CHAPTER 3

NATURE, ATTRIBUTES, AND

CLASSIFICATIONS OF CORPORATIONS

Analyzing Statutory Definition of Corporation

Theories on Formation of a Corporation
Theory of Concession
Theory of Enterprise Entity
TRI-LEVEL EXISTENCE IN CORPORATE SETTING
Corporation as a Creature of the Law
Constitutional Provision
Civil Code Provision
Franchises of Corporations
Attributes of Corporation
Artificial Being
Creature of Law
Right of Succession
Creature of Enumerated Powers, Attributes and Properties
Advantages of Corporate Form
Strong Legal Personality
Limited Liability to Investors
Free Transferability of Units of Investment
Centralized Management
Advantages over Unregistered Associations
Disadvantages of Corporate Form
Complicated and Costly Formation and Maintenance
Lack of Personal Element
Abuse of Corporate Management
Limited Liability Hits Innocent Victims
Double Taxation
Comparing the Corporation with Other Business Media
Sole Proprietorships
Partnerships
Does a Defective Incorporation Process Result Into a Partnership?
Business Trusts
Joint Ventures
Cooperatives
ENTITLEMENT OF CORPORATION TO CONSTITUTIONAL GUARANTEES
Liability of Corporations for Torts
Criminal Liability of Corporations
Entitlement to Moral Damages
NATIONALITY OF CORPORATIONS
Exploitation of Natural Resources
Owning and Operating Public Utilities
Mass Media
Advertising Industry
 War-time Test
Investment Test and Grandfather Rule
Policy of the Corporation Code on Control Test
CLASSIFICATIONS OF CORPORATIONS
In Relation to the State:
Public and Private Corporations
Distinctions Between Public and Private Corporations
Quasi-Public Corporations
As to Place of Incorporation:
Domestic Corporations
Foreign Corporations
As to Legal Status:
Corporation De Jure
Corporation De Facto
Corporation by Estoppel
Corporation by Prescription
As to Existence of Shares of Stock:
Stock Corporations
Non-Stock Corporations
As to Relationship of Management and Control
Holding Company
Affiliate Company
Parent and Subsidiary Companies

——

ANALYZING THE STATUTORY DEFINITION OF THE CORPORATION1

. . . 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.2

The corporate entity is a medium, one of many available to businessmen,

by which commercial activities can efficiently be undertaken. Although under
Section 2 of the Corporation Code, a corporation is a juridical entity with a
personality separate and distinct from the members or stockholders that
compose it, in reality a corporation is but a fiction extended by law to investors,
managers and businessmen by which to conduct their affairs in the business
world.

1
This portion is taken from the introduction of the published article entitled "Corporate
Contract Law: Unifying Theme on Theories Relating to Promoter's Contracts, De Facto
Corporations, Corporations by Estoppel, Articles of Incorporation, By-Laws, and Ultra Vires Acts,"
37 ATENEO L.J. 1 (No. 2, June 1994).
2
Sec. 2, Corporation Code.
 The present statutory definition of the corporation is essentially a narrow
and antiquated view of the corporate vehicle. It looks at only one aspect—the
relationship between the corporation and the State—of the otherwise
multifaceted relationships that a corporation would have in the business
environment. The statutory definition views the corporation merely as a creature
of the law, when actually juridical personality is merely one aspect of corporate
existence. The corporate setting embodies contractual relationships of varying
degrees, and consequently, principles of Contract Law, Agency Law, and even
Labor Law, tend to be enmeshed into Corporate Law principles. The resulting
interactions between principles of Corporate Law and other legal disciplines have
continued to create tension and sometimes hybrid legal products, that animate
the Philippine legal system.

THEORIES ON FORMATION A CORPORATION

Two basic theories have evolved on the formation of a corporation and its
capacity to act in the commercial world.

1. Theory of Concession
Tayag v. Benguet Consolidated, Inc.,3 characterized a corporation as an
artificial being, created by operation of law. . . "It owes its life to the state, its birth
being purely dependent on its will."
Tayag expressly denied the application of the genossenschaft theory
enunciated by Friedmann4 which treated a corporation as "the reality of the group
as a social and legal entity, independent of state recognition and concession."5 It
held that a corporation is "a creature without any existence until it has received
the imprimatur of the state acting according to law," and that "[i]t is logically
inconceivable therefore that it will have rights and privileges of a higher priority
than that of its creator. . . [and] cannot legitimately refuse to yield obedience to
acts of its state organs, certainly not excluding the judiciary whenever called
upon to do so."6
Ang Pue & Co. v. Secretary of Commerce and Industry,7 would hold that to
"organize a corporation or a partnership 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."
Torres v. Court of Appeals,8 in invalidating the act of the principal
stockholder of a family corporation in canceling stock certificates and issuing new
3
26 SCRA 242, 252 (1968)
4
LEGAL THEORY, pp. 164-168 (1947); also Holdsworth, English Corporation Law, 31 YALE
L.J. 382 (1922).
5
26 SCRA 242, 253.
6
Ibid.
7
5 SCRA 645, 647 (1962).
8
278 SCRA 793 (1997).
once and not coursing the same through the Corporate Secretary, held that “[a]ll
corporations, big or small, must abide by the provisions of the Corporation Code.
Being a simple family corporation is not an exemption. Such corporations cannot
have rules and practices other than those established by law.”
Under the theory of concession, although fiction cannot be created unless
there is an enterprise or group upon whom it may be conferred, and in spite of
the underlying contract among the persons wanting to form the corporation, the
grant is only by virtue of a primary franchise given by the State. It is within the
power of the State whether to grant it or not. The theory of concession is also the
underlying basis for the ultra vires doctrine.
The theory of concession, therefore, looks at a corporation simply as a
creature of the State, completely within the control of the latter. This is the theory
covered by Section 2 of the Corporation Code as it defines a corporation.

2. Theory of Enterprise Entity

Under the enterprise theory, the entity commonly known as "corporate
entity" takes its being from the reality of the underlying enterprise, formed or in
formation; that the state's approval of the corporate form sets up a prima facie
case that the assets, liabilities and operations of the corporation are those of the
enterprise. But that where the corporate entity is defective, or otherwise
challenged, its existence, extent and consequences may be determined by the
actual existence and operations of the underlying enterprise, which by these very
qualities and operations acquires an entity of its own, recognized by law.9
The enterprise theory is meant to cover the situations where the courts
have either: (a) erected corporate personality which the state had not granted; or
(b) disregarded corporate personality where the state had granted it; both for the
purpose of giving legal effect to factual relationships set up between an economic
entity and an outsider.10 As the exponent of the theory had written, "The
corporation is emerging as an enterprise bounded by economics, rather than as
an artificial juridical personality bounded by forms of words in a charter, minute
books, and books of account."11
The theory draws is vitality from the fact that it is not legal fiction alone that
creates a corporate entity. Any State grant must presuppose the existence of
consent or common venture among those who will form the corporation. Although
it is within the power of the State to give such grant or to deny it, the corporate
fiction cannot be created unless there is an enterprise or group upon whom it
would be conferred. But once granted, and the entity acquires juridical
personality, it does not mean that the group, as distinguished from the juridical
entity, becomes a creature of the State, but actually becomes a creature of its
own volition and maintains either singly or collectively their inherent rights under

9
Berle, The Theory of Enterprise, 47 COL. L. REV. No. 3 (April, 1947).
10
Ibid, at 345.
11
Ibid.
the law, which may tend to project to their business dealings done through the
corporation.
Although generally the enterprise entity theory has to a great extent been
discarded in American corporate literature, its basic flaw may not pertain to
Philippine setting because we have in our jurisdiction a different principle on
juridical personality. While under American common law, a partnership does not
have a personality separate and distinct from the partners, under Philippine civil
law tradition, although a partnership is inherently a contractual relationship, the
Civil Code grants to it a personality separate and distinct from the partners.12
Therefore, other than a general code provision granting it a juridical personality,
the partnership personality becomes a reality by two or more persons deciding to
contribute money, property or industry to a common fund with the intention of
dividing the profits among themselves without need of a grant of specific
authority by the state.
To a great extent, once a corporate entity comes into being it has certain
rights almost independent of the whims of its creator. Even though the
corporation is a creature of the State, the underlying relationship is still
composed of moral individuals who are not at all creatures of the State. For
example, the State would not destroy the group nor the business, without
observing the due process clause of the Constitution. In Bache & Co. (Phil.), Inc.
v. Ruiz,13 the Court held that a corporation is entitled to immunity against
unreasonable searches and seizures. It recognized that "[a] corporation is, after
all, 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. It can only be proceeded against by due process of law, and is
protected against unlawful discrimination."
In Philippine Stock Exchange, Inc. v. Court of Appeals,14 the Court
recognized that “[a] corporation is but an association of individuals, allowed to
transact under an assumed corporate name, and with a distinct legal personality
[and that in] organizing itself as a collective body, it waives no constitutional
immunities and perquisites appropriate to such a body.” The Court held that
although the Securities and Exchange Commission (SEC), under the Revised
Securities Act, Pres. Decree 902-A, and other pertinent laws, has been entrusted
the serious responsibility of enforcing all laws affecting corporations and other
forms of associations not otherwise vested in some other government office,
nevertheless, the SEC did not have absolute control on the management
prerogatives of the Board of Directors of the Philippine Stock Exchange (PSE),
12
Art. 1768 of the Civil Code provides: “The partnership has a juridical personality separate
and distinct from that of each of the partners,” even in case of failure to comply with the
requirements of the law on registration. In contrast there now provision in the Corporation Code
that expressly provides a juridical personality of a corporation “separate and distinct from that of
each of the stockholders or members” that compose it. See also Campos Rueda & Co. v. Pacific
Commercial Co., 44 Phil. 916 (1922).
13
37 SCRA 823 (1971).
14
281 SCRA 232, 88 SCAD 589 (1997).
since the “PSE is, after all, a corporation authorized by its corporate franchise to
engage in its proposed and duly approved business.”
The enterprise theory therefore hinges itself on the fact that there can be
no corporate existence without persons to compose it; there can be no
association without associates.15 The separate juridical existence granted to a
corporation is mere legal fiction, and therefore whenever necessary for the
interests of the public or for the protection or enforcement of the rights of the
members, courts will disregard the legal fiction and operate upon both the
corporation and the persons composing it.
The recognition of the organizational existence of a groups of individuals
extant any State grant or recognition is now more recognized in the case of
unincorporated associations. On matters involving affairs of an unincorporated
association, such as election contests for officers of civic clubs, the courts
generally will not interfere in the ruling of its policy-making body.16 If the State
would consider binding among the associates in an unincorporated associations
their acts and actuations, then the more so in a duly incorporated association,
which has a juridical personality.
To a great extent, this underlying relationship between and among
individuals as the root of every corporate setting is recognized and reinforced by
the Corporation Code itself that requires that no corporation can be organized
unless formed by "[a]ny number of natural persons not less than five (5) but not
more than fifteen (15), all of legal age and a majority of whom are residents of
the Philippines."17

TRI-LEVEL EXISTENCE IN CORPORATE SETTING

In considering developments in Corporate Law, there are in the corporate
setting three (3) “levels of existence,” thus:
First, the corporation as a juridical entity or a juridical fiction, which views
the relationship between the State and the corporation.
Second, the corporate setting provides for contractual relationships on
four (4) sub-levels, namely:

(a) Between the corporation and its agents or representatives to

act in the real world, such as its directors and its officers,
governed suppletorily by the Law on Agency;
(b) Between the corporation and its shareholders or members;
(c) Between and among the shareholders in a common venture;
and

15
Arnold v. Willets & Patterson, Ltd. 45 Phil. 634 (1923).
16
Lions Club International v. Amores, 121 SCRA 621 (1983).
17
Sec. 10, Corporation Code.
 (d) Between the corporation and third parties or "outsiders",
which is essentially governed by Contract Law; and Labor
Law when it comes to relationship with officers and
employees.

