Vous êtes sur la page 1sur 114

Revised Bagtas Reviewer by Ve and Ocfe 2A

ATENEO DE MANILA LAW SCHOOL


OUTLINE ON PHILIPPINE Atty.
CESAR L. VILLANUEVA
CORPORATE LAW1
2ND SEMESTER, SY 2004-2005

I. HISTORICAL BACKGROUND
1. Philippine Corporate Law:2 Sort of Codification of American Corporate Law
Under American sovereignty, attention was drawn to the fact that there was no entity in
Spanish law exactly corresponding to the notion "corporation" in English and American law;
the Philippine Commission enacted the Corporation Law (Act No. 1459), to introduce the
American corporation into the Philippines as the standard commercial entity and to hasten the
day when the sociedad anónima of the Spanish law would be obsolete. The statute is a sort of
codification of American Corporate Law. Harden v. Benguet Consolidated Mining, 58 Phil. 141
(1933).

2. The Corporation Law


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

3. The Corporation Code


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

4. Proper Treatment of Philippine Corporate Law


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

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

II. CONCEPTS
See opening paragraphs of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No.
2, June 1994)
1. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code)
Sec. 2 Corporation defined – A corporation is an artificial being created by operation of law,
having the rights of succession and the powers attributes and properties, expressly
authorized by law or incident to its existence.
Art. 44(3) The following are juridical persons – 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.
Art. 45 Juridical persons mentioned in Nos.1 and 2 of the preceding article are governed by laws
creating or recognizing them.
Private corporations are regulated by laws of general application on the subject.
Partnerships and associations for private interest or purpose are governed by the provisions
of this Code concerning partnerships.
Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and regulations of
their organization.
Art. 1775 Association and societies, whose articles are kept secret among the members, and
wherein any pone of the members may contract in his own name with third persons, shall
have no juridical personality, and shall be governed by the provisions relating to co-ownership
corporation is an artificial being created by operation of law. It has a personality separate
and distinct from the persons composing it, as well as from any other legal entity to which it
may be related. PNB v. Andrada Electric & Eng’ring Co., 381 SCRA 244 (2002).
- “an artificial being” - a person created by law or by state; legal fiction
- “created by law” – its existence is dependent upon the onsent 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

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.
Revised Bagtas Reviewer by Ve and Ocfe 2A 3

Q. Why does the definition of a corporation involve a statement “creature of the law”?
A. To reiterate the fact that the corporation can only do acts given to it by the law. It is of limited
existence, outside its powers, it does not exist.

2. Tri-Level Existence of the Corporation


(a) AGGREGATION OF ASSETS AND RESOURCES – physical assets of the corporation; the tangibles
( ex. in a grocery, the goods being sold)
(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.

3. Relationships Involved in a Corporate Setting


A) JURIDICAL ENTITY LEVEL, which views the State-corporation relationship
- the state cannot destroy a corporation without observing due process of law

(b) INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a contractual
relationship on four (4) levels:
• 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
• Between the corporation and its shareholders or
members
• Between and among the shareholders in a common
venture
B) EXTRA-CORPORATE LEVEL, which views the relationship between the corporation and
third-parties or “outsiders”, essentially governed by Contract Law and Labor Law.
- most imporatant level, highest form of law in this level is contract law.

4. Theories on the Formation of Corporation:


- the SC has looked upon the corp. not merely as an artificial being but more as an
AGGRUPATION OF PERSONS DOING BUSINESS or AN UNDERLYING ECONOMIC UNIT.
- The corp. is emerging as an enterprise bounded by economics rather than an artificial
personality bounded by forms of words in a charter, minute books & books of
accounts.
- The proposition that a corp. has an existence separate and distinct from its
Tayag vs Benguet Consolidated, Inc. (26 SCRA 242)

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


There can be no corp. existence w/o persons to compose it & there can be no
association w/o associates.
(a) Theory of Concession (aTayag v. Benguet Consolidated, 26 SCRA 242 [1968]).
- corporation – creature of the state
- limited – no other privilege may be exercised beyond grant
To organize a corporation that could claim a juridical personality of its own and
transact business as such, is not a matter of absolute right but a privilege which may be
enjoyed only under such terms as the State may deem necessary to impose. cf. Ang Pue
& Co. v. Sec. of Commerce and Industry, 5 SCRA 645 (1962)
“It is a basic postulate that before a corporation may acquire juridical personality, the
State must give its consent either in the form of a special law or a general enabling act,”
and the procedure and conditions provided under the law for the acquisition of such
juridical personality must be complied with. Although the statutory grant to an association
of the powers to purchase, sell, lease and encumber property can only be construed the
grant of a juridical personality to such an association . . . nevertheless, the failure to
comply with the statutory procedure and conditions does not warrant a finding that such
association acquired a separate juridical personality, even when it adopts sets of
constitution and by-laws. International Express Travel & Tour Services, Inc. v. Court of
Appeals, 343 SCRA 674 (2000).
Since all corporations, big or small, must abide by the provisions of the Corporation
Code, then even a simple family corporation cannot claim an exemption nor can it have
rules and practices other than those established by law. Torres v. Court of Appeals, 278
SCRA 793 (1997).

FACTS:
- Idonah Slade Perkins died in 1960 with County Trust & Co. of New York as her
domiciliary administrator & left, among others, 2 stock certificates covering 33, 002
shares of stock of appellant Benguet Consolidated, Inc.
- Renato Tayag, as ancilliary administrator in the Philippines, requested County Trust
to surrender to ancilliary administrator the stock certificates to satisfy the legitimate
claims of local creditors. However, County Trust refused.
- The lower court then presided by Judge Santos ruled that :
1. stock certificates are considered lost for all purposes of admin. & liquidation
of the Philippine estate of Perkins
2. said certificates are cancelled
3. directs said corp. To issue new certificates in lieu thereof, the same to be
delivered by aid corp. to either Tayag or the Probate division of this court.
- An appeal was taken not by County Trust, as domiciliary admin., but by Benguet on
the ground that the certificates of stock are existing and in possession of County
Trust. They also assert that there was a failure to observe certain requirements of
its by-laws before new stock certificates could be issued.
ISSUE: Whether or not Benguet properly pursued the appeal?
HELD: The Court held that the appeal cannot prosper. Judgment affirmed. Benguet bound by
order.
- the challenged order represents a response & express a policy arsing out of a
specific problem, addressed to the attainent of specific ends by the use of specific
remedies, w/ full & ample support from legal doctrines of weight and significance.
Formally adopts the concession theory; corp w/o imprimatur outside state grant.
wn set of by laws etc., the corp would still have to obey the order of the state by Ve and Ocfe 2A
virtue of a primary franchise given by the state. AndRevised Bagtas
it is within Reviewer
the power of the state to grant it or not. But5 once granted
pplication of EET – corp- as A
reality of the group as a social & legal entity independent of state recognition
disagreement ensued between the ancilliary and the domiciliary & concession.
admin to who ws
entitled the certificate of stocks
- The CFI ordered County Trust to produce and deposit the stocks with the court w/c
wasn’t complied with Thus the order of the CFI.
- Benguet didn’t dispute Tayag’s authority to gain control & possession of all the
he corp. life of its own tellsassets
it to goofand
themultiply
decedent w/n the Phil.
profitably. The corp. like every Juan and Maria given life by God acts on its
- Corporation is an artificial being created by operation of law. It owes it life to the
state its birth being purely dependent on its will.
- Flether: “A corp. is not in fact and in reality a person, but the law treats it as though
it were a person by process of fiction, or by regarding it as an artificial person
distinct and separate from its individual stockholders.
- There is thus a rejection of Gierke’s genossenchaft theory. A corp as known to Phil.
Jurisprudence is a creature w/o any existence until it has received the imprimatur of
the state acting according to law. It is logically inconceivable therefore that it will
have rights and privileges of a higher priority than that of its creator. More than that
it cannot legitimately refuse to yield obedience to acts of its state organs, certainly
not excluding the judiciary, whenever called upon to do so.
- Corporate by-laws must yield to judicial order
- As a matter of fact, a corp. once it comes into being comes more often w/n the ken
of the judiciary than the other two coordinate branches. It institutes the appropriate
court action to enforce its right. Correlatively, it is not immune from judicial control
in those instances, where a duty under the law as ascertained in an appropriate legal
proceeding is cast upon it.

c) Theory of Enterprise Entity (BERLE, Theory of Enterprise Entity, 47 COL. L. REV. 343
[1947])
- juridical personality
- contractual relation between 5 or more individuals
- recognize existence of an aggregation of individuals (enterprise entity)
A corporation is but an association of individuals, allowed to transact under an
assumed corporate name, and with a distinct legal personality. In organizing itself as a
collective body, it waives no constitutional immunities and perquisites appropriate to such
a body. PSE v. Court of Appeals, 281 SCRA 232 (1997).
Corporations are composed of natural persons and the legal fiction of a separate
corporate personality is not a shield for the commission of injustice and inequity, such as
to avoid the execution of the property of a sister company. Tan Boon Bee & Co., Inc. v.
Jarencio, 163 SCRA 205 (1988).
5. Four Corporate Attributes Based on Section 2:
A) A CORPORATION IS AN ARTIFICIAL BEING (“Ability to Contract and Transact”)
- a person created by law or by state; a legal fiction
B) CREATED BY OPERATION OF LAW (“Creature of the Law”)
- its existence is dependent upon the consent or grant of the state EXCEPT corporation
by estoppel and de facto corporation
C) WITH RIGHT OF SUCCESSION (“Strong Juridical Personality”)
- the corporation exist despite the death of its members as a corporation has a
personality separate and distinct from that of its individual stockholders. The separate
personality remains even if there has been a change in the members and stockholders
of the corporation.
D) HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS
EXISTENCE (“Creature of Limited Powers”)

