI by which the
state grants the primary franchise.) state manifests its consent through the SEC
while the corporation manifests its consent by the filing of the AI, through the
incorporators and eventually through the Board of Directors.

b.) Between the state and stockholders

c.) Between the corporation and stockholders the stockholders manifest their
 Revised Bagtas Reviewer by Ve and Ocfe 2A 73
Sec. 14 Contents
consent through
of the Articles
their subscription
of Incorporation
of stocks
Alland
corporations
through voting
organized
as under
against this
thecode
shall filecorporation,
with the SECthe articles
stockholders
of incorporation
do not have
in any
individual
of the official
standing
languages
but onlyduly
standing
signed asand
acknowledged
a group.by all of the incorporators, containing substantially the following matters,
except as otherwise prescribed by this Code or by special law.
d.) Among stockholders in this situation they now have individual standing.
1. The name of the corporation;
e.) Between the stockholders and the Board of Directors
2. The specific purpose or purposes for which the corporation is being incorporated. Where a
f.) Between
corporation the
has corporation
more than oneand the public
stated purpose,(since
the the AI isof
articles a public document.)
incorporation shall state
2.) A PUBLIC DOCUMENT because it is registered with the SEC. Such worksor
which is the primary purpose and which is/are the secondary purpose purposes:
with the doctrine
Provided,
of public that
notice a non-stock
that when the corporation
public dealsmay
withnot
theinclude a purpose
corporation, which would
the contents of AI change
binds or
themcontradict
whether its nature
they ashave
in fact such;seen the AI or not. When a person enters into a contract
or any transaction with a corporation whether or not he has checked with the SEC the
3. The
terms place
and where the
conditions principal
of the AI, he office
will beofbound
the corporation is to be
by it. He cannot located,
claim which of
ignorance must
the be
within
charter of the
the Philippines;
corporation.

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

1. Nature of Charter: The charter is in the nature of a contract between the corporation and
the
5.government. aGovernment
The names, nationalities of P.I.
and v. ManilaofRailroad
residences Co., 52 Phil. 699 (1929).
the incorporators;

6. The number
GOVERNMENT of v.
OF P.I. directors
MANILAand trusteesCO.
RAILROAD which shall not be less than five nor more than
fifteen;
Facts: The GPI filed a petition for mandamus in the SC to compel the Manila Railroad and Jose
Paez,7.its
The names,to
manager nationalities
provide andand residences
equip of persons
the telegraph poleswho shall
of the act as directors
company in Tarlac orand trustees
La
Union until
with the first regular
crosspieces for 6directors
telegraph or wires
trustees are duly
belonging toelected and qualified
the government which,in accordance
it alleged, are
with for
necessary thispublic
Code;service between certain municipalities. Petitioner relies on Sec. 84 of Act No.
1459 which provides that the railroad company shall establish a telegraph line for the use of the
8. If and
railroad it bethat
a stock
suchcorporation,
posts may be theused
amount of its authorized
for government wirescapital
and shall stock
be in lawful money
sufficient for of
the Philippines,
crosspieces to carry the thenumber
numberofofwires shares whichto which it is divided,may
the government andconsider
in case the share are
necessary forpar
public value shares,
service. the par
Petitioner value ofthat
contends each,since the6names, nationalities
crosspieces are nowand residences
necessary of theservice,
for public original
subscribers,
the company should and the amount
provide subscribed
sufficient crosspieces.and paid by eachanswers
Respondent on his subscription,
by saying that andtheif some
Charter orofallManila
of the Railroad
shares are (Actwithout
No. 1510) par value,
repealed such fact
Sec. 84must
of Actbe1459
stated;and contended that the
Government is entitled to only 4 wires.
9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and
residences of the contributors and the amount contributed by each; and
Held: Petition denied. Inasmuch as Act No. 1510 is the charter of the Manila Railroad Co.
10. Such
constitutes other matters
a contract between as are
thenot inconsistent
corporation andwith law and which
the government, it the incorporators
would seem that the may
deemisnecessary
corporation governed and by itsconvenient.
contract and not by the provisions of the general law. But from a
reading of the charter it will be seen that there is no indication that the government intended to
imposeThe uponSECsaidshall not accept
company any the
other articles of incorporation
conditions or obligations of any stock corporation
not expressly found inunless
the said
accompanied
contract or charter.bySection
a sworn 84statement
of the Corp. of the
LawTreasurer elected
was intended by thetosubscribers
to apply all railwaysshowing
in the that
at leastwhich
Philippines twenty-five
did notpercent
have a (25%)
specialofcharter
the authorized capital
or contract. Act stock
No. 1510of the corporation
applies only to has been
Manila
subscribed
Railroad and being andaatspecial
least twenty-five
charter, its percent
adoption(25%) had theof the total
effect of subscription
superseding has the been fully paid
provisions of
to him in actual
the corporation cash and/or
law which in property
are applicable the fair valuation
to railroads in general. of which is equal to at least twenty-
five percent (25%) of said subscription, such paid-up capital being not less than P5,000.
Sec. 15 Forms of Articles of Incorporation Unless otherwise prescribed by special law,
articles
The charter of a incorporation
corporation of is aallcontract
domestic corporations
between shall comply
three parties: (1) it substantially with the the
is a contract between
statefollowing
and the form:
corporation to which the charter is granted (2) it is a contract between stockholders
and the state (3) it is a contract between the corporation and its stockholders. A special charter
constitutes a contract between the corporation and the government and as such are both equally
NOTE: by
bound Theitsform goes into
provisions. Forthethevalidity
State to and enforceability
impose of theorArticles
an obligation a duty of Incorporation.
upon the respondent
corporation, not expressly provided in the charter would amount to a violation of said contract.
The a) As to Number
provisions of Act and
1459Residency
relate to the of Incorporators
number of wires (Sec. 10); the government may place upon
which
poles of the company are different and more onerous than the provisions of the charter.
Sec. 10 Number and Qualifications of Incorporators Any number of natural person not less
than five but not more than fifteen, all of legal age and a majority of whom are residents of
NOTE:theArticles
Philippines, may form acannot
of Incorporation privateprevail
corporation for any lawful
over statutory purpose
provisions. or purposes.
Such Each of
cannot overcome
the incorporators
the law. However in the of case
a stock corporation
of GPI, its special must own overruled
charter or be a subcriber
the Gen. toLaw
at least one
on the share that
ground of
the capital
the former is bothstock of the corporation.
a contract and a law. Thus, its charter as a law creates an amendment to all
other laws. In the same manner, if the former were a mere contract then the case would have
been
NOTE:decided differently.
Incorporators must be warm-blooded individuals for purposes of accountability. They must
not be more than fifteen for pragmatic reasons, and they must be less than five because two and
four create a deadlock, while three is not as efficient as five. (Institution of the Board of Directors
is a clear embodiment of the corporations centralized management.)

b) Corporate Name (Secs. 18, 14(1) and 42; Red Line Trans. v. Rural Transit, 60 Phil. 549
2. Procedure and Documentary Requirements (Sec. 14 and 15)
[1934]).
 Revised Bagtas Reviewer by Ve and Ocfe 2A 75
Sec. 18 Corporate Name No corporate name may be allowed by the SEC if the proposed
name is identical or deceptively confusing or similar to that of any existing corporation or to
any other name already protected by law or is patently deceptive, confusing or contrary to
existing laws. When a change in the corporate name is approved, the Commission shall issue
an amended certificate of incorporation under the amended name.

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

Parties organizing a corporation must choose a name at their peril; and the use of a
name similar to one adopted by another corporation, whether a business or a nonprofit
organization, if misleading or likely to injure the exercise of its corporate functions,
regardless of intent, may be prevented by the corporation having a prior right. Ang Mga
Kaanib sa Iglesia ng Dios Kay Kristo Hesus v. Iglesia ng Dios Kay Dristo Jesus, 372 SCRA
171 (2001).

Similarity in corporate names between two corporations would cause confusion to the
public especially when the purposes stated in their charter are also the same type of
business. Universal Mills Corp. v. Universal Textile Mills Inc., 78 SCRA 62 (1977).

Section 18 of Corporation Code expressly prohibits the use of a corporate name which
is identical or deceptively or confusingly similar to that of any existing corporation or to
any other name already protected by law or is patently deceptive, confusing or contrary
to existing laws. The policy behind the foregoing prohibition is to avoid fraud upon the
public that will occasion to deal with the entity concerned, the evasion of legal obligations
and duties, and the reduction of difficulties of administration and supervision over
corporations. Industrial Refractories Corp. v. Court of Appeals, 390 SCRA 252 (2002);
Lyceum of the Philippines v. Court of Appeals, 219 SCRA 610, 615 (1993).

A corporation has no right to intervene in a suit using a name, not even its acronym,
other than its registered name, as the law requires and not another name which it had not
registered. Laureano Investment and Dev. Corp. v. Court of Appeals, 272 SCRA 253
(1997).

There would be no denial of due process when a corporation is sued and judgment is
rendered against it under its unregistered trade name, holding that [a] corporation may
be sued under the name by which it makes itself known to its workers. Pison-Arceo
Agricultural Dev. Corp. v. NLRC, 279 SCRA 312 (1997).

A corporation may change its name by the amendment of its articles of incorporation,
but the same is not effective until approved by the SEC. Philippine First Insurance Co. v.
Hartigan, 34 SCRA 252 (1970).

A change in the corporate name does not make a new corporation, and has no effect
on the identity of the corporation, or on its property, rights, or liabilities. Republic Planters
Bank v. Court of Appeals, 216 SCRA 738 (1992).

The name of a corporation is very important, the incorporators constituting as body politic
and corporate under the name stated in the articles of incorporation for the period of time
mentioned therein. Such name is fatal in commercial transactions. The public may only know
the corporation through its name.
 The name of a corporation is (1) essential to its existence (2) it cannot change its name
except in the manner provided by the statute (3) by that name alone is it authorized to
transact business and (4) it is through its name that a corporation can sue and be sued and
perform all other legal acts.

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

Guidelines on Corporate Names:

1.) Name must contain Corp. or Inc.

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

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

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

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

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

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

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

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

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

The best proof of the purpose of a corporation is its articles of incorporation and by-
laws. The articles of incorporation must state the primary and secondary purposes of
the corporation, while the by-laws outline the administrative organization of the
corporation, which, in turn, is supposed to insure or facilitate the accomplishment of
said purpose. Therefore, the Court brushed aside the contention that the corporations
were organized to illegally avoid the provisions on land reform and to avoid the
payment of estate taxes, as being prohibited collateral attack. Gala v. Ellice Agro-
Industrial Corp., 418 SCRA 431 (2003).

Significance: It confers as well as limits the powers which a corporation may exercise. Other
reasons: (1) prospective investors shall know the kind of business the corporation deals with
(2) management shall know the limits of its action (3) a third party can know whether his
dealing with the corporation is within the corporate functions and powers (4) also, for the
 Revised Bagtas Reviewer by Ve and Ocfe 2A77
administrative supervision and monitoring of the State, to determine which particular agency
shall have jurisdiction over the operations of the corporation.
The purpose must be lawful, having only one primary purpose and many secondary purposes.

d) Corporate Term (Sec. 11)

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

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

No extension of term can be effected once dissolution stage has been reached, as it
constitutes new business. Alhambra Cigar v. SEC, 24 SCRA 269 (1968).

e) Principal Place of Business (Sec. 51)

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

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

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

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

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

Place of residence of the corporation is the place of its principal office. Clavecilla Radio
System v. Antillon, 19 SCRA 379 (1967)

The residence of its president is not the residence of the corporation because a
corporation has a personality separate and distinct from that of its officers and
stockholders. Sy v. Tyson Enterprises, Inc., 119 SCRA 367 (1982).

f) Minimum Capitalization (Sec. 12)

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

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

Q: Does the Corp. Code expressly provide for a minimum requirement of the authorized
capitalstock?
A: Under Sec. 12 there is no minimum requirement but the Code says that in no case shall
the paid up capital be less than P5,000 (Sec. 13). Thus it turns out that P5,000 is the
minimum.
 Q: Why is the maximum capitalization required to be indicated?
A: (1) To protect the stockholders and also it limits the issuance of capital stock and the
extent of the voting power or capacity of a stockholder (2) Because of accountability. Whether
a corporation is going to do good or bad will depend upon the assets its holds. The only way
by which the State can look at the accountability of a corporation in terms of assets it
receives is to get a maximum so that if the corporation wants to go beyond that, it has to go
back to the State.

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

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

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

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

Q: Must each subscribe equally?

A: No.

NOTES:

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

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

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

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

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

contribute to a proposed corporation.

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

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

h) Steps and Documents Required in SEC

In addition to the AI, documents required are:

1.) Treasurers Affidavit accompanied by a sworn statement of the Treasurer that at

least 25% of the capital stock authorized is subscribed and at least 25% of such have
been fully paid in cash or property fair valuation of which is equal at least to 25% of
the said subscription, such paid-up capital not being less than P5,000.
 Revised Bagtas Reviewer by Ve and Ocfe 2A 79
2.) Certificate of deposit

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

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

1. Grounds for Disapproval (Sec. 17)

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

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

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

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

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

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

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

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

When the proposed articles show that the object is to organize a barrio into a separate
corporation for the purpose of taking possession and having control of all municipal property
within the incorporated barrio and administer it exclusively for the benefit of the residents,
the object is unlawful and the articles can be denied registration. Asuncion v. De Yriarte, 28
Phil. 67 (1914).

It is well to note that, if a corporations purpose, as stated in the Articles of Incorporation,

is lawful, then the SEC has no authority to inquire whether the corporation has purposes other
than those stated, and mandamus will lie to compel it to issue the certificate of
incorporation. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).