Third, the corporation becomes in its operation a business economic unit,

a business enterprise, or what is called in Accounting as a "going concern."18
Being well-aware of the tri-level existence in the corporate setting provides
a better way to explain the varying and interweaving doctrines prevailing in
Corporate Law. Although the Supreme Court would declare that there is a need
"to put an end to the fiction that corporations are people,"19 nevertheless it would
make the corporation liable for torts,20 or sooner pierce the veil of corporate
fiction and make the individual members of the corporation answerable for
corporate liabilities, when even without doing so, no obstacles are thrown in the
way of obtaining justice.21
In practice the piercing of the veil of corporate fiction is achieved only by
looking at the corporation as an aggregation of individuals doing business; thus,
the Supreme Court looks at the underlying association of individuals in a
corporate setting. "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."22 In the first case23 where the Philippine Supreme Court
applied the piercing doctrine, it had to concede the underlying association of
individuals in a corporate setting:

The proposition that a corporation has an existence

separate and distinct from its membership has its
limitations. It must be noted that this separate existence is
for particular purposes. It must also be remembered that
there can be no corporate existence without persons to
compose it; there can be no association without
associates.24

18
VALIX & PERALTA, FINANCIAL ACCOUNTING (Vol. One), 1976 ed., pp. 13 and 18.
19
Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 86 SCRA 305 (1978).
20
Philippine National Bank v. Court of Appeals, 83 SCRA 237 (1978)
21
See more exhaustive discussions in Chapter 4 on Corporate Juridical Personality and
Doctrine of Piercing the Veil of Corporate Fiction.
22
Tan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205 (1988).
23
Arnold v. Willits & Patterson, Ltd., 44 Phil. 634 (1923).
24
Ibid, at p. 644, quoting THOMPSON ON CORPORATIONS, 2d ed. Vol. I, Sec. 10.
CORPORATION AS A CREATURE OF THE LAW
1. Constitutional Provisions
The power to create corporations is one of the attributes of sovereignty.25
The exercise of the power is legislative in character, and that Legislature may,
subject to the restrictions of the Constitution, create a particular corporation by
direct act, or make provisions, by general law, for the organization of
corporations by natural persons upon compliance with the prescribed
conditions.26
Under the Constitution,27 Congress cannot, except by general law, provide
for the formation, organization, or regulation of private corporations. The same
constitutional provisions allows government-owned or -controlled corporations to
be created or established by special charters in the interests of the common
good and subject to the test of economic viability. Consequently, it has been held
that a private corporation created pursuant to a special law is a nullity, and such
special law is unconstitutional for being violative of the Constitution.28
The constitutional provision taking away from Congress the power to grant
specific franchises to private corporations comes from a history of corruption
when such power was exercised by Legislatures in common law jurisdiction,
where only the rich and powerful could obtain such franchises, and therefore be
able to have monopolies of certain endeavors.
In Philippine jurisdiction, the Corporation Code is the general law under
which private corporations are organized pursuant to the mandates of the
Constitution.29

2. Civil Code Provisions

Under Article 44 of the Civil Code of the Philippines, other than the State
and its political subdivisions, and other corporations, institutions and entities for
public interest or purpose, the law recognizes corporations, partnerships and
associations for private interest or purpose to which are granted “a juridical
personality, separate and distinct from that of each shareholder, partner or
member.”
Under Article 45 of the same Code, the juridical persons organized as
public corporations are governed by the laws creating or recognizing them, while
private corporations are regulated by laws of general application on the subject.
Partnerships and associations for private interests or purpose are governed by
the provisions of the Civil Code concerning partnerships.
25
McCullough v. Maryland, 4 Wheat. 316, 4 L.Ed. 579.
26
FISHER, THE PHILIPPINE LAW ON STOCK CORPORATIONS, (1929 Ed.), p. 3.
27
Sec. 16, Art. XII of the 1987 Constitution.
28
NDC v. Phil. Veterans Bank, 192 SCRA 257 (1990).
29
Likewise it is the Corporation Code that is the central statutory component of the "laws of
general application" referred to under Art. 45 of the Civil Code which provides: "Private
corporations are regulated by laws of general application on the subject."
 3. Franchises of Corporations
J.R.S. Business Corp. v. Imperial Insurance, Inc.,30 recognized the
differences between the primary franchise and secondary franchise of a
corporation. "For practical purposes, franchises, so far as relating to
corporations, are divisible into (a) corporate or general franchises; and (b) special
or secondary franchises. The former is the franchise to exist as a corporation,
while the latter are certain rights and privileges conferred upon existing
corporations, such as the right to use the streets of a municipality to lay pipes or
tracks, erect poles or string wires . . . The primary franchise of a corporation, 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. But the special or secondary
franchises of a corporation 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."31

ATTRIBUTES OF THE CORPORATION

From the statutory definition of a corporation, the following four basic
attributes are often ascribed to the corporate entity:
1. Artificial Being
It is the fiction of law which creates the "person" of the corporation. By
operation of law, it becomes a being with the attributes of an individual with full
capacity to enter into contractual relations. It is a legal or juridical person with a
personality separate and distinct from its individual members.
As was held in Vazquez v. Borja,32 "[i]t is well known that a corporation is
an artificial being invested by law with a personality of its own, separate and
distinct from that of its stockholders and from that of its officers who manage and
run its affairs. The mere fact that its personality is owing to a legal fiction and that
it necessarily has to act thru its agents, does not make the latter personally liable
on a contract duly entered into, or for an act lawfully performed by them, for and
in its behalf. The legal fiction by which the personality of a corporation is created
is a practical reality and necessity. Without it, no corporate entities may exist and
no corporate business may be transacted."33

2. Creature of the Law

The juridical existence of a corporation is dependent on the consent or
grant of the sovereign. From a strict legal point of view, a corporation cannot

30
11 SCRA 634 (1964).
31
Ibid, p. 638, quoting from Gulf Refining Co. v. Cleveland Trust Co., 108 So., 158.
32
74 Phil. 560 (1944).
33
Ibid, at pp. 566-567.
come into being by mere consent of the parties; there must be a law granting it,
and once granted form the primary franchise of the corporation.
There must first be an underlying contract among the individuals forming
the corporation upon which the state grant may be conferred. Therefore, you
have an inter-play of State grant and contractual relations between the parties.
Which principle has precedence in resolving conflict would depend upon the
public interest or issue to be resolved. This issue is discussed more in details in
Chapter IV, on Corporate Contract Law.

3. Right of Succession
The corporation has the capacity for continuous existence despite the
death or replacement of its shareholders or members, for it has a personality
separate and distinct from those who compose it. The strong legal personality of
the corporation is an attribute that has made it most attractive to businessmen
when compared to other media.

4. Creature of Enumerated Powers,

Attributes and Properties
Under the classic concession theory, once a corporation has been granted
juridical personality by the State, it is allowed and can legally exercise only such
powers granted by the law for its creation, as opposed to a natural person, who
has the ability to exercise any power and enter into any business activity and the
only limitation would be that an individual has no right to enter into an act or
transaction that is contrary to law, morals and public policy. In other words,
Section 2 of the Corporation Code which provides that a corporation as “having
the . . . powers, attributes and properties expressly authorized by law or incident
to its existence,” defines every corporation to be a creature of limited powers.
This is the old and narrow view of the corporation as a creature of the law.

ADVANTAGES OF CORPORATE FORM

1. Strong Legal Personality
The corporation has a legal capacity to act and contract as a distinct unit
in its own name; and it has continuity of existence. As distinguished from a
partnership, it has a strong legal personality having a separate and distinct
personality from the members composing it, unaffected by the death, resignation,
insolvency of any of its stockholders or members. Its credit-worthiness and the
certainty of long-term contractual dealings with a stable person, are strengthened
by such continuity of existence.
In addition, a corporation's creation, organization, management and
dissolution are standardized as they are governed by a general incorporation
law, and therefore, the commercial practice and jurisprudential law governing
corporations tend to be more established and reliable when compared to other
media of doing business. Likewise, the constitution of the Securities and
Exchange Commission as the administrative agency granted quasi-judicial power
over controversies and issues governing corporations and corporate matters, has
allowed a more efficient system focused on the special field and consistent
stream of decisions on Corporate Law coming from a single agency.
With the enactment of the Securities Regulation Code,34 which has
transferred all corporate cases and issues to the jurisdiction of the regular courts,
the tradition of allowing a specialized forum to handle corporate matters and
issues has been retained since under the Administrative Memorandum No. 00-
11-03-SC35 of the Supreme Court, only designated Regional Trial Court branches
in each regional district in the country, whose presiding judges are well-versed in
corporate and commercial development, are granted exclusive jurisdiction to
hear and decide on corporate cases under Section 5 of Pres. Decree 902-A.

2. Limited Liability to Investors

The Supreme Court has defined the limited liability feature of corporate
entities as follows:

One of the advantages of a corporate form of business

organization is the limitation of an investor’s 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.36

The liability of investors in a corporation is limited to their shares as

distinguished from partnerships where even if the assets of the partnership are
already exhausted, creditors can still go after the individual properties of the
partners. In a partnership, an investor can lose everything he owns even when
not intended for the venture,37 while this is not the case in corporations.

34
Subsec. 5.2 of Republic Act No. 8799.
35
Dated 21 November 2000.
36
San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645,
99 SCAD 281, 298 (1998).
37
Art. 1816 of the Civil Code provides that “All partners are liable pro rata with all their
properties and after partnership assets have been exhausted, for all partnership debts.
Art. 1817 provides that “Any stipulation against personal liability of partners for partnership
debts is void, except as among them.”
Art. 1824, provides that “All partners are liable solidarily with the partnership for everything
chargeable to the partnership when caused by the wrongful act or omission of any partner acting
 Of course, through contractual stipulations, there are many ways to go
around the limited liability feature of a corporation and to make major
shareholders still liable for more than their actual or promised investments in the
corporation. For example in case of bank loans, bankers sometimes demand
additional security or may require that in addition corporate officers make
themselves also personally liable for the corporate debt.
The advantage of the corporate setting is the default rule of limited liability
affords a more efficient means to encouraging investments in the venture, and
additional economic cost is spent only when parties attempt to go around the
limited liability feature. A corporation and its stockholders may therefore choose
whether or not to concede the advantage or protection of limited liability, while in
a partnership, there is already an implied contract that if the partnership's assets
are insufficient, the partners separate properties would be liable.

3. Free Transferability of Units of Investment

In a corporate setting, as a general rule, the shares of stocks can be
transferred without the consent of the other stockholders. This would assure
investors of a ready mechanism to dispose of their investments when their
personal or financial situation may require it, and therefore places more liquidity
in the corporate setting and would better encourage investors to do channel their
investments through corporate vehicles.
However, the system of free transferability of the units of investments in
the corporate setting presumes a well-developed market for shares of stocks.
Clark opines that the corporate vehicle flourishes best in a society where the
distribution of wealth, although by no means equal, is not extremely lopsided, so
that large amounts of money capital needed to launch and sustain large business
enterprises must be collected and aggregated into usable pools. Business must
solicit investors on a mass scale, not merely by private negotiations with a
handful of very rich people.38

4. Centralized Management
A corporation's management is centralized in the board of directors.
Shareholders are not agents of the corporation, nor can they bind the
corporations, unlike in a partnership setting, where each partner may bind the
partnership,39 even without the knowledge of the other partners. Therefore, in its
legal relationship, a corporation presents a more stable and efficient system of
governance and dealings with third parties, since management prerogatives are
centralized in its board of directors. By imposition of law, and except in

in the ordinary course of business of the partnership or with authority from the other partners and
for partner’s act or misapplication of properties.”
38
CLARK, CORPORATE LAW, (Little Brown and Company, 1986 ed.), p. 3.
39
In the absence of contractual stipulation, all partners shall be considered agents and
whatever any one of them may do alone shall bind the partnership. Arts. 1803(1) and 1818, Civil
Code.
particularly designated instances, stockholders are bound by the management
decisions and transactions of the board of directors of the corporation, whether
they like it or not.

5. Advantages Over Unregistered Associations

A corporation established in accordance with the Corporation Code has
benefits or advantages over that of an unregistered association. These
advantages are: It enjoys perpetual succession under its corporate name and in
an artificial form; it has the capacity to take and grant property, and contract
obligations; it can sue and be sued in its corporate name as a juridical person; it
has the capacity to receive and enjoy common grants of privileges and
immunities; and its stockholders or members have generally no personal liability
beyond the value of their shares.40 The advantages of the corporation over
unregistered association is subject to the rules pertaining to the corporation by
estoppel doctrine.41
Article 1775 of the Civil Code provides that associations and societies,
whose articles are kept secret among the members, and wherein any one 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.

DISADVANTAGES OF CORPORATE FORM

1. Complicated and Costly Formation and Maintenance
The corporation is relatively complicated in formation and management.
When compared to other media like the single proprietorship or the partnership,
the corporation entails relatively high cost of formation and operation. There is a
greater degree of governmental control and supervision than in other forms of
business organization.

2. Lack of Personal Element

There is ordinarily lack of personal element in view of the transferability of
shares, and the vesting of management powers in the board of directors who
may be professional managers. This has spawned corporate irresponsibility.

3. Abuse of Corporate Management

In large corporations, management and control are separated from
ownership; there is a severance of control and ownership. Control is vested in
the board of directors. The stockholder's voting rights have become theoretical
particularly in large corporations because of the use of the proxies and
widespread ownership. In a practical sense therefore, investors have very little
voice over the conduct of business of the corporation.
40
SEC Opinion, 26 June 1989, XIII SEC QUARTERLY BULLETIN, 19-20 (No. 3, Sept. 1989)
41
See Chapter 5 on Corporate Contract Law.
 4. Limited Liability Hits Innocent Victims
The limited liability feature of the corporation has often been abused by
business in order to avoid having to provide adequate protection and
compensation for victims of the business ventures they undertake. Also the
limited liability feature has tended to increase transaction cost by the parties
being forced to enter into contractual schemes skirting the limited liability features
of the corporation when it is a party to a transaction.