6. Advantages and Disadvantages of Corporate Form:


(a) Four Basic Advantageous Characteristics of Corporate Organization:
(i) STRONG LEGAL PERSONALITY
“A corporation is an entity separate and distinct from its stockholders. While not
in fact and in reality a person, the law treats the corporation as though it were a
person by process of fiction or by regarding it as an artificial person distinct and
separate from its individual stockholders.” Remo, Jr. v. IAC, 172 SCRA 405 (1989).
The transfer of the corporate assets to the stockholder is not in the nature of a
partition but is a conveyance from one party to another. aStockholders of F. Guanzon
and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).
STOCKHOLDERS OF F. GUANZON & SONS Inc. v REGISTER OF DEEDS
Facts:
In 1960, five stockholders of F. Guanzon & Sons, Inc. executed a certificate of liquidation of the
assets of the corporation which provided that due to the resolution of the stockholders dissolving the
corporation, they have distributed among themselves in proportion to their shareholdings, as
liquidating dividends, the assets of said corporation including real properties located in Manila. The
certificate of liquidation was denied registration by the Register of Deeds and one of the grounds is
that the judgment of the corporation in approving dissolution and directing opposition of assets of
the corporation need to be presented aside from the following: (1) the number of parcels which were
not certified in the acknowledgement (2) P430.50 registration fees have to be paid (3) P90.45
docustamps need to be attached. Stockholders contend that it was not conveyance but a mere
distribution of corporate assets after the corporation ceased to exist upon dissolution.
Issue: WON the certificate merely involves a distribution of the corporate assets or should be
considered a transfer or conveyance.
Held:
The Supreme Court agrees with the Register of Deeds and the Land Registration Commission. A
corporation is a juridical person distinct from the members composing it. Properties registered in the
name of the corporation are owned by it as an entity separate and distinct from its members. While
shares of stock constitute personal property, they do not represent property of the corporation. The
corporation has property of its own which consist mainly of real estates. A share of stock only typifies
an aliquot part of the corporation’s property or the right to share in the proceeds to that extent when
distributed according to law and equity. But its holder is not the owner of any part of the capital nor
Revised Bagtas Reviewer by Ve and Ocfe 2A 7
is he entitled to the possession of any definite portion of its property or assets. The stockholder is not
a co-owner or tenant in common of the corporate property. Thus, the act of liquidation made by the
stockholders of the corporation’s assets cannot be considered as a partition of the community
property but rather a transference or conveyance of the title of its assets to the individual
stockholders in proportion to their stockholdings. Therefore, said transfer cannot be effected without
the corresponding deed of conveyance from the corporation to the stockholders.
(ii) CENTRALIZED MANAGEMENT
As can be gleaned from Sec. 23 of Corporation Code “It is the board of directors
or trustees which exercises almost all the corporate powers in a corporation.” Firme
v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003).
The exercise of the corporate powers of the corporation rest in the Board of
Directors save in those instances where the Corporation Code requires stockholders’
approval for certain specific acts. Great Asian Sales Center Corp. v. Court of Appeals,
381 SCRA 557 (2002).
(iii) LIMITED LIABILITY TO INVESTORS AND OFFICERS
One of the advantages of the corporation is the limitation of an investor’s
liability to the amount of investment, which flows from the legal theory that a
corporate entity is separate and distinct from its stockholders. San Juan Structural
and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631 (1998).
It is hornbook law that corporate personality is a shield against personal liability
of its officers—a corporate officer and his spouse cannot be made personally liable
under a trust receipt where he entered into and signed the contract clearly in his
official capacity. Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA
671 (2001).
Obligations incurred by the corporation acting through its directors, officers and
employees, are its sole liabilities. Malayang Samahan ng mga Manggagawa sa M.
Greenfield v. Ramos, 357 SCRA 77 (2001).
(iv) FREE TRANSFERABILITY OF UNITS OF OWNERSHIP FOR INVESTORS
Authority granted to corporations to regulate the transfer of its stock does not
empower the corporation to restrict the right of a stockholder to transfer his shares,
but merely authorizes the adoption of regulations as to the formalities and
procedure to be followed in effecting transfer. Thomson v. Court of Appeals, 298
SCRA 280 (1998).

(b) Disadvantages:
(i) Abuse of corporate management
(ii) Abuse of limited liability feature
(iii) High cost of maintenance
(iv) Double taxation

Advantages and Disadvantages of Corporate Form:


Four Basic Advantageous Disadvantages:
Characteristics of Corporate
Organization:
(i) Strong Legal Personality (i) Abuse of corporate
management
- entity attributable powers;
- there is
- continuity of existence;
severance of
control and
 having the right of ownership.
succession, the Control will be
death of an vested with
individual the BoD, thus
stockholder does investors
not affect corporate have no say
existence over the use
of their
 not a natural investment
occurrence, exists and little
mainly because the voice in the
law provides for it. conduct of
This is what the business
distinguishes the
separate juridical
personality of a (ii) Abuse of limited liability
corporation from a feature
partnership. The
legal personality of - this feature
a corp is strong had been
because the law abused and
provides for the may hurt
right of succession, innocent
surviving even w/o creditors.
those who
incorporated it
while in a (ii) Cost of maintenance
partnership the - the formation
separate juridical and
personality is incorporation
extinguished upon of a corp.
the death of a entails a lot of
partner difficulties
 no delectus and costs,
personarum particularly
the
requirements
(ii) Limited Liability of Investors ( provided made by the
for by jurisprudence only) law so as to
qualify for
- the liability of an investor is incorporation.
limited their investments
and investors cannot be held
accountable for more than (iv) Double taxation
what they invested.
Dividends received by
- CLV: However there are a individuals from domestic
lot of ways to circumvent the corporations are subject to
law and make the final 10% tax for income
shareholders liable for more earned on or after 1
than his actual investment January 1998 (Sec. 24(B)
(ex. A creditor requiring the (2), 1997 NIRC)
chairmn or president of the
company as a joint debtor of Inter-corporate
the loan) dividends between
domestic corporations,
- A trade-off to the abdication however, are not subject
made by the investor of his to any income tax (Sec.
right to manage the property 27(D)(4), 1997 NIRC)
he had invested in the
Revised Bagtas Reviewer by Ve and Ocfe 2A 9
company. Under property In addition, there is re-
law, a person exercises full imposition of the 10%
ownership over his property “improperly accumulated
but when he invests it in a earnings tax” for holding
corporation, the owner companies (Sec. 29, 1997
abdicated the six “jus” of NIRC)
ownership

(iii) Free Transferability of shares


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

(iv) Centralized Management


- One of the advantages of a
corp. is the limitation of an
investor’s liability, this flows
from the legal theory that a
corp. entity is separate and
distinct from its stockholders

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


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

Q. Is limited liability a normal run of things?


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

Q. If limited liability as shown in a corporation setting good for the investors, does it mean that
delectus personarum is a bad thing?
A. No. It is good in one way, since persons are bound by the contracts they enter into.

7. COMPARED WITH OTHER BUSINESS MEDIA


4 Distribution of Risk, Profit and Control 3

a) Sole Proprietorships

Sole Proprietorship Corporation


Free from many requirements and Heavily regulated; a lot of
regulations in its operation requirements imposed for registration
and incorporation

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

Owner stands to lose more than Investors have limited liabilty


what he puts into the venture

(b) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code)
Art. 1768 The partnership has a juridical capacity separate and distinct from that of each of
the partners, even in case of failure to comply with requirements of Art. 1772 first
paragraph.
Art. 1775 Association and societies, whose articles are kept secret among the members, and
wherein any pone of the members may contract in his own name with third persons, shall
have no juridical personality, and shall be governed by the provisions relating to co-
ownership

Corporation Partnership
Separate legal personality Separate legal personality

Investors limited liability Contractual limited liability ( when a


limited partnership is created)

Free transfer of shares Transfer with consent of partner

Centralized management Every partner is agent

Q. How does the contractual management of a corp. compare with the management of a
partnership?
A. Every partner, in the absence of a stipulation in the articles of partnership, binds the
partnership as every partner is an agent of the others (delectus personarum). In a
corporation, only the BoD and not the stockholders can bind the corporation.

Q. What are the 2 types of partnerships?


A. Regular and Joint venture

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


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

Q. If limited liability is something that can be contracted in a partnership, why did the legislature put
such limited liability as an attribute of a corporation? If the feature of limited liability cots money
then why not take it out? Why not eave it up to the investors who can decide if they want limited
liability or not?
A. Even though limited liability will cost a lot of money, borrowing makes a lot more sense. If I have
Pioneer insurance & Surety corp. vs. CA ( 175 SCRA 668)

Revised Bagtas Reviewer by Ve and Ocfe 2A 11


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 pt
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 people’s 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 corp. is an 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).

