Escolar Documentos
Profissional Documentos
Cultura Documentos
Atty. CESAR L. VILLANUEVA 1 OUTLINE IN PHILIPPINE CORPORATE LAW 2ND SEMESTER, SY 2004-2005
I. HISTORICAL BACKGROUND 1. Philippine Corporate Law :Sort of Codification of American Corporate Law Under American sovereignty, attention was drawn to the fact that there was no entity in Spanish law exactly corresponding to the notion "corporation" in English and American law; the Philippine Commission enacted the Corporation Law (Act No. 1459), to introduce the American corporation into the Philippines as the standard commercial entity and to hasten the day when the sociedad annima of the Spanish law would be obsolete. The statute is a sort of codification of American Corporate Law. Harden v. Benguet Consolidated Mining, 58 Phil. 141 (1933). 2. The Corporation Law The first corporate statute, the Corporation Law, or Act No. 1459, became effective on 1 April 1906. It had various piece-meal amendments during its 74-year history. It rapidly became antiquated and not adapted to the changing times. 3. The Corporation Code The Corporation Code (Batas Pambansa Blg. 68) took effect on 1 May 1980. It adopted various corporate doctrines enunciated by the Supreme Court under the old Corporation Law. It clarified the obligations of corporate directors and officers, expressed in statutory language established principles and doctrines, and provided for a chapter on close corporations. 4. Proper Treatment of Philippine Corporate Law Philippine Corporate Law comes from the common law system of the United States. Therefore, although we have a Corporation Code that provides for statutory principles, Corporate Law is essentially, and continues to be, the product of commercial developments. Much of this development can be expected to happen in the world of commerce, and some expressed jurisprudential rules that try to apply and adopt corporate principles into the changing concepts and mechanism of the commercial world.
2
A public corporation can only exist when a legislative grant is conferred. A corporation will be formed only when 5 individual persons, as incorporators, agree to form a corporation.
1 2
Unless otherwise indicated, all references to sections pertain to The Corporation Code of the Philippines.
The whole body of statutory and jurisprudential rules pertaining to corporations is referred to as "Corporate Law" to differentiate it from the old statute known as "The Corporation Law," or Act No. 1459.
- created by law its existence is dependent upon the onset or grant of the state EXCEPT corporation by estoppel and de facto corporation - the definition of a corporation is merely a guide and does not really provide for the basis of a corporation A corporation upon coming to existence, is invested by law with a personality separate and distinct from those persons comprising it as well as from any other legal entity to which it may be related. (Construction Dev. Corp of the Phils v. Cuenca 466 SCRA 714, 2005) Corporation is a creature of Limited Powers- Except for those powers which are expressly conferred on it by the Corporation Code and those that are implied by or are incidental to its existence, a corporation has no powers. It exercises its powers through its board of directors and/or its duly authorized officers and agents. (Pascual and Santos v. The Members of the Tramo Wakas Neighborhood Association, INC., 442 SCRA 438, 2004)
Revised Bagtas Reviewer by Ve and Ocfe 2A 3 CLV: We should note that there must be an underlying contract between and among the people forming the corporation for it is upon such contract that the state grant is offered. A corporation will be formed only when 5 individual persons, as incorporators agree to form a corporation and the state gives its consent. Being only a creature of law, it only has powers, attributes and properties which the law wishes to grant.
Q. Why is it important to know that the corporation is a juridical person? A. To be able to know that the corporation is able to contract with others. Q. Why does the definition of a corporation involve a statement creature of the law? A. To reiterate the fact that the corporations can only do acts given to it by the law. It is of limited existence. Outside its powers, it does not exist. 2. Four Corporate Attributes Based on Section 2 (a) A corporation is an artificial being (Ability to contract and Transact) - a person created by law or by state; a legal fiction. Created by operation of law (Creature of the Law) - its existence is dependent upon the consent or grant of the state except corporation by estoppel and de facto corporation. With the right of succession (strong juridical personality) - the corporation exists despite the death of a member as a corporation has a personality separate and distinct from that of its individual Stockholders. The separate juridical personality remains even if there has been a change in the members and stockholders of the corporation. Has the powers, attributes and properties expressly authorized by law or incident to its existence (Creature of Limited Powers)
(b)
(c)
(d)
3. Tri-Level Existence of the Corporation (a) AGGREGATION OF ASSETS AND RESOURCES physical assets of the corporation; the tangibles (Ex. in a grocery, the goods being sold) (b) BUSINESS ENTERPRISE OR ECONOMIC UNIT the commercial venture; this includes not only the tangible assets but also the intangibles like goodwill created by the business (C) JURIDICAL ENTITY juridical existence as a person; the primary franchise granted by the state Q. Why is the distinction between the three levels important? A. Each is important in its own way as there are consequences for each. The distinctions become important and come into play when it comes to dealing with corporation law. What are you selling or buying (and their worth) will depend upon the particular level you choose. EXAMPLE: If you merely want to purchase the assets and not the business, a simple deed of sale would suffice and you will not be liable for contingent liabilities. It will be different if you buy the business as an economic concept. SEC Regulations or Bulk sales Law may be applied.
B) INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a contractual relationship on four (4) levels: 1. Between the corporation and its agents or representatives to act in the real world, such as its directors and its officers, which is governed also by the Law on Agency 2. Between the corporation and its shareholders or members 3. Between and among the shareholders in a common venture C) EXTRA-CORPORATE LEVEL, which views the relationship between the corporation and thirdparties or outsiders, essentially governed by Contract Law and Labor Law. Most important level, highest form of law in this level is contract law.
4. Theories on the Formation of Corporation: Theory of Corporate Enterprise or Economic unit - the SC has looked upon the corporation not merely as an artificial being but more as an AGGRUPATION OF PERSONS DOING BUSINESS or AN UNDERLYING ECONOMIC UNIT. - The corporation is emerging as an enterprise bounded by economics rather than an artificial personality bounded by forms of words in a charter, minute books & books of accounts. - The proposition that a corporation has existence separate and distinct from its membership has its limitations. (Separate existence is for a particular purpose.) There can be no corporate existence w/o persons to compose it & there can be no association w/o associates. (a) Theory of Concession (Tayag v. Benguet Consolidated, 26 SCRA 242 [1968]). corporation creature of the state limited no other privilege may be exercised beyond grant
To organize a corporation that could claim a juridical personality of its own and transact business as such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose. cf. Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 (1962) It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act, and the procedure and conditions provided under the law for the acquisition of such juridical personality must be complied with. Although the statutory grant to an association of the powers to purchase, sell, lease and encumber property can only be construed the grant of a juridical personality to such an association . . . nevertheless, the failure to comply with the statutory procedure and conditions does not warrant a finding that such association acquired a separate juridical personality, even when it adopts sets of constitution and by-laws. International Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000).
TAYAG V. BENGUET CONSOLIDATED, 26 SCRA 242 (1968) FACTS: Idonah Slade Perkins died in 1960 with County Trust & Co. of New York as her domiciliary administrator. She left, among others, 2 stock certificates covering 33, 002 shares of stock of appellant Benguet Consolidated, Inc. Renato Tayag, as ancilliary administrator in the Philippines, requested County Trust to surrender to ancilliary administrator the stock certificates to satisfy the legitimate claims of local creditors. However, County Trust refused. The lower court then presided by Judge Santos ruled that : 1. Stock certificates are considered lost for all purposes of admin. & liquidation of the Philippine estate of Perkins 2. Said certificates are cancelled 3. Directs said corporation to issue new certificates in lieu thereof, the same to be delivered by aid corp. to either Tayag or the Probate division of this court. An appeal was taken not by County Trust, as domiciliary admin., but by Benguet on the ground that the certificates of stock are existing and in possession of County Trust. They also assert that there was a failure to observe certain requirements of its by-laws before new stock certificates could be issued. ISSUE: Whether or not Benguet properly pursued the appeal? HELD: The Court held that the appeal cannot prosper. Judgment affirmed. Benguet bound by order.
The challenged order represents a response & expresses a policy arising out of a specific problem, addressed to the attainent of specific ends by the use of specific remedies, w/ full & ample support from legal doctrines of weight and significance. A disagreement ensued between the ancillary and the domicillary administrator as to who was entitled to the certificate of stocks - The CFI ordered County Trust to produce and deposit the stocks with the court which was not complied with. Thus the order of the CFI. Benguet did not dispute Tayags authority to gain control and possession of all the assets of the dependent within the Philippines. The corporation, like every Juan and Maria given life by God acts on it Corporation is an artificial being created by operation of law. It owes it life to the state its birth being purely dependent on its will. Flether: A corp. is not in fact and in reality a person, but the law treats it as though it were a person by process of fiction, or by regarding it as an artificial person distinct and separate from its individual stockholders.
TAYAG DOCTRINES: Formally adopts the concession theory; corp. w/o imprimatur outside the state grant: 1. Even if it has its own set of by laws etc., the corp would still have to obey the order of the state. 2. Repudiated the application of EET- corp as reality of the group as a social and legal entity independent of state recognition.
As a matter of fact, a corp. once it comes into being comes more often w/n the ken of the judiciary than the other two coordinate branches. It institutes the appropriate court action to enforce its right. Correlatively, it is not immune from judicial control in those instances, where a duty under the law as ascertained in an appropriate legal proceeding is cast upon it. c) Theory of Enterprise Entity (BERLE, Theory of Enterprise Entity, 47 COL. L. REV. 343 [1947]) juridical personality contractual relation between 5 or more individuals recognize existence of an aggregation of individuals (enterprise entity)
A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such a body. PSE v. Court of Appeals, 281 SCRA 232 (1997). Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not a shield for the commission of injustice and inequity, such as to avoid the execution of the property of a sister company. Tan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205 (1988).
CLV: Fiction cannot be created unless there is an enterprise or group of persons upon whom it would be conferred. But in spite of the underlying contract among the persons wanting to form a corp., the grant is only by virtue of a primary franchise given by the state. And it is within the power of the state to grant it or not. But once granted corporate life of its own tells it to go and multiply profitably. Once juridical personality is acquired, however, this doesnt mean that the group becomes a creature of the state, but actually becomes a creature of its own volition and remains as a distinct personality.