5. Double Taxation
The corporation has traditionally been subjected to heavier taxation than
other forms of business organizations; the profits of the corporation which are
already subjected to corporate income tax when declared and distributed as
dividends to the stockholders are again subjected to further income tax.
With the trust of Government to encourage both local and foreign
investments in the country, and to entice the use of the corporation as the vehicle
for such investments, many of the previous tax laws that tended to make
corporate vehicles expensive have been abolished. Except for dividends
declared by domestic corporation in favor of foreign corporation,42 dividends
received by individuals from corporation,43 as well as inter-corporate dividends
between domestic corporations,44 were subject to zero rate of income taxation.
There had also been an abolition of the personal holding companies tax and tax
on unreasonably accumulated surplus of corporations.45
However, with the passage of the Tax Reform Act of 1997, beginning
1998, there has been imposed the following tax burdens on the means of doing
business through the medium of the corporation:

(a) Re-imposition of final tax on cash and property dividends

received by individuals from domestic corporations;46
(b) Imposition of minimum corporate income tax at 2% of gross
income on the fourth taxable year from commencement of
business operations, when the minimum income tax is
greater than the regular corporate income tax;47 and
(c) Re-imposition of improperly accumulated earnings tax at the
rate of 10% of the defined improperly accumulated taxable
income.48

42
Sec. 25(a) and (b), National Internal Revenue Code of 1977.
43
Sec. 21, National Internal Revenue Code of 1977.
44
Sec. 24, National Internal Revenue Code of 1977.
45
Executive Order No. 37 (1986).
46
Sec. 24(B)(2), National Internal Revenue Code of 1997.
47
Sec. 27(E), National Internal Revenue Code of 1997.
48
Sec. 29, National Internal Revenue Code of 1997.
COMPARING THE CORPORATION WITH
OTHER MEDIA OF BUSINESS ENDEAVORS
1. Sole Proprietorships
Sole proprietorships are less saddled with the many requirements and
regulations which corporations are often subjected to by law. The owner is in
command of his whole business and he stands to lose as much as he puts in and
even more to the extent of all his personal holdings.
This is in contrast to a corporation where control belongs to the board of
directors, and there is limited liability on the part of the shareholders.
Consequently, sole proprietorships work well only for carrying-on simple or
small business endeavors, and do not function well in cases of large enterprises
which require huge capital investments and specialized management skills.

2. Partnerships49
Article 1768 of the Civil Code provides that the partnership has a juridical
personality separate and distinct from that of each of the partners, even in case
of failure to comply with the registrations requirements of the Code.50
The most important distinction between the corporation and the
partnership are their legal capacities. A corporation has a stronger legal
personality, enabling it to continue despite the death, insolvency or withdrawal of
any of its stockholders or members. In a partnership, the withdrawal, death or
insolvency of any partner would automatically bring about the dissolution of the
partnership.51
Limited liability is a main feature in a corporate setting, whereas partners
are liable personally for partnership debts not only to what they have invested in
the partnership but even as to their other properties.52
Generally, every partner is an agent of the partnership53 and by his sole
act, he can bind the partnership,54 whereas in a corporation, only the board of
directors or its agents can bind the corporation.

a. Does a Defective Incorporation Process

Result into a Partnership?
The clear distinctions between the corporation and partnership can best
be illustrated by discussing the issue of whether a defective incorporation would
at least result into a partnership.

49
Please see capsule on Philippine Partnership Law, Appendix A.
50
See Art. 1772, first paragraph, Civil Code.
51
Arts. 1828 and 1830, Civil Code.
52
Arts. 1816, 1817, 1824, and 1839, Civil Code.
53
Arts. 1803(1), 1818, and 1819, Civil Code.
54
Arts. 1822 and 1823, Civil Code.
 When five or more persons come together to contribute money or property
to a venture with the intention of receiving profits therefrom and intending to form
a corporation, but because of certain defects no corporation is formed under the
law, do we then consider at the very least, that a partnership with a separate
juridical personality has been created? The author believes that the answer
would be in the negative, based on two grounds:
First, both corporate and partnership relationship are fundamentally
contractual relationship created by the co-venturers who consent to come
together under said relationship. If the parties had intended to create an
association in the form of a corporation, a partnership cannot be created in its
stead since such is not within their intent, and therefore does not constitute a part
of their consent to the contractual relationship.
Second, the important differences between the corporation and the
partnership cannot lead one to the conclusion that in the absence of the first, the
contracting parties would have gone along with the latter. Limited liability,
centralized management and easy transferability of the units of ownership in a
corporation are by themselves strong factors for parties' intention to be bound in
the corporate relationship, and one cannot presume that if these features are not
met that they would in the alternative wish to be covered by a partnership
relationship, which has generally would involve unlimited liability, mutual agency
among the partners, and the delectus personarum feature.
It is the legal principle that when parties come together and all the
elements of a particular contract are present, although the parties may have
nominated it otherwise, the law will impose such contractual relationship upon
them. In other words, the contract or relationship is what the law says it is, not
how the parties wish to call it. Therefore, when five or more persons come
together to contribute money or property to a common venture or fund with the
intention of dividing the profits among themselves, the parties may wish to call it
otherwise; however, under the definition of the Article 1767 of the Civil Code, it
would still be a partnership, even if the parties had intended a corporation but did
not materialize because of certain registration deficiencies.
Nevertheless, such principle cannot apply, since the essence of what
constitutes the contractual relationship of partnership under Article 1767 is the
coming "together" or what is known in partnership law as "delectus personarum"
and not just the joint venture. The essence of partnership is the personal
relationship, i.e., that each would-be partner goes into the venture precisely
because he wants the other co-venturers, and no other persons, to be with him in
the venture. A venturer who seeks to enter into a corporate relationship perhaps
does not even care about the personality of the other co-venturers, and fully
aware that he himself and others have the ability to transfer their investments to
outsiders.
On the other hand, there seems to be indications of contrary view to the
above. Under Section 21 of the Corporation Code, when parties act and pretend
to be a corporation, when in fact none exist, the law would impute to them a
juridical personality to validate the contract under the corporation by estoppel
doctrine; however, it would treat the parties as partners since it expressly makes
them liable as "general partners."
Under such contrary view, the main issue would be the priority between
the personal creditors of the "partners" in a corporation by estoppel doctrine, and
the "corporate" creditors of the corporation by estoppel, as to the assets invested
into the venture. The author would presume that it would have to be the
corporate creditors that would have priority over the “corporate” assets as this
seems to be the moving spirit of the corporation by estoppel doctrine.
This position of the author has been partially justified by the discussions of
the Supreme Court in Pioneer Insurance & Surety Corp. v. Court of Appeals,55
when it resolved the issue of "What legal rules govern the relationship among co-
investors whose agreements was to do business through the corporate vehicle
but who failed to incorporate the entity in which they had chosen to invest?"56
Quoting from American jurisprudence, the Supreme Court in Pioneer
Insurance held that there has been the position that as among themselves the
rights of the stockholders in a defectively incorporated association should be
governed by the supposed charter and the laws of the state relating thereto and
not by the rules governing partners,57 nevertheless it has been held that
“ordinarily persons who attempt, but fail, to form a corporation and who carry on
business under the corporate name occupy the position of partners inter se,58
and their rights as members of the company to the property acquired by the
company will be recognized.”59
Notwithstanding the foregoing, the Supreme Court took the position that
such partnership relationship does not exist, "for ordinarily persons cannot be
made to assume the relation of partners, as between themselves, when their
purpose is that no partnership shall exist . . . and it 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 corporation, so as to be liable as such in an action for
settlement of the alleged partnership and contributions. . . A partnership relation
between certain stockholders and other stockholders, who were also directors,
will not be implied in the absence of an agreement, so as to make the former
liable to contribute for payment of debts illegally contracted by the latter.60 Nor will
it make the investor to a would-be corporation liable for losses sustained from its

55
175 SCRA 668 (1989).
56
Ibid, at p. 681.
57
Quoting from CORPUS JURIS SECUNDUM which cited Cannon v. Brush Electric Co., 54 A.
121, 96 Md. 446, 94 Am. S.R. 584.
58
Ibid, citing Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913 A. 1065.
59
Ibid, citing Smith v. Schoodoc Pond Packing Co., 84 A, 268m 109 Me. 555; Whipple v.
Parker, 29 Mich 369.
60
Ibid, at p.683, quoting from CORPUS JURIS SECUNDUM, Vol. 68, p. 464.
operations under a partnership inter se theory.”61 The key elements in resolving
the issue seem to have been in Pioneer Insurance those of intent and
participation in business activities.
The doctrinal pronouncement is Pioneer Insurance can be summarized as
follows: When parties come together intending to form a corporation, but no
corporation is formed due to some legal cause, then:

(a) Parties who had intended to participate or actually

participated in the business affairs of the proposed
corporation would be considered as partners under a de
facto partnership, and would be liable as such in an action
for settlement of partnership obligations; whereas,
(b) Parties who took no part except to subscribed for stock in a
proposed corporation, do not become partners with other
subscribers who engaged in business under the name of the
pretended corporation, and are not liable for action for
settlement of the alleged partnership contribution.

The doctrinal pronouncements in Pioneer Insurance are consistent with

the distinctions between an investor in partnership venture, where there is a clear
intent to participate in the management of the partnership business and for which
limited liability is not afforded by law; and an investor in a corporation, where
under the principal of centralized management, there is no intent to participate in
the corporate operations, and for which limited liability is afforded by law.

3. Business Trusts
As compared to a corporation, a business trust is simply a deed of trust
which is easier and less expensive to constitute for it is not bound by any legal
requirements like the former. It does not have a separate juridical personality,
and is mainly governed by contractual doctrines and the common law principles
on trust. Trust relationship is centered upon properties, and which places naked
titled in the trustee, and beneficial title in the beneficiary.

4. Joint Ventures62
The Supreme Court has held that the legal concept of a joint venture is of
common law origin, and has no precise legal definition. Under Philippine law, a
joint venture is a form of partnership and should thus be governed by the law of
partnerships,63 which would then include the features of separate juridical
personality, mutual agency among the co-venturers, and unlimited liability.

61
Ibid, at p. 685.
62
For a more comprehensive discussion on joint ventures, see Appendix C on Philippine
Law on Joint Ventures.
63
Aubach v. Sanitary Wares Mfg. Corp., 189 SCRA 130 (1989). In that case the Supreme
Court held also: "It has been held that while generally a corporation cannot enter into a
 The element of a joint ventures, being basically those of the partnership,
has been affirmed in Kilosbayan, Inc. v. Guingona, Jr.:64

Joint venture is defined as 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. the acts of working together in a joint
project.65

5. Cooperatives66
A cooperative is a duly registered association of persons, with a common
bond of interest, who have voluntarily joined together to achieve 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.67
A cooperative, like an ordinary corporation, has a juridical personality
separate and distinct from its members, and has limited liability feature.68
Unlike an ordinary corporation, cooperatives are governed by principles of
democratic control where the members in primary cooperatives shall have equal
voting rights on a one-member-one-vote principle;69 where the board of directors
manages the affairs of the cooperative, but it is the general assembly of full
membership that exercises all the rights and performs all of the obligations of the
cooperative;70 and are under the supervision and control of the Cooperative
Development of Authority71 and not the SEC.
Unlike an ordinary stock corporation which is organized for profit, and a
non-stock corporation which can be organized for any eleemosynary purpose
and no part of the net income is to be distributed to the officers and members
thereof, the primary objective of every cooperative is self-help: "to provide goods

partnership contract, it may however engage in a joint venture with others. Some features of a
joint venture agreement, carried out in the form of a corporation, are that a minority group is given
a specified number of seats in the board of directors, i.e., three directors in a board of nine
directors; the minority group is entitled to designate a member of the executive committee and his
vote is required for certain transactions; the quorum is required for amendment of the articles and
by-laws is more than the number specified in the law, i.e. 75 % of outstanding shares of stock."
64
232 SCRA 110, 143 (1994).
65
Ibid, citing BLACK’S LAW DICTIONARY, Sixth ed., at p. 839.
66
More detailed discussions on legal requirements covering cooperatives are found in
Chapter 17 on Non-Stock Corporations and Foundations.
67
Art. 3, Cooperative Development Authority Act (R.A. 6938)
68
Arts. 12 and 30, ibid.
69
Art. 4(2), ibid.
70
Arts. 5(3) and 34, ibid.
71
The Cooperative Development Authority Act (R.A. 6939).
and services to its members and thus enable them to attain increased income
and savings, investments, productivity, and purchasing power and promote
among them equitable distribution of net surplus through maximum utilization of
economies of scale, cost-sharing and risk-sharing without conducting the affairs
of the cooperative for eleemosynary or charitable purposes."72
The Law on cooperatives declares it a policy of the State to foster the
creation and growth of cooperatives as a practical vehicle for promoting self-
reliance and harnessing people power towards the attainment of economic
development and social justice.73