Facts:
- In 1965, Jacob S. Lim was engaged in the airline business as owner of Southern
Airlines, a single proprietorship.
- On May 17, 1965, he bought from Japan Domestic Airlines for the sale of 2 aircrafts
and one set f necessary spare parts for the total price of $109,00. Both arrived in
Manila
- On May, 22 1965, Pioneer Insurance Corp, as surety executed and issued its surety
bond in behalf of Lim, principal, for the balance price for the aircrafts and spare
parts.
- Border Machinery and Heavy Equipment (BORMAHECO), the Cervanteses and
Constancia Maglana contributed some funds in the purchase of the above aircrafts
and spare parts. The funds were supposed to be their contributions to anew
corporation proposed by Lim to expand his airline business. They executed
indemnity agreements in favor of Pioneer, one signed by Maglana and the other
jointly signed SAL, BORMAHECO and Cervantes: where they principally agree and
bind themselves jointly and severally to indemnify pioneer.
- On June 10, 1965 Lim for SAL executed in favor of Pioneer a deed of chattel
mortgage as security for the suretyship in favor of Pioneer. The deed was duly
registered with the Manila RoD and with the Civil Aeronautics Administration.
- Lim defaulted on his subsequent installments prompting JDA to request payment
from the surety. Pioneer paid about P298,000
- Pioneer filed for an extra-judicial foreclosure of the mortgage but the Cervanteses
and Maglana filed a third party complaint claiming that they are co-owners of the
aircraft. Pioneer later filed a petition for judicial foreclosure and an application for a
writ of preliminary attachment against Lim, the Cervanteses, BORMAHECO and
Maglana.
- In their answer, the Cervanteses, BORMAHECO and Maglana alleged they were not
privy to the contracts signed by Lim.
- The RTC ruled in favor of Pioneer, holding Lim liable but dismissing the case as to the
other defendants. On appeal, the CA affirmed.

ISSUE: whether or not the Cervanteses, BORMAHECO and Maglana are entitled to reimbursement of
amounts given by Lim?

HELD:
Lim’s assertions: The failure of respondents to incorporate, a de facto partnership
among them was created, and that as a consequence of such relationship all must share in
the losses and/or gains of the venture in proportion to their contribution.

PRINCIPLES: Persons who attempt, but fail, to form a corporation and who carry on business under
the corporate name occupy the position of PARTNERS INTER SE. Thus, where persons associate
themselves together under articles to purchase property to carry on a business, and their
organization is so defective as to come short of creating a corp. w/n the statute, they become in legal
effect partners inter se, and their rights as members of the company to the property acquired by the
company will be recognized.
However, such a relationship does not exist, for ordinary persons cannot be made to assume
the relation of partners, as between themselves, when their purpose is that no partnership shall exist
and should be implied only when necessary to do justice between the parties: thus, one who takes
no part except to subscribe for stock in a proposed corporation which is never legally formed does
not become a partner with other subscribers who engage in business under the name of the
pretended corp., so as to be liable as such in an action for settlement of the alleged partnership and
contribution.
- the records show that Lim received the amount of P151,000 representing the
participation of BORMAHECO and Maglana
- it was clear that Lim never intended to form a corp with them but they were duped
into giving their money
- no de facto corp. was created

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.
Revised Bagtas Reviewer by Ve and Ocfe 2A 13

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


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

LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES

Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. entered into a contract with
Phil. Fishing Gear Industries Inc. for the purchase of fishing nets and floats. They claimed that they
were a fishing venture with Lim Tong Lim who was however not a signatory to the contract. They
failed to pay and so PFGI filed a collection case with a prayed for a writ of preliminary attachment.
The case was filed against Chua, Yao and Lim because it was found that Ocean Quest was a non-
existent corporation as shown by the certification from SEC. Chua admitted liability and Yao waived
his right to cross-examine and present evidence because he failed to appear while Lim filed a
counterclaim and a cross-claim. Court granted the writ of attachment and ordered the Auction Sale
of the F/B Lourdes which was previously attached. Trial court ruled that PFGI was entitled to the Writ
and Chua, Yao and Lim were jointly liable as general partners.
Held:
1.) Lim was contesting that the CA ruled that there was a partnership in the Compromise
Agreement and alleges that he had no direct participation in the negotiations and was merely
leasing F/B Lourdes to Chua and Yao à Facts found by the TC and CA showed that there was
a partnership formed by the three of them. They initially purchased two boats through a loan
from Lim’s brother and as security, was placed in the name of Lim Tong Lim. The repairs and
supplies were shouldered by Chua and Yao. A civil case was filed by Chua and Yao against Lim
for nullity of commercial documents, reformation of contracts and declaration of ownership of
fishing boats…which was settled amicably. In the Compromise Agreement, it was revealed
that they intended to pay the loan from Jesus Lim by selling the boats and to divide among
them the excess or loss. Therefore it was clear that a partnership existed which was not solely
based on the agreement. It was merely an embodiment of the relationship among parties.
2.) Lim alleges that he was merely a LESSOR by showing the Contract of Lease and registration
papers of the boats, including F/B Lourdes where the nets were found à As found by the
lower courts, the boats were registered to Lim only as security for the loan that was granted
to the partnership by the brother of Lim, which was not an uncommon practice. Aside from
the fact that it was absurd for Lim to sell the boats to pay the debt he did not incur, if needed
he was merely leasing the boats to Chua and Yao.
3.) Lim contests his liability by saying that only those who dealt in the name of the ostensible
corporation should be held liable. His name was not in any of the contracts and never dealt
with PFGI à Sec. 21 – All persons who assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof; Provided however that when any such ostensible
corporation is sued, on any transaction entered by it as a corporation or ant tort committed
by it as such, it shall not be allowed to use as a defense its lack of corporate personality. Even
if the ostensible corporate entity is proven to be non-existent, a party may be estopped from
denying its corporate existence because an unincorporated association has no personality
and would be incompetent to act and appropriate for itself the power and attributes of a
corporation as provided by law. It cannot create agents or confer authority on another to act
on its behalf. Thus, those who act or purport to act as its representatives do so without
authority and at their own risk. Clearly, Lim benefited from the use of the nets found inside
F/B Lourdes which was proved to be an asset of the partnership. He in fact questioned the
attachment because it has effectively interfered with the use of the vessel. Though
technically, he did not directly act on behalf of the corporation, however, by reaping the
benefits of the contract entered into by persons he previously had an existing relationship
with, he is deemed part of said association and is covered by the doctrine of corporation by
estoppel.
CLV: Pioneer case à actors who knew of corporation’s non-existence are liable as general partners
while actors who did not know are liable as limited partners, passive investors are not liable; Lim
teaches us that even passive investors should be held liable provided they benefited from such
transactions.

(c) Joint Ventures


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

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


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

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


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

Q. Does the requirement of registration needed in a partnership also required in a joint venture?
A. No. Only in a partnership is registration required (Art. 1772, Civil Code)

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


A cooperative is a duly registered association of persons, with a common bond of
interest, who have voluntarily joined together to achieve a lawful common social or
economic end, making equitable contributions to the capital required and accepting a fair
share of the risks and benefits of the undertaking in accordance with universally accepted
cooperative principles.
Cooperatives are established to provide a strong social and economic organization to
ensure that the tenant-farmers will enjoy on a lasting basis the benefits of agrarian
reforms. Corpuz v. Grospe, 333 SCRA 425 (2000).

Cooperative Corporation
Separate Juridical Personality
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. BoD is the repository of all powers
But it is the GA of full membership EXCEPT for acts where the Corp.
that exercises all the rights and Code requires concurrence or
performs all of the obligations of the
Revised Bagtas Reviewer by Ve and Ocfe 2A 15
coop. ratification by the SH

Under the supervision of the coop. Under the Supervision of the SEC
Development Authority
Organized for the purpose of Stock Corp. for profit; Non-Stock
providing goods and services to its Corp eleemosynary (charitable,
members and thus to enable them philantrophic) purpose
to attain increased income and
saving, etc.

e) Business Trusts (Article 1442, Civil Code)


Art. 1442

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


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

(f) Sociedades Anónimas


A sociedad anónima was considered a commercial partnership “where upon the
execution of the public instrument in which its articles of agreement appear, and the
contribution of funds and personal property, becomes a juridical person—an artificial
being, invisible, intangible, and existing only in contemplation of law—with power to hold,
buy, and sell property, and to sue and be sued—a corporation—not a general
copartnership nor a limited copartnership . . . The inscribing of its articles of agreement in
the commercial register was not necessary to make it a juridical person—a corporation.
Such inscription only operated to show that it partook of the form of a commercial
corporation.” Mead v. McCullough, 21 Phil. 95 (1911).
The sociedades anónimas were introduced in Philippine jurisdiction on 1 December
1888 with the extension to Philippine territorial application of Articles 151 to 159 of the
Spanish Code of Commerce. Those articles contained the features of limited liability and
centralized management granted to a juridical entity. But they were more similar to the
English joint stock companies than the modern commercial corporations. Benguet
Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956).
Our Corporation Law recognizes the difference between sociedades anónimas and
corporations and will not apply legal provisions pertaining to the latter to the former. Phil.
Product Co. v. Primateria Societe Anonyme, 15 SCRA 301 (1965).

(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 right to them. Bourns v. Carman, 7
Phil. 117 (1906).