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

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

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

by special law and for legitimate purposes, any provision or matter stated in the articles of
incorporation may be amended by a majority vote of the board of directors or trustees and
the vote or written assent of the stockholders representing at least 2/3 of the outstanding
capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance
with the provisions of this Code, or the vote or written assent of at least 2/3 of the members if
it be a non-stock corporation.
 The original and amended articles together shall contain all provisions required by law to set
out in the articles of incorporation. Such articles, as amended shall be indicated by
underscoring the change or changes made, and a copy thereof duly certified under oath by
the corporate secretary and a majority of the directors or trustees stating the fact that said
amendment or amendments have been duly approved by the required vote of the
stockholders or members shall be submitted to the SEC.

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

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

2/3 votes are needed in AI while a majority is needed in amending by laws Such is the case
to make it easier to amend by-laws.

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

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

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

Revised Bagtas Reviewer by Ve and Ocfe 2A 81

unreasonable & oppressive, thus void.

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

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

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

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

HELD:

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

2. Any person who buys stocks in a corp. does so with the knowledge that its affairs are
dominated by a majority of the stockholders & that he impliedly contracts that the will of
the majority shall govern in all matters within the limits of the AoI & By-laws. A
stockholder is said to have parted with his right to regulate the disposition of his property
which he invested in the corporation. Thus, no contract between the SHs and corp. was
infringed.
VIII. BY-LAWS
3. Pursuant to Sec. 18 of the Corp. Law, any corp. may amend its AoI by a vote or written
See relevant portions of VILLANUEVA, "Corporate Contract Law," 38 ATENEO L.J. 1 (No. 2,
assent of the Shs representing at least t 2/3 of the subscribed capital stock. If it changes,
June 1994).
diminishes or restricts the rights of SHs, the dissenting minority has only the right to
object
1. Nature in Functions
and writing & demand payment
(aGokongwei of their
v. SEC, share.
89 SCRA 337Petitioner has nov.vested
[1979]; aPea right
CA, 193 to be
SCRA
elected director.
717 [1991])

4. A director stands in a fiduciary relation to the corp. & its SHs. He has control & guidance
of corporate affairs & property & hence, of the property interests of SHs. Equity
recognizes that SHs are properties of corporate interest & are ultimately the only
beneficiaries thereof. Thus, he cannot serve 2 adverse masters without detriment to one
FACTS:
of them He cannot utilize his inside information & strategic position to his own
preferment.
In 1972, Universal Robina Corp acquired 622,987 share in San Miguel Corp. In 1972 also,
Consolidated Foods Corp. acquired SMC shares amounting to P543,959. John Gokongwei, the
presidne5.tand controlling stockholder
An amendment of URC
to the by-laws which& CFC purchased
renders 5,000 SMC
a SH ineligible shares.
to be Gokongwei
a director, tried
if he be also a
to get a seat in theinSMC
director BoD but was
a competitor rejected
corp. by the
has been SHs nvalid.
sustained the grounds that heon
This is based was
theengaged
principleinthat
a
competitive business
where and his is
the director securing a seat
employed in the
in the BoDof
service would subject
a rival corp heSMC to great
cannot disadvantages.
serve both but
must betray one or the other. Such an enactment merely advances the benefit of the corp
On&September
for its own 18,
good.
1976Corporate officers
repondent SHsare not permitted
amended to use
the by-laws of their
SMC,position
Gokongwei of trust &
contends
that: confidence to further their private interests.

1. the BoD acted without authority & in usurpation of the power of the SHs since the
6. DOCTRINE OF CORPORATE OPORTUNITY rests on the unfairness of an officer or director
computation of 2/3 vote was based on the authorized capital stock as of 1961 & not as of
taking advantage of an opportunity for his own personal profit where the interest of the
1976
corporation calls for protection. Here BoD members have access to marketing strategies,
pricing structure, budget for expansion, R&D sources of funding, availability of personnel,
2. The authority granted in 1961 was also extended in 1962 & 1963 when said authority was
mergers & tie-ups, etc. The questioned amendment of the y-laws was done to prevent the
supposed to cease to exist
creation or an oppositor for an officer or director of SMC, also an officer of a competing
3.corp.
Prior from taking
to said advantage
amendment, of the information
petitioner had all the which he as director
qualifications to promote
as Director & that his
as a
individual
substitute corporate
SH he hasinterests
the rightto
tothe
votedetriment
& be votedof SMC, it would
as director be hard
& that to avoid any
in amending the by-
possibility of Gokongweis
laws, the corp. taking advantage
purposely provided of his position
for Gokongweis as SMC director.
disqualification& deprived him of his
vested right.
7. The SC grants the petition regarding Gokongweis petition to examine the book and
4.records
Gokongwei further alleges that the corp. has no inherent power to disqualify a SH & that
of SMC
provision allowing the BoD to consider such factors as business & family relations is
 Pe?a vs. CA

Revised Bagtas Reviewer by Ve and Ocfe 2A83

8. However, it sustained
majority than the majority the
ofvalidity of theofamendment
the number to the
board members toby-laws without
constitute prejudice to
the quorum
the question
necessary of actual
for the disqualification
valid transaction of Gokongwei
f business. Being a to run if elected
dormant to several
corp. for sit as SMC director
years, it was
being decided, after proper hearing by the SMC BoD, whose decisions shall be appealable
highly irregular, if not anomalous, for a group of three individuals representing themselves to
betothe
thedirectors
SEC & toofthe SC, unless
respondent disqualified,
PAMBUSCO to the
passprohibiton in the
a resolution said by-laws
disposing of the will
onlynot apply
to Gokongwei.
remaining asset of the corporation in favor of a former corporate officer. The latest list of SH
of respondent PAMBUSCO on file with the SEC does not show that the said alleged directors
were among the SHs of respondent PAMBUSCO. Since the disposition of said redemption right
of PAMBUSCO by virtue of the questions ed resolution was not approved by the required
number of SHs under the law, the said resolution, as well as the subsequent assignment
executed assigning to respondent Enriquez the said right of redemption should be struck
FACTS: down as null and void.
As theoriginal
PAMBUSCO rules and regulations
owners or private
of the lots laws enacted
in question, mortgagedby the
the same
corporation
to DBPtoinregulate,
govern and control its own actions, affairs and concerns and its stockholders
consideration of P935,000. This mortgage was foreclosed and said properties were awarded or members
to and
directors
Rosita Pea and officers
as highest bidder with
in therelation thereto
foreclosure and
sale. among
The Boardthemselves
of PAMBUSCO, in their relation
through to it,
three by-
of its
members laws are indispensable
resolved to assign its to
to corporations. These may
one of its members, Atty.not be essential
Joaquin Briones,totocorporate
execute and birth buta
sign
certainly, these
deed of assignment are in
for and required
behalf by law for an orderly
of PAMBUSCO in favorgovernance and management
of any interested party. Thus,of Briones
executedcorporations. Loyola Grand
a deed of Assignment Villas Homeowners
of PAMBUSCOs v. CA,right
redemption 276 over
SCRAthe 681 (1997).
subject lots in favor of
Marelino Enriquez. The latter then redeemed the said properties and a certificate of redemption
dated Aug. 15, 1975 was issued. Enriquez executed a deed of absolute sale of the subject properties
in favor of plaintiff-appellants, the spouses Rising T. Yap and Catalina Lugue.

Q. Distinguish by-laws from AoI

Pea wrote the sheriff notifying him that the redemption was not valid as it was made under a
A. The
void AoI of
deed is not an internal
assignment. document
She that binds
then requested the the parties
recall of thetosaid
a corporate
redemptionsetting.
and aIt restraint
is also a on
document that binds
any registration the State.regarding
or transaction The BL is the
an intramural document,
lots. Defendant its supposed
Pea through to bind
counsel wrote the
theinner
sheriff
workings of a corp.
asking for execution of a deed of final sale in her favor on the ground that the one year period of
redemption has long elapsed without any valid redemption having been exercised. Plaintiff Yap
wrote defendant Pea asking for payment for back rentals in the amount of P42,750.00 for the use
and occupancy
Q. Are of the
the AoI and land and
BL public house. Later, the spouses Yap were prompted to file the instant case
documents?
on the ground that being registered owners, they have the right to enforce their right to possession
against
A. defendant
Yes, both whodocuments
are public has been allegedly
because in unlawful
they are notpossession thereof. without the approval of
valid and binding
the SEC

It was contended that plaintiffs could not have acquired ownership over the subject properties
under a deed of absolute sale executed in their favor by one Marcelino Enriquez who likewise could
Q.
notDoes
havethe BL have
become theto be approved
owner by the SEC?
of the properties in question by redeeming the same under a void deed
of assignment. The defense was that since the deed of assignment executed by PAMBUSCO in favor
A. Yes, prior was
of Enriquez to the approval
void offor
ab initio thebeing
SEC, an
theultra
by-laws
viresare
actnot binding
of its boardsince the code
of directors expressly
and for being
requires
without any valuable consideration, it could not have had any legal effect. TC foundthe
the approval of the SEC to be binding upon the SHs and members. Absent for codal
petitioner.
provision,
CA reversed.it is binding because of a corp.s inherent power to adopt its own by-laws.

HELD:
Q. Do BL bind the public?
In order that the SEC can take cognizance of a case, the controversy must pertain to any of
A.
theAs a general
following rule, BL provisions do not bind the public, except if the third person has knowledge
relationships:
of the BL provision.
a. between corp., partnership or assoc. and the public

b. between the corp. and its SH, members, officers

(a) Common Law Limitations on By-Laws
c. between corp. and the state in so far as its franchise, permit or license to operate is
(i) By-Laws Cannot Be Contrary to Law and Charter
concerned

d. among the A by-law provision

stockholders, granting
partners orto a stockholder
associates permanent seat in the Board of
themselves.
Directors is contrary to the provision in Corporation Code requiring all members of the
NeitherBoard to be elected
petitioner by the stockholders.
nor respondents Yap spousesEven when the members
are stockholders of the
or officers association
of PAMBUSCO.
may have
Consequently, the formally adopted
issue of the theofprovision,
validity the seriestheir action would
of transactions be of
may beno avail because
resolved only by no
provision
the regular courts.of the by-laws can be adopted if it is contrary to law. Grace Christian High
School of
The by-laws v. a
Court of Appeals,
corporation 281own
are its SCRA 133 (1997).
private laws which substantially have the same
effect as the laws of the corporation. They are in effect written into the charter. In this sense,
they(ii)
become
By-Lawart of the fundamental
Provisions law of the corporation
Cannot Be Unreasonable which the
or Be Contrary corporation
to the Nature ofand its
directors
By-laws. Government of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927). PAMBUSCO
and officers must comply with. Only three out of five directors of
convened on November 19, 1974 by virtue of a prior notice of a special meeting. There was
no quorumAuthority
to validlygranted
transacttobusiness since,to
a corporation under Section
regulate the 4 of the amended
transfer of its stockby-laws herein
does not
above reproduced,
empower the at least 4 members
corporation mustthe
to restrict be present
right of a tostockholder
constitute atoquorum
transferinhis
a special
shares,
meetingbut of the BoD.authorizes
merely The AoI orthe
by-laws of the
adoption of corp. may fixasa to
regulations greater number than
the formalities and the
procedure
to be followed in effecting transfer. Thomson v. Court of Appeals, 298 SCRA 280
 China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).

Revised Bagtas Reviewer by Ve and Ocfe 2A 85

(1998).

By-laws are intended merely for the protection of the corporation, and prescribe
regulation, not restriction; they are always subject to the charter of the corporation.
Rural Bank of Salinas, Inc. v. CA, 210 SCRA 510 (1992).

(iii) By-Law provisions cannot discriminate

(b) Binding Effects on By-laws: aChina Banking Corp. v. Court of Appeals, 270 SCRA 503
(1997).

FACTS:

Calapatia, a stockholder of PR Valley Golf and Country Club pledged his Stock Certificate
to petitioner China Banking. Petitioner wrote VGCCI requesting that the aforementioned
pledge agreement be recorded in its books. Later, Calapatia obtained a loan of P20,000 from
petitioner, payment of which was secured by the aforestated pledge agreement still existing
between Calapatia and petitioner. Due to Calapatias failure to pay his obligation, petitioner
filed a petition for extra-judicial foreclosure. Petitioner informed VGCCI of the above-
mentioned foreclosure proceedings and requested that the pledged stock be transferred to its
name. However, VGCCI wrote petitioner expressing its inability to accede to petitioners
request due to Calapatias unsettled accounts with the club.
Despite the foregoing, Notary Public de Vera held a public auction and petitioner emerged as
the highest bidder, VGCCI sent Calapatia a notice demanding full payment of his overdue account in
the amount of P18,783.24. VGCCI caused to be published in the newspaper Daily Express a notice of
auction sale by VGCCI of its subject share of stock and thereafter filed a case with the RTC of Makati
for the nullification. The RTC dismissed the case for lack of jurisdiction over the subject matter on
the theory that it involves an intra-corporate dispute.