ENTITLEMENT OF THE CORPORATION TO

CONSTITUTIONAL GUARANTEES
A corporation enjoys constitutional rights and, generally, it enjoys the
same protection that the law grants to individuals.
A corporation is entitled to due process and the equal protection of the law
and protection against unreasonable search and seizure. In Smith, Bell & Co. v.
Natividad,74 a domestic corporation with the majority of its shareholdings held by
British subjects, sought to have a law reserving registration of vessels for
coastwide shipping only to domestic corporations wholly owned by Filipinos or
American citizens as violation of the due process and equal protection clauses.
Although denying the stand of the domestic corporation, the Supreme Court
acknowledged that corporate entities do have a right to claim protection under
such constitutional rights, thus -

The guarantees of the Fourteenth Amendment and so of

the first paragraph of the Philippine Bill of Rights, are universal
in their application to all persons within the territorial
jurisdiction, without regard to any differences of race, color, or
nationality. The word "person" includes aliens . . . Private
corporations, likewise, are "persons" within the scope of the
guaranties in so far as their property is concerned. . .75

Stonehill v. Diokno,76 recognized that corporations are protected by the

constitutional guarantee against unreasonable searches and seizures. However,
the Court ruled that the officers of a corporation from which documents, papers
and things were seized 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 separate and distinct from those of

72
Art. 7, The Cooperative Code of the Philippines (R.A. 6938).
73
Art. 2, ibid.
74
40 Phil. 136 (1919).
75
Ibid, at p. 144.
76
20 SCRA 383 (1967).
said officers. It held that the legality of a seizure can be contested only by the
party whose rights have been impaired thereby; and the objection to an unlawful
search is purely personal and cannot be availed of by third parties, such as
officers of the corporation who interpose it for their personal interests.
In Bache & Co. (Phil.), Inc. v. Ruiz,77 the Court held that a corporation is
entitled to immunity against unreasonable searches and seizures. "A corporation
is, after all, 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. It can only be proceeded against by due process of law,
and is protected, under the 14th Amendment, against unlawful discrimination."78
In the same case, however, the Court denied that corporations have a
right to claim protection on the constitutional right against self-incrimination. By
applying American doctrine, the Court held that the privilege against self
incrimination "is a personal one, applying only to natural individuals,"79 and a
corporation may be compelled to submit to the visitorial powers of the State even
if this result in disclosure of criminal acts of the corporation.80
In Bataan Shipyard & Engineering Co., Inc. v. PCGG,81 the Court held that
the right against self-incrimination has no application to juridical persons: "While
an individual may lawfully refuse to answer incriminating questions unless
protected by an immunity statute, it does not follow that a corporation, vested
with special privileges and franchises, may refuse to show its hand when
charged with an abuse of such privilege."82
The denial of the right against self-incrimination is extensively quoted in
Bataan Shipyard from Wilson v. United States:83

The corporation is a creature of the state. It is presumed

to be incorporated for the benefit of the public. It receives
certain special privileges and franchises, and holds them
subject to the laws of the state and the limitations of its
charter. Its power are limited by law. It can make no contract
not authorized by its charter. Its right to act as a corporation
are only preserved to it so long as it obeys the laws of its
creation. There is a reserve right in the legislature to
investigate its contracts and find out whether it has exceeded
its powers. It would be a strange anomaly to hold that a state,
having chartered a corporation to make use of certain
franchises, could not, in the exercise of sovereignty, inquire

77
37 SCRA 823 (1971).
78
Ibid, at p. 837, quoting from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652.
79
United States v. White, 322 U.S. 694, 698 (1944).
80
Hale v. Henkel, 201 U.S. 43 (1906); Wilson v. United States, 221 U.S. 361 (1911). See
also BERNAS, CONSTITUTIONAL RIGHTS & DUTIES (Vol. I, 1974 ed.) pp. 299-300.
81
150 SCRA 181 (1987).
82
Ibid, at p. 234, quoting from Hal v. Henkel, 201 U.S. 43.
83
55 L.Ed. 771,780.
 how these franchises had been employed, and whether they
had been abused, and demand the production of the corporate
books and papers for that purpose. The defense amounts to
this, that an officer of the corporation which is charged with a
criminal violation of the statute may plead the criminality of
such corporation as a refusal to produce its books. To state
this proposition is to answer it. While an individual may lawfully
refuse to answer incriminating questions unless protected by
an immunity statute, it does not follow that a corporation,
vested with special privileges, and franchise may refuse to
show its hand when charged with an abuse of such privileges.

It would seem that when it comes to the constitutional rights of due

process, equal protection of law, and protection against unreasonable searches
and seizures, the Supreme Court would be willing to view the corporation merely
as a vehicle, by which individuals transact their businesses and therefore, by
using such medium, they are deemed not to have waived their constitutional
rights. After all, as discussed in other chapters of this book, jurisprudence has
tended to recognize the underlying enterprise beneath the corporation fiction, or
at least the aggregation of individuals that make-up any corporate setting. And
yet, when it comes to the constitutional right against self-incrimination, the
Supreme Court would rely upon old American doctrine which views the
corporation as a mere creature of the law and with separate juridical personality
apart from its stockholders or members.
The difference in the Court's stance may lie in the fact, that the right
against self-incrimination does not really result in physical intrusion into the
premises of the corporation, because it would require only that the corporation,
through its agents, produce records and books before the courts. The denial of
the right against self-incrimination from corporations does not really invite state
authorities into the premises or physical privacy of the stockholders or members
who compose the corporation; but would deny acting individuals the right to
abuse the corporate medium as a means to do folly.
On the other hand, to deny the due process rights or right against
unreasonable searches and seizures to corporations would actually be to invite
state authorities to physically intrude into corporate premises, and therefore also
intrude into the personal and business privacy of the stockholders or members
who compose it. Perhaps that is the basis for the difference in stance by the
Supreme Court between two sets of constitutional rights with respect to
corporations.
Another view is that the constitutional guarantees of due process, equal
protection clause and against unreasonable searches and seizures are all meant
to curb the abuse that the State and its representatives may employ upon the
citizenry, including the modes upon which they conduct their lives and
businesses. On the other hand, the constitutional protection against self-
incrimination is not meant to prevent an actual State abuse but to avoid
pressuring the individual from having to tell a lie. "The main purpose of the
provision . . . is to prohibit compulsory oral examination of prisoners before the
trial, or upon trial, for the purpose of extorting unwilling confessions or
declarations implicating them in the commission of a crime."84 A corporation owes
full allegiance and subject to the unrestricted jurisdiction of the courts of the State
under which it has been organized.85 Likewise, it has no soul that can be damned
by a lie.

LIABILITY OF CORPORATIONS FOR TORTS

Philippine National Bank v. Court of Appeals,86 set out clearly the nature of
the liability of a corporation for the tortuous acts of its directors or officers. In that
case, it was shown that the Philippine National Bank, through the
unreasonableness of its board of directors in refusing to timely approved the
lease of sugar quota allocation mortgaged with the bank, caused a borrower to
lose the lease income it was to earn therefrom, which lease proceeds were more
than enough to fully pay the loan obligation of the borrower with the bank. The
lower court found the bank, through the unreasonable intransigence of its
directors, as being guilty of torts under Article 19 of the Civil Code which
mandates that every person "must in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith."
In affirming the liability of the bank for the tortuous act of its board, the
Supreme Court held that a corporation is civilly liable in the same manner as
natural persons for torts, because "generally speaking, the rules governing the
liability of a principal or master for a tort committed by an agent or servant are the
same whether the principal or master be a natural person or a corporation, and
whether the servant or agent be a natural person or artificial person. All of the
authorities agree that a principal or master is liable for every tort which he
expressly directs or authorizes, and this is just as true of a corporation as of a
natural person. A corporation is liable, therefore, whenever a tortuous act is
committed by an officer or agent under express direction or authority from the
stockholders or members acting as a body, or, generally, from the directors as
the governing body."87
It seems clear from the ruling in Philippine National Bank that not every
tortuous act committed by an officer can be ascribed to the corporation as its
liability, for it is reasonable to presume that in the granting of authority by the
corporation to its agent, such a grant did not include a direction to commit
tortuous acts against third parties. Only when the corporation has expressly
directed the commission of such tortuous act, would the damages resulting
therefrom be ascribable to the corporation. And such a direction by the
corporation, is manifested either by its board adopting a resolution to such effect,

84
U.S. v. Tan Teng, 23 Phil. 145, 152 (1912).
85
Tayag v. Benguet Consolidated, Inc., 26 SCRA 242, 248 (1968).
86
83 SCRA 237 (1978).
87
Ibid, at p. 247, citing 10 FLETCHER CYCLOPEDIA CORPORATION, 1970 ed., pp. 266-267.
as in the Philippine National Bank case, or having taken advantage of such an
tortuous act the corporation, through its board, expressly or impliedly ratifies such
an act or is estopped from impugning such an act.
Since the board of directors of a corporation is the embodiment of the very
power and prerogatives of a corporation, the act of the board in directing or
undertaking a tortuous act is necessarily that of the corporation. In short, the act
of the board is essentially that of the corporation, and therefore corporate assets
cannot escape enforcement of the claims for damages of the tort victim. The tort
liability of the corporation is without prejudice to a derivative suit being filed by
the stockholders to recover from the responsible board members and officers the
damages suffered by the corporation.
Sergio F. Naguiat v. NLRC,88 although admitting that “[o]ur jurisprudence
is wanting as to the definite scope of ‘corporate tort’,” nevertheless sought to
encompass corporate tort to “consists in the violation of a right given or the
omission of a duty imposed by law . . , tort is a breach of a legal duty.” In that
case, for failure of the corporate employer to grant separation pay to employees
in case of closure or cessation of operations of establishments or undertaking not
due to serious business losses or financial reverses as mandated in Article 283
of the Labor Code, the Court held the corporate employer liable for tort, including
its stockholder who was actively engaged in the management or operation of the
business.

CRIMINAL LIABILITY OF CORPORATIONS

In the early case of West Coast Life Ins. Co. v. Hurd,89 while the Court
admitted that there are various penal laws in the Philippines which corporations
as such may violate, there are no provisions in the law relating to the practice
and procedure in criminal actions whereby a corporation may be proceeded
against criminally and brought into court.
In West Coast Life the Court held that in many American cases cited
which show that corporations have been proceeded against criminally by
indictment and otherwise, and have been punished as malefactors by the courts,
"in those cases, the statute, by express words or by necessary intendment,
included corporations within the persons who could offend against the criminal
laws; and the legislature, at the same time established a procedure applicable to
corporations. No case has been cited to us where a corporation has been
proceeded against under a criminal statute where the court did not exercise its
common law powers or where there was not in force a special procedure
applicable to corporations."90
The Court also took cognizance of the fact that when it comes to criminal
jurisdiction, our courts "have no common law jurisdiction or powers," and being

88
269 SCRA 564, 80 SCAD 502 (1997).
89
27 Phil. 401 (1914).
90
Ibid, at p. 407-408.
creatures of statute have only those powers conferred upon them by statute,
which would naturally come from Spanish and not from common law sources.
The Court went on to say -

It is undoubted that, under the Spanish criminal law and

procedure, a corporation could not have been proceeded
against criminally, as such, if such an entity as a corporation in
fact existed under the Spanish law, and as such it could not
have committed a crime in which a willful purpose or a
malicious intent was required. Criminal actions would have
been restricted or limited, under that system, to the officials of
such corporation and never would have been directed against
the corporation itself. This was the rule with relation to
associations or combination of persons approaching, more or
less, the corporation as it is now understood, and it would
undoubtedly have been the rule with corporations. From this
source, then, the courts derive no authority to bring
corporations before them in criminal actions, nor to issue
processes for that purpose.91