III. NATURE AND ATTRIBUTES OF A CORPORATION


1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitution)
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
Revised Bagtas Reviewer by Ve and Ocfe 2A 17
corporation. NDC v. Philippine Veterans Bank, 192 SCRA 257 (1990).
Congress cannot enact a law creating a private corporation with a special charter, and it
follows that Congress can create corporations with special charters only if such corporations
are government-owned or controlled. Feliciano v. Commission on Audit, 419 SCRA 363 (2004).
Q: What distinguishes a public corporation from a private corporation owned by the
government? A: It is not ownership which distinguishes a public
corporation from a private corporation. It is the civil service eligibility of its employees and if
the financial records are subject to the examination of the Commission on Audit. A public
corporation is created by its charter whereas a private corporation is created under the
Corporation Code.
2. CORPORATION AS A PERSON:
(a) Entitled to Due Process
The due process clause is universal in its application to all persons without regard to
any differences of race, color, or nationality. Private corporations, likewise, are “persons”
within the scope of the guaranty insofar as their property is concerned. Smith Bell & Co. v.
Natividad, 40 Phil. 136, 144 (1920).

(b) Equal Protection Clause (Smith Bell & Co. v. Natividad, 40 Phil. 136 [1920]).
(c) Unreasonable Searches and Seizure
A corporation is protected by the constitutional guarantee against unreasonable
searches and seizures, but its officers have no cause of action to assail the legality of the
seizures, regardless of the amount of shares of stock or of the interest of each of them in
said corporation, and whatever the offices they hold therein may be, because the
corporation has a personality distinct and separate from those of said officers. Stonehill v.
Diokno, 20 SCRA 383 (1967).
A corporation is but an association of individuals under an assumed name and with a
distinct legal entity. In organizing itself as a collective body it waives no constitutional
immunities appropriate for such body. Its property cannot be taken without compensation;
can only be proceeded against by due process of law; and is protected against unlawful
discrimination. Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823, 837 (1971), quoting from
Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652.
Q: Why is a corporation entitled to the rights of due process and equal protection?
CLV: A corporation enjoys constitutional rights. In that manner, it enjoys the same protection
the law grants to an individual. A corporation is entitled to due process and equal protection
by virtue of the juridical personality given by the State through the primary franchise of the
corporation. The constitution did not distinguish whether the term “person” in Sec. 1 Art. III of
the Constitution refers to an individual or a juridical entity, which therefore extends to private
corporations within the scope of the guaranty.
Q: Why is the corporation entitled to the protection against unreasonable searches and
seizures? A: The corporation being entitled to due process and equal
protection is the consequence of the State’s grant of a primary franchise to a corporation. It
emanates from the Theory of Concession, whereby the government recognizes not only the
separate juridical personality of the corporation but also grants unto it all the rights and
protections that a natural individual would possess which includes the right to due process
and equal protection.
However, a corporation is also entitled to protection against unreasonable searches
and seizures. This right however does not emanate from the grant of the State by way of
primary franchise but is sourced through the Theory of Enterprise Entity which recognizes that
regardless of Section 2 of the Corporation Code, a corporation is still for all intents and
purposes an association of individuals under an assumed name and with a distinct legal
personality. In organizing itself as a collective body, it waives no constitutional immunities for
such body. (1) Its properties cannot be taken without just compensation (2) it can only be
proceeded against by due process of law (3) it is protected against unlawful discrimination.
In the same line of reasoning, although a corporation is a legal fiction, a search and
seizure involves physical intrusion into the premises of the corporation, and therefore also
intrudes into the personal and business privacy of the stockholders or members who compose
it. It can be seen that the right of the individual against unreasonable searches and seizures is
extended to corporations upon whom they are members.

(d) But Not Entitled to Privilege Against Self incrimination


“It is elementary that the right against self-incrimination has no application to juridical
persons.” Bataan Shipyard & Engineering v. PCGG, 150 SCRA 181 (1987).
While an individual may lawfully refuse to answer incriminating questions unless
protected by an immunity statute, it does not follow that a corporation, vested with
special privileges and franchises, may refuse to show its hand when charged with an
abuse of such privilege. Hale v. Henkel, 201 U.S. 43 (1906); Wilson v. United States, 221
U.S. 361 (1911); United States v. White, 322 U.S. 694 (1944).
Q: Why is a corporation entitled to equal protection but not the right against self-
incrimination? A: Any individual is entitled to equal protection whether
they be juridical or natural. The corporation being in the same class should be treated equally.
However, the right to self-incrimation is not extended to corporation because:
1. The right is meant to prevent individuals from having to lie under oath in order to protect
his interest. It is to protect the individual from having to commit perjury just to keep
himself from going to jail. However, if a corporation lies under oath, who would you bring
to jail when in fact, a corporation is just a legal fiction.
2. The corporation is subject to the reportorial requirements of the law. The corporation
being a mere creature of the State is subject to the whims of its Creator. The corporation
powers are limited by law.
CLV: Beats me! Perhaps such right is attributable to the moral dimension of an individual, and
since the corporation is of an amoral personality, such right may not be attributable to it.

3. Practice of Profession
Corporations cannot engage in the practice of a profession since they lack the moral and
technical competence required by the PRC.
A corporation engaged in the selling of eyeglasses and which hires optometrists is not
engaged in the practice of optometry. Samahan ng Optometrists v. Acebedo International
Corp., 270 SCRA 298 (1997); Alfafara v. Acebedo Optical Company, 381 SCRA 293 (2002).

4. Liability for Torts


A corporation is civilly liable in the same manner as natural persons for torts, because the
rules governing the liability of a principal or master for a tort committed by an agent or
servant are the same whether the principal or master be a natural person or a corporation,
and whether the servant or agent be a natural or artificial person. That a principal or master is
liable for every tort which he expressly directs or authorizes, is just as true of a corporation as
a natural person. aPNB v. Court of Appeals, 83 SCRA 237 (1978).
PNB v COURT OF APPEALS
Facts:
Rita Gueco Tapnio had an export sugar quota of 1,000 piculs for the agricultural year 1956-
1957. Since, she did not need it, she agreed to allow Mr. Jacobo Tuazon to use the said quota
for consideration of 2,500. Her sugar cannot be exported without sugar quota allotments.
Sometimes, however a planter harvests less sugar than her quota so her excess quota is used
by her mother who pays for it. This is her arrangement with Mr. Tuazon. At the time of the
agreement, she was indebted to PNB of San Fernando, Pampanga. Her indebtedness was
known as a crop loan and was secured by her sugar crop, and since her quota was mortgaged
to PNB, her arrangement with Mr. Tuazon had to be approved by the bank. Upon presentment
of the lease arrangement, the PNB branch manager revised it by increasing the lease amount
Revised Bagtas Reviewer by Ve and Ocfe 2A 19
to P2.80 per picul for a total of P2,800. Such increase was agreed to by both Rita and Jacobo.
However, when it was presented to the Board of Directors for approval, they further increased
the amount to P3.00 per picul. Jacobo asked for the reconsideration but he was denied the
same. The matter stood as it was until Jacobo informed Rita and PNB that he had lost interest
in pursuing the deal. In the meantime, the debt of Rita with the PNB matured. Since she had a
surety agreement with the Philippine American General Insurance Co. Inc. (Philamgen), the
latter paid her outstanding debt. Philamgen in turn demanded from Rita the amount which
they paid the bank. Instead of paying the bank, Rita claimed that she told Philamgen that she
did not consider herself indebted to the bank since she had an agreement with Jacobo
Tuazon. When such was discontinued, she failed to realized the income with which she could
have paid her creditors. Philamgen filed a complaint for the collection of sum of money
against Rita. Rita implicated PNB as a third party defendant claiming that her failure to pay
was due to the fault or negligence of PNB.
Issue: WON PNB is liable for the damage caused to Rita.
Held:
 There is no question that Rita’s failure to utilize her sugar quota was due to the
disapproval of the lease by the Board of Directors of the petitioner, thus PNB should be
held liable.
 The Board justified the increase to P 3.00 per picul by saying that it was the prevalent rate
at that time. However, there was no proof that any other person was willing to lease the
sugar quota allotment of Rita for a price higher than P2.80 per picul. Just because there
are isolated transactions where the lease price was P3.00 per picul does not mean that
there are always ready takers.
 While PNB had the ultimate authority of approving or disapproving the proposed lease
since the quota was mortgaged to the bank, the latter certainly cannot escape its
responsibility of observing precaution and vigilance which the circumstances of the case
justly demanded in approving or disapproving the lease of said sugar quota.
 According to Art. 19 of the Civil Code, “[e]very person must in the exercise of his rights
and the performance of his duties, act with justice, give everyone his due and observe
honesty and good faith.” This the petitioner failed to do. As a consequence, Art. 21 states,
[a]ny person who willfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.
 On the liability of the corporation, the court ruled that, “[a] corporation is civilly liable in
the same manner as natural persons for torts, because generally speaking, the rules
governing the liability of a principal or master for a tort committed by an agent or servant
are the same whether the principal or master be a natural person or artificial person. All of
the authorities agree that a principal or master is liable for every tort which he expressly
directs or authorizes, and this is just as true of a corporation as of a natural person. A
corporation, is liable therefore, whenever a tortuous act is committed by an officer or
agent under express direction or authority from the stockholders or members acting as a
body, or generally, from the directors as the governing body.
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.
Our jurisprudence is wanting as to the definite scope of “corporate tort.” Essentially,
“tort” consists in the violation of a right given or the omission of a duty imposed by law; a
breach of a legal duty. The failure of the corporate employer to comply with the law-imposed
duty under the Labor Code to grant separation pay to employees in case of cessation of
operations constitutes tort and its stockholder who was actively engaged in the management
or operation of the business should be held personally liable. Sergio F. Naguiat v. NLRC, 269
SCRA 564 (1997).
Q: When is a corporation liable for tort?
A: A corporation is liable for tort when: (a) the act is committed by an officer or agent (2) under
express direction of authority from the stockholders or members acting as a body or through the
Board of Directors.
Q: How can authority given to the agent of the corporation be determined?
A: Either by: (a) such direction by the corporation is manifested, by its board adopting a
resolution to such effect (b) by having takien advantage of such a tortious act, the corporation
through its board, has expressly or impliedly ratified such an act or estopped from impugning the
same.