5. Four Corporate Attributes Based on Section 2: A) A CORPORATION IS AN ARTIFICIAL BEING a person created by law or by state; a legal fiction (Creature of the Law) (Ability to Contract and Transact)
- its existence is dependent upon the consent or grant of the state EXCEPT corporation by estoppel and de facto corporation C) WITH RIGHT OF SUCCESSION (Strong Juridical Personality) - the corporation exist despite the death of its members as a corporation has a personality separate and distinct from that of its individual stockholders. The separate personality remains even if there has been a change in the members and stockholders of the corporation. D) HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE (Creature of Limited Powers)
6. Advantages and Disadvantages of Corporate Form: (a) Four Basic Advantageous Characteristics of Corporate Organization: (i) STRONG LEGAL PERSONALITY A corporation is an entity separate and distinct from its stockholders. While not in fact and in reality a person, the law treats the corporation as though it were a person by process of fiction or by regarding it as an artificial person distinct and separate from its individual stockholders. Remo, Jr. v. IAC, 172 SCRA 405 (1989). The transfer of the corporate assets to the stockholder is not in the nature of a partition but is a conveyance from one party to another. a Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962). Execution pending appeal was allowed in Borja v. Court of Appeals, 196 SCRA 847 (1991) only because the prevailing party is already of advanced age and in danger of extinction but not in this case because the winning party is a corporation. A juridical entitys existence cannot be likened to a natural person- its precarious financial condition is not by itself a compelling circumstance warranting immediate execution and does not outweigh the long standing general policy of enforcing only final and executor judgment (Manacop v. Equitable PCI Bank, 468 SCRA 256, 2005).
(b) Disadvantages: (i) Abuse of corporate management (ii) Abuse of limited liability feature (iii) High cost of maintenance (iv) Double taxation Dividends received by individuals from domestic corporations are subject to final 10% tax for income earned on or after 1 January 1998 (Sec. 24(b)(2), 1997 NIRC) Inter-corporate dividends between domestic corporations, however, are not subject to any income tax (Sec. 27(d)(4), 1997 NIRC) There is re-imposition of the 10% improperly accumulated earnings tax for holding companies (Sec. 29, 1997 NIRC)
7. COMPARED WITH OTHER BUSINESS MEDIA Distribution of Risk, Profit and Control a) Sole Proprietorships
Sole Proprietorship Free from many requirements and regulations in its operation Owner has full control of his business
Corporation Heavily regulated; a lot of requirements imposed for registration and incorporation Control of business is done by the BOD
Owner stands to lose more than what he put Investors have limited liability into the venture (b) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code)
Art. 1768 The partnership has a juridical capacity separate and distinct from that of each of the partners, even in case of failure to comply with requirements of Art. 1772 first paragraph. Art. 1775 Association and societies, whose articles are kept secret among the members, and wherein any pone of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to co- ownership.
Q. How does the contractual management of a corporation compare with the management of a partnership? A. Every partner, in the absence of a stipulation in the articles of partnership, binds the partnership as every partner is an agent of the others (delectus personarum). In a corporation, only the BoD and not the stockholders can bind the corporation.
CLV: The principle in constitutional law that delegated power cannot be further delegated has no application in a corporate setting because a corp. is not a product of political context- it is a product of business. A corporate setting is best described as hierarchical and flat. Just because the BoD are to be elected by the stockholders does not mean that the former derives its power from the latter. The powers of the BoD is original, said powers are not delegated by the stockholder. The powers are vested by law (and by the AoI). The BoD sit on the board not as representatives of the stockholders but because they are directors.
Q. What are the 2 types of partnerships? A. Regular (General and Limited) and Joint venture Q. Can a corporation be a partner in a regular partnership? A. No. Because a partner must be a natural person. It is against public policy for corporation to be a partner in a regular partnership. Q. If limited liability is something that can be contracted in a partnership, why did the legislature put such limited liability as an attribute of a corporation? If the feature of limited liability costs money then why not take it out? Why not leave it up to the investors who can decide if they want limited liability or not? A. Even though limited liability will cost a lot of money, borrowing makes a lot more sense. If I have P100M, it would be foolish to put all my eggs in one basket (if the basket falls, all eggs break). So, I merely put P10M in one corporation and then borrow the P90M while the rest of my money I put somewhere else. If the corporation fails, I do not lose all my P100M, I lose only my P10M. But if the corp. succeeds and I get to pay my creditor, I retain the P10M plus the profits acquired from the P90M paid up loan. This is the concept of LEVERAGING, using other peoples money to make a profit for yourself. This is why borrowing is an integral part of corporate life and it is up to the creditors to make a diligent appraisal of the credit standing of the corp. Q. What is the main distinction between a corporation and a partnership? A. A corporation is the intermingling of corporation law and contract law. On the other hand, a partnership is purely a contractual relationship and so every time a partner dies, the contract is actually extinguished. Q. What is Corporation Law all about? A. It is all about jurisprudence actually built around the 4 attributes of a corporation Q. Can a defective attempt to form a corporation result at least in a partnership? A. Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989); Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999).
Q. In cases where there is a defective attempt to form a corp. which is the prevailing rule, a partnership inter se is created or a corporation by estoppel? A. It depends wholly on the extent of the participation of the party on who a claim is being mind. In the case at bar, there was no intent on the other parties to enter into a partnership but a corporation. As to the Cervanteses & BORMAHECO, they cannot be considered to have entered even into a partnership inter se, since there was no intention to do so and to be held liable as such. But if it were the Cervanteses or BORMAHECO, who entered into the contracts using the corporate name and actively participated in the activities of the corporation, then they are to be held liable as partners. Q. Why are we taking up Pioneer? Why were they not liable? A. Because Pioneer shows us that for a person to be liable as a partner, he should have actively participated in the conduct of the business, the SC held in this case that to be able to be held liable the person should possess powers of management.
Q. What is the difference between Pioneer and Lim Tong Lim? A. In the case of Pioneer, the SC stopped when it declared that to be liable, you have to possess powers of management. In Lim tong Lim, it continues its pronouncement, by saying that if you have beneficial ownership over the business, then you are also liable as a partner. LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. entered into a contract with Phil. Fishing Gear Industries Inc. for the purchase of fishing nets and floats. They claimed that they were a fishing venture with Lim Tong Lim who was however not a signatory to the contract. They failed to pay and so PFGI filed a collection case with a prayed for a writ of preliminary attachment. The case was filed against Chua, Yao and Lim because it was found that Ocean Quest was a non- existent corporation as shown by the certification from SEC. Chua admitted liability and Yao waived his right to cross-examine and present evidence because he failed to appear while Lim filed a counterclaim and a cross-claim. Court granted the writ of attachment and ordered the Auction Sale of the F/B Lourdes which was previously attached. Trial court ruled that PFGI was entitled to the Writ and Chua, Yao and Lim were jointly liable as general partners.
Q. What is the difference between a joint venture and a partnership? A. A joint venture is by law a partnership because it follows the same definition as having two or more persons binding themselves together under a common fund with the intention of dividing the profits
Q. Is it possible for a joint venture not to be a partnership? A. Yes. When the joint venture forms a corporation, it then becomes a joint venture corporation.
Q. Does the requirement of registration needed in a partnership also required in a joint venture? A. No. Only in a partnership is registration required (Art. 1772, Civil Code)
(d) Cooperatives
A cooperative is a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles. Cooperatives are established to provide a strong social and economic organization to ensure that the tenant-farmers will enjoy on a lasting basis the benefits of agrarian reforms. Corpuz v. Grospe, 333 SCRA 425 (2000).
Corporation
Governed by principles of SH vote their percentage share of democratic control where the the stocks subscribed by them members have equal voting rights on a one-member-one vote principle BoD manage the affairs of the coop. But it is the GA of full membership that exercises all the rights and performs all of the obligations of the coop. Under the supervision of the coop. Development Authority BoD is the repository of all powers EXCEPT for acts where the Corp. Code requires concurrence or ratification by the SH. Under the Supervision of the SEC
Organized for the purpose of Stock Corp. for profit; Non-Stock providing goods and services to its Corp eleemosynary (charitable, members and thus to enable them to attain philantrophic) purpose increased income and saving, etc. e) Business Trusts (Article 1442, Civil Code) Art. 1442 Q. What is the difference between a business trust and a corporation? A. The relationship in a business trust is essentially a trust relationship. The business trust does not have a personality which is apart from the trustor or the trustee/beneficiary. The concept of a separate juridical personality is absent from a business trust.
(g) Cuentas En Participacion A cuentas en participacion as a sort of an accidental partnership constituted in such a manner that its existence was only known to those who had an interest in the same, there being no mutual agreement between the partners, and without a corporate name indicating to the public in some way that there were other people besides the one who ostensibly managed and conducted the business, governed under Article 239 of the Code of Commerce. Those who contract with the person under whose name the business of such partnership of cuentas en participacion is conducted, shall have only a right of action against such person and not against the other persons interested, and the latter, on the other hand, shall have no right of action against third person who contracted with the manager unless such manager formally transfers his rights to them. Bourns v. Carman, 7 Phil 117 (1906).
The Congress shall not except by general law, provide for the formation, organization or regulation of private corporations, Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability. P.D. 1717, which created New Agrix, Inc. violates the Constitution which prohibits the formation of a private corporation by special legislative act which is neither owned nor controlled by the government, since NDC was merely required to extend a loan to the new corporation, and the new stocks of the corporation were to be issued to the old investors and stockholders of the insolvent Agrix upon proof of their claims against the abolished corporation. NDC v. Philippine Veterans Bank, 192 SCRA 257 (1990). Congress cannot enact a law creating a private corporation with a special charter, and it follows that Congress can create corporations with special charters only if such corporations are government-owned or controlled. Feliciano v. Commission on Audit, 419 SCRA 363 (2004)
Q: What distinguishes a public corporation from a private corporation owned by the government? A: It is not ownership which distinguishes a public corporation from a private corporation. It is the civil service eligibility of its employees and if the financial records are subject to the examination of the Commission on Audit. A public corporation is created by its charter whereas a private corporation is created under the Corporation Code.