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

HELD:

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

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

In order to be bound, the 3rd party must have acquired knowledge of the pertinent by-laws at
the time the transaction or agreement between said 3rd party and the shareholder was entered into,
in this case, at the time the pledge agreement was executed. Petitioners belated notice of said by-
laws at the time of the foreclosure will not suffice. By-laws signify the rules and regulations of
 Revised Bagtas Reviewer by Ve and Ocfe 2A 87
corporation, subject to the inspection of the stockholders or members
private laws enacted by the corporation to regulate, govern and control its own actions, affairs and
concerns and its during office hours.
stockholders A copyand
or members thereof, duly and
directors certified to by
officers witha majority of
relation thereto and among
the directors or trustees countersigned by the secretary of the
themselves in their relation to it. The purpose of a by-law is to regulate the conduct and define the
corporation,
duties of the members towards shall
thebe filed with the
corporation andSecurities and Exchange
among themselves.
Commission which shall be attached to the original articles of
incorporation.
Note: Knowledge of the by-laws must be present at the time of the perfection of the contract. Such is
not the case here, knowledge of the by-laws was had only during the proceedings, as such, it cannot
bind China Bank. However, one may argue in the same way in Land Titles, where banks are required
to go beyond theNotwithstanding
face of the title the provisions
as they of the preceding
are institutions endowed paragraph,
with publicby-laws
interest; in this case
China Bank should may be adopted
have inquired andinto filed
such prior to incorporation;
by-laws before entering in into
suchthecase, such by- mentioned.
transactions
laws shall be approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission, together with
the articles of incorporation.
Neither can we concede that such contract would be invalid just because the
signatory thereon was not the Chairman of the Board which allegedly violated the
In all cases, by-laws shall be effective only upon the issuance by the
corporations by-laws. Since by-laws operate merely as internal rules among the
Securities and Exchange Commission of a certification that the by-laws
stockholders, they cannot affect or prejudice third persons who deal with the
are not inconsistent with this Code.
corporation, unless they have knowledge of the same. aPMI Colleges v. NLRC, 277
SCRA 462and
The Securities (1997).
Exchange Commission shall not accept for filing the by-laws or any amendment thereto of
any
bank, banking institution, building and loan association, trust company, insurance company, public utility,
PMI COLLEGES v. NLRC
educational
institution or other special corporations governed by special laws, unless accompanied by a certificate of the
FACTS: appropriate
There can government
be no automatic agency to the effect
dissolution simplythat such by-laws
because or amendments
the incorporators failed are in accordance
to file the with law. (20a)
PMIrequired by-laws under
is an educational Sec. 46
institution of Corporation
offering courses onCode.
basicThere
seamanis notraining
outrightand
demise of
other marine-
corporate
related courses existence.
hired private Proper
respondentnoticeasand hearing are
contractual cardinal
instructor components
with an agreementof due process
that in any
the latter
shall be democratic institution,
paid at an hourly rte ofagency
P30 t P50.or society.
PR thenInorganized
other words, the in
classes incorporators must be given
marine engineering. PR andthe
chance towere
other instructors explain their neglect
compensated for or omission
services and remedy
rendered duringthethesame. Loyola
first three Grand
periods ofVillas
the above-
mentioned Homeowners v. CA, 276
contract. However, forSCRA 681 unknown
reasons (1997). to PR, he stopped receiving payment for the
succeeding rendition of services.
3.Repeated
Contentsdemands
(Sec. 47)having likewise failed, PR was soon constrained to file a complaint
seeking payment for salaries earned. PMI contended that classes in the courses offered which
complainant claimed to have remained unpaid were not held in the school premises of PMI. Only PR
Section 47. Contents of by-laws. - Subject to the provisions of the
knew whether classes were indeed conducted. Later in the proceedings, petitioner manifested that
Constitution, this Code, other special laws, and the articles of
Mr. Tomas Cloma Jr., a member of the petitioners BoD wrote a letter to the Chairman of the Board
incorporation, a private corporation may provide in its by-laws for:
clarifying the case of PR and stating therein that under PMIs by-laws, only the Chairman is
authorized to sign any employment contract. A decision was rendered by the Labor Arbiter finding
for PR. The NLRC1.affirmed.
The time, place and manner of calling and conducting regular or
special meetings of the directors or trustees;

2. The time and manner of calling and conducting regular or special

HELD: meetings of the stockholders or members;
The contract would be invalid just because the signatory was not the chairman which
allegedly violated3.PMI
Theby-laws
required but since by-laws
quorum operate
in meetings merely as internal
of stockholders rules among
or members and the stock
holders, they cannot affect orofprejudice
the manner 3rd persons who deal with the corporation in good faith unless
voting therein;
they have knowledge of the same. No proof appears on record that PR ever knew anything about the
provisions of said4.by-laws.
The formPetitioner itself
for proxies merely asserts
of stockholders the
and same without
members even
and the bothering to attach
manner
a copy or excerptofthereof to show
voting them; that there is such a provision. That this allegation has never been
denied by PR does not necessarily signify admission.
5. The qualifications, duties and compensation of directors or trustees,
officers and employees;
2. Adoption Procedure (Sec. 46)
6. The time for holding the annual election of directors of trustees and
the mode or manner of giving notice thereof;
Section 46. Adoption of by-laws. - Every corporation formed under this
Code must, within one (1) month after receipt of official notice of the
7. The manner
issuance of electionof
of its certificate orincorporation
appointment by and the
the term of office
Securities and of all
officers
Exchange other than directors
Commission, adopt oratrustees;
code of by-laws for its government not
inconsistent with this Code. For the adoption of by-laws by the
8. The penalties
corporation for violation
the affirmative of the
vote by-laws;
of the stockholders representing at
least a majority of the outstanding capital stock, or of at least a
majority
9. In the of theofmembers
case in case of non-stock
stock corporations, corporations,
the manner shall be
of issuing stock
necessary.
certificates;The
andby-laws shall be signed by the stockholders or
members voting for them and shall be kept in the principal office of the
10. Such other matters as may be necessary for the proper or
convenient transaction of its corporate business and affairs. (21a)
 4. Amendments (Sec. 48)

- Power to amend may be delegated to the BoD

Section 48. Amendments to by-laws. - The board of directors or

trustees, by a majority vote thereof, and the owners of at least a
majority of the outstanding capital stock, or at least a majority of the
members of a non-stock corporation, at a regular or special meeting
duly called for the purpose, may amend or repeal any by-laws or adopt
new by-laws. The owners of two-thirds (2/3) of the outstanding capital
stock or two-thirds (2/3) of the members in a non-stock corporation
may delegate to the board of directors or trustees the power to amend
or repeal any by-laws or adopt new by-laws: Provided, That any power
delegated to the board of directors or trustees to amend or repeal any
by-laws or adopt new by-laws shall be considered as revoked whenever
stockholders owning or representing a majority of the outstanding
capital stock or a majority of the members in non-stock corporations,
shall so vote at a regular or special meeting.

Whenever any amendment or new by-laws are adopted, such

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

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

Admittedly, the right to amend the by-laws lies solely in the discretion of the employer, this being in
the exercise of management prerogative or business judgment. However this right, extensive as it
may be, cannot impair the obligation of existing contracts or rights. . . If we were to rule otherwise, it
would enable an employer to remove any employee from his employment by the simple expediency
of amending its by-laws and providing that his/her position shall cease to exist upon the occurrence
of a specified event. Salafranca v. Philamlife (Pamplona) Village Homeowners, 300 SCRA 469
(1998).

IX. CORPORATE POWERS, AUTHORITY AND ACTIVITIES

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

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

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

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

 Revised Bagtas Reviewer by Ve and Ocfe 2A89
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;

3. To adopt and use a corporate seal;

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

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

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transactions of the lawful business of the corporation may
reasonably and necessary require, subject to the limitations prescribed by law and the
Constitution;

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

9. To make reasonable donations, including those for the public welfare or hospital or
charitable, cultural, scientific, civic or similar purposes: Provided, That no corporation,
domestic or foreign shall give donations in aid of any political party or candidate or for
purposes of partisan political activity;

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

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

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

A corporation has only such powers as are expressly granted to it by law and by its
articles of incorporation, those which may be incidental to such conferred powers, those
reasonably necessary to accomplish its purposes and those which may be incident to its
existence. Pilipinas Loan Company v. SEC, 356 SCRA 193 (2001).

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

EXPRESS IMPLIED INCIDENTAL

These powers given to a Those powers that exist as a Those powers that:
corporation either: necessary consequence of:
a.) attachto a
a.) By clear or express a.) theexerciseof corporation at the
provision of the law. express powers of the momentof its
corporation or creation
Some of the other
powersexpressly b.) the pursuit of its b.) without regard to its
granted under Sec. 36 purpose as provided express powers or
are considered to be for in the article of particularprimary
inherent or incidental incorporation purposes and
powers which even if
not given by express the c.) is said to be inherent

grantare management in it as a legal entity
nevertheless deemed ofa oralegal
to be within the corporation, in organization.
capacityofthe the absence of
foreign entities (such express Powers that go into
as the power to adopt restrictions, the very nature and
has extentofa
 by-laws) discretionary corporations juridical
authorityto entitycannotbe
b.) By the charter or articles enterinto presumedtobe
of incorporation. contractsor incidental or inherent
transactions powers. This juridical
Expressgrantof which may be entity is State-grant
authority from the deemed and cannot be altered
boardof directors reasonably or amended without
needed to validly bind necessaryor State authority (egs.
the corporation. incidentalto right of succession,
itsbusiness right to merger)
Thus the SC held that purpose.
absentanyboard
resolution authorizing
an officer or any
person to exercise
express powers given
to a corporation such
as filing a suit on its
behalf, such an action
is invalid.

Thepowerofa
corporation to sue
and be sued in any
court is lodged with
the board of directors
thatexerciseits
corporate powers.

By-laws are not a

source of powers.

Art. 46 of the Civil Sec. 2 of the Corp. Code

Sub-paragraph 11 of
Codeexpressly Sec. 36 provide that a provides the corporation as
providesforthe corporation has the having the powers,
powersofa power and capacity to attributes and properties
corporationasa exercisesuch expressly authorized by law
juridicalpersonality powers as may be or incident to its existence.
possesses. essential or necessary
tocarryoutits
purpose or purposes
Sec.36ofthe
asstatedinits
CorporationCode
articlesof
expressly enumerates
incorporation.
the ten powers which
a corporation may
exercise.

Sec.45ofthe
CorporationCode
recognizesother
powers provided in
theArticleof
Incorporation.

Generally,purely Generally, purely members

Generallyexercised
bytheBoardof members of the Board of the Board of Directors
Directorswith of Directors exercise exercise this.
exception to certain this.
instanceswhere
shareholders assent
are needed.
 Revised Bagtas Reviewer by Ve and Ocfe 2A 91
BASISVires
Ultra OF ULTRA
doctrine VIRES
is connected
DOCTRINEwith (Twoancillary
Corporatedoctrines
Principles)
as of (1) apparent authority and of
(2) estoppel.
1. A corporation is a creature of the law and has only such powers and privileges as are
granted
One has by the State
to look at the corporation
the ultra viresas doctrine
a personisbefore
a product
the lawof the theoryofofthe
because concession
(1) issue as
of
provided
consent and in Sec. 2.
(2) liability who commits itself to obligation. The state only gives a corporation
limited powers and not general powers as an individual has because of the consent and
2. The doctrine upholds the fiduciary duty of directors and officers to the stockholders or
liability.
members such duty dictates that the corporation engage only in transactions to which the
stockholders
(b) Where Corporate and members
Power bind
Lodgedthemselves by way of the provisions of the purposes clause.
This is also necessarily include an obligation not to enter into transactions which violate the
law. A corporation has no power except those expressly conferred on it by the Corporation
Code and those that are implied or incidental to its existence. In turn, a corporation
TESTexercises
TO DETERMINE said powers
ULTRAthrough
VIRES its board ofthe
Whether directors and/or its
act in question isduly authorized
in direct officers and
and immediate
furtherance of the corporations business, fairly incident to the express powers and can be
agents. . . In turn, physical acts of the corporation, like the signing of documents,
performed
reasonably only byto
necessary natural persons duly
their exercise. authorized
The strict termsfor the purpose
direct by corporate
and immediate refersby-laws
to the
or by a specific act of the board of directors. Shipside Inc. v. Court
business of the corporation while the liberal terms fairly incident and reasonably of Appeals, 352 SCRA
334 (2001).
necessary with reference to the powers of the corporation. With regard to the business of the
corporation as the reference point, much latitude is given to the corporation to enter into
variousUnless
contracts as longprovided
otherwise as they by
havethelogical relationCode,
Corporation to the pursuit ofpowers
corporate such business. On the
are exercised by
otherthehand,
Board when the purpose
of Directors, whichclause
theyused
may limiting
delegate words that an
to either Court will hold
executive such corporation
committee,
to such limited
officers business. managers. The delegation, except for the executive committee,
or contracted
must be for specific purposes, which makes the officers the agents of the corporation, and
accordingly the general rules of agency as to the binding effects of their acts would apply.
POLICIES SUPERVENING
For such IN deemed
officers to be ULTRA VIRES
fully ISSUES
clothed by
Acts
thenot per se illegal,
corporation liberal ainterpretation.
to exercise power of the
1.) PUBLIC CONVENIENCE if corporation contracts are strictly construed, the public Corp.
Board, the latter must specially authorize them to do so. ABS-CBN Broadcasting wouldv.be
Court of Appeals,
inconvenienced 301 SCRA
by having 572and
to verify (1999).
enter into contractual safeguards when entering into
contracts with corporations. As such liberal construction is afforded to such corporate
contracts.
PRIMARY RULE: The Board of Directors/Trustees is the repository of all corporate powers (sec.

23)
2.) CONTRAVENTIONOF CONTRACTUAL EXPECTATIONS setting aside the corporate contract
on
Thethe ground
source of ultraofvires
of power wouldof
the board contravene
directors isthe expectations
therefore primaryof and
bothnot
parties who entered
delegated power
into
fromthe
thecontract expecting
stockholders to be bound.
or members of the corporation. However, there are specified instances
in the Corporation Code where the particular exercise of power of the corporation by the
3.) PRINCIPLE
board, in orderOFto BUSINESS
be bindingJUDGMENT therequires
and effective, court will
thenot sit in judgment
consent to substitute
and ratification of the their
business judgment
stockholders for thaton
or members, of one
the directors;
hand, andand the that ason
State, much
the as possible,
other hand. directors in the
exercise of their business judgment, should be given leeway to adopt corporate policies and
to engage in transactions as they deem best for the corporation.
IN CONSONANCE WITH CONTRACT LAW PRINCIPLES in conformity with the principles of
contract law, that a party cannot relieve himself from the contractual terms and conditions,
4.) NATURE OF BUSINESS OF OPERATIONS it is impossible to anticipate all possible
much less amend or alter them, without the consent or approval of the other party or parties.
contingencies at the time the Articles are drawn thus there would be a need to amend or
revise the Articles to keep abreast with the various aspects of the business.
EXCEPTION TO THE GENERAL RULE, in cases where the stockholders consent is required,
majority rules. The consent or dissent of the stockholders is recognized by their majority vote
ULTRA VIRES ACTS DISTINGUISHED FROM ACTS WHICH ARE ILLEGAL PER SE
or their qualified two-thirds as the case may be which would bind even those who abstained
or dissented. For those who dissented, there is a way out for them by way of exercising their
Illegal acts of a corporation are those acts which are contrary to law, morals, or public
appraisalorder
rightor
(depending
contravenes on some
the issue).
rule of public policy or public duty are void. Such acts or
contracts cannot be the basis of any court action nor acquire validity by performance,
ratification or estoppel.
2. ULTRA VIRES DOCTRINE

Ultrarelevant
See vires acts
portions
are those
of Vwhich are
ILLANUEVA , Corporate
not illegalContract
and voidLaw,
ab initio
38 ATENEO
but are
L.J. within
1 (No. the
2,
scopeJune
of the
1994).
articles of incorporation are merely voidable and may become binding
and enforceable when ratified by stockholders. Said ratification cures the infirmity of
(a) Concept and Types act
the corporate (Sec. 45)
and makes it valid and enforceable.