Q: What is a derivative suit?


A: Since, the act of the board is essentially that of the corporation and therefore corporate assets
cannot escape enforcement of the award of damage to the tort victim. As a remedy, the
stockholders may institute a derivative suit against the responsible board members and officers
for the damages suffered by the corporation as a result of the tort suit.
5. Corporate Criminal Liability (aWest Coast Life Ins. Co. v. Hurd, 27 Phil. 401 (1914); aPeople
v. Tan Boon Kong, 54 Phil. 607 [1930]; aSia v. Court of Appeals, 121 SCRA 655 [1983]; Articles
102 and 103, Revised Penal Code).

WEST COAST LIFE INS. CO. v HURD

Facts:

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

Issue: WON corporations can be held criminally liable.

Held:

No. While the courts have inherent powers which usually go with courts of general jurisdiction, it
was held that under circumstances of their creation, they have only such authority in criminal
matters as is expressly conferred upon them by statute or which is necessary to imply from such
authority in order to carry out fully and adequately the express authority conferred. The SC did
not feel that Courts have authority to created new procedure and new processes of criminal law.
Although, there are various penal laws in the Philippines which the corporation may violate, still
the SC does not believe that the courts are authorized to go to the extent of creating special
procedure and processes for the purpose of carrying out the penal statutes, when the legislative
itself has neglected to do so. This is true since the courts are creatures of the statute and have
only powers conferred upon them by statute. Philippines courts have no common law jurisdiction
Revised Bagtas Reviewer by Ve and Ocfe 2A 21
or powers.

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 criminally liable. In the present case, Tan Boon Kong allegedly made a false
return for purposes of taxation of the total amount of sales for year 1924. As such, the filing of
false returns constitutes a violation of law. Him being the author of the illegal act must be held
liable.

SIA v PEOPLE
Facts:
The facts reveal that in 1963, the accused Jose Sia was the general manager of Metal
Manufacturing Company of the Philippines engaged in the manufacturing of steel office
equipment. When the company was in need of raw materials to be imported from abroad, Sia
applied for a letter of credit to import steel sheets from Tokyo, Japan, the application being
directed to Continental Bank and was opened in the amount of $18,300. According to the
Continental Bank, the delivery of the steel sheets was only permitted upon the execution of the
trust receipt. While according to Sia, the steel sheets were already delivered and were even
converted to equipment before the trust receipt was signed by him. However, there is no
question that when the bill of exchange became due, neither the accused nor his company made
payments, despite demands of the bank. On appeal, Sia contends that he should not be held
liable.
Issue: WON petitioner Sia may be liable for the crime charged, having acted only for and in behalf
of his company.
Held:
NO. The Court disputed the reliance of the lower court and the CA on the general principle that for
a crime committed by a corporation, the responsible officers thereof would personally bear the
criminal liability, as enunciated in Tan Boon Kong. The latter provides that: “[t]he corporation was
directly required by law to do an act in a given manner and the same law makes the person who
fails to perform the act in the prescribed manner expressly liable criminally. The performance of
an act is an obligation directly imposed by the law on the corporation. Since it is a responsible
officer or officers of the corporations who actually perform the act for the corporation, they must
of necessity be the ones to assume the criminal liability; otherwise this liability as created by the
law would be illusory, and the deterrent effect of the law, negated.
The Court concluded that the cited case does not fall squarely with the circumstances
surrounding Sia since the act alleged to be a crime is not in the performance of an act directly
ordained by law to be performed by the corporation. The act is imposed by the agreement of the
parties in pursuit of the business. The intention of the parties is therefore a factor determinant of
whether a crime or a civil obligation alone is committed. The absence of a provision of the law
even in the RPC making Sia criminally liable as the president of his company created a doubt that
must be ruled in his favor according to the maxim, that all doubts must be resolved in favor of the
accused.
CONTRASTING THE THREE CASES

 In the case of West, the court in effect enunciated that for a person to proceed criminally
against a corporation, it was necessary that express provisions of law be enacted, specifically
providing that a corporation may be proceeded against criminally and brought to court.
 But since a corporation is a legal fiction that cannot be handcuffed and brought to court, the
case of Tan Boon Kong provided that since a corporation acts through its officers and agents,
any violation of law by any of the actors of the corporation in the conduct of its business
involves a violation of law, the correct rule is that all who participate in it are liable. In making
actors liable, the court here said attaching criminal liability to the fiction cannot be done
since: (1) a corporation is only an artificial person (2) there is a lack of intent imputable to a
being since it lacks its own mind.
 To apply the doctrine of separate juridical personality would allow criminals to use the
corporation as a shield or cloak to hide their criminal activities behind such.
 However, the liability of officers were delineated in case of Sia where the court held that the
responsible officer is personally liable is personally liable for crimes committed by the
corporation only in a situation where the corporation was directly required by law to do an act
in a given manner, and the same law makes the person who fails to perform the act in the
prescribed manner expressly liable criminally.
NOTE: While the law only defines individuals as offenders of criminal acts or as criminal actors,
the law is currently undergoing changes such that juridical persons are also defined as offenders
of criminal acts, as with the case of the Anti-Money Laundering Act.
 Art. 102 of the RPC: Subsidiary civil liability of innkeepers, tavern-keepers and proprietors of
establishments – In default of the persons criminally liable, innkeepers, tavern-keepers and
any other person or corporations shall be civilly liable for crimes committed in their
establishments, in all cases where a violation of municipal ordinances or some general or
special police regulation shall have been committed by them or their employees.
Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery or
theft within their houses from guests lodging therein, or for the payment of the value
therefore, provided that such guests shall have notified in advance the innkeeper himself, or
the person representing him, of the deposit of such goods within the inn; and shall
furthermore have followed the directions which such innkeeper or his representative may
have given them with respect to the care of and vigilance over such goods. No liability shall
attach in case of robbery with violence against or intimidation of persons unless committed
by the innkeeper’s employees.
 Art. 103 of the RPC: Subsidiary civil liability of other persons – The subsidiary liability
established in the next preceding article shall also apply to employers, teachers, persons and
corporations engaged in any kind of industry for felonies committed by their servants, pupils,
workmen, apprentices, or employees in the discharge of duties.
No criminal suit can lie against an accused who is a corporation. Times, Inc. v. Reyes, 39
SCRA 303 (1971).
When a criminal statute forbids the corporation itself from doing an act, the prohibition
extends to the board of directors, and to each director separately and individually. People v.
Concepcion, 44 Phil. 129 (1922).
While it is true that a criminal case can only be filed against the officers and not against
the corporation itself, it does not follow that the corporation cannot be a real-party-in-interest
for the purpose of bringing a civil action for malicious prosecution for the damages incurred
by the corporation for the criminal proceedings brought against its officer. Cometa v. Court of
Appeals, 301 SCRA 459 (1999).
Revised Bagtas Reviewer by Ve and Ocfe 2A 23
Q: Why can the corporation be held liable for tortuous acts done by its agent but not for
criminal acts done outside its authority?
A: Crime is not within the corporate contemplation while negligence is. Negligence could be
part of every transaction. It is an integral part of corporate transactions. For as long as people
comprise the corporation, it is within the contemplation of every corporate act.

6. Recovery of Moral and Other Damages


A corporation, being an artificial person, cannot experience physical sufferings, mental
anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are
basis for moral damages under Art. 2217 of the Civil Code. However, a corporation may have
a good reputation which, if besmirched, may be a ground for the award of moral damages.
Mambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968); APT v. Court of
Appeals, 300 SCRA 579 (1998).
A corporation, being an artificial person and having existence only in legal contemplation,
has no feelings, emotions nor senses; therefore, it cannot experience physical suffering and
mental anguish. Mental suffering can be experienced only by one having a nervous system
and it flows from real ills, sorrows, and griefs of life—all of which cannot be suffered by an
artificial person. Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993); LBC Express, Inc. v.
Court of Appeals, 236 SCRA 602 (1994); Acme Shoe, Rubber & Plastic Corp. v. Court of
Appeals, 260 SCRA 714 (1996); Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997);
NPC v. Philipp Brothers Oceanic, Inc., 369 SCRA 629 (2001).
The statement in People v. Manero and Mambulao Lumber Co. v. PNB, that a corporation
may recover moral damages if it “has a good reputation that is debased, resulting in social
humiliation” is an obiter dictum. Recovery of a corporation would be under Articles 19, 20 and
21 of the Civil Code, but which requires a clear proof of malice or bad faith. ABS-CBN
Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999).