2. CORPORATION AS A PERSON: (a) Entitled to Due Process and Equal Protection Clause The due process clause is universal in its application to all persons without regard to any differences of race, color, or nationality. Private corporations, likewise, are persons within the scope of the guaranty insofar as their property is concerned. Smith Bell & Co. v. Natividad, 40 Phil. 136, 144 (1920). (b) Unreasonable Searches and Seizure A corporation is protected by the constitutional guarantee against unreasonable searches and seizures, but its officers have no cause of action to assail the legality of the seizures, regardless of the amount of shares of stock or of the interest of each of them in said corporation, and whatever the offices they hold therein may be, because the corporation has a personality distinct and separate from those of said officers. Stonehill v. Diokno, 20 SCRA 383 (1967). A corporation is but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate for such body. Its property cannot be taken without compensation; can only be proceeded against by due process of law; and is protected against unlawful discrimination. Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823, 837 (1971), quoting from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652. Q: Why is a corporation entitled to the rights of due process and equal protection? CLV: A corporation enjoys constitutional rights. In that manner, it enjoys the same protection the law grants to an individual. A corporation is entitled to due process and equal protection by virtue of the juridical personality given by the State through the primary franchise of the corporation. The constitution did not distinguish whether the term person in Sec. 1 Art. III of the Constitution refers to an individual or
NOTE: CLV tells us that it is clear from the ruling of the Court in this case that not every tortuous act committed by an officer can be ascribed to the corporation as its liability, for it is 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, as in this case, or having taken advantage of such a tortuous act the corporation, through its board, expressly or impliedly ratifies such an act or is estopped from impugning such an act.
Q: When is a corporation liable for tort? A: A corporation is liable for tort when: (a) the act is committed by an officer or agent (2) under express direction of authority from the stockholders or members acting as a body or through the Board of Directors. Q: How can authority given to the agent of the corporation be determined? A: Either by: (a) such direction by the corporation is manifested, by its board adopting a resolution to such effect (b) by having takien advantage of such a tortious act, the corporation through its board, has expressly or impliedly ratified such an act or estopped from impugning the same.
PEOPLE v TAN BOON KONG Facts: During 1924, in Iloilo, Tan Boon Kong as manager of the Visayan General Supply Co. engaged in the purchase and sale of sugar, bayon, copra, and other native products and as such must pay internal revenue taxes upon is sales. However, he only declared 2.3 million in sales but in actuality the sales amounted to 2.5 million, therefore failing to declare for the purpose of taxation about 200,000, not having paid the government 2,000 in taxes. Upon filing by the defendant of a demurrer, the lower court judge sustained said motion on the ground that the offense charged must be regarded as committed by the corporation and not its officials. Issue: WON the defendant as manager may be held criminally liable. Held: Ruling reversed. Case remanded. The court held that the judge erred in sustaining the motion because it is contrary to a great weight of authority. The court pointed out that, a corporation can act only through its officers and agents where the business itself involves a violation law, the correct rule is that all who participate in it are
Q. Why can the corporation be held liable for tortuous acts done by its agent but not for criminal acts done outside its authority? A: Crime is not within the corporate contemplation while negligence is. Negligence could be part of every transaction. It is an integral part of corporate transactions. For as long as people comprise the corporation, it is within the contemplation of every corporate act.
7. CORPORATE NATIONALITY: UNDER WHOSE LAWS INCORPORATED(Sec. 123) Section 123: Definition and rights of foreign corporations For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency.
There are three tests to determine the nationality of the corporation, namely: 1.) Place of incorporation that a corporation is of the nationality of the country under whose laws it has been organized and registered, embodied in Sec. 123 of the Corporation Code. 2.) Control test nationality determined by the nationality of the majority stockholders, wherein control is vested. Situation #1: 51% Filipino 49% Japanese: Under the control test, the nationality cannot be determined because for a group of stockholders to exercise control over a corporation it is required by the Corporation Code that they at least control 60% of the corporation. Why 60%? Because under the Corporation Code for a group of persons to incorporate a corporation, at least 5 persons are required by law. A majority of the 5 is 3 and converting it into percent, one gets 60%. We can say that in fact 51% is majority but in a group of 5 people 51% is 2 & 1/5, there really is no 1/5 of a person. the control test, this is considered a Filipino corporation 3.) Principal place of business applied to determine whether a State has jurisdiction over the existence and legal character of a corporation, its capacity or powers, internal organizations, capital structure, rights and liabilities of directors.
Q: What is the importance of determining the nationality of the corporation? A: It is necessary so as to determine whether or not a corporation can enter into various transactions or engage in different industries. And also, the legal fiction supporting a corporation is valid only within Philippine territory.
Q: It was said that the place of incorporation is the primary test to determine the nationality of the corporation, why then are there other tests used? A: There are certain aspects of the Philippine economy that require that the controlling test in corporations engaging in said type of business be that of Filipinos. The nationalized economic sectors are primarily focused at making Filipino interests benefit directly from the bounties of this country. The place of incorporation test need not have been expressly provided by the Constitution since it is an integral part of our law specifically the power of Congress to grant primary franchise to corporations. The place of incorporation test is deemed the primary test. It is a true test of nationality. Being a creature of law of the place where it was incorporated, the corporation cannot escape said law. By providing for the control test, the Constitution is providing for a secondary test to determine which corporations are entitled to entry in nationalized sectors.
Q: What is the implication of having a primary test and a secondary test? A: Simply put, if a corporation does not pass the first test, which the place of incorporation test, automatically it is deemed to be a foreign corporation. However, having passed the first test, the nationality of the corporation may have been established but this does not mean that the corporation is entitled to enter every single economic sector of the Philippines. The control test determines now whether the corporation fulfills the equity requirements of the Constitution. In doing this, the other tests are made such as: war-time test, investment test and grandfather rule. EXCEPTIONS: TEST OF CONTROLLING OWNERSHIP also applies in: (a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Constitution; a Roman Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the Register of Deeds of Davao, 102 Phil. 596 [1957]). Sec. 140 Stock ownership in certain corporations Pursuant to the duties specified by Article XIV of the Constitution, the National Economic Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corporation of by business or industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their prevention or correction. Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public interest pursuant to the provisions of this section, belonging to the individuals or groups of individuals related to each other by consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restrain or trade, to implement national economic policies declared in laws, rules and regulations designed to promote the general welfare and foster economic development. In recommending to the Batasang Pambansa corporations, business or industries to be declared vested
60% of their capital owned by Filipino citizens, the constitution manifestly disregarded the corporate fiction i.e. the juridical personality of such corporation 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. 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. NOTE: The Roman Catholic Church is a corporation by prescription, with acknowledged juridical personality inasmuch as it is an institution which antedated almost a thousand years any other personality in Europe, and which existed when Grecian eloquence still flourished in Antioch and when idiots were still worshipped in the temple of Mecca. Since it is a corporation by prescription, it has no nationality, and hence, the nationality test does not apply. (But refer to below.) Q: Why is this case relevant to us? A: It is relevant because while it tells us that a corporation sole is not subject to the nationality test, it must be further qualified to mean that this is the case only insofar as the control test is concerned. Nationality is irrelevant insofar as this test is concerned. However, it becomes relevant when the place of incorporation comes into play since the case never sought to touch the place of incorporation test.
The registration of the donation of land to an unincorporated religious organization, whose trustees are foreigners, would violate constitutional prohibition and the refusal would not be in violation of the freedom of religion clause. The fact that the religious association has no capital stock does not suffice to escape the constitutional inhibition, since it is admitted that its members are of foreign nationality. . . and the spirit of the Constitution demands that in the absence of capital stock, the controlling membership should be composed of Filipino citizens. Register of Deeds of Rizal v. Ung Sui Si Temple, 97 Phil. 58 (1955). (b) Public Utilities (Sec. 11, Art. XII, Constitution; a People v. Quasha, 93 Phil. 333) Sec. 11 Art. XII No franchise, certificate or any other form of authorization for the operation of public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines. NOTE: Stock ownership must at least be 60% Filipino but management must be 100% Filipino for such corporation to operate in industries concerning public utilities.
Q: Why are we studying Quasha? A: This case makes a distinction with the grant by the government of primary and secondary franchise. As far as doctrinal pronouncements are concerned, any and all type of corporations may be incorporated, so long as the requirements for incorporation are fulfilled and that its purpose is lawful and not contrary to law or public policy. The violation of equity requirements with regard to entry into nationalized sectors as provided by the Constitution come only into play when the secondary franchise is granted. In granting the secondary franchise considerations of equity are now made. CLV: Note that while Quasha makes such doctrinal pronouncements, in practice, this is not the case. SEC will refuse to register the Articles of Incorporation if it is not 60% owned by Filipinos. In fact, Quasha lied in order to have the articles registered.