Sec. 45 Ultra vires acts of corporations No corporation under this Code shall possess or
TYPES OF ULTRA VIRES CASES
exerciseany corporate powers except those conferred by this Code or by its articles of
incorporation
1.) acts and
or contracts except
which aresuch as illegal
per se necessary or incidental
as being contrary to
to the
lawexercise
VOID of the powers so
conferred.
2.) acts done beyond the powers of the corporation as provided for in the law or its articles of
incorporation;
Sec. 45 of and VOID or VOIDABLE?
the Corporation Code is the statutory embodiment of the Ultra Vires Doctrine that
provides that the corporation cannot exercise powers beyond what had been granted to it by
3.) acts or contracts
statute entered of
or by its articles into in behalf of except
incorporation the corporation by persons
such as necessary orwho have no
incidental tocorporate
the
authority
exerciseofUNENFORCEABLE
powers so conferred. It was meant to control and regulate the actions of
corporations.
Ultra vires acts of the second type are void as between the corporation and the State or in the
first level of corporate existence while it is merely voidable in the third level because of public
 Revised Bagtas Reviewer by Ve and Ocfe 2A93
policy. The public who deals
minor children with the sum convertible in good
into faith
shareswith the corporation
of stock. Lourdes de hasla the
Ramaright to expect
later learnedthat
thatthe
since theobligation
companyentered into
shares of shallwas
stock be actually
complied3.6 with.
times their par value, the company would in
effect be giving them an amount totaling to P1,440,000 and that stocks if were given to the children,
the voting strength of the De la Rama daughters would be adversely affected. This caused Lourdes
to ask for the cancellation and waiver of her pre-emptive rights. Don Esteban then advised the
First Type
corporate secretary that Ultra Vires: An be
the resolution ultra vires act
nullified dueistoone
thecommitted outside the
misunderstanding as toobject
its for
implications. which a corporation is crated as defined by the law of its organization and therefore
beyond the power conferred upon it by law. The term ultra vires is distinguished from
an illegal act for the former is merely voidable which may be enforced by performance,
In 1947, the ratification,
Board adopted a resolution
or estoppel, whilechanging theisform
the latter void of
anddonation
cannot from 4,000 shares
be validated. to merely a
aAtrium
renunciationManagement
in favor of the children
Corp. of the
v. Court of corporate
Appeals, 353 right, titles
SCRA 23and interests as beneficiary to the
(2001).
proceeds of the life insurance policy subject to the condition that proceeds be retained by the
company as a loan with 5% interest ($321,500). Estefania as guardian of the children, accepted the
ATRIUM
donationMANAGEMENT
in their behalf.CORP. v. COURTwas
Said donation OF APPEALS
formally ratified in 1949 after Estefania bought a house in
New York for $75,000. In 1950 Osmena Jr. husband of Lourdes de la Rama addressed an inquiry to
Facts: Hi-Cement through the corporate signatories (De Leon treasurer, Delas Alas chairman)
the SEC asking for an opinion regarding the donation. SEC opined that the donation was void
issued checks in favor of E.T. Henry & Co. Inc. as a collateral for a loan) E.T. Henry endorsed the four
because the corporation could not dispose of its assets by gifts. Therefore, it acted beyond the scope
checks to Atrium for valuable consideration. Upon presentment for payment, the bank dishonored all
of its powers. Thus, the stockholders revoked the donation on this ground.
four checks because the payment was stopped. Atrium filed with the RTC an action for collection of
the proceeds of four postdated checks amounting to P2M. The TC ordered that De Leon, ET Henry
and
WithHi-Cement pay Atrium
these revocation, jointly
plaintiff as and severallyby
represented the value oftheir
Estefania the four checks
mother, seekplus interest.
t enforce The CA on
this
the other hand
resolutions absolved
adopted Hi-Cement
by the Board of from liability.
Directors and Stockholders of De la Rama Steamship Co. giving
to said children the proceeds of the insurance policies of the deceased with the company as the
beneficiary.
Issue: WON The company
De Leon contends
was not that to
authorized theissue
resolution and the contract executed pursuant thereto
the checks
are ultra vires and if valid, the obligation to pay the amount given is not yet due and demandable.
WON
Plaintiffs the
won in issuance
the lowerofcourt,
the checks
hence were ULTRA VIRES ACTS
this petition.
Held: De Leon was authorized and such issuance is not an ultra vires act.
Issue: WON the said Board of Directors resolution was an ultra vires act?
Ratio: De Leon as treasurer of the corporation is authorized to sign checks for the corporation. As a
Held:
rule, the act of issuing checks is within the ambit of a valid corporate act. And securing a loan to
finance the activities of the corporation is not an ultra vires act. While an ultra vires act is one
The grant or donation in question is remunerative in nature and was given in consideration of the
committed outside the object or which a corporation is created as defined by law of its organization
services rendered by the heirs father to the corporation. The donation has already been perfected
and therefore beyond the power conferred upon it by law, the act pertained to in the case is not an
such that the corporation could no loner rescind it. It was embodied in a Board Resolution.
illegal act.
Representatives of the corporation and even its creditors as the NDC have given their concurrence.
The resolution was actually carried out when the corporation and Estefania entered into an
De Leonthat
agreement on the
the other handwill
proceeds was benegligent in confirming
entered as that such
a loan. Estefania checks
accepted were
the issuedand
donation to ET
such
Henry
was as payment
recorded forcorporation.
by the their companys debt with
The Board the former.
of Directors That isEstefanias
approved why she was held toofbethe house
purchase
personally
in New York.liable to Atrium.
Company stockholders formally ratified the donation.

Second Type Ultra Vires: When the President enters into speculative contracts,
The donationwithout
was a corporate
prior board act carried out
approval, andby the corporation
without subsequent not only with the
submission sanction
of those of the to the
contracts
Board of Directors
Board but also of itsorstockholders.
for approval Thewere
ratification, nor donation has reachedincluded
the transactions a stage of
in perfection
the reportswhich
of the
is valid and binding uponsuch
corporation, the corporation
contracts do and
notcannot be corporation.
bind the rescinded unless there
It must exists legal
be pointed out grounds
that the
for doing so.Board
The SEC opinion nor
of Directors, notthe subsequent
the President, Board Resolution
exercises arepowers.
corporate not sufficient reasons
Safic Alcan to v.
& Cie
nullify the donation.
Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001).

The donation is also not an ultra vires act. The corporation was given broad and unlimited powers to
(b) Ratification of Ultra Vires Acts: (aPirovano v. De la Rama Steamship Co., Inc., 96 Phil.
carry out the purpose for which it was organized which includes the power to (1) invest and deal with
335 [1954]; Carlos v. Mindoro Sugar Co., 57 Phil. 343 [1932]; Republic v. Acoje Mining
corporate money not immediately required in such manner as from time to time may be determined
Co., 3 SCRA 361 [1963]; aCrisologo Jose v. Court of Appeals, 177 SCRA 594 [1989];
(2) aid in any other manner to any person, association or corporation of which any obligation is held
aHarden v. Benguet Consolidated Mining Co., 58 Phil. 140 [1933]).
by this corporation. The donation undoubtedly comes within the scope of this broad power.

An ultra vires act is (1) an act contrary to law, morals, or public order or contravene some rules of
public
PIROVANOpolicyDEorLA duty.
RAMAIt cannot
STEAMSHIPacquire
CO.validity
INC. by performance, ratification, estoppel. It is essentially
void (2) those within the scope of the Articles of Incorporation and not always illegal. It is merely
Facts: Theand
voidable story
maybegan
becomewithbinding
Enrico Perovano
and enforceable
becomingwhenPresident
ratified of
bythe
stockholders.
Dela Rama Corporation.
Under his management, the corporation grew into a multi-million company until his death. Don
Esteban
Since it isdela
not Rama who owned
contended that theand controlled
donation the stock
is illegal of the corporation,
or contrary to any of thedistributed
expressedhis provisions of
shareholdings among his fivenor
the Articles of Incorporation daughters
prejudicialincluding Estefania.ofThe
to the creditors the company hassaid
corporation, a bonded
donation even if
indebtedness
ultra vires is notamounting
void andto P7,500 in its
if voidable, 1940 but had
infirmity hasassets/capitals
been cured byofratification
P15 M as ofand1941 which were
subsequent atcs
mortgaged as security
of the corporation. The for the debt to
corporation the National
is now estoppedDevelopment
or preventedCorp.
from This bondedthe
contesting indebtedness was
validity of the
convertedTo
donation. to allow
non-voting preferred shares
the corporation to undoofwhatthe company
it has doneunder
wouldthebecondition thatand
most unfair they would bearthe
contravene a
fixed cumulative
well-settled divisor
doctrine thatofthe6%defense
per annum andvires
of ultra this was carried
cannot be seoutupinor1949. NDC
availed of now had
in any the right to
completed
be represented by four out of nine members in the Board of Directors. It was in 1946 that the Board
transaction.
of Directors adopted the questioned resolution where the corporation ser aside P400,000 to the four

NOTE: The ratification of the stockholders of the donation made is the key in this case. Because such
 Revised Bagtas Reviewer by Ve and Ocfe 2A 95
ratification is meant to protect the contractual
By 1929, Benguet had spent P1,417,952,15 relationshipoforthe
in pursuance interest of stockholders.
contract. Balatoc stockholders have
been receiving large dividends. Harden and two other stockholders filed a suit against Benguet,
Balatoc and the officers to annul the certificate covering P600,000 shares of Balatoc issued to
Benguet and to recover a large sum of money alleged to have been unlawfully collected by Benguet
and to annul the contract. The trial court dismissed the complaint, hence this petition.
CRISOLOGO-JOSE v. COURT OF APPEALS
Issue: WON it is lawful for Benguet to hold any interest in another mining corporation?

Held: No. Section 75 of the Philippine Bill of 1902 prohibits corporation engaged in mining from being
Facts: Atty.in
interested Benares
any other wascorporation
the President of Movers
engaged Enterprise
in mining. This while Ricardo Santos
was amended by Act Jr. was
No. thewhich
3518 Vice-
President. On April 1980 Atty. Benares in accommodation of his
now provided that a corporation is prohibited to hold more than 15% of the OCS of anotherclients, the spouses Jaime and Clarita
Ong issued aThe
corporation. check
Corp.drawn
Lawagainst
did not Traders
contain Royal Bank in
any clause the amount
directly of 45,000
penalizing the acts payable to Crisologo-
of a corporation or
Jose.
member Since
in the check was
an interest underto
contrary the account
Sec. 13 of Actof the corporation,
1459. The penalties the president
imposed and by thetheCorp.
treasurer
Law are
should
of suchsign thethat
nature check.
theyButcan since the treasurer
be enforced only bywasa not available,
criminal Benares
prosecution orasked
by anSantos
action to be the
of quo
alternate signatory. The check was issued to Crisologo-Jose in consideration
warranto which can only be maintained by the Atty. General. Benguet Co. has committed no civil of the waiver of
Crisologo
wrong againstover the
a certain property
plaintiff which the
stockholders andGAIA agreed
if a public to sell
wrong is to the clientsthe
committed, of directors
Benares (spouses
of Balatoc
Ong)plaintiff
and with the understanding
Harden himself were that the
upon approval
active of the
inducers ofcompromise
the commission agreement with theThe
of that wrong. spouses
contracts
Ong,
have thebeencheck will be on
performed encashed
both sides accordingly.
and thereHowever, the compromise
is no possibility of undoingagreement
what has been was not
done.
approved within the expected period. So Benares replaced the check with another one with the same
amount also payable to Jose. When petitioner deposited the check, it was dishonored for insufficiency
of fund. Petitioner
Plaintiffs then invoke filed criminal
Art. complaint
1305 which for violation
declares of BP 22.party
that an innocent Meanwhile, duringcontract
to an illegal the preliminary
may
investigation,
recover anything that he may have given while he is not bound to fulfill any promise hepetitioner
Santos tendered cashiers check in payment of the dishonored check but may have
refused to accept this
made. Supposing it. Santos then encashed
is applicable, the check
the general remedy and deposited
provided by the
Art. money to the be
1305 cannot Clerk of Court.
invoked
Incidentally, Benares purchased the cashiers
where a special remedy is supplied in special law. check and gave it to the plaintiff to be applied as
payment of the dishonored check. RTC held that it was not persuaded to believe that consignation is
applicable here. So the complaint was dismissed. CA reversed and set aside such decision. Petitioner
In as much
contends as the
that the accommodation
corporation law prohibits the case
party in this acquisition
is Mover by Enterprises
one mining and corporation of any
not private interest
respondent
in another and that these were enacted in
who merely signed the check in a representative capacity.the exercise of general police power of the government, it
results that where a corporation does so, the stockholders cannot maintain an action to annul the
contract by which such interest was acquired. The remedy must be sought in a criminal proceeding
or quo warranto action instituted by the government. Until thus assailed in a direct proceeding, the
contract by which the interest was acquired will be treated as valid as between the parties.
Issue: Assuming that Mover Enterprises is the accommodation party, WON it may be held liable on
the accommodation instrument.
NOTE: We are studying Harden because of the pronouncement that even where corporate contracts
are
Held:illegal per se, when
No. Corporation is only public The
not liable. or government
provisions of policy
the NIL is at stakeholds
which and noan private wrong is party
accommodation
committed,
liable on thethe courts will
instrument to leave thefor
a holder parties
value, asalthough
they are such
in accordance
holder at the withtime
theiroforiginal
taking contractual
the
expectations.
instrument knew (The only
him to contracts
be only anthat the courts willparty,
accommodation touchitare does contracts
not applywhich are void for which
to corporations being are
illegal per se.) parties This is because issue or endorsement of negotiable paper by a corporation
accommodation
without consideration and for the accommodation is an ultra vires act.