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

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

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

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

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

 Situation #1: 51% Filipino 49% Japanese à 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. à Why 60%? Because under the Corporation Code for a group of persons
to incorporate a corporation, at least 5 persons are required by law. A majority of the 5
is 3 and converting it into percent, one gets 60%. We can say that in fact 51% is
majority but in a group of 5 people 51% is 2 & 1/5, there really is no 1/5 of a person.

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

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

Q: Do all three tests apply in the Philippines?


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

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


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

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

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


A: Simply put, if a corporation does not pass the first test, which the place of incorporation test,
automatically it is deemed to be a foreign corporation. However, having passed the first test, the
nationality of the corporation may have been established but this does not mean that the
corporation is entitled to enter every single economic sector of the Philippines. The control test
determines now whether the corporation fulfills the equity requirements of the Constitution. In
doing this, the other tests are made such as: war-time test, investment test and grandfather rule.
EXCEPTIONS: TEST OF CONTROLLING OWNERSHIP also applies in:
(a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Constitution;
aRoman Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the Register of
Deeds of Davao, 102 Phil. 596 [1957]).
 Sec. 140 Stock ownership in certain corporations – Pursuant to the duties specified by
Article XIV of the Constitution, the National Economic Development Authority shall,
from time to time, make a determination of whether the corporate vehicle has been
used by any corporation of by business or industry to frustrate the provisions thereof
or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed
necessary, a report of its findings, including recommendations for their prevention or
correction.
Maximum limits may be set by the Batasang Pambansa for stockholdings in
corporations declared by it to be vested with a public interest pursuant to the
provisions of this section, belonging to the individuals or groups of individuals related
to each other by consanguinity or affinity or by close business interests, or whenever it
is necessary to achieve national objectives, prevent illegal monopolies or combinations
in restrain or trade, to implement national economic policies declared in laws, rules
and regulations designed to promote the general welfare and foster economic
development.
Revised Bagtas Reviewer by Ve and Ocfe 2A 25
In recommending to the Batasang Pambansa corporations, business or industries to be
declared vested with a public interest and in formulating proposals for limitations on
stock ownership, the National Economic and Development Authority shall consider the
type and nature of the industry, the size of the enterprise, the economies of scale, the
geographic location, the extent of Filipino ownership, the labor intensity of the activity,
the export potential, as well as the other factors which are germane to the realization
and promotion of business and industry.
 Sec. 2 Art. XII
All lands of the public domain, waters, minerals, coal, petroleum and other mineral
oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna
and other natural resources are owned by the State. With the exception of agricultural
lands, all other national resources shall under the full control and supervision of the
State. The State may directly undertake such activities or it may enter into co-
production, joint venture, or production-sharing agreements with Filipino citizens, or
corporations or associations at least sixty percentum of whose capital is owned by
such citizens. Such agreements may be for a period not exceeding twenty-five years,
renewable for not more than twenty-five years, and under such terms and conditions
as may be provided by law. In cases of water rights for irrigation, water supply,
fisheries, or industrial uses other than the development of water power, beneficial use
may be the measure and limit of the grant.
The State shall protect the nation’s marine wealth in its archipelagic waters, territorial
sea, and exclusive economic zone, and reserve its use and enjoyment exclusively to
Filipino citizens.
The Congress may, by law, allow small-scale utilization of natural resources by Filipino
citizens, as well as cooperative fish farming, with priority to subsistence fishermen and
fishworkers in rivers, lakes, bays and lagoons
The President may enter into agreements with foreign-owned corporations involving
either technical or financial assistance for large-scale exploration, development and
utilization of minerals, petroleum and other mineral oils according to the general terms
and conditions provided by law, based on real contributions to the economic growth
and general welfare of the country. In such agreements, the State shall promote the
development and use of local scientific and technical resources.
The President shall notify the Congress of every contract entered into in accordance
with this provision within thirty days from its execution.
ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO v THE LRC
Facts:
Mateo Rodis, a Filipino citizen and resident of Davao, executed a deed of sale of a parcel of
land located in the same city in favor of the Roman Catholic Administrator of Davao, a
“corporation sole” organized and existing in accordance with Philippine laws. The incumbent
administrator is Msgr. Clovis Thibault, a Canadian citizen. When the deed was presented to
the Register of Deeds for registration, it required them to submit an affidavit stating that the
ownership of the corporation is 60% Filipino citizens as required under the Constitution.
Roman Catholic stated that it was a corporation sole (meaning only one incorporator) and that
the totality of the Catholic population in Davao would become the owner of the property.
Register of Deeds doubted this and submitted the case for en consulta in the Land
Registration Commission. LRC ruled that the requirement of the Constitution must be followed
and since the 60% cannot be complied with, the registration should be denied. Hence, this
appeal.
Issue: WON the Roman Catholic Apostolic Church, being a corporation sole, can lawfully
acquire lands in the Philippines.
Held: YES.
 Corporation sole – a special form of corporation usually associated with the clergy
designed to facilitate the exercise of the functions of ownership of the church which
was registered as property owner. It is created not only to administer the temporalities
of the church or religious society where the corporator belongs, but also to hold and
transmit the same to his successor in said officer.
 The incumbent administrator is not the actual owner of the land but the constituents
or those that make up the church, thus it is their nationality that has to be taken into
consideration. The corporation sole only holds the property in trust for the benefit of
the Roman Catholic faithful.
Dissenting opinion by Justice JBL Reyes à In requiring corporations or association to have
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; aPeople 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.
Revised Bagtas Reviewer by Ve and Ocfe 2A 27

PEOPLE v QUASHA
Facts:
William Quasha, a member of the Philippine Bar was charged with falsification of public and
commercial documents in the CFI. He was entrusted with the preparation and registration of
the articles of incorporation of Pacific Airways Corporation but he caused it to appear that
Arsenio Baylon, a Filipino had subscribed to and was the owner of 60% of subscribed capital
stock. Such was not case because the real owners of said portions were really American
citizens. The purpose of such false statement was to circumvent the Constitutional mandate
that no corporation shall be authorized to operate as a public utility in the Philippines unless
60% of its capital is owned by Filipinos.
Held:
The falsification imputed to Quasha consists in not disclosing in the Articles of Incorporation
that Baylon was a mere trustee of the Americans, thus giving the impression that Baylon
subscribed to 60% of the capital stock. But contrary to the lower court’s assumption, the
Constitution does not prohibit the mere formation of a public utility corporation without the
required proportion of Filipino capital. What it does prohibit is the granting of a franchise or
other form of authorization for the operation of a public utility to a corporation already in
existence but without the requisite proportion of Filipino capital. From the language of the
text, the terms “franchise”, “certificate”, and “other form of authorization” are qualified by the
phrase “for the operation of public utility.” As such, these terms cannot and do not refer to the
corporation’s primary franchise, which vests a body of men with corporate existence, but to its
secondary franchise, or the privilege to operate as public utility after the corporation has
already gone into being.
Primary franchise refers to that franchise which invests a body of men with corporate
existence, while the secondary franchise is the privilege to operate as a public utility after the
corporation has already come into being.
For the mere formation of the corporation, such revelation was not essential and the
corporation law does not require it. Therefore, Quasha was under no obligation to make it. In
the absence of such obligation and of the alleged wrongful intent, Quasha cannot be legally
convicted of the crime with which he is charged. A corporation formed with capital that is
entirely alien may subsequently change the nationality of its capital through transfer of shares
to Filipino citizens. The converse may also happen. Thus for a corporation to be entitled to
operate a public utility, it is not necessary that it be organized with 60% of its capital owned
by Filipinos from the start. Said condition, may at any time be attained through the necessary
transfer of stocks. The moment for determining whether a corporation is entitled to operate as
public utility is when it applies for a franchise, certificate or any other form of authorization for
that purpose and that can only be done after the corporation has already come into being not
while being formed.

Q: Why are we studying Quasha?