SILAHIS INTERNATIONAL HOTEL Hotel Properties Inc. 69% 1.) 53% Foreign 47% Filipino Filipino stockholdings 31%
47/100 (Hotel Properties) x 69 = 32.43 + 31 (remaining Filipino stockholdings in Silahis) TOTAL: 63.43%
SITUATION #2 Whether or not there may be an investment made by Pinoy Inc. in Mass Media which requires 100% Filipino ownership. Pinoy Inc. is 40% owned by Pedro, a Filipino, while 60% is owned by ABC, Inc. ABC on the other hand, is a corporation registered in the Philippines 60% of which is owned by Maria, a Filipino, while 40% is owned by George, a German. Q: Can Pinoy, Inc. enter into the operation of a television station? A: In this situation, is the GFR is applied straight; Pinoy, Inc. would be disqualified since 24% of Pinoy is owned by George. But under the present investment regime of the Philippines, the FIA provides that corporations which are 60% owned by Filipino citizens shall be considered of Philippine nationality. It is defined under said law that for the purposes of investment such a corporation of 60% Filipino and 40% foreign equity is allowed to invest in a corporation engaged in a nationalized sector. Q: Does this not contradict the very provisions of the Constitution? A: It does not because the main purpose of such provision of the law is to spur investments into the Philippine economy. What it specifically prohibits is for a corporation with a foreign equity to engage in nationalized industries. Note the difference in the use of terms, namely to engage as opposed to to invest. Engaging in nationalized industries involve direct participation in the exploitation or use of natural resources or entry into protected industries vested with public interest. This is what is prohibited from being entered into by non- nationals. Q: When should the GFR be applied? A: It should be applied when two requisites are met: (1) when there is involved a nationalized or partly
IV. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION See relevant portions of VILLANUEVA, Restatement of the Doctrine of Piercing The Veil of Corporate Fiction, 37 ATENEO L.J. 19 (No. 2, June 1993). IV. A. MAIN DOCTRINE: A CORPORATION HAS A PERSONALITY SEPARATE AND DISTINCT FROM ITS STOCKHOLDERS OR MEMBERS 1. Sources: Sec. 2; Article 44, Civil Code Sec. 2 Corporation defined A corporation is an artificial being created by operation of law, having the right of succession, and the powers, attributes, and properties expressly authorized by law or incident to its existence. Article 44 The following are juridical persons: (2) other corporations, institutions and entities for public interest or purpose, created by law, their personality begins as soon as they have been constituted according to law; (3) corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member. 2. Importance of Protecting Main Doctrine: The separate juridical personality includes the right of succession, limited liability, centralized management, and generally free transferability of shares of stock. Therefore, an undermining of the separate juridical personality of the corporation such as the application of the piercing doctrine, necessarily dilutes any or all of those attributes. FROM WHICH ATTRIBUTE OF THE CORPORATION DOES THE DOCTRINE OF PIERCING THE
TRADERS ROYAL BANK v COURT OF APPEALS Facts: Filriters Guaranty Assurance Corporation (Filriters) is the registered owner of Central Bank Certificate of Indebtedness (CBCI) with a face value of 500,000. Such was then transferred to Philippine Underwriters Finance Corporation (Philfinance) under a Detached Assignment. Philfinance entered into a repurchase agreement with Traders Royal Bank over the CBCI whereby TRB buys the CBCI and Philfinance will repurchase it on April 27, 1981 for 519,361.11 Upon the default of Philfinance TRB sought to register the CBCI in its name. CB refused to register and transfer the CBCI due to the adverse claim of Filriters. (Filriters interjected the defense that Alfredo Banaria Senior VP of Filriters without any board resolution, knowledge or consent of the board of directors executed the detached assignment in favor of Philfinance. Subsequently, Alberto Fabella, Senior VP Comptroller and Pilar Jacobe Senior VP Treasury, of Filriters and of Philfinance executed similar forms transferring the CBCI to TRB. As such the transfers were null and void.) TRB then went to the RTC of Manila and filed for mandamus to compel CB to register. Petitioner argued that the CBCI was a negotiable instrument and that it was a holder in due course. It also contended that Philfinance owned 90% of Filriters equity and the two corporations have identical officers, this demanding the application of the doctrine of piecing the veil of corporate fiction as to give validity to the transfer of the CBCI. Issue: WON the doctrine of piercing the veil of corporate fiction applicable in this case. Held: The CBCI is not a negotiable instrument because it lacks the words of negotiability. It is payable only to Filriters and the transfer by a non-owner i.e. Philfinance, to TRB should have put the latter on guard as to the title of Philfinance to dispose of the CBCI. Also the assignment of Filriters toPhilfinance was fictitious as the same is without consideration and was contrary to the rules of CB Circular 70 which provides that any assignment shall not be valid unless made by the registered owner in person or by a duly authorized representative in writing. Philfinance merely borrowed the CBCI from Filriters a sister corporation to guarantee financing corporations. The doctrine of piecing the corporate veil is an equitable remedy which may only be awarded in cases when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime or where a corporation is a mere alter ego or business conduit of a person. It requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarily, they could be subject to or distinguishes one corporation from a seemingly separate one, were it not for the existing corporate fiction. The court must be sure that the corporate fiction was misused.. It is the protection of innocent 3rd parties dealing with corporate entity that the law seeks to protect by this doctrine. In this case, other than the allegation that Filriters is 90% owned by Philfinance and the identity of one shall be maintained as to the other, there is nothing else which could lead the court under the circumstances to disregard their separate corporate personalities. There is no showing that TRB was defrauded at all when it acquired the subject certificate of indebtedness from Philfinance. The fact that Philfinance owns a majority share in Filriters is not by itself a ground to disregard their
FRAUD- to prevent wrong PIERCING DOCTRINE ALTER-EGO disrespect for the corp. fiction & to defeat public convenience
EQUITY- to do justice
The application of the doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance for which such doctrine was applied. (a) Equitable Remedy: The doctrine of piercing the corporate veil is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. a PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001). (b) Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not available when other remedies are still available. a Umali v. Court of Appeals, 189 SCRA 529 (1990). UMALI v. COURT OF APPEALS Facts: The Castillo family is the owner of a parcel of land which was given as security for a loan from the DBP. For failure to pay the amortization, foreclosure of the property was initiated. This was made known to Santiago Rivera, the nephew of plaintiff Mauricia Meer vda. De Castillo and president of Slobec Realty Dev. Corp. Rivera proposed to them the conversion into a subdivision lot of the four parcels of land adjacent to the mortgaged property to raise the money. The Castillos agreed so a MOA was executed between Slobec represented by Rivera and the Castillos. Rivera obliged himself to pay the Castillos P70T after the execution of the contract and P400T after the property had been converted into a subdivision. Rivera armed with the agreement approached Cervantes, president of Bormaheco and bought a Caterpillar Tractor with P50T down payment and the balance of P180T payable in installments. Slobec through Rivera executed in favor of Bormaheco a chattel mortgage over the said equipment as security for the unpaid balance. As further security, Slobec obtained through the Insurance Corporation of the Philippines a Surety Bond in favor of Counter-Guaranty with REM executed by Rivera as president of Slobec and the Castillos as mortgagors and ICP as mortagee. The Caterpillar Tractor was delivered to Slobec. Meanwhile for violation of the terms and the conditions of the Counter-Guaranty Agreement, the properties of the Castillos was foreclosed by ICP. As the highest bidder, a Certificate of Sale was issued in its favor and TCTs over the parcels of land were issued by the Register of Deeds in favor of ICP. The mortgagors had one year from the registration of the sale to redeem the property but they failed to do so. ICP consolidated its ownership over the parcels of land. Later on ICP sold to Philippine Machinery Parts Mfg. Co. the parcels of land and by virtue of said sale, PM transferred unto itself the title
(d) Mixing-up Operations; Disrespect to the Corporate Entity: Employment of same workers; single place of business, etc., may indicate alter ego situation. a La Campana Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953); a Shoemart v. NLRC, 225 SCRA 311 (1993). Where two business enterprises are owned, conducted, and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities and treat them as identical. Sibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992). Where corporate fiction was used to perpetrate social injustice or as a vehicle to evade obligations or confuse the legitimate issues (as in this case where the actions of management of the two corporations created confusion as to the proper employer of claimants), it would be discarded and the two corporations would be merged as one. Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999). Mixing of personal accounts with corporate bank deposit accounts. Ramirez Telephone Corp. v. Bank of America, 29 SCRA 191 (1969). (e) Parent-subsidiary; Affiliated Companies: Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946); PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990). The person who invokes the doctrine must always be the injured party. Absence of proof that control over a corporation is being used by a mother company to commit fraud or wrong, there would be no basis to disregard their separate juridical personalities. Ramoso v. Court of Appeals, 347 SCRA 463 (2000); Guatson Intl Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990). If used to perform legitimate functions, a subsidiarys separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective businesses. Even when the parent corporation agreed to the terms to support a standby credit agreement in favor of the subsidiary, does not mean that its personality has merged with that of the subsidiary. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002). (h) Guiding Principles in Alter-Ego Cases: Doctrine applies even in the absence of evil intent, because of the direct violation of a central corporate law principle of separating ownership from management; Doctrine in such cased is based on estoppel: if stockholders do not respect the separate entity, others cannot also be expected to be bound by the separate juridical entity Piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced against the stockholders or officers of the corporation. (i) Distinction Between Fraud Piercing and Alter-ego Piercing: Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003). 6. Equity Cases: (a) When used to confuse legitimate issues. Telephone Engineering and Service Co., Inc. V. WCC, 104 SCRA 354 (1981).
c) Private Corporation (Sec. 3, Act 1459). - one formed for some private purpose, benefit or end. Governments majority shares does not make an entity a public corporation. National Coal Co., v. Collector of Internal Revenue, 46 Phil. 583 (1924). A corporation is created by operation of law under the Corporation Code while a government corporation is normally created by special law referred to often as a charter. Bliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271 (1994).
2. That at least two-thirds (2/3) of its membership have given their written consent or have voted to incorporate, at a duly convened meeting of the body; 3. That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious denomination, sect, or church of which it forms a part; 4. That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the administration of its affairs, properties and estate; 5. The place where the principal office of the corporation is to be established and located, which place must be within the Philippines; and
(c) Educational Corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232) Section 106. Incorporation. - Educational by the general provisions of this Code. (n) corporations shall be governed by special laws and
Section 107. Pre-requisites to incorporation. - Except upon favorable recommendation of the Ministry of Education and Culture, the Securities and Exchange Commission shall not accept or approve the articles of incorporation and by-laws of any educational institution. (168a) Section 108. Board of trustees. - Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5). Unless otherwise provided in the articles of incorporation on the by- laws, the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the transaction of business. The powers and authority of trustees shall be defined in the by-laws. For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations. (169a) (d) Charitable, Scientific or Vocational Corporations (e) Business Corporation 4. As to Number of Members: (a) Aggregate Corporation (b) Corporation Sole (Secs. 110 to 115; Roman Catholic Apostolic Administrator of Davao, Inc. v. LRC and the Register of Deeds of Davao City, 102 Phil. 596 [1957]). Section 110. Corporation sole. - For the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. (154a) Section 111. Articles of incorporation. - In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file with the Securities and Exchange Commission articles of incorporation setting forth the following: 1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious
The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982) and Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984), that a corporation sole is disqualified to acquire/hold alienable lands of the public domain, because of the constitutional prohibition qualifying only individuals to acquire land and the provision under the Public Land Act which applied only to Filipino citizens or natural persons, has been expressly overturned in Director of Land v. IAC, 146 SCRA 509 (1986). (3Overturning affirmed in Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984); Republic v. IAC, 168 SCRA 165 (1988).)