Later, in People v. Concepcion,92 the Court held that when a criminal

statute forbids the corporation itself from doing an act, the prohibition extends to
the board of directors, and to each director separately and individually.
In People v. Tan Boon Kong,93 the Court laid down the principle that "a
corporation can act only through its officers and agents, and where the business
itself involves a violation of the law, the correct rule is that all who participate in it
are liable."94
In Tan Boon Kong the trial court dismissed an information filed against the
general manager of a corporation for violation of the requirement under the
provisions of the then Administrative Code, for corporations to make and file true
returns of their receipts and sales on the ground that the offense charged must
be regarded as committed by the corporation and not by its officials or agents.
The trial court recognized and applied the separate juridical personality of the
corporation in the application of the criminal statute for acts done for and in
behalf of the corporation. On appeal the Supreme Court brushed aside the
defense of separate juridical personality of a corporation by an officer who seeks
to avoid criminal liability arising from a violation of the law for transactions done
in behalf of the corporation. The Court's reasoning was in line with the piercing
doctrine that the veil of corporate fiction cannot be used to avoid the penalty
imposable for committing a criminal offense.
Essentially, therefore, in the field of Criminal Law, the Court refuses to
apply the fiction of corporate entity to shield the individual actors in the criminal
91
Ibid.
92
44 Phil. 129 (1922).
93
54 Phil. 607 (1930).
94
Ibid, at p. 609.
act, even when they do the criminal act for or in behalf of the corporation they
represent. The doctrinal pronouncement in Tan Boon Kong is essential to social
order; otherwise, criminals can hide behind the cloak of corporate fiction, and
with impunity violate the laws of the land with no adverse consequences to their
persons and personal fortunes.
The other reason why a corporation cannot be held liable for a crime is the
difficulty, if not impossibility, of imposing the penal sanction, i.e., imprisonment, to
a being that has no corporal existence, and which cannot therefore be thrown in
jail. Although there are instances where the law also imposes fine as a penalty,
and the same can be imposed against a corporation, such a theory would
undermine the criminal law system of a country, since bad guys would then with
impunity, commit crimes to further business objectives, if the dire consequences
would only be fines, especially so when the whole venture still would be
profitable even when the fines are paid.
Also, a crime cannot be imputed to a corporation, being a mere artificial
being without a mind, since the criminal intent as an essential ingredient of a
crime would be missing. Thus, by way of obiter, the Court would say matter-of-
factly in Times, Inc v. Reyes,95 that no criminal action can lie against an accused
who is a corporation because of the lack of the essential element of malice.
In Sia v. People,96 the Court made a clear distinction when a corporate
officer can be held personally criminally liable for acts done in behalf of the
corporation. In that case, the President of the corporation had, on behalf of the
corporation, entered into a trust receipt arrangement for the corporation with the
bank. When the corporation failed to turn over the merchandise covered by the
receipt or the proceeds from the sale thereof, a crime of estafa punishable under
the Revised Penal Code was filed against the President.
Although the President acted in behalf of the corporation, the Supreme
Court held that under the circumstances it cannot be held liable for the crime.
The Court held that the principle in Tan Boon Kong holding the responsible
officer personally liable for crimes committed by the corporation applies only in a
situation where "the corporation was directly required by law to do an act in a
given manner, and the same law makes the person who fails to perform the act
in the prescribed manner expressly liable criminally."97 The Court went on to
say—

The performance of the act is an obligation directly

imposed by the law on the corporation. Since it is a
responsible officer or officers of the corporation who actually
perform the act for the corporation, they must of necessity be

95
39 SCRA 303 (1971).
96
121 SCRA 655 (1983).
97
Ibid, at p. 662. For example, under Section 1 (2) of Pres. Decree 772, if the offense of
squatting is committed by a corporation or an association, the penalty imposed by law shall be
meted out on the president, director, manager or managing partners of the corporation or
association who shall be liable thereon.
 the ones to assume the criminal liability; otherwise this liability
as created by the law would be illusory, and the deterrent
effect of the law, negated.98

At the time of Sia, Pres. Decree 115 had not been enacted making it
expressly a case of estafa for violating the terms of the trust receipts and
imposing expressly the criminal liability upon the responsible officer, directors,
officers, employees or other officials of a corporation. Since at the time of Sia the
act alleged to be a crime was not in the performance of an act directly ordained
by the law to performed by the corporation, and that the crime imputed would
only arise based on the intent and the agreement of the parties to the trust
receipt, and not by the direct provision of law, then "[t]he intention of the parties,
therefore, is a factor determinant whether a crime was committed or whether a
civil obligation alone [was] intended by the parties."99
The Court then held in the absence of an express provision of law making
the President liable for the criminal offense committed by the corporation, the
existence of a criminal liability on his part may not be said to be beyond any
doubt, as is the quantum of evidence required in criminal cases. "In all criminal
prosecutions, the existence of criminal liability for which the accused is made
answerable must be clear and certain. The maxim that all doubts must be
resolved in favor of the accused is always of compelling force in the prosecution
of offenses."100
Although before Sia, the Court had convicted an individual liable for estafa
under a trust receipt transaction in Samo v. People,101 it held that it was
inapplicable since in that case the individual was shown to be acting for his own
behalf and not in behalf of a corporation. The Court held in Sia that it "has thus
far not ruled on the criminal liability of an officer of a corporation signing in behalf
of said corporation a trust receipt of the same nature as that involved herein."102
Such pronouncement of the Court would mean that when an officer does
an act for and in behalf of the corporation, his intent would not be ascribed to him
in his personal capacity, but should be ascribed as the intent of the corporation
as it pertains to the transaction. This would amount to respecting the separate
juridical personality of a corporation, even in criminal cases, so that the intent
and motivation of corporate officers acting for in behalf of the corporation would
be ascribable to the corporation as corporate offenses, and the responsible
officer liable for the criminal act as the "personification" of the corporation in the
real world.
Such an implied conclusion can be drawn-out from the concurring opinion
of then Justice Teehankee in Sia when he ruled that —

98
Ibid.
99
Ibid, at p. 663.
100
Ibid.
101
5 SCRA 354 (1962).
102
Samo v. People, 5 SCRA 354, 663.
 . . . Petitioner personally cannot be charged and
convicted for the crime of estafa for failure of the corporation
(MEMAP) represented by him as president and general
manager to pay . . .
All these acts were corporate acts with the accused duly
representing the corporation as its president and general
manager: the application for bank financing, the deposit (which
was from corporate funds, and not a deposit made by the
petitioner, as wrongly alleged in the information), the receipt of
the steel sheets, then manufactured into finished products
(which could not technically be done under the terms of the
trust receipt required by the bank, under which the very sheets
were supposed to be sold by the corporation) and the non-
payment of the credit extended by the bank. There is not the
slightest evidence nor intimation that these corporate acts
were unauthorized or that petitioner personally had committed
any fraud or deceit in connection therewith or that he had
personally been responsible for or benefited from the
corporation's failure to pay the bank the balance due under the
trust receipt.103

It seems that the deceit or fraud employed by an officer to further a

corporate transactions cannot be ascribed as his personal deceit. This position is
untenable, for every agent, even in the pursuit of the business of his principal,
would be personally liable for the deceit or fraud which he chose voluntarily as an
individual to do when he could have avoided it.
If we pursue the doctrine in Sia that a corporate officer can only be held
personally liable for the crime committed by or in behalf of a corporation only in
cases when "the corporation was directly required by law to do an act in a given
manner, and the same law makes the person who fails to perform the act in the
prescribed manner expressly liable criminally," and in all other cases, such acting
officer cannot be held personally liable for the crime committed on behalf of the
corporation, since there is a refusal to disregard the separate entity of the
corporation, then what the trial court held in Sia would apply to a great body of
criminal acts done by bad guys through the corporate scheme —

A corporation is an artificial person, an abstract being. If

the defense theory is followed unscrupulously legions would
form corporations to commit swindle right and left where
nobody could be convicted, for it would be futile and ridiculous
to convict an abstract being that can not be pinched and
confined in jail like a natural, living person, hence the result of
the defense theory would be hopeless chose in business and
finance. It is completely untenable.104

103
121 SCRA 655, 668.
104
Ibid, at p. 662.
 Finally, the Supreme Court clarified in Cometa v. Court of Appeals,105 that
although a criminal case can only be filed against the officers of a corporation
and not against the corporation itself, it does not follow that the corporation
cannot be a real-party-in-interest for the purpose of bringing a civil action for
malicious prosecution for the damages incurred by the corporation for the
criminal proceedings brought against its officer.

ENTITLEMENT TO MORAL DAMAGES

In an early case,106 the Supreme Court held that since a corporation is an
artificial person, and cannot experience physical sufferings, mental anguish,
fright, serious anxiety, wounded feelings, moral shock or social humiliation, there
would be no basis to grant its recovery of moral damages. However, the Court
noted by way of obiter in that same case that "[a] corporation may have a good
reputation which, if besmirched, may also be a ground for the award of moral
damages."107
Nevertheless, in recent decisions, the Supreme Court held that even when
the corporation's reputation and goodwill have been prejudiced, "there can be no
award for moral damages under Article 2217 and succeeding articles of Section
1 of Chapter 3 of Title XVIII of the Civil Code in favor of a corporation."108
Although in Asset Privatization Trust v. Court of Appeals,109 the Supreme
Court seemed again to have gone back to the original doctrine that “[u]nder
Article 2217 of the Civil Code, moral damages include besmirched reputation
which a corporation may possibly suffer,” nevertheless the Court set the record
straight in ABS-CBN Broadcasting Corp. v. Court of Appeals,110 that corporations
are not entitled to recover any form of moral damages, thus:

Moral damages are in the category of an award designed

to compensate the claimant for actual injury suffered and not
to impose a penalty on the wrongdoer. The award is not meant
to enrich the complainant at the expense of the defendant, but
to enable the injured party to obtain means, diversion, or
amusements that will serve to obviate the moral suffering he
has undergone. It is aimed at the restoration, within the limits
of the possible, of the spiritual status quo ante, and should be
proportionate to the suffering inflicted. . . The award of moral
damages cannot be granted in favor of a corporation because,
being an artificial person and having existence only in legal

105
301 SCRA 459, 102 SCAD 360 (1999).
106
Mambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968). See also
People v. Manero, 218 SCRA 85 (1993).
107
Ibid, at p. 380.
108
Prime White Cement Corp. v. Intermediate Appellate Court, 220 SCRA 103, 113-114
(1993); also Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267, 84 SCAD 366 (1997).
109
300 SCRA 579, 101 SCAD 1028 (1998).
110
301 SCRA 589, 102 SCAD 459 (1999).
 contemplation, it has no feelings, no emotions, no senses. It
cannot, therefore, experience physical suffering and mental
anguish, which can be experienced only by one having a
nervous system. The statement in People v. Manero [218
SCRA 85 (1993)] and Mambulao Lumber Co. v. PNB [130
Phil. 366 (1968)], that a corporation may recover moral
damages if it “has a good reputation that is debased, resulting
in social humiliation” is an obiter dictum. . . The possible basis
of recover 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.

NATIONALITY OF CORPORATIONS
The nationality of a corporation "serves as a legal basis for subjecting the
enterprise or its activities to the laws, the economic and fiscal powers, and the
various social and financial policies, of the state to which it is supposed to
belong."111
In Philippine jurisdiction, the principal doctrine on the test of nationality of
a corporate entity is the place of incorporation test: that a corporation is a
national of the country under whose laws is has been organized and registered.
This is embodied in Section 123 of the Corporation Code which provides that "a
foreign corporations 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."
The other test of nationality is the control test, under which the nationality
of a corporation is determined by the nationality of the majority of the
stockholders on whom control is vested.
Nationality is only one basis by which a state controls the affairs of the
corporation. The place of principal business test is also applied to determine
whether a state has jurisdiction over the existence and legal character of a
corporation, its capacity or powers, internal organization, capital structure, the
rights and liabilities of directors, officers, and shareholders towards each other
and to creditors and third persons.112 Under that test, the corporation is a
"national" or subject to the jurisdiction of the place where its principal office or
center of management (siege social) is located.
Although the place of incorporation test is the primary test of nationality of
corporations in the Philippines, in the following cases, in addition to the place of
incorporation test, the control test is also applied:

1. Exploitation of Natural Resources

111
SALONGA, PRIVATE INTERNATIONAL LAW (1979 ed.), p. 338.
112
SALONGA, ibid, at pp. 348-350.
 Section 2, Article XII of the Constitution provides that "[a]ll lands of the
public domain, waters, minerals, coal, petroleum, and other mineral oils, all
forces of potential and other natural resources are owned by the State. . . The
State may directly undertake such activities, or it may enter into co-production,
joint venture, or production sharing agreements with Filipino citizens, or
corporations or associations at least sixty per centum of whose capital is owned
by such citizens."113
The policy of the State to ensure that the exploitation of natural resources
or the pursuit of activities deemed to be of public or national interest are in the
control of Filipinos.
In addition, the section authorizes the President to 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 general terms and conditions provided by law,
based on real contributions to the economic growth and general welfare of the
country. However, the President shall notify the Congress of very contract
entered into within 30 days from its execution.
Even if the corporation is a creature of the State, which can be controlled,
there was a need to further safeguard the exploitation of our natural resources. If
a creature of the Philippine law does not assure the Legislature of its control,
then a creature created by another state must necessarily be disqualified.
Allegiance, by virtue of nationality of said corporation, is owed to the State which
created it.
The constitutional provision114 on limiting the exploitation of natural
resources to corporations at least 60% of the capital stock is owned by Filipino
citizens, does not contain the place of incorporation test. But it must necessarily
be presumed that the control test provided in the Constitution would pertain only
to domestic corporations; and that necessarily a foreign corporation even though
controlled by Filipino citizens would not be qualified to exploit our natural
resources.
The constitutional provision does not distinguish between voting shares
and non-voting shares. So that, even if the voting shares are controlled by
Filipinos, if the total shareholdings of the company (both voting and non-voting)
does not meet the minimum 60% Filipino ownership requirement of the
Constitution, such corporation would still not be qualified to engage in activities
that seek to exploit our natural resources. The broadness of the constitutional
language by not distinguishing voting from non-voting shares seems to square
with Section 6 of the Corporation Code, where in eight fundamental corporate
restructuring or transactions, all shares, including non-voting shares, would be
entitled to vote. Therefore, in those eight case enumerated in Section 6, even
foreigners who hold non-voting shares would be entitled to vote.