A: This case makes a distinction with the grant by the government of primary and secondary
franchise. As far as doctrinal pronouncements are concerned, any and all type of corporations
may be incorporated, so long as the requirements for incorporation are fulfilled and that its
purpose is lawful and not contrary to law or public policy. The violation of equity requirements
with regard to entry into nationalized sectors as provided by the Constitution come only into
play when the secondary franchise is granted. In granting the secondary franchise
considerations of equity are now made.
CLV: Note that while Quasha makes such doctrinal pronouncements, in practice, this is not the
case. SEC will refuse to register the Articles of Incorporation if it is not 60% owned by Filipinos.
In fact, Quasha lied in order to have the articles registered.
The primary franchise, that is, the right to exist as such, is vested in the individuals
who compose the corporation and not in the corporation itself and cannot be conveyed in
the absence of a legislative authority so to do. The special or secondary franchises are
vested in the corporation and may ordinarily be conveyed or mortgaged under a general
power granted to a corporation to dispose of its property, except such special or
secondary franchises as are charged with a public use. J.R.S. Business Corp. v. Imperial
Insurance, 11 SCRA 634 (1964).
The Constitution requires a franchise for the operation of a public utility; however, it
does not require a franchise before one can own the facilities needed to operate a public
utility so long as it does not operate them to serve the public. There is a clear distinction
between “operation” of a public utility and the ownership of the facilities and equipment
used to serve the public. aTatad v.Garcia, Jr., 243 SCRA 436 (1995).
TATAD v GARCIA
Facts
In 1989, DOTC planned to construct a light railway transit along EDSA. Initially, Eli Levin
Enterprise Inc. was supposed to construct the LRT III on a Build-Operate-Transfer (BOT) basis.
Subsequently, RA 6957 was enacted which provides for two schemes for the financing,
construction and operation of government projects through private initiative and investment:
Build-Operate-Transfer (BOT) or Build-Transfer (BT). DOTC issued a Department Orders
creating the Pre-qualification Bids and Awards Committee. EDSA LRT Consortium composed of
10 foreign and domestic corporations, was one of the five groups who responded to the
invitation. And being the sole complying bidder, it was awarded the contract. DOTC and EDSA
LRT Corp., Ltd. in substitution of the EDSA LRT Consortium entered into an “Agreement to
Build, Lease and Transfer an LRT system for EDSA” under the terms of the BOT Law.
Agreement was subsequently revised and another “Supplemental Agreement” was also
contracted.
According to the agreements, the EDSA LRT III (MRT) will use light rail vehicles from abroad
(Czech and Slovak Federal Republics) and will have a maximum carrying capacity of 450,000
passengers a day. It will have its own power facility and will have 13 passenger stations. The
private respondent will finance the entire project required for a complete operational LRT
system. Upon full or partial completion and viability, private respondent shall deliver the use
and possession of the completed portion to DOTC which shall operate the same. DOTC shall
pay respondent monthly rentals, which is to be determined by an independent and
internationally accredited inspection firm. As agreed upon, private respondent’s capital shall
be recovered from the rentals to be paid by DOTC, which in turn, shall come from the
earnings of the MRT. After 25 years and after the DOTC shall have completed payment of the
rentals, ownership of the project shall be transferred to the latter.
Petitioners argue that the Agreements, insofar as it grants EDSA LRT Corp. Ltd., a foreign
corporation the ownership of MRT, a public utility, violate the Constitution. They claim that
since the MRT is a public utility, its ownership and operation is limited by the Constitution to
Filipino citizens and domestic corporation, not foreign corporations, like private respondent.
DOTC Secretary and private respondent on the other hand, contend that the nationality
requirement for public utilities mandated by the Constitution does not apply to private
respondent. Also, these Agreements were already approved by President Ramos.
Issue: WON the Agreements violated the Constitution (re: ownership/operation of a public
utility by a foreign corporation).
Held: No.
It is to be noted that what the private respondents own are the rail tracks, rolling stocks like
the coaches, rail stations, terminals and power plant, which do not fall under “public utility”.
While a franchise is needed to operate these facilities to serve the public, they do not by
themselves constitute a public utility. What constitutes a public utility is not their ownership
but their use to the public. While the Constitution requires a franchise for the operation of
Revised Bagtas Reviewer by Ve and Ocfe 2A 29
public utility, it does not however require a franchise before one can own the facilities needed
to operate a public utility so long as it does not operate them to serve the public. There must
be a clear distinction between the “operation” of a public utility and the ownership of the
facilities and equipments used to serve the public. The right to operate a public utility may
exist independently and separately from the ownership of the facilities without operating
them as a public utility, or conversely, one may operate a public utility without owning the
facilities used to serve the public.
In the case, while private respondent is the owner of the facilities necessary to operate the
MRT, it admits that it is not enfranchised to operate a public utility. In view of the incapacity,
private respondent EDSA Corp. and DOTC agreed that on completion date, private respondent
will deliver possession of the LRT system by way of lease of 25 years, during which period
DOTC shall operate the same as common carrier and private respondent shall provide the
technical maintenance and repair services to DOTC.
In sum, private respondent will not run the light rail vehicles and collect fees from the riding
public. It will have no dealings with the public and the public will have no right to demand any
services from it. A mere owner and lessor of the facilities used by a public utility is not a
public utility. Even the mere formation of a public utility corporation does not ipso facto
characterize the corporation as one operating a public utility. The moment for determining the
requisite Filipino nationality is when the entity applies for a franchise certificate or any other
form of authorization for that purpose.
Q: How does the case of Quasha differ from the case of Tatad?
A: Quasha tells us that we have to look at the secondary franchise, i.e. to whom such is given
while Tatad tells us that it does not matter to whom the franchise is given but what matters is
who actually operates the utility. The latter case tells us that restrictions are not on the assets
of the corporations but on the enterprise itself, thus control determines nationality and not
the beneficiaries. CLV: The Constitution restricts the juridical person as it controls the
enterprise. Note, that assets are different from the juridical person and from the business
enterprise itself.
(c) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution)
 Sec. 11(1) Art. XVI
The ownership and management of mass media shall be limited to citizens of the
Philippines, or to corporations, cooperatives or associations, wholly-owned and
managed by such citizens.
The Congress shall regulate or prohibit monopolies in commercial mass media when
the public interest so requires. No combination in restraint of trade or unfair
competition shall be allowed.
 Mass media includes the gathering, transmission of news, information, messages,
signals and forms of written, oral and all visual communication and shall embrace the
print medium, radio, television, films, movies, advertising in all its phases and their
business managerial. It does not include commercial telecommunications because
such is a public utility.
 The Constitutional requirements are much stricter for it requires that socks are 100%
Filipino owned and managed.
Sources: P.D. 36, amended by P.D.s 191 and 197; DOJ Opinion No. 120, s. of 1982; Sec. 2,
P.D. 576; SEC Opinion, 24 March 1983; DOJ Opinion 163, s. 1973; SEC Opinion, 15
July 1991, XXV SEC QUARTERLY BULLETIN, (No. 4—December, 1991), at p. 31.
Cable Industry: “Cable TV operations shall be governed by E.O. No. 205, s. 1987. If
CATV operators offer public telecommunications services, they shall be treated just like a
public telecommunications entity.” (NTC Memo Circular No. 8-9-95)
Cable TV as “a form of mass media which must, therefore, be owned and managed by
Filipino citizens, or corporations, cooperatives or associations, wholly-owned and managed
by Filipino citizens pursuant to the mandate of the Constitution.” (DOJ Opinion No. 95, s.
1999, citing Allied Broadcasting, Inc. v. Federal Communications Commission, 435 F. 2d
70).
 The National Telecommunications Commission which regulates and supervises the
cable television industry in the Philippines under Sec. 2 of EO 436 series of 1997 has
provided under the NTC Memorandum Circular No. 8-9-95 under item 920(a) thereof
provides that “[c]able TV operations shall be governed by E.L. No. 205 series of 1987.
If CATV operators offer public telecommunications services, they shall be treated just
like public telecommunications industry.”
 Under DOJ opinion No. 95 series of 1999, the Secretary of Justice taking its cue from
Allied Broadcasting Inc. v. Federal Communications Commission 435 F.2d 70
considered CATV as “a form of mass media, which must therefore be owned and
managed by Filipinos, or corporations, cooperatives or associations, wholly-owned and
managed by Filipino citizens pursuant to the mandate of the Constitution.”
(d) Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution)
 Sec. 11(2) Art. XVI
The advertising industry is impressed with public interest and shall be regulated by law for
the protection of consumers and promotion of the general welfare.
Only Filipino citizens or corporations or associations at least seventy percentum of the
capital of which is owned by such citizens shall be allowed to engage in the advertising
industry.
The participation of foreign investors in the governing body of entities in such industry
shall be limited to their proportionate share in the capital thereof, and all the executive
and managing officers of such entities must be citizens of the Philippines.
 Only Filipino citizens or corporations or associations at least seventy percent of the capital
shall be allowed to engage in the advertising industry. It also provides that the
participation of foreign investors in the governing body shall be limited to their
proportionate share in the capital thereof, and all the executive and managing officers of
such entities must be citizens of the Philippines.
(e) War-Time Test (Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., 89
Phil. 54 [1951]; Davis Winship v. Philippine Trust Co., 90 Phil. 744 [1952]; Haw Pia v. China
Banking Corp., 80 Phil. 604 [1948]).
 In Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., the Court held that in
times of war, the nationality of a private corporation is determined by the character or
citizenship of its controlling stockholders The court considered the juridical entity as an
enemy based on the fact that the “majority of the stockholders of the respondent
corporation were German subjects.” It ruled that the control test was applicable only in
war-time. It refused the sole application of the place of incorporation test during the war-
time to determine the nationality of an enemy corporation.
(f) Investment Test as to “Philippine Nationals” (Sec. 3(a) & (b), R.A. 7042, Foreign
Investments Act of 1991)
 Under Sec. 3a of the FIA of 1991, the term “Philippine national” as it refers to a corporate
entity shall mean a corporation organized under the laws of the Philippines of which at
least 60% percent of the capital stock outstanding and entitled to vote is owned and held
by citizens of the Philippines. NOTE: In this aspect, FIA is more liberal than the Constitution
which did not specify as to what type of share the 60% Filipino-ownership requirement
pertained to. FIA, in this aspect, only referred to voting shares.
 However, it provides that were a corporation and its non-Filipino stockholders own stocks
in a SEC-registered enterprise, at least 60% of the capital stock outstanding and entitled
to vote of both corporations must be owned and held by citizens of the Philippines and at
least 60% of the members of the Board of Directors of both corporations must be citizens
of the Philippines, in order that a corporation shall be considered a Philippine national. The
law therefore limits the test to voting shares, but however makes it more stringent when it
Revised Bagtas Reviewer by Ve and Ocfe 2A 31
comes to actual control by making a double 60% rule requirement as to both holding and
held company, as well as their Board of Directors.
Q: Why should not we infer that the 60% Filipino ownership requirement of the Constitution as
pertaining to voting shares?
A: Elementary rule of Statutory Construction that when the law does not distinguish, neither
should we. Moreover, the right to vote is not the only right granted to stockholders, as the
right to file suits against the Board of Directors is granted to them.
Q: Given these facts: ABC Company is comprised of 60% Filipino and 20% Foreign investors
with respect to voting stocks and 40% Foreign investors with respect to non-voting stocks,
under the FIA, is it a Philippine national?
A: Yes, since FIA limits its scope to voting stocks.
Q: Given these facts: ABC Company with 20 voting stocks is comprised of 80% Filipino (16)
and 20% Foreign (4), is it a Philippine national? Can it therefore own land under the
Constitution? A: Yes, under FIA, it is a
Philippine national but it cannot own land. As to the aspects that FIA runs contrary to the
Constitution, which is the supreme law of the land, the former shall not apply.
(g) Grandfather Rule (Opinion of DOJ No. 18, s. 1989, 19 January 1989; SEC Opinion, 6
November 1989, XXIV SEC QUARTERLY BULLETIN (No. 1- March 1990); SEC Opinion, 14
December 1989, XXIV SEC QUARTERLY BULLETIN (No. 2 -June 1990)
 Shares belonging to corporations or partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or partnership is less than 60%, only
the number of shares corresponding to such percentage shall be counted as of Philippine
nationality. Example: partnership between ABC and X companies. ABC owns 60% with
40% foreign and 60% Filipino-owned shares while X companie own 40% with 100%
Filipino-owned shares. Under the SEC DOJ Rule, such partnership is Filipino-owned.
Moreover, under this rule once the 60% requirement is reached, there is no more need for
tierring.
 It must be stressed however that the aforequoted SEC rule applies only for purposes of
resolving issues on investments. The SEC was quick to add: “[h]owever, while a
corporation with 60% Filipino and 40% foreign equity ownership is considered a Philippine
national for purposes of investment, it is not qualified to invest in or enter into a joint
venture agreement with corporations or partnerships, the capital or ownership of which
under the constitution of other special laws are limited to Filipino citizens only. A joint
venture arrangement would mean that such corporation has become a partner and is
deemed then to be acting or involving itself in the operations of a nationalized activity by
the acts of the local partners by virtue of the principle of mutual agency applicable to
partnerships.
 There seems to be a conflict as to the applicability of the SEC Rule and to that of the
Foreign Investments Act but each in itself has advantages and disadvantages, since both
require stringent requisites for a corporation to avail of its privileges. But under the
present scenario, the FIA is believed to be the default rule having been enacted more
recently that the SEC Rule.
 GRANDFATHER RULE – a method by which the percentage of Filipino equity in corporations
engaged in nationalized or partly nationalized areas of activity provided for under the
Constitution and other national laws is accurately computed, in cases where corporate
shareholders are part of the ownership structure by considering the nationality of the
second or even subsequent tier of ownership to determine the nationality of the corporate
shareholder.
Q: When is the GFR applied?
A: The GFR is applied in cases where the corporation has corporate stockholders with alien
stockholdings, otherwise, if the rule is not applied, the presence of such corporate
srockholders could diminish the effective control of Filipinos.
 SITUATION #1 – Silahis International Hotel, the capital stock of which is 69% owned by
another corporation Hotel Properties Inc. and 31% owned by Filipinos. Hotel Properties in
turn is 53% alien-owned and 47% Filipino-owned. The SEC through the GFR stated that
Silahis International Hotel can engage in partly nationalized business because the Filipino
equity in said corporation is 63.43% while the foreign equity in said corporation is 36.57%.