5. As to Legal Status: (a) De Jure Corporation (b) De Facto Corporation (Sec. 20) Section 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (c) Corporation by Estoppel (Sec. 21) S Section 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. Q. Why is there piercing in a de facto corporation? A. Piercing is allowed because the intention of the law is to protect the contracts entered into by the corporation. 6. As to Existence of Shares (Secs. 3 and 5): Sec. 3 Classes of Corporation Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations. Sec. 5 Corporations and incorporators, stockholders and members Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Corporators in a non-stock corporation are called stockholders or shareholders. Corporators in a nonstock corporation are called members. (a) Stock Corporation (b) Non-Stock Corporation
VI. CORPORATE CONTRACT LAW See relevant portion of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No. 2, June 1994) INTRODUCTION: Corporate Contract Law: contracts shaped by corporate law. Form v. substance: substance prevails
Q: In order to reach the level of corporation by estoppel, what is the essential ingredient of such doctrine? A: When there is a representation that a corporation exists when in fact there is none and at least one party thought that there was a corporation. Q: Distinguish promoters contract principles from the corporation by estoppel doctrine? A: In both the corporation does not exist. But in promoters contracts there is no misrepresentation that the corporation does not yet exist. When the contracts are entered into by persons who in behalf of the corporation, acknowledging that the corporation does not yet exist and is still in the process of incorporation, you do not apply the doctrine of corporation by estoppel. It is still what one may call as the promoters contract. (The moment there is no corporation and contracts are entered into under the representation that the corporation does exist then that is the only time you apply the doctrine of corporation by estoppel.) 1. Pre-Incorporation Contracts (a) Who Are Promoters? Promoter is a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. (Sec. 3.10, Securities Regulation Code [R.A. 8799]) CLV: The definition of promoter is important to determine the liability for promoters contract. Before you can make a promoter liable, you must be able to determine who is the promoter. He must be the one who takes initiative on the founding and organization of the business venture which eventually ends up as the corporation being organized. Q: At the promoters stage there is no juridical personality until the SEC issues the certificate of incorporation. Until the certificate is issued, the stage of the de facto corporation has not yet been reached. Prior to the de facto corporation stage what then is the status of the contract entered into by a promoter for and in behalf of the person or agent who had undertaken the transaction? A: Unenforceable. It is not binding upon the corporation because it has not given consent to the authority of the person or agent who had undertaken the transaction.
RIZAL LIGHT & ICE CO. INC. v. MUNICIPALITY OF MORONG Facts: Rizal Light and Ice Co. Inc. is a domestic corporation granted by the Public Service Commission, a certificate of public convenience for the installation, operation and management of an electric light, heat, and power service in Morong, Rizal. PSC required Rizal light to show cause why it should not be penalized for violation of the conditions of its CPC and for failure to comply with directions to raise its service voltage, etc. Rizal failed to comply so the PSC ordered the cancellation and revocation of Rizals CPC and forfeiture of its franchise. The order of revocation was set aside when it was known that the company representative failed to appear due to illness. The municipality of Rizal formally asked the PSC to revoke Rizals CPC and forfeiture of its franchise. PSC found that Rizal failed to comply with its directive and violated the conditions of the CPC. PSC
ARNOLD HALL v. PICCIO Facts: Petitioner Arnold Hall and Bradley Hall and respondent Fred Brown, Emma Brown, Hipolita Chapman and Ceferino Abella signed and acknowledged the Articles of Incorporation of the Far Eastern Lumber and Commercial Co., Inc. a general lumber business. 23,428 shares of stock were subscribed and fully paid for and certain properties were transferred to the corporation. The Articles of Incorporation were filed with the SEC for the issuance of the corresponding certificates of incorporation. The corporation proceeded to do business. Pending the issuance of the certificates by SEC, the respondents Brown et. al. filed before the CFI of Leyte a civil case entitled Fred Brown v. Arnold Hall alleging among others, that the Far Eastern Lumber and Commercial Co. was an unregistered partnership; that they wish to have it dissolved because of a bitter dissension among the members, mismanagement and fraud by the managers and heavy financial losses. Hall, et. al. filed a motion to dismiss alleging the lack of jurisdiction by the court. Judge Piccio ordered the dissolution of the company. Held: The SEC had not issued the corresponding certificate of incorporation. All of them know or ought to know that the personality of a corporation begins to exist only from the moment such certificate is issued, not before. Here, the complaining associate have not represented to the others that they were incorporated any more than the defendant had made similar representations. Since nobody was led to believe anything to his prejudice and damage, the principle of estoppel does not apply. The section on de facto corporations does not apply in this case: (1) First, Far Eastern Lumber, even its stockholders, may not probably claim in good faith to be a corporation not having obtained the certificate of incorporation. Thus the immunity of collateral attack granted to corporations claiming in good faith to be a corporation does not apply here. (2) Second, this suit is not one in which the corporation is a party. This is a litigation between stockholders of the alleged corporation for the purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without intervention of the State. CLV: The de facto doctrine was formulated to safeguard the security of commercial transactions whenever they involve the corporation. Parties dealing with said corporation are secured by the fact that the transactions entered into with said corporations may be sued upon and they can recover. That is why aside from the other two requisites there must be a set of officers (i.e. assumption of corporate powers) or directors because of the principle that a corporation can only act through its officers. Effect as to both parties: (1) cannot deny its existence (2) liable as general partners. Not applicable to intra-corporate disputes, why? (1) it is a third level doctrine (2) public is not expected to know, while the above are expected to know. If the other party knows of the non-
When the incorporators represent themselves to be officers of the corporation which was never duly registered with the SEC, and engage in the name of the purported corporation in illegal recruitment, they are estopped from claiming that they are not liable as corporate officers under Sec. 25 of Corporation Code which provides that all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all the debts, liabilities and damages incurred or arising as a result thereof. People v. Garcia, 271 SCRA 621 (1997); People v. Pineda, G.R. No. 117010, 18 April 1997 (unpub). 4. TRUST FUND DOCTRINE See VILLANUEVA, "The Trust Fund Doctrine Under Philippine Corporate Setting," 31 ATENEO L.J. (No. 1, Feb. 1987). The capital stock of the corporation especially its unpaid subscriptions is a trust fund for the benefit of the general creditors of the corporation. a) Commercial/Common Law Premise: Equity versus Debts (Art. 2236, Civil Code) Art. 2236 The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to the exceptions provided by law. b) Nature of Doctrine: Ong Yong v. Tiu, 401 SCRA 1 (2003).
Under the trust fund doctrine, the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Comm. of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999). The trust fund doctrine considers the subscribed capital stock as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital stock may be turned over or released to the stockholder (except in the redemption of the redeemable shares) without violating this principle. Thus dividends must never impair the subscribed capital stock; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the consideration therefore. NTC v. Court of Appeals, 311 SCRA 508 (1999). The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the capital stock, property and other assets of a corporation are regarded as equtiy in trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void. Boman Environmental Dev. Corp. v. CA, 167 SCRA 540 (1988). c) To Purchase Own Shares (Secs. 8, 41, 43 and 122, last paragraph; Phil. Trust Co. v. Rivera, 44 Phil. 469 [1923]; Steinberg v. Velasco, 52 Phil. 953 [1929]) Sec. 8 Redeemable Shares Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock
The trust fund doctrine applies in the following cases: (1) where the corporation has distributed its capital among the stockholders without providing for the payment of creditors (2) where it had released subscribers to capital stock from their subscription receivables (3) where it had transferred corporate property in fraud of its creditors and (4) where the corporation is insolvent. Statutory references: (1) Sec. 122 of the Corp. Code governing dissolution of corporations and their liquidation when it provides that except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. (2) SEC Rules governing Redeemable and Treasury Shares expressly adopts the doctrine as follows, the outstanding capital stock of a corporation, including unpaid subscriptions, shall constitute a trust fund for the benefit of its creditors which shall not be returned to the stockholders by repurchase of shares or otherwise, except in the manner as provided for under the Corporation Code and this rules. Coverage of Trust Fund Doctrine adopted the two precursors of the trust fund doctrine which is the a.) capital impairment rule and the b.) profit rule. A fixed capital must be preserved for protecting the claims of creditors so that dividend distributions to stockholders should be limited to profits earned or accumulated by the corporation. In a solvent corporation, the trust fund doctrine encompasses only the capital stock. 1.) Coverage of capital stocks covers capital stock; the protection by the doctrine upon corporation not in a state of insolvency but only up to the extent of the capital stock of the corporation. 2.) Retained earnings although part of the stockholders equity, do not constitute part of the capital stock. It is not covered by the doctrine. The corporation is at liberty to declare and pay out dividends from its assets. 3.) Outstanding capital stock total shares of stock issued to subscribers or stockholders whether or not fully or partially paid (as long as there is a binding subscription agreement) except treasury shares (Sec. 137 ). 4.) Par value stock capital stock represented by aggregate par value of all shares issued and subscribed. If par value shares are sold at premium, excess is not treated as legal capital/capital stock but can be declared as stock dividends. This stock dividends fall within the ambit of the Trust Fund doctrine. 5.) No par value stock legal capital = total consideration received for the shares of stock. Entire consideration for no par value stock treated as capital and not available for distribution as dividends. Funds received by a corporation to cover subscription payment on increase in authorized capital stock prior to approval thereof of the SEC would not be covered by the TFD. As a TF, this money is still withdrawable by any of the subscribers at any time before issuance of the corresponding shares of stock, unless there is a pre-subscription to the contrary.