By way of a corporation, an officer or agent may do so ONLY IF specifically authorized to do so. But
(i) Theory of Estoppel or Ratification
where the facts show that the accommodation involved was for their personal account, undertaking
or purpose and theThe creditor was of
principle aware thereof.
estoppel precludes a corporation and its Board of Directors from
denying the validity of the transaction entered into by its officer with a third party who
NOTE: That whileinthe public
good is relied
faith, not required
on the to know that
authority oneformer
of the is authorized or nottotoact
as manager bind
on the
behalf of the
corporation for acorporation.
certain obligation
aLipat and that while
v. Pacific the Corp.,
Banking contract
402 may be 339
SCRA enforced
(2003).even without
authority because the public dealing in good faith has the right to expect that the obligation entered
into shall be complied with, such doctrine does not apply when the dealing public in the first place is
In order to ratify the unauthorized act of an agent and make it binding on the
in bad faith, as in this case; that is why the corporation was not bound to such accommodation
corporation, it must be shown that the governing body or officer authorized to ratify
agreement.
had full and complete knowledge of all the material facts connected with the
transaction to which it relates. Ratification can never be made on the part of the
corporation by the same person who wrongfully assume the power to make the
HARDEN v. BENGUET contract, but the ratification
CONSOLIDATED MININGmust be by the officer or governing body having authority
to make such contract. Vicente v. Geraldez, 52 SCRA 210 (1973).

Facts: Benguet Consolidated

The admission Mining and
by counsel Balatoc
on behalf of Mining Co. are entities
the corporation organized
of the latters for the
culpability
purpose for
of engaging in theobtained
personal loans mining ofby gold in the Philippines
its corporate officers and their
cannot berespective
given legalproperties lie
effect when
only a few
themiles apart. was
admission The without
original stockholders
any enablingof Balatoc
act were unable
or attendant to supply
ratification the means
of corporate
for profitable
act, operation thus, its board
as would authorize ordered
or even ratify a suspension
such of all
admission. work.
In the A general
absence meeting of
of such
the stockholders approved
ratification to establish
or authority, a committee
such admission doestonot
find investors.
bind The committee
the corporation. Aguenzain turn
v.
approached Bean, President
Metropolitan Bank and and General
Trust manager
Co., 271 SCRAof Benguet to secure the necessary capital
1 (1997).
for the development of the Balatoc properties. The management of both companies executed
a contract where Benguet was to proceed with the development and construction of a milling
Doctrine of Laches or Stale Demands: The principle of laches or stale
plant for the mine and to erect a power plact. In return, Benguet would receive from Balatoc
demands provides that the failure or neglect, for an unreasonable and unexplained
shares of par value of P600,000 in payment of the first 600,000 to be advanced to it.
length of time, to do that which by exercising due diligence could or should have been
 Revised Bagtas Reviewer by Ve and Ocfe 2A97
done earlier, or the negligence or omission to assert a right within a reasonable time,
warrants a presumption that the party entitled to assert it either has abandoned it or
declined to assert it. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002).

PRINCIPLE OF ESTOPPEL It being merely voidable, an ultra vires act can be enforced or
validated if there are equitable grounds for taking such action. Here it is fair that the
resolution be upheld at least on the ground of estoppel.
Ratification (a) the act must be consummated and not executory (b) creditors are not
prejudiced or all of them have given their consent (c) rights of the public or the State are not
involved (d) all the stockholders must give their consent.

(ii) Theory of Apparent Authority (Art. 1883, Civil Code;aPrime White Cement Corp. v.
IAC, 220 SCRA 103, 113-114 [1993]; aFrancisco v. GSIS, 7 SCRA 577 [1963]; aYao Ka
Sin Trading v. CA, 209 SCRA 763 [1992]).

Outward appearance, the agents apparent representation yields to the principals true
representation and the contract is considered as entered into between the principal and the
third person.

Due what seems to be and what happens otherwise.

Q: Upon whom is placed the burden of discovering that the agent has no authority?
A: In view of the authority of apparent authority, the third person dealing with the corporation
is not given the burden of discovering whether the agent has authority or not. It is also
therefore reasonable in a case where an officer of a corporation has made a contract in its
name, that the corporation should be required, if it denies the authority of the officer, to state
such defense in its answer, since it allows the plaintiff to be appraised of the fact that the
agents authority is contested; and he is given an opportunity to adduce evidence showing
either that the authority existed or that the contract was ratified and approved.

NOTE: The theory of apparent authority is classified into two types by which such may be
manifested or proved, which are by position and by circumstance. The burden of proof
mentioned above applies to the second classification.

PRIME WHITE CEMENT CORP. v INTERMEDIATE APPELLATE COURT

Facts: A director (Te) entered into an agreement of Dealership agreement with PWCC, signed by its
chairman and president of the corporation to supply 20,000 bags of white cement per month for five
years at a fixed price of P9.70 per bag. Subsequently, the Board refused to abide by the contract
unless new conditions are accepted providing for a new price formula. The dealing director sued for
specific performance on the contract.

Held: The Court held that under both the Corporation Law then and the present Corporation Code,
the doctrine is that all corporate powers shall be exercised by the Board of Directors, except as those
provided by law. Although it cannot completely abdicate its powers and responsibility to act for the
juridical entity, the Board may expressly delegate specific powers to its president or any of its
officers. In the absence of such express delegation, a contract entered into by its President on behalf
of the corporation may still bind the corporation if the Board should ratify the same expressly or
impliedly.

Implied ratification takes various forms (1) silence or acquiescence (2) by acts showing approval or
adoption of the contract or (3) by acceptance and retention of the benefits flowing therefrom.

Even in the absence of express or implied authority by ratification, the President as a general rule
may bind the corporation by a contract in the ordinary course of business, provided the same is
reasonable under the circumstances. These rules are basic but general and flexible. Applies where
the President is dealing with third persons but different where a director is dealing with his own
corporation.

The court herein held that the director holds a position of trust and as such he owes a duty of loyalty
to his corporation and his contracts with the corporation must always be at reasonable terms,
 Revised Bagtas Reviewer by Ve and Ocfe 2A 99
the one t bear
otherwise the contract
the resulting
is void
loss.
or voidable at the instance of the corporation. The court here found the
terms of the Dealership Agreement were unreasonable for the corporation and that the unfairness in
YAO KA SIN TRADING
the contract v. COURT
was a basis which OF APPEALS
renders a contract entered into the President without authority from
the Board, void or voidable, although it may have been in the ordinary course of business.

NOTE: The President as the highest office of the corporation, by practice and jurisprudence embodies
Facts:
apparent authority. On the other hand, the general manager on its own may or may not embody
Maglana, the president
such authority depending and
onchairman of PWCC sent
the circumstances thatagoletter
withtoit.Yao
TheKa Sin Trading
corporate represented
secretary by its
and lawyer
manager Yao. It
enjoy no such quoted the because
presumption followingtheir
P24.30/94 lbs.do
positions Bag net FOB
entail much CEBU; P24.30/94
commercial lbs. Bag FOB
significance.
Asturias; 45,000 bags (15,000/month). On June 30, 1973 Mr. Yao accepted the letter offer and issued
a check for P243,000, PWCC Board of Directors disapproved the same. On July 5, 1973 PWCC
informed YKS of the disapproval. However with respect to the 10,000 bags of cement. YKS accepted
without
FRANCISCOprotest. On August 4, 1973 PWCC wrote a letter to YKS stating that it is withdrawing or taking
v. GSIS
delivery of not less than 10,000 bags of cement. On September 10, 1973 YKS insisted on the delivery
of the 45,000 bags of cement. On December 7, 1973 PWCC only delivered 9,775 bags. YKS filed an
action for specific performance with the CFI. It was discovered that PWCC by-laws give the Chairman
Facts:
and theTrinidad Francisco
President the powermortgaged
to executeto GSIS
and a parcel
sign of land
for and with 21
in behalf of bungalows (Vic-Mari
the corporation Compound)
all contracts or
for
agreements which the corporation enters into subject to the qualification that all his actuationsper
a P400,000 loan of which P336,100 was released payable within 10 years with 7% interest shall
annum
be given compounded
to the Boardmonthly. In 1959
of Directors GSIS
of the extrajudicially
corporation. PWCC foreclosed
contendsthe thatmortgage
Mr. Maglanaon the
wasground
not of
default of payment in the amount of P32,000 ( total payment amounted to P130,000)
authorized to make any offer and sign a contract in behalf of the corporation and only the Board has where GSIS
was also the
the power to buyer. Atty.lower
do so. The Francisco,
courtthe father
ruled of Trinidad
in favor proposed
of YKS but the CAtoreversed.
the General Manager
Hence, of GSIS
this peition.
to pay P30,000 of the P52,000 and asked that the foreclosure be set aside and for GSIS to take over
the administration of the mortgaged property and to collect installments due on the unpaid purchase
price for more than 31 house and lot payees to be applied to the arrearage and the loan. The GSIS
approved
Issue: WON this
theand Atty. Francisco
contract originallywas notifed
entered intobybytelegram. GSIS accepted
PWCC through Presidenta Maglana,
check forbinds
P30,000the and
remittances totalingthe
corporation despite to P44,121.29
rejection of for
thewhich
Boardthe corresponding ORs were issued. GSIS then sent 3
of Directors.
letters signed by the GM asking a proposal for the payment of the debt since the 1yr. Period for
Held:
redemption had expired.
The by-laws do not confer upon the President, the authority to enter into contracts independently of
the Board of Directors. The fact that contracts are signed through the President was only meant to
Atty. Francisco
expedite protested
its execution butand
stillbrought to theaattention
presupposes prior act of
of GSIS the concluded
the corporation, contract
through theand
Boardits of
acceptance
Directors. Nobygreater
telegram. GSIS replied
authority can be asking
impliedpayment
from such forexpress,
various but
expenses
limited, and that the authority.
delegated telegram It
should
may bebe disregarded
presumed that for
theits failure toe
President hasexpress thetocontent
authority of a boardif resolution
make contracts he is givendue to error
general of its
control
minor employeesover
and supervision in the sending
affairs of the of corporation.
the telegram. ButThe approval
here, there was apparently
is a general conditioned
manager charged onwith
Atty.
Franciscos
direct agreement
management to pay
of the all expenses
business incurred
which Mr. Maglanain foreclosure. GSIS held
was not involved in. that the remittances
were insufficient so that GSIS consolidated title to the compound in its name. Hence, this suit for
specific performance and damages. The lower court ruled in favor of Francisco.
The doctrine on apparent authority provide that if a private corporation intentionally or negligently
clothes its officers or agents with apparent power to perform acts for it, the corporation will be
Held: The to
estopped SCdeny
findsthat
no reason for altering
such apparent the conclusion
authority is real, asthat the offer 3of
to innocent compromise made by
rd persons dealing in good faith
Francisco
with such had been
officers orvalidly
agents.accepted and was
This apparent bindingmay
authority on the defendant
result from: (1)GSIS. The terms
the general of the offer
manager by
were clear and the acceptance of the proposal was signed by the GM Andal. The
which the corporation holds out an officer or agents as having power to act (2) the acquiescence telegram hinted inon
no
his anomaly
acts of a and was within
particular nature,Andals apparent
with actual authority.
or constructive knowledge thereof, whether with or without
the scope of power. However, YKS failed to prove that PWCC indeed clothed Mr. Maglana with
Corporation
apparent transactions
power. PWCC also would
showedspeedily
that come to a standstill
no contract where by
can be signed every
the person
Presidentdealing with
without thea
corporation held duty-bound
Board of Directors to disbelieve
approval (and clearance every
fromacttheof its responsible
NIDC officers,
representative no matter
and legal how The
counsel). regular
they contract
first should appear on their
is at most face.
unenforceable.

If a corporation knowingly permits one of its officers or any other agent within the scope of an
apparent and thuswas
The first contract holds him out toand
disapproved the rejected
public asby
possessing
the Boardpower to do those
of Directors whichacts, the
at the corporation
same time
will as against
considered theany one who
P243,000 has in by
received good faith dealt
Maglana with thefor
as payment corporation through
10,000 bags such agent
of cement, be as an
treated
estopped
entirely from denying
different such
contract. YKSauthority. Hence,
had in fact even
agreed to ifthis
it were the Boardthe
by accepting Secretary
deliverywho sentwithout
receipt the
telegram, the corporation could not evade the binding effect produced by the telegram. The
protest.
corporation had sufficient notice of the allegedly unauthorized telegram when it pocketed the
P30,000
NOTE: but kept
Under silent about
the doctrine it.
of apparent authority and under the sub-classification of apparent
authority by circumstance, the first contract is unenforceable because PWCC effectively proved
through
Knowledge clear
of and
factsconvincing
acquired or evidence
possessed thatbytheir President
an officer cannot
or agent of bind the corporation
a corporation withoutof his
in the course
authorization
employment and frominthe Boardtoofmatters
relation Directors, so not
within thethe burden
scope shifted
of his upon
authority isYKS for to
notice himthetocorporation,
provide for
such circumstances
whether which have
he communicates such led him to believe
knowledge or not. that the President has such apparent authority to
bind the corporation; however such was not effectively discharged by YKS, that is why the first
contract
The silenceis unenforceable.
taken togetherAlso,
with it is unconditional
the most important to note, that
acceptance of 3the contract
other for 10,000
substantial bags of of
remittances
cement
the is enforceable
original agreementbecause
constitutesuch is a contract
a binding of sale
ratification ofentered into agreement.
the original by the President in the regular
Ratification may be
course
effectedofexpressly
business orof tacitly.
the corporation. However,
There is tacit the 45,000
ratification if with bags contract
knowledge of is unenforceable
the reason whichbecause
renders it
is voidable
it a contract of such
and dealership
reasonwhich is in
having the extraordinary
ceased, to a person course
who has ofathe business
right to invokeof the corporation.,
it should execute
hence, not within
an act which the purview
necessarily impliesof an
theintention
apparentto authority
waive his ofright.
the President.