113
Emphasis supplied.
114
Sec. 2, Art. XII, 1987 Constitution.
 Register of Deeds of Rizal v. Ung Sui Si Temple115 laid down the principle
"that the purpose of the sixty per centum requirement is obviously to ensure that
corporations or associations allowed to acquire agricultural land or to exploit
natural resources shall be controlled by Filipinos; and that the spirit of the
Constitution demands that in the absence of capital stock, the controlling
membership should be composed of Filipino citizens."116 In that case, the Court
disqualified a non-incorporated religious organization, whose trustees and whose
members were Chinese nationals, from acquiring by donation a piece of land.
In Roman Catholic Administrator of Davao, Inc. v. The LRC and the
Register of Deeds of Davao,117 held that a corporation sole would have no
nationality at all to disqualify it from owning land in the Philippines even though
its only corporator was a Canadian citizen.
Studying the history of the Roman Catholic Apostolic Church in the
Philippines, the Court held that —

. . . Under the circumstances of the present case, it is

safe to state that even before the establishment of the
Philippine Commonwealth and of the Republic of the
Philippines, every corporation sole then organized and
registered by express provision of law the necessary power
and qualification to purchase in its name private lands located
in the territory in which it exercised its functions or ministry and
for which it was created, independently of the nationality of its
incumbent unique and single member and head, the bishop of
the diocese. It can be also maintained without fear of being
gainsaid that the Roman Catholic Apostolic Church in the
Philippines has no nationality and that the framers of the
Constitution did not have in mind the religious corporation sole
when they provided that 60 per centum of the capital thereof
be owned by Filipino citizens.118

The Court classified a corporation sole as a special form of corporation

usually associated with the clergy designed to facilitate the exercise of the
functions of ownership of the church which was regarded as property owner. It is
created not only to administer the temporalities of the church or religious society
where the corporator belongs, but also to hold and transmit the same to his
successor in said office.
But the Court went on to say, that even if nationality is ascribed to a
corporation sole, the nationality of the constituents of the diocese, and not the
nationality of the actual incumbent of the parish, must be taken into
consideration, because the corporation sole ordinarily holds the property in trust

115
97 Phil. 58 (1955).
116
Ibid, at p. 61.
117
102 Phil. 597 (1957).
118
Ibid, at p. 612.
for the benefit of the Roman Catholic faithful of their respective locality or
diocese.
The reasoning of the majority decision in Roman Catholic Administrator
has serious flaws. As observed by Justice J.B.L. Reyes in his dissenting opinion,
"[i]n requiring corporations or associations to have 60% of their capital owned by
Filipino citizens, the constitution manifestly disregarded the corporate fiction, i.e.,
the juridical personality of such corporations or associations. It went behind the
corporate entity and looked at the natural persons that composed it, and
demanded that a clear majority in interest (60%) should be Filipino."119 He
observed the doctrine in Ung Siu Si Temple, that if the association had no
capital, its controlling membership must be composed of Filipinos "[b]ecause
ownership divorced from control is not true ownership."120
Since under the rules governing corporation sole, the members of the
religious association cannot overrule or override the decisions of the sole
corporator, then it would be wrong to conclude that the control of the corporation
sole would be in the members of the religious association.
What the Court held in Roman Catholic Administrator as "the unhappy
freak of English law" has certainly now become a freak in Philippine Corporate
Law.

2. Owning and Operating Public Utilities

Section 11, Art. XII of the Constitution provides that "[n]o franchise,
certificate, or any other form of authorization for the operation of a public utility
shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum
of whose capital is owned by such citizens, nor shall such franchise, certificate,
or authorization be exclusive in character or for a longer period than fifty years. . .
The State shall encourage equity participation in public utilities by the general
public. The participation of foreign investors in the governing body of any public
utility enterprise shall be limited to their proportionate share in its capital, and all
the executive and managing officers of such corporation or association must be
citizens of the Philippines."
Unlike the provisions on the exploitation of natural resources, the
aforequoted provisions expressly includes the place of incorporation test and
requires that only domestic corporations with at least 60% of the capital stock
owned by Filipinos may own and operate public utilities in the Philippines.
In People v. Quasha,121 the Court held that 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

119
Ibid, at p. 636.
120
Ibid, at p.637.
121
93 Phil. 333 (1953).
already in existence but without the requisite proportion of Filipino capital.
Quasha therefore draws the distinction between the primary franchise of a
corporate entity by virtue of which it is constituted as a body politic endowed with
separate juridical personality, and the secondary franchise that it may receive
during its life for the exercise of a privilege granted by law, such as the operation
of a public utility.
The ruling in Quasha can be pointed to as the basis to show that the
constitutional provision122 prohibiting Congress, except by general law, to provide
for the formation, organization, or regulation of private corporations, really serves
no useful benefit, since all that it covers is the primary franchise, which merely
constitutes the corporation into a juridical entity. It is the secondary franchise by
which the corporation may be granted special privileges, licenses or benefits not
enjoyed by other corporations, where the real abuse may be committed. And yet,
there is no doubt that under the Constitution, Congress has the power to directly
grant secondary franchises to private corporations.
The Quasha doctrine was reiterated in Tatad v. Garcia, Jr.,123 which held
that although the Constitution requires in no uncertain terms that a franchise for
the operation of a public utility can be granted only to corporations at least 60%
of the capital of which is owned by Filipinos; 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. In law, there is a clear
distinction between the ‘operation’ of a public utility and the ownership of the
facilities and equipment used to serve the public."124 Therefore, the Court held
that in a railway system, while a foreign corporation may own the rail tracks,
rolling stocks like the coaches, rail stations, terminals and the power plant, and
although 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 serve the public."125 The Court held that in
law, there is a clear distinction between the "operation" of a public utility and the
"ownership" of the facilities and equipment used to serve the public.126

3. Mass Media
Under Section 11, Article XVI of the 1987 Constitution, the ownership of
mass media shall be limited to citizens of the Philippines, or to corporations,
cooperatives or associations, wholly-owned and managed by such citizens. Mass
media includes radio, television, and printed media and does not include

122
Sec. 16, Art. XII, 1987 Constitution.
123
243 SCRA 436, 60 SCAD 480 (1995).
124
Ibid, at pp. 452-453.
125
Ibid, at pp. 453, citing Iloilo Ice & Cold Storage Co. v. Public Service Board, 44 Phil. 551
(1923).
126
Ibid, at pp. 452-453, citing Iloilo Ice & Cold Storage Co. v. Public Service Board, 44 Phil.
551, 557-558 (1923).
commercial telecommunications, which are considered as public utilities, nor the
advertising industry.127
The term "mass media" shall mean the gathering, transmission of news,
information, messages, signals, and forms of written, oral and all visual
communication and shall embrace the print medium, radio, television, films,
movies, advertising in all its phases, and their business managerial.128 The
distinctive features of any mass media undertaking is the dissemination of
information and ideas to the public, or a portion thereof.129 It is divided into the
print media and the broadcast media; the broadcast media includes radio and
television broadcasting in all their aspects and all other cinematographic or radio
promotion and advertising.130 The term covers any medium of communication, a
newspaper, radio, motion pictures, or television, designed to reach the masses
and that tends to set the standards, ideals and aims of the masses.131 The term
has also been opined to include cable television.132
Although the constitutional provision governing mass media does not
expressly include the place of incorporation test, the same shall be deemed
included under the same principle governing exploitation of natural resources. In
fact, the ancillary control test for mass medium under the Constitution is actually
more stringent than in other defined areas, since it requires not only 100%
Filipino ownership of the capital stock of the corporation, but also 100%-Filipino
management of the entity.

4. Advertising Industry
Section 11, Art. XVI of the 1987 Constitution provides that the advertising
industry is impressed with public interest, and shall be regulated by law for the
protection of consumers and the promotion of the general welfare.
Only Filipino citizens or corporations or associations at least seventy
percent (70%) of the capital of which is owned by such citizens shall be allowed
to engage in the advertising industry. It also provides that the participation of
127
BERNAS, THE CONSTITUTIONS OF THE REPUBLIC OF THE PHILPPINES—A COMMENTARY
(1988 ed.), p. 563; Chapter 1, Rules and Regulations for Mass Media in the Philippines.
128
Pres. Decree 36, as amended by Pres. Decrees 191 and 197.
129
DOJ Opinion No. 120, series of 1982.
130
Section 2, Pres. Decree 576; SEC Opinion, 24 March 1983, addressed to Justice Manuel
Lazaro.
131
DOJ Opinion 163, s. 1973; SEC Opinion dated 15 July 1991, XXV SEC QUARTERLY
BULLETIN, 31 (No. 4, Dec. 1991).
132
The National Telecommunications Commission (NTC), which regulates and supervises
the cable television industry in the Philippines under Section 2 of Executive Order No. 436, s.
1997, has provided under NTC Memorandum Circular No. 8-9-95, under item 920(a) thereof
provides that “Cable TV operations shall be governed by E.O. No. 205, s. 1987. If CATV
operators offer public telecommunications services, they shall be treated just like a public
telecommunications entity.” Under DOJ Opinion No. 95, series of 1999, the Secretary of Justice,
taking its cue from Allied Broadcasting, Inc. v. Federal Communications Commission, 435 F. 2d
70, considered CATV as “a form of mass media which must, therefore, be owned and managed
by Filipino citizens, or corporations, cooperatives or associations, wholly-owned and managed by
Filipino citizens pursuant to the mandate of the Constitution.”
foreign investors in the governing body of the entities in such industry shall be
limited to their proportionate share in the capital thereof, and all the executive
and managing officers of such entities must be citizens of the Philippines.

5. War-Time Test
In Filipinas Compañia de Seguros v. Christern,133 the Court held that in
times of war, the nationality of a private corporation is determined by the
character or citizenship of its controlling stockholders. The Court considered the
juridical entity an enemy based on the fact that the "majority of the stockholders
of the respondent corporation were German subjects." It ruled that the control
test was applicable only in war-time. It refused the sole application of the place of
incorporation test during war-time to determine the nationality of an enemy
corporation.
The war-time test enunciated by Filipinas Compañia has since been
adhered to in subsequent decisions of the Court.134

6. Investment Test and Grandfather Rule

The "grandfather rule" is the method by which the percentage of Filipino
equity in a corporation engaged in nationalized and/or partly nationalized areas
of activities, provided for under the Constitution and other nationalization laws, is
computed, in cases where corporate shareholders are present in the situation, by
attributing the nationality of the second or even subsequent tier of ownership to
determine the nationality of the corporate shareholder.
In recognizing and applying the grandfather rule, the SEC has adopted the
formula of the Secretary of Justice135 to the effect that:

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. . .136

It must be stressed however, that the afore-quoted SEC rule applies only
for purposes of resolving issues on investments. The SEC was quick to add:
133
89 Phil. 54 (1951).
134
Davis Winship v. Philippine Trust Co., 90 Phil. 744 (1952).
135
DOJ Opinion No. 18, s. 1989.
136
SEC Opinion, 23 November 1993, XXVIII SEC QUARTERLY BULLETIN 39 (No. 1, March
1994); SEC Opinion, 14 April 1993, XXVII SEC QUARTERLY BULLETIN 29 (No. 3, Sept. 1993); SEC
Opinion, 23 March 1993, XXVII SEC QUARTERLY BULLETIN 15 (No. 3, Sept. 1993); SEC Opinion, 6
August 1991, SEC QUARTERLY BULLETIN 44 (No. 4, Dec. 1991); SEC Opinion, 30 May 1990, XXIV
SEC QUARTERLY BULLETIN 52 (No. 3, Sept. 1990); SEC Opinion, 14 December 1989, XXIV SEC
QUARTERLY BULLETIN 7 (No. 2, June 1990); SEC Opinion, 6 November 1989, XXIV SEC
QUARTERLY BULLETIN 56 (No. 1, March 1990.
"However, 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 or other
special laws are limited to Filipino citizens only."137 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.
Under Section 3(a) of the Foreign Investment Act of 1991, the term
"Philippine national" as it refers to a corporate entity shall mean a corporation
organized under the laws of the Philippines of which at least sixty percent (60%)
of the capital stock outstanding and entitled to vote is owned and held by citizens
of the Philippines. However, it provides that where a corporation and its non-
Filipino stockholders own stocks in a SEC-registered enterprise, at least sixty
percent (60%) of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by citizens of the Philippines and at least
sixty percent (60%) of the members of the Board of Directors of both
corporations must be citizens of the Philippines, in order that the corporation
shall be considered a Philippine national. The law therefore, limits the test to
voting shares, but however, makes it more stringent when it comes to actual
control by making a double 60% rule requirement as to both holding and held
company, as well as their board of directors.
How many levels should grandfather rule be applied? In the early case of
Palting v. San Jose Petroleum Inc.,138 the Supreme Court refused the registration
and sale into the Philippines of securities of a Panamanian registered company
the proceeds of which were to be exclusively used to finance the oil exploration
efforts of a domestic corporation, which was owned 90% by the Panamanian
company. The Panamanian company sought authority to issue the securities on
the basis of the parity rights under the Laurel-Langley Agreement.
It was the contention of the Panamanian company that since its majority
shareholdings are owned by another Panamanian company, which in turn was
owned 100% by two (2) Venezuelan companies whose shares were being traded
in the stock exchanges in the United States, then it was qualified to exercise the
privileges granted under the Laurel-Langley agreement.
In refusing to apply the long chain of ownership source to find control to be
with American citizens in the United States who have bought the shares of the
two (2) Venezuelan companies, the Court held that "with a long chain of
intervening foreign corporations . . . is to unduly stretch and strain the language
and intent of the law. For, to what extent must the word 'indirectly' be carried?
Must we trace the ownership or control of these various corporations ad infinitum