corporation, the stockholders do not have individual standing but only standing as a group.
stockholders and the Board of Directors f.) Between the corporation and the public (since the AI is a public document.) 2.) A PUBLIC DOCUMENT because it is registered with the SEC. Such works with the doctrine of public notice that when the public deals with the corporation, the contents of AI binds them whether they in fact have seen the AI or not. When a person enters into a contract or any transaction with a corporation whether or not he has checked with the SEC the terms and conditions of the AI, he will be bound by it. He cannot claim ignorance of the charter of the corporation. 1. Nature of Charter: The charter is in the nature of a contract between the corporation and the government. Government of P.I. v. Manila Railroad Co., 52 Phil. 699 (1929). GOVERNMENT OF P.I. v. MANILA RAILROAD CO. Facts: The GPI filed a petition for mandamus in the SC to compel the Manila Railroad and Jose Paez, its manager to provide and equip the telegraph poles of the company in Tarlac and La Union with crosspieces for 6 telegraph wires belonging to the government which, it alleged, are necessary for public service between certain municipalities. Petitioner relies on Sec. 84 of Act No. 1459 which provides that the railroad company shall establish a telegraph line for the use of the railroad and that such posts may be used for government wires and shall be sufficient for crosspieces to carry the number of wires which the government may consider necessary for public service. Petitioner contends that since 6 crosspieces are now necessary for public service, the company should provide sufficient crosspieces. Respondent answers by saying that the Charter of Manila Railroad (Act No. 1510) repealed Sec. 84 of Act 1459 and contended that the Government is entitled to only 4 wires. Held: Petition denied. Inasmuch as Act No. 1510 is the charter of the Manila Railroad Co. constitutes a contract between the corporation and the government, it would seem that the corporation is governed by its contract and not by the provisions of the general law. But from a reading of the charter it will be seen that there is no indication that the government intended to impose upon said company any other conditions or obligations not expressly found in the said contract or charter. Section 84 of the Corp. Law was intended to apply to all railways in the Philippines which did not have a special charter or contract. Act No. 1510 applies only to Manila Railroad and being a special charter, its adoption had the effect of superseding the provisions of the corporation law which are applicable to railroads in general.
1. Grounds for Disapproval (Sec. 17) Sec. 17 Grounds when articles of incorporation or amendment may be rejected or disapproved The SEC may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, that the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or approval 1.) That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; 2.) That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral or contrary to government rules and regulations; 3.) That the Treasurers Affidavit concerning the amount of capital stock subscribed and/or paid is false. 4.) That the percentage of ownership of the capital stock to be owned by the citizens of the Philippines has not been complied with as required by existing laws or the Constitution. No articles of incorporation or amendment to articles of incorporation of banks, banking and quasibanking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. When the proposed articles show that the object is to organize a barrio into a separate corporation for the purpose of taking possession and having control of all municipal property within the incorporated barrio and administer it exclusively for the benefit of the residents, the object is unlawful and the articles can be denied registration. Asuncion v. De Yriarte, 28 Phil. 67 (1914). It is well to note that, if a corporations purpose, as stated in the Articles of Incorporation, is lawful, then the SEC has no authority to inquire whether the corporation has purposes other than those stated, and mandamus will lie to compel it to issue the certificate of incorporation. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003). SECs duty is not merely ministerial It has been granted by PD 902-A the powers to examine and approve or disapprove the articles of incorporation and registration of a corporation.
4. Amendments to the Articles of Incorporation (Sec. 16). Sec. 16 Amendment of Articles of Incorporation Unless otherwise prescribed by this Code or by special law and for legitimate purposes, any provision or matter stated in the articles of incorporation
5. Commencement of Corporate Existence (Sec. 19). Sec. 19 Commencement of corporate existence A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the SEC issues a certificate of incorporation under its official seal and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law.
VIII. BY-LAWS See relevant portions of VILLANUEVA, "Corporate Contract Law," 38 ATENEO L.J. 1 (No. 2, June 1994). 1. Nature and Functions (Gokongwei v. SEC, 89 SCRA 337 [1979]; Pea v. CA, 193 SCRA 717 [1991]) GOKONGWEI vs. SEC FACTS: In 1972, Universal Robina Corp acquired 622,987 share in San Miguel Corp. In 1972 also, Consolidated Foods Corp. acquired SMC shares amounting to P543,959. John Gokongwei, the presidne tand controlling stockholder of URC & CFC purchased 5,000 SMC shares. Gokongwei tried to get a seat in the SMC BoD but was rejected by the SHs n the grounds that he was engaged in a competitive business and his securing a seat in the BoD would subject SMC to great disadvantages. On September 18, 1976 repondent SHs amended the by-laws of SMC, Gokongwei contends that: 1. the BoD acted without authority & in usurpation of the power of the SHs since the computation of 2/3 vote was based on the authorized capital stock as of 1961 & not as of 1976
Q. Distinguish by-laws from AoI A. The AoI is not an internal document that binds the parties to a corporate setting. It is also a document that binds the State. The BL is an intramural document, its supposed to bind the inner workings of a corp.
Q. Are the AoI and BL public documents? A. Yes, both are public documents because they are not valid and binding without the approval of the SEC
Q. Does the BL have to be approved by the SEC? A. Yes, prior to the approval of the SEC, the by-laws are not binding since the code expressly requires the approval of the SEC to be binding upon the SHs and members. Absent the codal provision, it is binding because of a corp.s inherent power to adopt its own by-laws.
Q. Do BL bind the public? A. As a general rule, BL provisions do not bind the public, except if the third person has knowledge of the BL provision.
Section 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code. (22a and 23a) Admittedly, the right to amend the by-laws lies solely in the discretion of the employer, this being in the exercise of management prerogative or business judgment. However this right, extensive as it may be, cannot impair the obligation of existing contracts or rights. . . If we were to rule otherwise, it would enable an employer to remove any employee from his employment by the simple expediency of amending its by-laws and providing that his/her position shall cease to exist upon the occurrence of a specified event. Salafranca v. Philamlife (Pamplona) Village Homeowners, 300 SCRA 469 (1998).
Sub-paragraph 11 of Sec. 36 provide that a corporation has the power and capacity to exercise such powers as may be essential or necessary to carry out its purpose or purposes as stated in its articles of incorporation.
Sec. 2 of the Corp. Code provides the corporation as having the powers, attributes and properties expressly authorized by law or incident to its existence.
Ultra Vires doctrine is connected with ancillary doctrines as of (1) apparent authority and of (2) estoppel. One has to look at the corporation as a person before the law because of the (1) issue of consent and (2) liability who commits itself to obligation. The state only gives a corporation limited powers and not general powers as an individual has because of the consent and liability. (b) Where Corporate Power Lodged A corporation has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents. . . In turn, physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors. Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001). Unless otherwise provided by the Corporation Code, corporate powers are exercised by the Board of Directors, which they may delegate to either an executive committee, officers or contracted managers. The delegation, except for the executive committee, must be for specific purposes, which makes the officers the agents of the corporation, and accordingly the general rules of agency as to the binding effects of their acts would apply. For such officers to be deemed fully clothed by the corporation to exercise a power of the Board, the latter must specially authorize them to do so. ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 572 (1999).
PRIMARY RULE: The Board of Directors/Trustees is the repository of all corporate powers (sec. 23) The source of power of the board of directors is therefore primary and not delegated power from the stockholders or members of the corporation. However, there are specified instances in the Corporation Code where the particular exercise of power of the corporation by the board, in order to be binding and effective, requires the consent and ratification of the stockholders or members, on one hand, and the State, on the other hand. IN CONSONANCE WITH CONTRACT LAW PRINCIPLES in conformity with the principles of contract law, that a party cannot relieve himself from the contractual terms and conditions, much less amend or alter them, without the consent or approval of the other party or parties. EXCEPTION TO THE GENERAL RULE, in cases where the stockholders consent is required, majority rules. The consent or dissent of the stockholders is recognized by their majority vote or their qualified two-thirds as the case may be which would bind even those who abstained or dissented. For those who dissented, there is a way out for them by way of exercising their appraisal right (depending on the issue).
3.) acts or contracts entered into in behalf of the corporation by persons who have no corporate
Ultra vires acts of the second type are void as between the corporation and the State or in the first level of corporate existence while it is merely voidable in the third level because of public policy. The public who deals in good faith with the corporation has the right to expect that the obligation entered into shall be complied with. First Type Ultra Vires: An ultra vires act is one committed outside the object for which a corporation is crated as defined by the law of its organization and therefore beyond the power conferred upon it by law. The term ultra vires is distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. a Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001). ATRIUM MANAGEMENT CORP. v. COURT OF APPEALS Facts: Hi-Cement through the corporate signatories (De Leon treasurer, Delas Alas chairman) issued checks in favor of E.T. Henry & Co. Inc. as a collateral for a loan) E.T. Henry endorsed the four checks to Atrium for valuable consideration. Upon presentment for payment, the bank dishonored all four checks because the payment was stopped. Atrium filed with the RTC an action for collection of the proceeds of four postdated checks amounting to P2M. The TC ordered that De Leon, ET Henry and Hi-Cement pay Atrium jointly and severally the value of the four checks plus interest. The CA on the other hand absolved Hi-Cement from liability. Issue: WON De Leon was not authorized to issue the checks WON the issuance of the checks were ULTRA VIRES ACTS Held: De Leon was authorized and such issuance is not an ultra vires act. Ratio: De Leon as treasurer of the corporation is authorized to sign checks for the corporation. As a rule, the act of issuing checks is within the ambit of a valid corporate act. And securing a loan to finance the activities of the corporation is not an ultra vires act. While an ultra vires act is one committed outside the object or which a corporation is created as defined by law of its organization and therefore beyond the power conferred upon it by law, the act pertained to in the case is not an illegal act.