As between two innocent parties, the one who made it possible for the wrong to be done should be
 Revised Bagtas Reviewer by Ve and Ocfe 2A10
was
NOTE: By-laws can bind third partiesinonly
denied they were not declared default in they
when connection with the cross-claim
have knowledge and that no
of such, otherwise, 1 may
such
evidence was parties.
not bind third presented (it was
In the also
same mentioned
manner, that Nyco
knowledge of ashould have impleaded
third person Sanshell
of such by-laws maybybind
waythe
of
a third party
corporation. complaint and not a cross-claim). CA affirmed the TC with modifications.

Issue: WON Nyco can be held liable for its President unauthorized acts.

Held: If a corporation knowingly permits one of its officers to act within the scope of an
apparent authority, it holds him out to the public as possessing the power to do those
Nyco as an assignor-vendor warranted
acts, the corporation that
will, as both the anyone
against credit itself
who (its
hasexistence anddealt
in good faith legality)
withand the
it through
person of the debtor (his solvency)
such agent, according
be estopped from to Articlethe
denying 1628of the authority.
agents NCC. Therefore,
Soler v.any breach
Court of the
of Appeals,
warranties, the 358
assignor
SCRAshould be held answerable. It is of no question that the assignor is liable for
57 (2001).
the invalidity of whatever he assigned. The deed of assignment executed by Nyco in favor of BA
Finance with Sanshell as debtor. BA Finance is actually enforcing the assignment. The check is
merely an incidental Thematter
authorityandofsoaNyco
corporate
is notofficer
being dealing with
held liable forthird
bothpersons
the BPImay be actual
and the or
Security
Bank check butapparent
rather the . .deed
. the of
principal is liable
assignment. The forissue
the obligations
on no notice contracted
of dishonorbywas
the given
agent.isThe
belied
not only by the agent
formal apparent representation
demand letter but also the yields to the
findings ofprincipal's
the TC that true
Yaorepresentation and the
and the Fernandezes
contract
had frequent contacts is considered
before, as entered
during and into between
after dishonor. There the
is noprincipal
novationand the third
because person.
there was no First
Philipine International Bank v. Court of Appeals, 252 SCRA 259
express agreement that BA Finance;s acceptance with Security Bank check will discharge Nyco from (1996).
liability. Neither is there incompatibility because both checks were given precisely to terminate a
single obligation. Persons who deal with corporate agents within circumstances showing that the
agents are acting in excess of corporate authority, may not hold the corporation liable.
Traders Royal Bank v. Court of Appeals, 269 SCRA 601 (1997).
Nyco disowned the Presidents acts claiming that it had not authorized Yao to apply to BA Finance for
credit accommodationApparent
sayingauthority maynot
that it did be issue
ascertained
a boardthrough
resolution(1) giving
the general manner inHowever,
such authority. which the
the by-laws clearly provide for the power of its President, which include executing contracts and words
corporation holds out an officer or agent as having the power to act, or, in other
the apparent
agreements, borrowing money, authority
signing,toindorsing
act in general with which
and delivering is clothes
checks, them;
all in orof
behalf (2)the
the
corporation. Also, there was already a prior transaction of discounting checks involving theknowledge
acquiescence in his acts of a particular nature, with actual or constructive same
parties whereinthereof, withinresolution
any enabling or beyondfromthe scope
Nyco wasof his ordinary with
dispensed powers.
and Inter-Asia
yet BA was Investment
still able to
collect from NycoIndustries v. Court
and Sanshell wasofable
Appeals, 403 SCRA
to discharge 452liabilities.
of its (2003). Therefore, that places Nyco
under estoppel in pais which arises when one, by his acts, representations or admissions, or by his
silence when he ought
Whentoa speak
banking out, intentionally
corporation, or through
when culpable
an officers negligence,
arranges induce
a credit line another to
agreement and
believe certain forwards
facts to exist and such
the same other
to the legalrightfully reliesat
department onitssuch
head belief, so and
officer, thatthe
he will
bank bedid no
prejudiced if thedisaffirm
former is
thepermitted
contract,tothen
deny it the existence
is bound by it.ofPremier
such fact..
Dev. Bank v. Court of Appeals,
G.R. No. 159352, 14 April 2004.

Per its Secretarys

A corporation Certificate,
cannot disown itsthePresidents
foundationact
hadofgiven its President
applying ostensible
to the bank and
for credit
apparent authority
accommodation, to inter
simply on alia
the deal
groundwith theitrespondent
that Bank, and
never authorized therefore by
the President thethe lack
foundation is estopped
of any formal from questioning
board resolution. the Presidents
The following authority to and
placed the corporation obtain
its the subject
Board of
loans frominthe
Directors respondent
estoppel Bank.
in pais: Lapulapu
Firstly, Foundation,
the by-laws providesInc.,
forv. Court
the of Appeals,
powers of the G.R.
No. 126006,
President, 29 January
which includes,2004.
executing contracts and agreements, borrowing money,
signing, indorsing and delivering checks; secondly, there were already previous
transaction of discounting the checks involving the same personalities wherein any
3. Express Powers
enabling resolution from the Board was dispensed with and yet the bank was able to
collect from the corporation. aNyco Sales Corp. v. BA Finance Corp., 200 SCRA 637
a) Enumerated
(1991). Powers (Secs. 36)
Sec. 36 Corporate powers and capacity Every corporation incorporated under this Code has
the power and capacity:
NYCO SALES CORPORATION v BA FINANCE CORPORATION
1.) To sue and be sued in its corporate name;
Facts:
2.) Of succession by its corporate name for the period of time stated in the articles of
Rufino Yao was the President and General Manager of Nyco Sales Corporation which was engaged in
incorporation and the certificate of incorporation;
the business of selling construction materials. Nyco Sales through Yao was approached by Santiago
and Renato Fernandez on behalf
3.) To adopt and of useSanshell Corporation
a corporate seal; requesting for credit accommodation since
Nyco had discounting privileges with BA Finance. The Fernandezes wen to Yao for the purpose of
discounting their4.)post-dated
To amendBPI its check
articlesworth P60,000 made
of incorporations in payable
accordanceto Nyco. The provisions
with the discountingof this
process agreed upon was that Nyco through Yao endorsed the check to BA Finance then BA Finance
Code;
would issue a check payable to Nyco for which Nyco would then endorse it to Sanshell. With the
exchange of checks,5.) Tothe
adopt by-laws,
parties agreednottocontrary
a Deed of to Assignment
law, morals executed
or public policy,
by Nycoandin to amend
favor of BAor
Finance the subjectrepeal thewas
of which same theincheck.
accordance with contained
The Deed this Code;a Continuing Suretyship Agreement
at the back whereby the Fernandezes unconditionally guaranteed to BA Finance full and prompt
6.) In case
payment and discharge of stock
of any corporations,
and all indebtedness to issue or sell
of Nyco. BPI stocks to subscribers
check was dishonoredand to sell
which
treasury
therefore led BA Finance stocks itinto
to report accordance with the
the Fernadezes. provisions
They of this
then issued Code; check,
another and to this
admit
time
from Security Bankmembers
which wastoalsothe dishonored.
corporation Despite
if it be arepeated
non-stockdemands,
corporation;Nyco and Fernandezes
failed to settle their obligation which prompted BA Finance to file an action in court. TC ruled against
7.) To purchase,
Nyco and the Fernandezes to payreceive, takeseverally.
jointly and or grant, Nycos
hold, convey, sell, lease,
cross-claim againstpledge, mortgage and
the Fernadezes
otherwise deal with such real and personal property, including securities and bonds
of other corporations, as the transactions of the lawful business of the corporation
 may reasonably and necessary require, subject to the limitations prescribed by law
and the Constitution;

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

9.) To make reasonable donations, including those for the public welfare or hospital or
charitable, cultural, scientific, civic or similar purposes: Provided, That no
corporation, domestic or foreign shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;

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

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

b) Extend or Shorten Corporate Term (Secs. 37 and 81 [1])

Sec. 37 Power to extend or shorten corporate term A private corporation may extend or
shorten its term as stated in the articles of incorporation when approved by majority vote of
the board of director or trustees and ratified at a meeting by the stockholders representing at
least 2/3 of the outstanding capital stock or by at least 2/3 of the members in case of non-
stock corporation. Written notice of the proposed action and of the time and place of the
meeting shall be addressed to each stockholder or member at his place of residence as shown
on the books of the corporation and deposited to the addressee in the post office with
postage prepaid or served personally. Provided, that in case of extension of corporate term,
any dissenting stockholder may exercise his appraisal right under the conditions provided in
this code.

Sec. 81[1] Instances of appraisal right Any stockholder of a corporation shall have the right
to dissent and demand payment of all the fair value of his shares in the following instances: In
case any amendment to the articles of incorporation has the effect of changing or restricting
the rights of any stockholders or rights of any stockholder class of shares, or of authorizing
preferences in any respect superior to those outstanding shares of any class, or of extending
or shortening the term of the corporate existence.

Such power only concerns the Juridical Entity Level such extending or shortening of the term
of the corporation tampers with the powers given the corporation by the State.

Q: Why should such extension or shortening require the ratificatory vote of stockholders when
this does not concern the business enterprise level but the juridical entity level?
A: Such in effect is an amendment of the articles of incorporation, and any amendment to
such would always require the consent of the State and of the corporations stockholders.
They also have a say in this because the extension or shortening of the corporate term
affects these stockholders investments.

Q: Why do stockholders not have appraisal right with respect to the shortening of the
corporate term whereas they do in the extension of the corporate term?
A: Actually, there is a seeming conflict between Sec. 37 which makes no mention of
stockholders appraisal right with respect to the shortening of the corporate term while Sec.
81(1) refers to such. CLV tells us that stockholders should be afforded an appraisal right even
in the case of the shortening of the corporate term because it is not enough to talk of free
transferability of interests when you dissent to the decrease because such concerns ones
expectations with respect to the business enterprise.

c) Increase or Decrease Capital Stock (Sec. 38)

Sec. 38 Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness No corporation shall increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority vote of the board of
directors and, at a stockholders meeting duly called for the purpose, 2/3 of the outstanding
capital stock shall favor the increase or diminution of the capital stock, or the incurring,
creating, or increasing ant bonded indebtedness. Written notice of the proposed increase or
 Revised Bagtas Reviewer by Ve and Ocfe 2A10
diminution of the capital stock or of the incurring, creating, or increasing of any bonded 3
indebtedness and of the time and place of the stockholders meeting at which the proposed
increase or diminution of the capital stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of directors of the corporation and

countersigned by the chairman and the secretary of the stockholders meeting, setting forth:

(1) That the requirements of this section have been complied with;

(2) The amount of the increase or diminution of the capital stock;

(3) If an increase of the capital stock, the amount of capital stock or number of shares of
no-par stock thereof actually subscribed the names, nationalities, residences of the
persons subscribing, the amount of capital stock or number of no-par stock subscribed
by each., and the amount paid by each on his subscription in cash or property, or the
amount of capital stock or number of shares of no-par stock allotted to each
stockholder if such increase is for the purpose of making effective stock dividend
thereof authorized;

(4) Any bonded indebtedness to be incurred, created or increased;

(5) The actual indebtedness of the corporation on the day of meeting;

(6) The amount of stock represented at the meeting; and

(7) The vote authorizing the increase or diminution of the capital stock, or the incurring,
creating, or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing any
bonded indebtedness shall require prior approval of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange Commission and attached to the original
articles of incorporation. From and after approval by the Securities and Exchange Commission
and the issuance by the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing any bonded indebtedness
authorized, as the certificate of filing may declare Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the corporation lawfully holding
office at the time of the filing of the certificate, showing that at least 25% of such increased
capital stock has been subscribed and that at least 25% of the amount subscribed has been
paid either in actual cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to 25% of the subscription: Provided
further, that no decrease of the capital stock shall be approved by the Commission if its effect
shall prejudice the rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness or increase the same with
the approval by a majority vote of the board of trustees and of at least 2/3 of the members in
a meeting duly called for that purpose.

Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof.

The policy behind the non-granting of appraisal right with respect to the increase and
decrease of the capital of the corporation is the fact that every stockholder should come into
the corporation setting aware that the expediencies of corporate life may require that
eventually the corporation may need to increase capitalization to fund its operations or
expansions, and needs to look primarily into its equity investors to fund the same.

In the increase, a stockholder may always sell his stock if he dissents to the increase of the
capital stock. Moreover, such appraisal right may defeat the purpose of the corporation in
increasing the funds; by increasing the funds for survival, if you grant the appraisal right in
 effect you pay out capital when you seek to keep more money inside.

In the decrease of capital stock, why appraise when in effect you will be returning capital to
your stockholders.

Despite the board resolution approving the increase in capital stock and the receipt of
payment on the future issues of the shares from the increased capital stock, such funds do
not constitute part of the capital stock of the corporation until approval of the increase by
SEC. Central Textile Mills, Inc. v. National Wages and Productivity Commission, 260
SCRA368 (1996).

A reduction of capital to justify the mass layoff of employees, especially of union

members, amounts to nothing but a premature and plain distribution of corporate assets
to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital
through the years, and would constitute unfair labor practice. Madrigal & Co. v. Zamora,
151 SCRA 355 (1987).