137
SEC Opinion, 14 December 1989, XXIV SEC QUARTERLY BULLETIN 7 (No. 2, June 1990).
138
18 SCRA 924 (1966).
for the purpose of determining whether the American ownership-control-
requirement is satisfied?"139
In short, the message of Palting is that the application of the grandfather
rule to determine the nationality of the ultimate controller of a subject corporation
cannot go beyond the level of what is reasonable. The further away the level of
ownership from the subject corporation, the less can one practically associate
control of the subject corporation.
In a 1977 internal memorandum issued by the SEC applying the
grandfather rule, it suggested that the rule be applied on two (2) levels of
corporate relations for publicly-held corporations or where the shares are traded
in the stock exchanges; and to apply the rule on three (3) levels for closely held
corporations or the shares of which are not traded in the stock exchange. On the
other hand, under Central Bank Circular No. 1171,140 the Monetary Board in
applying the grandfather rule in corporate ownership in banking institutions
directed application up to the fourth level or fourth tier of corporate ownership.
Aside from the General Banking Law of 2000 which expressly provides for
the application of the grandfather rule,141 the Investment Houses Law also applies
the rule.142

7. Policy of the Corporation Code on Control Test

Section 140 of the Corporation Code, which allows the imposition of the
control test, provides that the National Economic and Development Authority
(NEDA) shall from time to time, make a determination of whether the corporate
vehicle has been used by any corporation or by business or industry to frustrate
the provisions thereof or of applicable laws, and shall submit to Congress,
whenever deemed necessary, a report of its findings, including recommendations
for their prevention or correction.
However, Section 140 takes into consideration the policy of the State for
economic development and integration of the Philippine economy in the
competitive world economy. Under Section 140 it is provided that in
recommending to Congress corporations, business or industries to be declared
vested with a public interest and in formulating proposals for limitations on stock
ownership, the NEDA shall consider the type and nature of 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
139
Ibid, at p. 937.
140
Issued in 1988.
141
Sec. 11, Rep. Act No. 8791: “The citizenship of the controlling stockholders of the
corporation shall be the basis of computing the percentage irrespective of the place of
incorporation."
142
Sec. 5, Pres. Decree 129 (1973), as amended by Rep. Act No. 8366: "In determining the
percentage of foreign-owned voting stocks in Investment Houses, the basis for the computation
shall be citizenship of each stockholder, and, with respect to corporate owners of voting stock, the
citizenship of the individual owners of the voting stock in the corporation holding shares in that
Investment House."
as other factors which are germane to the rationalization and promotion of
business and industry.
The section authorizes the setting by Congress of maximum limits for
stockholdings in corporations declared by it to be vested with a public interest,
belonging to individuals or groups of individuals related to each other by
consanguinity or affinity or by close business interests, or whenever it is
necessary to achieve national objectives, prevent, monopolies or combinations in
restraint of trade, or to implement national economic policies declared in laws,
rules and regulations designed to promote the general welfare and foster
economic development.
There are writers who have taken the position of considering the control
test and principal place of business test, under specified conditions, as equally
prominent and independent of the place of incorporation test, even under
Philippine jurisdiction.143 This author does not agree with such position. Under
Philippine jurisdiction, the primary test is always the place of incorporation test,
since we adhere to the doctrine that a corporation is a creature of the State under
whose it has been created. A corporation organized under the laws of a foreign
country, irrespective of the nationality of the persons who control it, is necessarily
a foreign corporation. The control test, and the principal place of business test
(siege social), are merely adjunct tests, when the place of incorporation test
indicates that the subject corporation is organized under Philippine laws.
The issue of double nationality or multiple nationality which other authors
have alluded to would arise because of different nationality tests employed by
various jurisdictions, is not an important consideration under Philippine setting.
As in the case of double nationality for individuals, as held by prominent authors
in Conflict of Laws, the Philippine authority will always consider the person from
the point of view of Philippine doctrine and treat it as Philippine national if it falls
squarely within the test.144
All issues relating to double taxation, standing to sue in local forum, etc.,
do not really relate to nationality issues, but are a function of jurisdiction, as it
pertains to the concept of "doing business". For indeed, even if a British
corporation is wholly owned by Filipinos, but does not engage in a single
transaction in Philippine soil, the determination of its nationality under Philippine
law would be utterly irrelevant since there is no conflict to resolve under
Philippine law which would require a resolution of such issue. In addition, even
when a clearly recognized Philippine corporation, owned 100% by Filipino citizen
does business in a foreign country, it would nevertheless be subject to taxation or
jurisdiction of the courts and agencies of such foreign country, irrespective of the
nationality issue.

143
See Vasquez, Nationality of Juridical Persons: Evaluation and Departure, 60 PHIL. L.J.
292 (1985).
144
SALONGA, PRIVATE INTERNATIONAL LAW, (U.P. Law Center, 1979 ed.), pp. 136-137.
PARAS, PHILIPPINE CONFLICT OF LAWS, (Rex Book Store, 1979 ed.), pp. 108-109.
CLASSIFICATIONS OF CORPORATIONS
For purely academic purposes, certain classes of corporations will be
discussed hereunder. However, for a better philosophical approach on certain
classifications other chapters of this book should be referred to.
The substantial issues relating to de facto corporations and the
corporation by estoppel doctrine are discussed in Chapter 5 on Corporate
Contract Law. The underlying doctrine on non-stock corporations, as
distinguished from stock corporations, is thoroughly discussed in Chapter 16 on
Non-Stock Corporations and Foundations. The substantial aspect of doing
business in the Philippines of foreign corporations, as distinguished from
domestic corporation, is discussed in Chapter 17 on Foreign Corporations and
the Concept of Doing Business.

IN RELATION TO THE STATE

1. Public and Private Corporations
Section 3 of the old Corporation Law distinguished between public and
private corporations, and defined public corporations as "those formed or
organized for the government of a portion of the State." On the other hand, the
same section defined private corporations as those formed for some private
purpose, benefit, aim, or end.
Public corporations are those created for political purposes connected with
the public good in the administration of the civil government. Public corporations
therefore are essentially municipal corporation, or those formed and organized by
the State for government, such as the baranggay, municipality, city and the
province. In essence, a public corporation, being a mini-state, possesses all
three great powers of government: police power, power of eminent domain, and
power of taxation.
Municipal corporations, with respect to its governmental functions, i.e.,
political subdivisions created by the legislature for the convenient administration
of the government, or some aspect of the government, of the inhabitants of a
defined district, remain entirely subject to the legislative control. They are
organized for the purpose of serving the communal welfare of the inhabitants of a
town or a city.
Municipal corporations are incorporated to continue the existence and the
legal status of the town or city without regard to the coming and going people
who inhabit it. They are not operated for profit, and the operating expenses are
levied against the members through the process of taxation.
A municipal corporation possesses a two-fold character: (a) public or
governmental character, in which it acts as agent of the state and exercises, by
delegation a part of the sovereignty of the state; (b) a private, corporate or
proprietary character, in which it acts as a private or business corporation, and
stands for the community in the administration of its local affairs wholly beyond
the sphere of public purposes for which its governmental powers are conferred.
In their governmental character, the municipal corporations are possessed
of and can exercise the so-called police power of the state, by delegation of the
legislature. They may levy taxes for certain purposes under limitations imposed
by the law making body.
In their proprietary character, municipal corporations are empowered to
mortgage their property under certain limitations. They can sue and be sued,
enter into contracts and may be held liable for damages for torts committed by
them in the exercise of their corporate functions as distinguished from public and
governmental functions.
Private corporations are divided into stock corporations and non-stock
corporations. Corporations which have a capital stock divided into shares and are
authorized to distribute to the holders of such shares dividends or allotments of
the surplus profit on the basis of the shares held are stock corporations. All other
private corporations are non-stock corporations. Private corporations may be
classified according to their purposes: (a) the business corporation, or the profit-
seeking corporations, (b) religious corporations, (b) eleemosynary corporations
or those organized for charitable, scientific or vocational corporations.

2. Distinctions Between Public and Private Corporations

What distinguishes a public corporation from a private corporation owned
by the government is not ownership of the controlling interest.
In National Coal Co. v. Collector of Internal Revenue,145 National Coal Co.
was created by Act 2705 for the purpose of developing the coal industry, with the
Government owning almost all of the shareholdings of the company. The
company was created with the general powers of a corporation and such other
powers as may be necessary to enable it to prosecute the business of the
development. The Legislature subsequently passed a law providing for the
leasing and development of coal lands and exempted the same from specific
taxes. On that basis, National Coal Co. took possession of coal lands belonging
to the government, and began to extract coal. The Collector levied against the
company specific tax coal extracted from coal land. National Coal Co. claimed
exemption from specific taxes stating that it is the owner of the land from which it
has mined the coal in question, being a government corporation.
The Court held that National Coal Co. is a private corporation. The mere
fact that the government happens to be a majority stockholder does not make a
corporation a public corporation. The Court took into consideration that the law
creating the National Coal Co. expressly made the company subject to all the
provisions of the then Corporation Law. As a private corporation, it had no
greater rights, powers, or privileges than any other corporation which might be
organized for the same purpose under corporation law. It was not certainly the
145
46 Phil. 583 (1924).
intention of the legislature to give it a right or privilege over other legitimate
private corporation. Even if the majority stockholder is the government or that the
charter was a direct grant by legislature or it was not incorporated for public
welfare, such matters did not make the National Coal Co. a public corporation—it
is still a private corporation especially the act creating it, made the company
subject to the provisions of the Corporation Law.
Therefore, National Coal shows that the mere fact that the government
happens to be a majority stockholder of a corporation with its own charter, does
not make it a public corporation, especially when its charter provides that it is
subject to all the provisions of the Corporation Law. It can therefore have no
greater rights, powers or privileges than any other corporation which might be
organized for the same purpose under the Corporation Code.
Sometimes the distinction between public corporation and a private
corporation is based on the corporation's creation. Usually a public corporation is
created by its charter whereas a private corporation is created under a general
incorporation law, which today is the Corporation Code. However, while this is a
general norm, many private corporations are granted special charters by the
Legislature, because they constitute government-owned or -controlled
corporations, but still cannot be considered as public corporations.
In Cervantes v. Auditor General,146 NAFCO was created under
Commonwealth Act 332, with its controlling stock owned by the Government and
the power of appointing its directors vested in the President of the Philippines.
However, it was expressly made subject to the provisions of the Corporation Law
insofar as they were compatible with the provisions of its charter. The Manager of
NAFCO questioned the denial by the Auditor General of his claims for quarters
allowance granted in a resolution of its board of directors.
The Court held that there could be no question that the NAFCO is a
private corporation controlled by the government, and subject to the provisions of
law which subjected it to the supervision and control of the Control Committee
which had the power to pass upon the program of activities and yearly budget of
expenditures approved by its board of directors.
Based upon the cases above, there are two types of private corporations:
(a) those organized for private ends and (b) those government-owned or
controlled corporation organized with their own charters. Therefore, it is possible
for a government controlled or owned corporations to have private holdings (e.g.
PNB before it was privatized) and a private corporation to have government
holdings.
However, it is not the public purpose alone, or the fact of complete or
controlling ownership by the State of its capital, or the fact that it has a charter
under a special law, that distinguishes a public corporation from a private
corporation. Thus, certain corporations, wholly-owned by the Government,
having a public purpose, and organized under their own charter would still

146
91 Phil. 359 (1952).
continue to be private corporations, such as the National Development
Corporation, the Philippine National Railways, etc.