PIROVANO DE LA RAMA STEAMSHIP CO. INC. Facts: The story began with Enrico Perovano becoming President of the Dela Rama Corporation. Under his management, the corporation grew into a multi-million company until his death. Don Esteban dela Rama who owned and controlled the stock of the corporation, distributed his shareholdings among his five daughters including Estefania. The company has a bonded indebtedness amounting to P7,500 in 1940 but had assets/capitals of P15 M as of 1941 which were mortgaged as security for the debt to the National Development Corp. This bonded indebtedness was converted to non-voting preferred shares of the company under the condition that they would bear a fixed cumulative divisor of 6% per annum and this was carried out in 1949. NDC now had the right to be represented by four out of nine members in the Board of Directors. It was in 1946 that the Board of Directors adopted the questioned resolution where the corporation ser aside P400,000 to the four minor children with the sum convertible into shares of stock. Lourdes de la Rama later learned that since the company shares of stock was actually 3.6 times their par value, the company would in effect be giving them an amount totaling to P1,440,000 and that stocks if were given to the children, the voting strength of the De la Rama daughters would be adversely affected. This caused Lourdes to ask for the cancellation and waiver of her pre-emptive rights. Don Esteban then advised the corporate secretary that the resolution be nullified due to the misunderstanding as to its implications. In 1947, the Board adopted a resolution changing the form of donation from 4,000 shares to merely a renunciation in favor of the children of the corporate right, titles and interests as beneficiary to the proceeds of the life insurance policy subject to the condition that proceeds be retained by the company as a loan with 5% interest ($321,500). Estefania as guardian of the children, accepted the donation in their behalf. Said donation was formally ratified in 1949 after Estefania bought a house in New York for $75,000. In 1950 Osmena Jr. husband of Lourdes de la Rama addressed an inquiry to the SEC asking for an opinion regarding the donation. SEC opined that the donation was void because the corporation could not dispose of its assets by gifts. Therefore, it acted beyond the scope of its powers. Thus, the stockholders revoked the donation on this ground. With these revocation, plaintiff as represented by Estefania their mother, seek t enforce this resolutions adopted by the Board of Directors and Stockholders of De la Rama Steamship Co. giving to said children the proceeds of the insurance policies of the deceased with the company as the beneficiary. The company contends that the resolution and the contract executed pursuant thereto are ultra vires and if valid, the obligation to pay the amount given is not yet due and demandable. Plaintiffs won in the lower court, hence this petition. Issue: WON the said Board of Directors resolution was an ultra vires act? Held:
CRISOLOGO-JOSE v. COURT OF APPEALS Facts: Atty. Benares was the President of Movers Enterprise while Ricardo Santos Jr. was the VicePresident. On April 1980 Atty. Benares in accommodation of his clients, the spouses Jaime and Clarita Ong issued a check drawn against Traders Royal Bank in the amount of 45,000 payable to CrisologoJose. Since the check was under the account of the corporation, the president and the treasurer should sign the check. But since the treasurer was not available, Benares asked Santos to be the alternate signatory. The check was issued to Crisologo-Jose in consideration of the waiver of Crisologo over a certain property which the GAIA agreed to sell to the clients of Benares (spouses Ong) with the understanding that upon approval of the compromise agreement with the spouses Ong, the check will be encashed accordingly. However, the compromise agreement was not approved within the expected period. So Benares replaced the check with another one with the same amount also payable to Jose. When petitioner deposited the check, it was dishonored for insufficiency of fund. Petitioner filed criminal complaint for violation of BP 22. Meanwhile, during the preliminary investigation, Santos tendered cashiers check in payment of the dishonored check but petitioner refused to accept it. Santos then encashed the check and deposited the money to the Clerk of Court. Incidentally, Benares purchased the cashiers check and gave it to the plaintiff to be applied as
HARDEN v. BENGUET CONSOLIDATED MINING Facts: Benguet Consolidated Mining and Balatoc Mining Co. are entities organized for the purpose of engaging in the mining of gold in the Philippines and their respective properties lie only a few miles apart. The original stockholders of Balatoc were unable to supply the means for profitable operation thus, its board ordered a suspension of all work. A general meeting of the stockholders approved to establish a committee to find investors. The committee in turn approached Bean, President and General manager of Benguet to secure the necessary capital for the development of the Balatoc properties. The management of both companies executed a contract where Benguet was to proceed with the development and construction of a milling plant for the mine and to erect a power plact. In return, Benguet would receive from Balatoc shares of par value of P600,000 in payment of the first 600,000 to be advanced to it. By 1929, Benguet had spent P1,417,952,15 in pursuance of the contract. Balatoc stockholders have been receiving large dividends. Harden and two other stockholders filed a suit against Benguet, Balatoc and the officers to annul the certificate covering P600,000 shares of Balatoc issued to Benguet and to recover a large sum of money alleged to have been unlawfully collected by Benguet and to annul the contract. The trial court dismissed the complaint, hence this petition. Issue: WON it is lawful for Benguet to hold any interest in another mining corporation? Held: No. Section 75 of the Philippine Bill of 1902 prohibits corporation engaged in mining from being interested in any other corporation engaged in mining. This was amended by Act No. 3518 which now provided that a corporation is prohibited to hold more than 15% of the OCS of another corporation. The Corp. Law did not contain any clause directly penalizing the acts of a corporation or member in an interest contrary to Sec. 13 of Act 1459. The penalties imposed by the Corp. Law are of such nature that they can be enforced only by a criminal prosecution or by an action of quo warranto which can only be maintained by the Atty. General. Benguet Co. has committed no civil wrong against the plaintiff stockholders and if a public wrong is committed, the directors of Balatoc and plaintiff Harden himself were the active inducers of the commission of that wrong. The contracts have
(i) Theory of Estoppel or Ratification The principle of estoppel precludes a corporation and its Board of Directors from denying the validity of the transaction entered into by its officer with a third party who in good faith, relied on the authority of the former as manager to act on behalf of the corporation. aLipat v. Pacific Banking Corp., 402 SCRA 339 (2003). In order to ratify the unauthorized act of an agent and make it binding on the corporation, it must be shown that the governing body or officer authorized to ratify had full and complete knowledge of all the material facts connected with the transaction to which it relates. Ratification can never be made on the part of the corporation by the same person who wrongfully assume the power to make the contract, but the ratification must be by the officer or governing body having authority to make such contract. Vicente v. Geraldez, 52 SCRA 210 (1973). The admission by counsel on behalf of the corporation of the latters culpability for personal loans obtained by its corporate officers cannot be given legal effect when the admission was without any enabling act or attendant ratification of corporate act, as would authorize or even ratify such admission. In the absence of such ratification or authority, such admission does not bind the corporation. Aguenza v. Metropolitan Bank and Trust Co., 271 SCRA 1 (1997). Doctrine of Laches or Stale Demands: The principle of laches or stale demands provides that the failure or neglect, for an unreasonable and unexplained length of time, to do that which by exercising due diligence could or should have been done earlier, or the negligence or omission to assert a right within a reasonable time, warrants a presumption that the party entitled to assert it either has abandoned it or declined to assert it. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002). ultra vires act can be enforced or validated if there are equitable grounds for taking such action. Here it is fair that the resolution be upheld at least on the ground of estoppel. Ratification (a) the act must be consummated and not executory (b) creditors are not prejudiced or all of them have given their consent (c) rights of the public or the State are not involved (d) all the stockholders must give their consent.
PRIME WHITE CEMENT CORP. v INTERMEDIATE APPELLATE COURT Facts: A director (Te) entered into an agreement of Dealership agreement with PWCC, signed by its chairman and president of the corporation to supply 20,000 bags of white cement per month for five years at a fixed price of P9.70 per bag. Subsequently, the Board refused to abide by the contract unless new conditions are accepted providing for a new price formula. The dealing director sued for specific performance on the contract. Held: The Court held that under both the Corporation Law then and the present Corporation Code, the doctrine is that all corporate powers shall be exercised by the Board of Directors, except as those provided by law. Although it cannot completely abdicate its powers and responsibility to act for the juridical entity, the Board may expressly delegate specific powers to its president or any of its officers. In the absence of such express delegation, a contract entered into by its President on behalf of the corporation may still bind the corporation if the Board should ratify the same expressly or impliedly. Implied ratification takes various forms (1) silence or acquiescence (2) by acts showing approval or adoption of the contract or (3) by acceptance and retention of the benefits flowing therefrom. Even in the absence of express or implied authority by ratification, the President as a general rule may bind the corporation by a contract in the ordinary course of business, provided the same is reasonable under the circumstances. These rules are basic but general and flexible. Applies where the President is dealing with third persons but different where a director is dealing with his own corporation. The court herein held that the director holds a position of trust and as such he owes a duty of loyalty to his corporation and his contracts with the corporation must always be at reasonable terms otherwise the contract is void or voidable at the instance of the corporation. The court here found the terms of the Dealership Agreement were unreasonable for the corporation and that the unfairness in the contract was a basis which renders a contract entered into the President without authority from the Board, void or voidable, although it may have been in the ordinary course of business.