Why do you need the consent of the stockholders when you increase or decrease capital
stock? When you increase the capital stock, stockholders have to put in more money to
maintain their proportionate interest in the corporation, as such the increase dilutes the value
of the stock they have prior to such increase. Moreover, such increase affects their rights as
in their voting capacity, their sharing in the dividends, their participation in the management,
the extent of their participation in the dissolution of the corporation, etc. The consent of the
stockholders is needed because such change once again affects their contractual expectation
when they first entered into the corporation.

But in decreasing capital stock, why do you again need the consent of the stockholders
whereas in effect they will be receiving part of their investment? Such once again affects their
contractual expectation when they first entered into the corporation.

d) Incur, Create or Increase Bonded Indebtedness (Sec. 38)

Sec. 38 Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness No corporation shall increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority vote of the board of
directors and, at a stockholders meeting duly called for the purpose, 2/3 of the outstanding
capital stock shall favor the increase or diminution of the capital stock, or the incurring,
creating, or increasing ant bonded indebtedness. Written notice of the proposed increase or
diminution of the capital stock or of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholders meeting at which the proposed
increase or diminution of the capital stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of directors of the corporation and

countersigned by the chairman and the secretary of the stockholders meeting, setting forth:

1. That the requirements of this section have been complied with;

2. The amount of the increase or diminution of the capital stock;

3. If an increase of the capital stock, the amount of capital stock or number of shares of
no-par stock thereof actually subscribed the names, nationalities, residences of the
persons subscribing, the amount of capital stock or number of no-par stock subscribed
by each., and the amount paid by each on his subscription in cash or property, or the
amount of capital stock or number of shares of no-par stock allotted to each
stockholder if such increase is for the purpose of making effective stock dividend
thereof authorized;

4. Any bonded indebtedness to be incurred, created or increased;

5. The actual indebtedness of the corporation on the day of meeting;

6. The amount of stock represented at the meeting; and

 Revised Bagtas Reviewer by Ve and Ocfe 2A10
7. The vote authorizing the increase or diminution of the capital stock, or the 5
incurring, creating, or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing any
bonded indebtedness shall require prior approval of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange Commission and attached to the original
articles of incorporation. From and after approval by the Securities and Exchange Commission
and the issuance by the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing any bonded indebtedness
authorized, as the certificate of filing may declare Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the corporation lawfully holding
office at the time of the filing of the certificate, showing that at least 25% of such increased
capital stock has been subscribed and that at least 25% of the amount subscribed has been
paid either in actual cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to 25% of the subscription: Provided
further, that no decrease of the capital stock shall be approved by the Commission if its effect
shall prejudice the rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness or increase the same with
the approval by a majority vote of the board of trustees and of at least 2/3 of the members in
a meeting duly called for that purpose.

Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof.

Bond security representing denominated units of indebtedness issued by a corporation to

raise money or capital obliging the issuer to pay the maturity value at the end of a specified
period which should be not less than 360 days. That is why not all indebtedness of the
corporation require the ratification of the stockholders, only bonded indebtedness require the
ratification of the stockholders.

A bond in contrast to a promissory note represents a unit of a large indebtedness, whereas a

promissory note represents a single indebtedness and may stand on its own. Mostly all
properties of the corporation i.e. the business enterprise comprise of the security of such
bonded indebtedness.

The SEC also require that a company has a minimum net worth of P25 M at the time of the
filing of the application and must have been in operation for three years.

(e) Sell or Dispose of Assets (Sec. 40)

Sale by Board of Trustees of the only corporate property without compliance with Sec.
40 of Corporation Code requiring ratification of members representing at least two-thirds
of the membership, would make the sale null and void. Islamic Directorate v. Court of
Appeals, 272 SCRA 454 (1997); Pea v. CA, 193 SCRA 717 (1991).

Sec. 40 Sale or other disposition of assets Subject to the provisions of existing law on illegal
combination and monopolies, a corporation may by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially
all of its property and assets including its goodwill, upon such terms and conditions and for
such consideration, which may be money, stocks, bonds or other instruments for the payment
of money or other property or consideration as its board of directors or trustees deem
expedient, when authorized by the vote of stockholders representing at least 2/3 of the
outstanding capital stock, or in the case of non-stock corporation, by the vote of at least 2/3
of the members, in a stockholders or members meeting duly called for that purpose. Written
notice of the proposed action and of the time and place of the meeting shall be addressed to
each stockholder or members at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid paid, or
served personally: Provided, that any dissenting stockholder may exercise his appraisal right
under the conditions provided for in the Code.
 A sale or other disposition shall be deemed to cover substantially all the corporate property
and assets if thereby the corporation would be rendered incapable of continuing the business
or accomplishing the purpose for which it was organized.

After such authorization or approval by the stockholders or members, the board of directors
or trustees, may nevertheless, in its discretion, abandon such sale, lease, exchange,
mortgage, pledge or other disposition of property and assets subject to the rights of third
parties under any contracting relating thereto without further action or approval by the
stockholders or members.

Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or
otherwise dispose of any of its property and assets if the same is necessary in the usual and
regular course of business of said corporation or if the proceeds of the sale or other
disposition of such property and assets be appropriated for the conduct of its remaining
business.

In non-stock corporations where there are no members with voting rights, the vote of at least
a majority of the trustees in office will be sufficient authorization for the corporation to enter
into any transaction authorized by this section.

NOTE: When the transaction is in the normal course of business, it only needs the majority of
the quorum of the Board of Director to approve such transaction. However, when such is in
the extraordinary course of the business as in the disposition of all or substantially all of the
assets of the corporation, such needs the vote of the absolute majority of the Board of
Directors plus the ratification of 2/3 vote of stockholders representing at least 2/3 of the
outstanding capital stock of the corporation in case it is a stock corporation, or in the case of
a non-stock corporation, 2/3 of the members.

This case is one of the exceptions to the rule where the stockholders have proprietary
interests in the business enterprise. This is also an exception to the rule that generally the
Board of Directors have the power to bind the, and transact for the corporation.

If transactions are entered into relating to this section without the ratification of the
stockholders, such transaction is void for it is illegal per se as it runs contrary to Sec. 40 of the
Corporation Code.

Example: San Miguel decides to sell its Pale Pilsen formula, but retains all of its P 4B worth of
investment, will such transaction need the ratification of the stockholders and the absolute
majority vote of the Board? Yes, since it concerns substantially all of the assets of the
corporation as such formula pertains to the capacity of the corporation to earn. The absence
of such ratification violates the social compact as between the stockholders and the
corporation. Such sale violates the contractual expectation of these stockholders, and as
such, their ratification must be availed of before it may be entered into. The same is also the
case, if San Miguel decides to share the P 4B and retain the Pale Pilsen formula.

(f) Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 42; aDe la Rama
v. Ma-ao Sugar Central Co., 27 SCRA 247 [1969])

Sec. 42 Power to invest corporate funds in another corporation or business or for any other
business purpose Subject to the provisions of this Code, a private corporation may invest its
funds in any other corporation or business or for any purpose other than the primary purpose
for which it was organized when approved by a majority of the board of directors or trustees
and ratified by the stockholders representing at least 2/3 of the outstanding capital stock, or
at least by 2/3 of the members in the case of non-stock corporations, at a stockholders or
members meeting duly called for that purpose. Written notice of the proposed investment
and the time and place of the meeting shall be addressed to each stockholder or member at
his place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid or served personally: Provided, That any
dissenting stockholder shall have appraisal right as provided in this Code: Provided however,
That where the investment by the corporation is reasonably necessary to accomplish its
primary purpose as stated in the articles of incorporation, the approval of the stockholders or
members shall not be necessary.
 Revised Bagtas Reviewer by Ve and Ocfe 2A 10
7

DE LA RAMA v. MA-AO SUGAR CENTRAL CO.

Facts:

De la Rama et.al. contend that Ma-ao Sugar Central through its President, subscribed P300,000 worth
of capital stock of the Philippine Fiber Processing Co. Inc. They allege that the time of the first two
payments were made there was no board resolution authorizing the investment and that it was only
before the third payment that the President was so authorized by the Board of Directors. De la Rama
also contends that even assuming, arguendo, that the said Board Resolutions are valid, the
transaction is still wanting in legality, no resolution having been approved by the affirmative vote of
the stockholders holding shares in the corporation, entitling them to at least 2/3 of the voting power.

Issue: WON the investment of corporate funds of Ma-ao were in violation of corporation law.

Held:

Investment of corporate funds in another corporation if done in pursuance of the corporate purpose,
does not need the approval of the stockholders, but where the purchase of the shares of another
corporation is done solely for investment and not to accomplish the purpose of its incorporation, the
vote of approval of the stockholders is necessary. The investment made in Philippine Fiber was
upheld by the SC. Philippine Fiber was engaged in the manufacture of bags or investments in another
corporation engaged in the manufacture of bags. Since the sugar central is engaged in the
manufacture of sugars, sugar bags necessarily would come under the purview of its needs under the
regular course of business

Any corporation whatever its primary purpose has a choice of placing such fund either in a
savings or time deposit account or in money market placements, or treasury bills, or even in
shares of stocks of other corporations which are traded in the stock exchange. The exercise of
such business judgment on the part of the board in consistency with the primary purpose,
since it is expected even from the stockholders to believe, that it is within the ordinary
business discretion of the Board to place the corporations investible fund in the form of
investment that would yield the best possible return to the corporation and would not require
the ratification of the stockholders or members each time.

Hotel Corporation invest 2M in 10M Bagoong Company in this case while it contemplates a
situation where the Board exercises ordinary business discretion, such investment would run
contrary to the relationship of the Board to the stockholders whereby they engaged to
manage the hotel corporation alone, and whereby they vowed to devote all their time and all
their effort in such corporation. By investing in 20% of another corporation, said Board
obtained a very big role in the management of such corporation, hence such would run
contrary to its obligation to the stockholders to take care of the business enterprise of the
hotel corporation and not any other corporations business enterprise. As such, it would need
a ratificatory vote of 2/3 of the stockholders.

Hotel Company invest 2M in 100B San Miguel Corporation in this case, the ratificatory vote
is not needed since such is really within the ordinary business discretion of the Board. And by
investing only in a relatively minimal share in the assets of another company, it does not
really engage in the business enterprise of another corporation, hence, they still afford priority
to the business enterprise of the hotel corporation.

(g) Declare Dividends (Sec. 43; aNielson & Co. v. Lepanto Consolidated Mining Co., 26
SCRA 540 [1968])

Sec. 43 Power to declare dividends The board of directors of a stock corporation, may
declare dividends out of the unrestricted retained earnings which shall be payable in cash, in
property or in stock to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividend due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock dividends shall be withheld
from the delinquent stockholder until his paid subscription is fully paid: Provided further, that
no stock dividend shall be issued without the approval of stockholders representing not less
than 2/3 of the outstanding capital stock at a regular or special meeting duly called for that
purpose.
 Revised Bagtas Reviewer by Ve and Ocfe 2A10
outstanding capital stock, or by at from
Stock corporations are prohibited leastretaining
a majority of the profits
surplus members in the of
in excess case
100%of aofnon-9
their
stock corporation
paid-in of both
capital stock, managing
except: (1) whenandjustified
the managed corporation
by definite corporateat expansion
a meeting duly called
projects or for
that purpose: Provided, That (1) where a stockholder or stockholders representing
programs approved by the board of directors; or (2) when the corporation is prohibited under the same
interest
any loanofagreement
both the managing and managed
with any financial corporations
institution own
or creditor or control
whether more
local than 1/3
or foreign, of the
from
total outstanding capital stock entitled to vote of the managing corporation;
declaring dividends without its/his consent, and such consent has not yet been secured; or or (2) where a (3)
majority of the
when it can be members of the
clearly shown board
that such ofretention
directors isofnecessary
the managing
under corporation also constitute
special circumstances
aobtaining
majority in
of the
the corporation,
members of such
the board
whenof directors
there of for
is need thespecial
managed corporation,
reserve then the
for probable
management
contingencies.contract must be approved by the stockholders of the managed corporation
owning at least 2/3 of the total outstanding capital stock entitled to vote, or by at least 2/3 of
the members in the case of a non-stock corporation. No management contract shall be
NIELSONentered into
& CO. v. for a longer
LEPANTO period thanMINING
CONSOLIDATED five yearsCO.for any one term.

Facts:

In 1937,The provisions
Lepanto of the
entered intonext preceding paragraph
a management shallNielson.
contract with apply toInany
thiscontract
agreement,whereby a was
Nielson
to managecorporation
and operateundertakes to mange
the Mankayan or operate
mining claim ofallLepanto
or substantially all of thefor
in consideration business of another
(a) P2,500 a
month andcorporation,
(b) 10% of whether such
dividends contracts
declared andare called
paid. service
In 1941, contracts,
Lepanto operating
declared agreements
dividends amountingor
otherwise:
to P175,000 10%ofProvided however,
which Nielson wasThat suchtoservice
entitled P17,500.contracts
Lepantoorhowever
operating agreements
never which
paid Nielson a
relatethe
cent. During to exploration,
liberation in development,
1945, Lepantoexploitation
unilaterally or utilizationthe
terminated of management
natural resources may with
contract be
Nielson.entered
In 1958,into for such
Nielson periods
instituted anasaction
may be for provided by the
its 10% share inpertinent laws or
the dividends regulations.
declared by Lepanto
in 1941. The suit reached the SC and it decided against Lepanto in 1941. The suit between Nielson
and Lepanto was suspended in 1942 when the US Army bombarded the Mankayan mining claims,
thus preventing Nielson from complying with its obligation (i.e. operating and managing the claim).
4. Implied Powers
The tribunal further said that the contract remained suspended even after the war was over in 1945
until 1948 When
when thethe mines
articleswere
expressly provide thatand
fully operational; thethat
purpose of the corporation
the management wasstill
contract to engage
had five in
years to the transportation
go from 1948. Thus, of the
person by water,
SC stated that such corporation
Nielson was entitledcannot engage
to 10% in dividend
of the the business of
land in
declarations transportation,
1949 and 1950 which
worthis an entirely
P3M. Lepantodifferent
soughtline of business, and,
reconsideration for decision
of SCs which reason,
in 1966.may
It
raised twonotmain
acquire anyatcertificate
points of public
issue namely: convenience
(1) What to operate
is the nature of theamanagement
taxicab service. LunetaIsMotor
contract? it one
of agency Co.and
v. A.D.
henceSantos, Inc., 5at
terminable SCRA 809 (1962).
the principals will or is it a contract of lease of services which
may be terminated only upon agreed causes? (2) Is Nielson entitled to 10% of the stock dividend
even though Lepanto is not
A corporation a stockholder?
whose primary purpose is to generate electric power has no authority to
undertake stevedoring services to unload coal into its pier since it is not reasonably necessary
for the operation of its power plant. NPC v. Vera, 170 SCRA 721 (1989).