3. Quasi-Public Corporations
There is a group of corporations that seem to be a cross between private
corporations and public corporations, and they are classified as quasi-public
corporations. These usually cover school districts, water districts, and the like.
Marilao Water Consumers Association, Inc. v. Intermediate Appellate
147
Court, held that water districts organized under Pres. Decree 198, although
considered as quasi-public corporations and authorized to exercise the powers,
rights and privileges given to private corporations under existing laws, are
entirely distinct from corporations organized under the Corporation Code, and not
within the jurisdiction of the SEC.
PNOC-Energy Development Corp. v. Leogardo,148 PNOC-Eneregy
Development Corp. v. NLRC,149 and Davao City Water District v. Civil Service
Commission,150 held that the doctrine that employees of government-owned and
controlled corporations, 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 is that: The test in determining whether a government-owned or
controlled corporation is subject to the Civil Service Law is the manner of its
creation, such that government corporations created by special charter are
subject to its provisions while those incorporated under the general corporation
law are not within the coverage, and therefore are governed by the Labor Code.
Boy Scouts of the Philippines v. NLRC,151 held that although Boy Scouts of
the Philippines does not receive any monetary or financial subsidy from the
Government, and that its funds and assets are not considered government in
nature and not subject to audit by the Commission of Audit, the fact that it
received a special charter from the government, that its governing board are
appointed by the Government, and that its purpose are of public character, for
they pertain to the educational, civic and social development of the youth which
constitute a very substantial and important part of the nation, it is not a public
corporation in the same sense that municipal corporation or local governments
are public corporation since its does not govern a portion of the state, but it also
does not have proprietary functions in the same sense that the functions or
activities of government-owned or -controlled corporations such as the National
Development Company or the National Steel Corporation, is may still be
considered as such, or under the 1987 Administrative Code as an instrumentality

147
201 SCRA 437 (1991).
148
175 SCRA 26 (1989).
149
201 SCRA 487 (1991).
150
201 SCRA 593 (1991).
151
196 SCRA 176 (1991).
of the Government. Therefore, the employees are subject to the Civil Service
Law.
Under Rep. Act 7656, which required government-owned or controlled
corporations to declare dividends to the National Government, the term
"government-owned or controlled corporations" has been specifically defined as
"corporations organized as a stock or non-stock corporation vested with functions
relating to public needs, whether governmental or proprietary in nature, and
owned by the Government directly or through its instrumentalities either wholly
or, where applicable as in the case of stock corporations, to the extent of at least
fifty-one percent (51%) of its capital stock." The term also includes financial
institutions, owned or controlled by the National Government, "but shall exclude
acquired asset corporations."

AS TO PLACE OF INCORPORATION
1. Domestic Corporations
A domestic corporation is one incorporated under laws of the Philippines.
Under Section 123 of the Corporation 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 business in the Philippines after it shall
have obtained a license to transact business in the country in accordance with
this code and a certificate of authority from the appropriate government agency."

2. Foreign Corporations
A foreign corporation may be licensed by the SEC to do business in the
Philippines only under the principle of reciprocity, after securing a certificate of
authority from the Board of Investments under Executive Order 226, or the
Omnibus Investments Code, and after complying with the conditions for issuance
of the license on application forms, structural organizations and capitalization.
The objectives of the statutory provisions prescribing conditions under
which foreign corporations are permitted to do business in a state other than that
of their creation:

(a) To place them on an equality with domestic corporations;

(b) To subject them to inspection so that their condition may be
known; and
(c) To protect the residents of the state doing business with them
by subjecting them to the courts of the state.
 In case of war, for reasons of national security, in addition to the
incorporation test embodied in Section 123 of the Corporation Code, the "control
test" is applied to determine the nationality of a corporation.152
A foreign corporation can have no legal existence beyond the bounds of
the state or sovereignty by which it is created. It exist only in contemplation of law
and by the force of law, and where that law ceases to operate, the corporation
can have no existence. This principle however, does not prevent a corporation
from acting in another state or country with the latter's express or implied
consent.
The state, in extending to foreign corporations the privilege of doing
business, may impose such privilege with whatever conditions and restrictions it
deems fit to impose.153

AS TO LEGAL STATUS
1. De Jure Corporation
A corporation has de jure existence if there is a full or substantial
compliance with the requirements of an existing law permitting organization of
such corporation as by proper articles of incorporation duly executed and filed.
Generally, its juridical personality is not subject to attack in the courts from any
source.
If a corporation is a de jure corporation, its due incorporation cannot be
successfully attacked even in a quo warranto proceeding by the State. Therefore
if such proceeding is brought against a corporation and the State has a prima
facie case, the corporation must show that it is a de jure corporation.

2. Corporation De Facto
A corporation has de facto existence where there is a bona fide attempt to
incorporate, colorable compliance with the statute and user of corporate powers.
Under Section 20 of the Corporation Code, the "due incorporation of any
corporation claiming in good faith to be a corporation . . . and its right to exercise
corporate powers, shall not be inquired into collaterally in any private suit ot
which such corporation may be a party." Such inquiry may be made by the
Solicitor General in a quo warranto proceeding.154
The doctrine grew out of the necessity to promote the security of business
transactions and to eliminate quibbling over irregularities. It would be a rare case
where a third persons dealing with a corporation is prejudiced by its recognition

152
Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., 89 Phil. 54 (1951);
Davis Winship v. Philippine Trust Co., 90 Phil. 744 (1952); Haw Pia v. China Banking Corp., 80
Phil. 604 (1948).
153
See discussions on doing business in Chapter 17 on Non- Stock Corporations and
Foundations.
154
Ibid.
as a separate entity despite some minor defects in its incorporation. It would be
unfair to allow a claimant against the alleged corporation to insist on the
individual liability of innocent investors merely because of some minor flaws in its
incorporation.
A more thorough discussion of the de facto corporation doctrine is
provided for in Chapter 5 on Corporate Contract Law.

3. Corporation by Estoppel
Although an entity may not be a corporation de jure or de facto, a
particular person or party may, by estoppel or admission, be precluded from
denying its corporate existence. A group of persons may assume to do business
as a corporation without having gone far enough to give a de facto existence to
the entity.
Under certain circumstances and for certain purposes, either the group or
third persons contracting with the purported corporation may be estopped to
deny its corporate status.
Under Section 21 of the Corporation Code, "[a]ll persons who assume to
act as a corporation knowing it to be without authority to do so shall be liable as
general partners for all debts, liabilities and damages incurred or arising as a
result thereof; Provided, however, That when any such ostensible corporation is
sued on any transaction entered by it as a corporation or on any tort committed
by it as such, it shall not be allowed to use as a defense its lack of corporate
personality.”
In addition, the same section provides that "[o]ne who assumes an
obligation to an ostensible corporation as such, cannot resist performance
thereof on the ground that there was in fact no corporation."
The corporation by estoppel doctrine is founded on procedural
convenience, avoidance of inquiries into irrelevant formalities, and fairness to all
parties concerned.
The corporation by estoppel doctrine is properly discussed in Chapter 5 on
Corporate Contract Law.

4. Corporation by Prescription
The Roman Catholic Church is a corporation by prescription, with
acknowledged juridical personality inasmuch as it is an institution which
"antedated by almost a thousand years any other personality in Europe, and
which existed ‘when Grecian eloquence still flourished in Antioch and when idols
were still worshipped in the temple of Mecca.’"155

155
Barlin v. Ramirez, 7 Phil. 41 (1906).
AS TO EXISTENCE OF SHARES OF STOCKS
1. Stock Corporations
Corporations which have a capital stock divided into shares and are
authorized to distribute to the holders dividends. If not authorized by the by-laws
to distribute the dividends, but it is a stock corporation, can a corporation
distribute dividends to its shareholders? The answer seems to be in the
affirmative, since one of the expressed powers granted to stock corporations
under Section 43 of the Corporation Code is the power to declared dividends.

2. Non-Stock Corporations
Section 87 of the Corporation Code provides that a non-stock corporation
is one where on part of its income is distributable as dividends. Under the Code,
a non-stock corporation is one where no part of its income is distributable as
dividends to its members, trustees or officers, subject to the provisions on
dissolution, provided that any profit which a non stock corporation may obtain as
an incident to its operations shall, whenever necessary or proper be used for the
furtherance of the purpose or purposes for which the corporation was organized,
subject or the provisions of this title.
This provisions governing stock corporations, when pertinent shall be
applicable to non-stock corporations, except as may be covered by specific
provisions of this title.
Section 88 provides that non-stock corporations may be formed or
organized for charitable, religious, educational professional, cultural, recreational,
fraternal, literary, scientific, social, civic service, or similar purposes, like trade,
industry, agriculture and like chambers, or any combination thereof, subject to
the special provisions of this title governing particular classes of non stock
corporations.
In Collector of Internal Revenue v. Club Filipino,156 the Club Filipino was a
civic organization created for recreational purposes, and neither in the articles of
incorporation nor in the by-laws was there a provision relative to dividends and
their distribution, although it is covenanted that upon its dissolution, the club's
remaining assets, after paying debts, shall be donated to a charitable institution.
Whatever profits the club had were used to defray its overhead expenses and to
improve its golf course. The issue is whether or not the club is liable to pay
business taxes. The Court found that the plain and ordinary meaning of business
is restricted to activities or affairs where profit is the purpose. Having found that
the club was organized to help develop and cultivate sports; that whatever profit
it derives are actually used to defray its over head expenses, it stands to reason
that the club is not engaged in the business of an operation of a bar and
restaurant.

156
5 SCRA 321 (1962).
 It would seem therefore that for a stock corporation to exist, two requisites
must be complied with: (a) a capital stock divided into shares; and (b) authority to
distribute dividends. However, it is to be noted that nowhere in its articles or by
laws could be found an authority for the distribution of its dividends or surplus
profits.
There is no authorization to declare dividends and this authorization can
only be found either in the articles, the by-law or the resolutions.
Thus, every time there is an express authorization in either the articles of
incorporation or by-laws of a corporation to declare dividends, it is undoubtedly a
stock corporation. When there is no express prohibition not to distribute
dividends, it would seem that the corporation is a non-stock corporation. And like
the Club Filipino case, where there is no express authorization, no express
prohibition, and practice of the corporation shows that it has never declared
dividends in the past and the purpose of the corporation is eleemosynary, it is a
non-stock corporation.

AS TO RELATIONSHIP OF MANAGEMENT AND CONTROL

1. Holding Company
A "holding company" is one that "controls another as a subsidiary or
affiliate by the power to elect its management. . . a holding company is one
which holds stocks in other companies for purposes of control rather than for
mere investment.157

2. Affiliate Company
An affiliate is a company which is subject to common control of a mother
or holding company and operated as part of a system.158 An "affiliate" is defined
by SEC as a person that directly or indirectly, through one or more
intermediaries, controls or is controlled by, or is under common control with, the
person specified, through the ownership of voting shares, by contract, or
otherwise.159

3. Parent and Subsidiary Companies

When a corporation has a controlling financial interest in one or more
corporations, the one having control is known as the "parent company" and the
others are known as the "subsidiary companies." A "subsidiary" of a specified

157
SEC Opinion, 30 September 1986, XX SEC QUARTERLY BULLETIN (Nos. 3 & 4, Sept. &
Dec, 1986), p. 308, quoting from BALLANTINE LAW ON CORPORATIONS.
158
Ibid.
159
Rule 1-2, SEC Rules on Form and Content of Financial Statements Required to Filed by
Corporations Whose Shares of Stock are Sold Or Offered for Sale to the Public. (1973).
person is an affiliate controlled by such person, directly or indirectly, through one
or more intermediaries.160
When it comes to listed companies, the SEC Rules on Form and Content
of Financial Statements161 require consolidated financial statements to be filed
combining the operations of both the parent and the subsidiary companies.
The SEC Rules define the term "control" as the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of the corporation, either through the ownership of its voting shares or by
the existence of a contract or by any other lawful means. In general, the SEC
rules provide that any corporation owning 20% of the outstanding voting shares
of another shall be presumed to be in control of the other.162
Other factors shall also be considered, other than the control factor, thus:

(a) When the shares of stock of one of the companies are

traded-in the stock exchanges or over-the-counter
markets; or
(b) When one of the companies is a banking institution,
financing company, investment house or investment
company;
(c) When one of the companies is issuing commercial papers
or other securities registered with the SEC as required
under the Revised Securities Act; or
(d) When the total liabilities of one of the companies is more
than P10 Million or when the total liabilities of the group is
more than P50 Million at the beginning of the most
recently completed fiscal year.

The submission of the consolidation financial statements to the SEC in

compliance with its rules, however, does not exempt the constituent corporations
from filing also their individual financial statements.
The following may be excluded from consolidations:

(a) When the control thereon by the parent company is likely

to be temporary as, for example when the subsidiary must
be disposed of under a court order or will be abandoned if
certain likely adverse contingencies materialize;
(b) When control does not rest with the majority owners as,
for instance, when the subsidiary is formally placed under
receivership, or operates under foreign exchange

160
Ibid.
161
Issued under SEC Circular No. 2, Series of 1973.
162
Rule 1-2, SEC Rules on Form and Content of Financial Statements Required to Filed by
Corporations Whose Shares of Stock are Sold Or Offered for Sale to the Public (1973).
 restrictions, controls or other governmentally imposed
uncertainties so severe that they cast significant doubt on
the parent's ability to control the subsidiary.

The financial statements of a non-subsidiary is also required to be

consolidated with those of another group of parent and subsidiary companies
provided that the group owns more than 50% of the equity capital of the non-
subsidiary even if the majority of the shares owned are non-voting, or provided
that the group has the power to control the operations of the non-subsidiary by
statute or agreement irrespective of the equity ownership involved.163

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163
See also Sandiego, Director, Examiners and Appraisers Dept., SEC, Accounting Times
(1st Quarter, 1993).