FRANCISCO v. GSIS Facts: Trinidad Francisco mortgaged to GSIS a parcel of land with 21 bungalows (Vic-Mari Compound) for a P400,000 loan of which P336,100 was released payable within 10 years with 7% interest per annum compounded monthly. In 1959 GSIS extrajudicially foreclosed the mortgage on the ground of default of payment in the amount of P32,000 ( total payment amounted to P130,000) where GSIS was also the buyer. Atty. Francisco, the father of Trinidad proposed to the General Manager of GSIS to pay P30,000 of the P52,000 and asked that the foreclosure be set aside and for GSIS to take over the administration of the mortgaged property and to collect installments due on the unpaid purchase price for more than 31 house and lot payees to be applied to the arrearage and the loan. The GSIS approved this and Atty. Francisco was notifed by telegram. GSIS accepted a check for P30,000 and remittances totaling to P44,121.29 for which the corresponding ORs were issued. GSIS then sent 3 letters signed by the GM asking a proposal for the payment of the debt since the 1yr. Period for redemption had expired. Atty. Francisco protested and brought to the attention of GSIS the concluded contract and its acceptance by telegram. GSIS replied asking payment for various expenses and that the telegram should be disregarded for its failure toe express the content of a board resolution due to error of its minor employees in the sending of the telegram. The approval was apparently conditioned on Atty. Franciscos agreement to pay all expenses incurred in foreclosure. GSIS held that the remittances were insufficient so that GSIS consolidated title to the compound in its name. Hence, this suit for specific performance and damages. The lower court ruled in favor of Francisco. Held: The SC finds no reason for altering the conclusion that the offer of compromise made by Francisco had been validly accepted and was binding on the defendant GSIS. The terms of the offer were clear and the acceptance of the proposal was signed by the GM Andal. The telegram hinted on no anomaly and was within Andals apparent authority. Corporation transactions would speedily come to a standstill where every person dealing with a corporation held duty-bound to disbelieve every act of its responsible officers, no matter how regular they should appear on their face. If a corporation knowingly permits one of its officers or any other agent within the scope of an apparent and thus holds him out to the public as possessing power to do those acts, the corporation will as against any one who has in good faith dealt with the corporation through such agent be estopped from denying such authority. Hence, even if it were the Board Secretary who sent the telegram, the corporation could not evade the binding effect produced by the telegram. The corporation had sufficient notice of the allegedly unauthorized telegram when it pocketed the P30,000 but kept silent about it. Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of his employment and in relation to matters within the scope of his authority is notice to the corporation, whether he communicates such knowledge or not. The silence taken together with the unconditional acceptance of 3 other substantial remittances of the original agreement constitute a binding ratification of the original agreement. Ratification may be effected expressly or tacitly. There is tacit ratification if with knowledge of the reason which renders it voidable and such reason having ceased, to a person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right.
NYCO SALES CORPORATION v BA FINANCE CORPORATION Facts: Rufino Yao was the President and General Manager of Nyco Sales Corporation which was engaged in the business of selling construction materials. Nyco Sales through Yao was approached by Santiago and Renato Fernandez on behalf of Sanshell Corporation requesting for credit accommodation since Nyco had discounting privileges with BA Finance. The Fernandezes wen to Yao for the purpose of discounting their post-dated BPI check worth P60,000 made payable to Nyco.
d) Incur, Create or Increase Bonded Indebtedness (Sec. 38) Sec. 38 Power to increase or decrease capital stock; incur, create or increase bonded indebtedness No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholders meeting duly called for the purpose, 2/3 of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating, or increasing ant bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholders meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of directors of the corporation and countersigned by the chairman and the secretary of the stockholders meeting, setting forth: 1. That the requirements of this section have been complied with; 2. The amount of the increase or diminution of the capital stock; 3. If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed the names, nationalities, residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each., and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stockholder if such increase is for the purpose of making effective stock dividend thereof authorized; 4. Any bonded indebtedness to be incurred, created or increased; 5. The actual indebtedness of the corporation on the day of meeting; 6. The amount of stock represented at the meeting; and 7. The vote authorizing the increase or diminution of the capital stock, or the5 incurring, creating, or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing any bonded indebtedness authorized, as the certificate of filing may declare Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least 25% of such increased capital stock has been subscribed and that at least 25% of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to 25% of the subscription: Provided further, that no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors.
(f) Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 42; De la Rama v. Ma-ao Sugar Central Co., 27 SCRA 247 [1969]) Sec. 42 Power to invest corporate funds in another corporation or business or for any other business purpose Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least 2/3 of the outstanding capital stock, or at least by 2/3 of the members in the case of non-stock corporations, at a stockholders or members meeting duly called for that purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. DE LA RAMA v. MA-AO SUGAR CENTRAL CO. Facts: De la Rama et.al. contend that Ma-ao Sugar Central through its President, subscribed P300,000 worth of capital stock of the Philippine Fiber Processing Co. Inc. They allege that the time of the first two payments were made there was no board resolution authorizing the investment and that it was only before the third payment that the President was so authorized by the Board of Directors. De la Rama also contends that even assuming, arguendo, that the said Board Resolutions are valid, the transaction is still wanting in legality, no resolution having been approved by the affirmative vote of the stockholders holding shares in the corporation, entitling them to at least 2/3 of the voting power.
situation where the Board exercises ordinary business discretion, such investment would run contrary to the relationship of the Board to the stockholders whereby they engaged to manage the hotel corporation alone, and whereby they vowed to devote all their time and all their effort in such corporation. By investing in 20% of another corporation, said Board obtained a very big role in the management of such corporation, hence such would run contrary to its obligation to the stockholders to take care of the business enterprise of the hotel corporation and not any other corporations business enterprise. As such, it would need a ratificatory vote of 2/3 of the stockholders.
needed since such is really within the ordinary business discretion of the Board. And by investing only in a relatively minimal share in the assets of another company, it does not really engage in the business enterprise of another corporation, hence, they still afford priority to the business enterprise of the hotel corporation. (g) Declare Dividends (Sec. 43; a Nielson & Co. v. Lepanto Consolidated Mining Co., 26 SCRA 540 [1968]) Sec. 43 Power to declare dividends The board of directors of a stock corporation, may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividend due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his paid subscription is fully paid: Provided further, that no stock dividend shall be issued without the approval of stockholders representing not less than 2/3 of the outstanding capital stock at a regular or special meeting duly called for that purpose. Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such when there is need for special reserve for probable contingencies.
TUASON & CO. v. BOLANOS Facts: JM Tuason & Co. Inc. represented by its managing partner Gregorio Araneta Inc. filed a complaint in the CFI for recovery of possession of registered land situated in Tatalon, QC against Quirino Bolanos. Defendant in his answer claims through prescription and that the registration of said land was obtained through fraud. The CFI ruled in favor of the plaintiff and declared that defendant had no right to the land. Hence, this appeal. Issue: WON the case should have been dismissed on the ground that it was not brought by the real party in interest?
QUICK REFERENCE ON THE POWERS OF THE CORPORATION POWER STATUTORY REQUIREMENT PROCEDURE 1. Written notice to each stockholder WITH OR WITHOUT APPRAISAL RIGHT Extension: Yes, such constitutes a novation of the contract. Shortening: No, but not because such is inherent, because such is not inherent as it constitutes an alteration of the powers granted it by the State.
Power to shorten or 1. Approved by a majority vote of extend corporate term the Board of Directors (majority of (Sec. 37) the quorum) 2. Ratified by at least 2/3 of the OCS or 2/3 of members in a non-stock corporation.
Power to increase 1. Approved by a majority vote 1. Written notice to capital stock and also of the Board of Directors (majority each stockholder the power to decrease of quorum) capital stock (Sec. 38) Special documentary 2. Ratified by at least requirements: 2/3 of the OCS a. Prior approval of the SEC; SEC shall not accept for filing unless with a sworn statement by treasurer that 2525 rule complied with b. SEC approval triggers effectivity
Increase: None, dilutes the worth of the stock, defeats the purpose of the increase. Decrease: None, because in effect there is a return of part of investments of the stockholders
Power to sell, dispose, 1) Of all or substantially all of lease, encumber its property (Sec. 40) - Majority vote of Board of ALL: Quantitative Test Directors (majority of quorum)
(1) Must comply with Yes, such a sale does not necessarily leads to a the Bulk Sales Law the corporate dissolution of the corporation and return of the residual value of the creditors and the amount corporation. Such is afforded as and nature of their a matter of equity and fairness. SUBSTANTIALLY ALL: - Ratified or approved by 2/3 of claims renders Qualitative Test the OCS or 2/3 of the members (purpose for which it transaction void - Relates to the primary purpose. was incorporated) (2) If no ratificatory 2) Exception to Sec. 40 if the vote of stockholders, it sale is necessary in the is an utra vires act of usual and regular course of the third kind business or if proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining businesses Majority vote of Board of Directors (business judgment rule) Does not relate to primary or secondary purpose
(1) eliminate fractional shares arising out of stock Buy back of shares (i) dividends decrease the cost of (2) collect or compromise an indebtedness to the doing business corporation arising out of of the enterprise. (ii) perpetuate control unpaid subscription in a delinquency sale, and to purchase delinquent shares during said sale and (3) to pay dissenting or withdrawing stockholders exercising their appraisal right - Taken from URE only, except redeemable shares
2.
As a g e n e r a l rule, section 42 applies if the investment is for secondary or other than the primary purpose. Exception: If the investment is reasonably necessary to accomplish its primary purpose as stated in the Articles of Incorporation, approval of the stockholders is not necessary as it is included in the Business Judgment of theBOD Power to declare Cash dividends: dividends(Sec.43) (1)Absolute majority of Board of Directors in accordance with the Business Judgment Rule (2) Only declared out of the URE which shall be payable in cash, in property or in stock (3)However, cash dividends due on delinquent shares shall be first applied to the unpaid balance while stock dividends shall be withheld until fully paid Stock dividends: Approval of 2/3of the OCS at a regular or special meeting called for that purpose.
Sec. 43 prohibits stock corporation from retaining surplus profits in excess of 100%of their paid-up capital stock, EXCEPT: 1. When justified by definite corporate expansion projects or programs as approved by the Board of Directors 2. When corporation is prohibited under any loan agreement from declaring dividends without its consent and such consent has not yet been secured, or
Yes.
(3) When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation such as when there is need for special reserve for profitable contingencies. Power to enter into Approved by absolute majority of the Board of Directors management contracts (Sec. Approved by stockholders owning majority of the OCS 44) HOWEVER where: (1) Stockholders representing the same interest of both managing and the managed corporation own or control more than 1/3 of the total OCS entitled to vote of the managing corporation OR (2) Where a majority of the members of the Board of Directors of the managing corporation also constitute a majority of the members of the Board of Directors of the managed corporation. Then it must be approved by the stockholders of the managed corporation owning at least 2/3 of the OCS EXCEPT if the corporation is organized primarily as management company. Not for a period longer than five years for any one term.