Held: A corporation organized to engage as a lending investor cannot engage in pawbroker.

Philipinas Loan Co. v. SEC, 356 SCRA 193 (2001).
The management contract is a contract for lease of service. (1) The theory of agency was raised only
on reconsideration
A mining which
company is a has
belated move by
not power Lepantoin(2)
to engage Agency
real estateisdevelopment.
premised on representation
Heirs of Antonio
while lease
Paelofv.service
Court ofis Appeals,
based on372employment. While an agent can execute juridical acts in behalf of
SCRA 587 (2001).
his principal ; an employee under a lease of service can only perform non-juridical acts or only
material acts. (3) Since
An officer who the
is acts of Nielson
authorized (exploration,
to purchase purchase,
the stock etc.) are
of another subject to
corporation general
has impliedcontrol
and approval
poweroftothe Board all
perform of other
Directors of Lepanto
obligations and therefrom
arising cannot create,
such modify, extinguish
as payment of the business
shares of
relationsstock.
between Lepanto
Inter-Asia and Nielson,
Investments these acts
Industries can only
v. Court be considered
of Appeals, as material
403 SCRA 452 (2003).acts done for
an employer for compensation. The contract, is therefore, a contract of lease of services. Being such
a contract, it cannot be revocable at the will of the employer. The contract specifically provided that
5. Incidental
Lepanto can cancel Powers
the contract only: a.) upon the 90-day written notice and b.) for Nielsons failure
to operate The
and actdevelop the mining
of issuing checksclaims for the
is within anyambit
causeofexcept
a validthose causes
corporate due
act, fortoitthe actssecuring
as for of God.
(4) Sinceathe war and the bombardment constitute acts of God, they cannot be
loan to finance the activities of the corporation, hence, not an ultra vires act. Atriumconsidered as
grounds Management
to terminate the Corp.contract. In fact,
v. CA, 353 SCRA the23contract
(2001). is deemed suspended from 1942 to 1948
when neither of the parties could comply with their obligations under it. Under its terms, the contract
is suspended in cases of fortuitous events. And such terms must be interpreted to mean that a
period equal Powers
6. Other to the period of suspension must be added to the original term of the contract by way of
extension. Thus, from 1948 the contract still had five more years. And by virtue of this extension,
Nielson isa)entitled
Sell Land to and
10%Other
of theProperties
dividends declared in 1949 and 1950.
When the corporations primary purpose is to market, distribute, export and import
merchandise, the sale of land is not within the actual or apparent authority of the
corporation acting through its officers, much less when acting through the treasurer.
Stock dividend
Likewise is theand
Articles 1874 amount
1878that theCode
of Civil corporation transfers
requires from
that when its is
land surplus profit an
sold through
account to agents
agent, the its capital account.
authority It isbe
must theinsame amount
writing, that can
otherwise the loosely be termed
sale is void. as the
San Juan
trust fund of the corporation. NTC v. CA, 311 SCRA 508 (1999).
Structural v. CA, 296 SCRA 631 (1998); AF Realty & Dev., Inc. v. Dieselman Freight
Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA
h) Enter into Management Contracts (Sec. 44; aNielson & Co., Inc. v. Lepanto
190 (2003).
Consolidated Mining, 26 SCRA 540 [1968]; Ricafort v. Moya, 195 SCRA 247 [1991]). Why
the difference in rule between entity and individual?
b) Borrow Funds
Sec. 44 Power to enter into management contracts No corporation shall conclude a
management contract with another corporation unless such contract shall have been
approved by the board of directors and by stockholders owning at least the majority of the
 The power to borrow money is one of those cases where even a special power of
attorney is required under Art. 1878 of Civil Code. There is invariably a need of an
enabling act of the corporation to be approved by its Board of Directors. The argument
that the obtaining of loan was in accordance with the ordinary course of business
usages and practices of the corporation is devoid of merit because the prevailing
practice in the corporation was to explicitly authorize an officer to contract loans in
behalf of the corporation. China Banking Corp. v. Court of Appeals, 270 SCRA 503
(1997).

a. Power to Sue

Under Sec. 36 of Corporation Code, in relation to Sec. 23, where a corporation is an

injured party, its power to sue is lodged with its Board of Directors. A minority stockholder
who is a member of the Board has no such power or authority to sue on the corporations
behalf. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001); Shipside Inc. v. Court of Appeals,
352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002).

Where the corporation is real party-in-interest, neither administrator or a project

manager could sign the certificate against forum-shopping without being duly authorized
by resolution of the Board of Directors (Esteban, Jr. v. Vda. De Onorio, 360 SCRA 230
[2001]), nor the General Manager who has no authority to institute a suit on behalf of the
corporation even when the purpose is to protect corporate assets. (Central Cooperative
Exchange Inc. v. Enciso, 162 SCRA 706 [1988]).

When the power to sue is delegated by the by-laws to a particular officer, such officer
may appoint counsel to represent the corporation in a pre-trial hearing without need of a
formal board resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993).

For counsel to sign the certification for the corporation, he must specifically be
authorized by the Board of Directors. BPI Leasing Corp. v. CA, 416 SCRA 4 (2003);
Mariveles Shipyard Corp. v. CA, 415 SCRA 573 (2003).

(d) Provide Gratuity Pay for Employees

Providing gratuity pay for employees is an express power of a corporation under the
Corporation Code, and cannot be considered to be ultra vires to avoid any liability arising
from the issuance of resolution granting such gratuity pay. Lopez Realty v. Fontecha, 247
SCRA 183, 192 (1995).

(e) Donate

(f) Enter Partnership or Joint Venture. aTuason & Co. v. Bolanos, 95 Phil. 106 (1954); SEC
Opinion, dated 29 February 1980.

TUASON & CO. v. BOLANOS

Facts:
JM Tuason & Co. Inc. represented by its managing partner Gregorio Araneta Inc. filed a complaint in
the CFI for recovery of possession of registered land situated in Tatalon, QC against Quirino Bolanos.
Defendant in his answer claims through prescription and that the registration of said land was
obtained through fraud. The CFI ruled in favor of the plaintiff and declared that defendant had no
right to the land. Hence, this appeal.

Issue: WON the case should have been dismissed on the ground that it was not brought by the real
party in interest?

Held:

No, the rules of court require that an action be brought in the name of but not necessarily by the real
party in interest. In fact,the practice really is for the attorney-at-law to bring the action and file the
complaint in plaintiffs name which was done her. And while it is true that the complaint also states
that the plaintiff is represented herein by its managing partner G. Araneta Inc. another corporation,
there is nothing against one corporation being represented by another person, natural or juridical in
a suit in court.
 Revised Bagtas
11 Reviewer by Ve and Ocfe 2A
1
The contention that G. Araneta Inc. cannot act as managing partner on the theory that it is illegal for
two corporations to enetr into a partnership is without merit for the true rule is that though a
corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture
with another where the nature of the venture is inline with the business authorized by is charter.
There is nothing in the record to show that the venture which plaintiff is represented by G. Araneta is
not inline with the corporate business of either corporation.

The SEC rule provides in an Opinion, that the right of the corporation to engage as a limited
partner (not a general partner, meaning that its liability is limited to the amount of investment it
pours into the partnership). But such a power to engage in a partnership must be specifically
provided for in the corporations charter.

QUICK REFERENCE ON THE POWERS OF THE CORPORATION

POWER STATUTORY PROCEDURE WITHORWITHOUT

REQUIREMENT APPRAISAL RIGHT

Power to shorten or Approvedbya Written notice to Extension Yes,

extend corporate term majority vote of the
(Sec. 37) Board of Directors
(majorityofthe
quorum)
Ratified by at least
2/3 of the OCS or
2/3 of members in a
non-stock
corporation.
each stockholder such constitutes a
novationofthe
contract.
Shortening No, but
not because such is
inherent, because such
is not inherent as it
constitutes an
alteration of the
powers granted it by
the State.

Powertoincrease Approvedbya Written notice to Increase None,

capital stock and also
the power to decrease
capital stock (Sec. 38)
Power to incur, create
orincrease
indebtedness (Sec. 38)
majority vote of the each stockholders dilutes the worth of
Board of Directors Special the stock, defeats
(majorityof documentary the purpose of the
quorum) requirements increase.
Ratified by at least Prior approval of Decrease None,
2/3 of the OCS the SEC; SEC shall because in effect there
not accept for filing is a return of part of
unless with a sworn investments of the
statementby stockholders
treasurer that 25-
25 rule complied
with
SECapproval
triggers effectivity
Written notice
Prior approval of
the SEC
Approvedbya None drains the
Supporting
majority vote of the corporation of financial
documents
Board of Directors resources contrary to
(majorityof the purpose for which
quorum) the power is exercised.

1) Ofallor(1)Must
Power to sell, dispose,
lease, encumber (Sec.
40)
ALL Quantitative
Test
SUBSTANTIALLY ALL
QualitativeTest
(purpose for which it
was incorporated)
2) Exception to Sec. the third kind
Power to purchase own
shares (Sec. 41)
required:Ratified by at least
1) trust indenture2/3 of the OCS
with a trusteeSECINTERIM
bankGUIDELINES
2) underwritingCorporation must have:
agreement
Minimum net worth
registeredof P25 M at the Bonds
with the SECtime of the filing of
the application
Havebeenin
operationfor at
least 3 years
Must fulfill financial
ratio mandated by
SECininterim
guidelines
substantially all ofcomply with the
its propertyBulk Sales Law Yes, such a sale does
Majority vote of Listingthe not necessarily leas to
Board of Directorscorporate creditors a dissolution of the
(majorityofand the amount corporation and return
quorum)and nature of their of the residual value of
the corporation. Such is
claims Ratifiedor
afforded as a matter of
approved by 2/3 of Failurerenders
equity and fairness.
the OCS or 2/3 oftransaction void
the members(2) If no ratificatory
Relatestothe vote of stockholders, it
is an utra vires act ofprimary purpose.
40 if the sale is
necessary in the
usual and regular
course of business
or if proceeds of
the sale or other
disposition of such
property and assets
be appropriated for
the conduct of its
remaining
businesses
Majority vote of
Board of Directors
(business judgment
rule
Does not relate to
primaryor
secondary purpose
Must be for a legitimate purpose example:
(1) eliminate fractional shares arising out
of stock dividends
(2) collectorcompromisean
indebtedness to the corporation
arising out of unpaid subscription in a
delinquency sale, and to purchase
delinquent shares during said sale and None
(3) to pay dissenting or withdrawing

Buy back of shares (i)

decrease the cost of
doingbusiness (ii)
perpetuate control of
the enterprise.
 Revised Bagtas Reviewer by Ve and Ocfe 2A11
theOCSata consent has not yet 3
stockholdersexercisingtheir
regular or special
been secured or
appraisal
meeting right
called
(3)for
When it can be
Taken from URE only except redeemable
that purpose.clearly shown that such
shares retention is necessary
Powertoinvest Written notice of Yes, because minus
Approved by aunderspecial
corporate funds in majority vote oftheproposed
circumstances the ratificatory vote
another corporation or theBoardofinvestmentand
obtaininginthe thecontractor
business or for any Directors (majoritythe time
corporation andas
such place transaction falls under
other purpose (Sec. of quorum)of meeting
when thereshall
is the
need realm
for of ultra
42) Ratified by at leastbe addressed to
specialreservefor
profitable vires transactions of
2/3 of the OCSeach stockholder
contingencies.
or member
Approved by absolute at hisofthe
majority thethird type.
Board
of Directors
As a general rule, place of residence
Power to enter into Approved
section by stockholders owning
42 applies as shown majority
in the of
management contracts theinvestment
if the OCS booksofthe
(Sec. 44)
is for secondary or corporationand
other thanthe deposited to the
primary purpose. addressee in the
HOWEVER
Exceptifthe
where:
Post Office with
investmentis postage prepaid or
(1) Stockholders representing the same
served interest
personally.
reasonably
of both managing and the managed corporation
necessaryto
own or control more than 1/3 of the total OCS
accomplishits
entitled to vote of the managing corporation OR
primarypurpose
(2) Where a majority of the members of the
as stated in the
Board of Directors of the managing corporation
Articlesof
also constitute a majority of the members of the
Incorporation,
Board of Directors of the managed corporation.
approval of the
Then it must be approved by the stockholders of
stockholders is not
the managed corporation owning at least 2/3 of
necessary as it is
the OCS
included in the
Business Judgment
ofBoardof
Directors
EXCEPT if the corporation is organized primarily
as
Cash dividends company.
management
(1)
Absolute
Powertodeclare Not for a period longer than five years for any
majorityof Yes.
one term. Sec. 43 prohibits
dividends (Sec. 43) Boardof stock corporation
Directors in fromretaining
accordance surplus profits in
withthe excess of 100% of
Business theirpaid-up
Judgment Rule capitalstock,
(2) Only declared out EXCEPT:
of the URE which shall (1)When
be payable in cash, in justifiedby
property or in stock definite
(3) However, cash corporate
dividendsdueon expansion
delinquentshares projectsor
shall be first applied programsas
to the unpaid balance approvedby
while stock dividends the Board of
shall be withheld until Directors
fully paid (2) When corporation
Stock dividends is prohibited under
approval of 2/3 of any loan agreement
fromdeclaring
dividends without its
consentandsuch