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 nationalized sector of Philippine economy and (2) when there is tierring, meaning the
corporation is partly-owned by another corporation.
Up to what level do you apply the grandfather rule? (aPalting v. San Jose
Petroleum Inc., 18 SCRA 924 [1966])
PALTING v. SAN JOSE PETROLEUM
Facts:
San Jose Petroleum filed with the SEC a sworn registration statement for the registration and
licensing for sale in he Philippine voting trust certificate representing 2 million shares of its
capital stock of a par value of $0.35/share at P1/share. It was alleged that the proceeds
thereof will be used to finance the operations of San Jose Oil Co. which has 14 petroleum
exploration concessions in various provinces. It was expressly conditioned that instead of
stock certificates, registered or bearer-voting trust certificates from voting trustees
(Americans) will be given. San Jose Petroleum amended the application from P2M to P5M at
Revised Bagtas Reviewer by Ve and Ocfe 2A 33
reduced offering at P0.70/share.
Palting, et.al filed with the SEC an opposition to said registration on the following grounds: (1)
the tie-up between SJP, a Panamanian corporation and SJO, a domestic corporation violates
the Constitution, the Corp. Law and the Petroleum Act of 1949 (2) the issuer is not licensed to
transact business in the Philippines (3) the sale of shares is fraudulent (4) the issuer is based
on unsound business principles (sic).
SJP claimed that it was a “business enterprise” enjoying parity rights, with respect to mineral
resources in the Philippines, which may be exercised pursuant to the Laurel-Langley
Agreement, through a medium, the SJO. It contends that giving SJO financial assistance did
constitute transaction of business in the Philippines.
SJO is a domestic corporation 90% of which is owned by SJP, a Panamanian Corp. the majority
interest of which is owned by Oil Investments, Inc. another Panamanian Corp. The latter is in
turn owned by Pantepec Oil Co. & PanCoastal Petroleum, both organized and existing under
the laws of Venezuela.
Under the Constitution, the exploitation of natural resources shall be limited to citizens of the
Philippines or to corporations or associations at least 60% of the capital of which is owned by
such citizens. However, this right was earlier extended to US citizens by virtue of the Parity
Agreement. Said US citizens can either directly or indirectly own or control the business
enterprise.
Held:
San Jose Petroleum is not entitled to Parity Rights: (1) It is not owned or controlled directly by
US citizens because it is owned and controlled by Panamanian corporation; (2) Neither can it
be said that it is indirectly owned and controlled by US citizens because the controlling
corporation is in turn owned by two Venezuelan corporations; (3) Although the two
Venezuelan corporations claim to be owned by stockholders residing in the US, there is no
showing that said stockholders were US citizens; (4) Even granting that these stockholders
are US citizens, it is still necessary to establish that their different states allow Filipino
corporations and citizens to engage in the exploitation of natural resources. However, there is
no such proof to this; (5) The word indirectly should not be unduly stretched in application.
Q: Why are we studying Palting?
A: It is because Palting enunciated the doctrine that for a corporation to comply to the
nationalization requirements of the Constitution, the equity requirements establishing the
nationality of the controlling interest in the corporation should not be stretched to absurdity.
The application of the GFR to determine the nationality of the ultimate controller of a subject
corporation cannot go beyond the level of what is reasonable.
(h) Special Classifications (Sec. 140)
 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 with a public interest and in formulating proposals for limitations on
stock ownership, the National Economic and Development Authority shall consider the
type and nature of the industry, the size of the enterprise, the economies of scale, the
geographic location, the extent of Filipino ownership, the labor intensity of the activity,
the export potential, as well as the other factors which are germane to the realization
and promotion of business and industry.

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


CORPORATE FICTION
See relevant portions of 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
Revised Bagtas Reviewer by Ve and Ocfe 2A 35
VEIL OF CORPORATE FICTION FOCUS ON?
1) Centralized management – Centralized management is not a natural occurrence. It is a
creation of statute under Sec. 23 of the Corporation Code Compared to partnerships,
partnerships have mutual agency under delectus personarum. Mutual agency is more of a
natural occurrence since here the partner is a co-owner of the assets of the partnership,
maintaining his control over his property. In property law, there is what is called the seven
juses of ownership. In partnership however, a partner retains all this seven juses, albeit as
a co-owner, through mutual agency. However, in a corporation, a stockholder abdicates
his jus dispossidendi, jus abutendi, etc. as to the property he is placing inside a
corporation retaining only to himself his jus fruendi, as to the dividends of his stocks. This
is unnatural since a person is entitled to full use, enjoyment or dispossession of his
property. But since under the Corporation Code, centralized management is provided
therefore it is the means by which a corporation acts and conducts it business. As such,
the piercing doctrine is not directed at the attribute of centralized management, because
in most instances, investors in a corporation hand the management of the business of the
corporation to professionals. To do away with the central management would place the
investors who had taken no active part in the conduct of the corporation to be liable as
partners with mutual agency.
2) Free transferability of assets – Shares of stock represent (1) right to profits/dividends (2)
voting right (3) contingent right which recognizes a proprietary right of a mere aliquot
share in the proceeds after dissolution and distribution of corporate assets. Therefore a
stockholder is neither owner nor co-owner of assets of a corporation. The assets of a
stockholder are distinct from the assets of a corporation. The stockholders have no control
in the dispossession or acquisition of assets (only as to their voting capacity in the
management of the corporation). The stockholders however have the right to freely
dispose of his shares of stock to any and all person who may purchase it. There the
corporation has no control. Applying the piercing doctrine as to the free transferability of
his assets cannot be done since jurisprudence points out that the piercing doctrine is a
remedy of last resort. If a third party claimant has a claim as to the assets to be disposed
of or acquired by a corporation can be afforded in other remedies whether it be intra or
inter corporate.
3) Limited Liability and Separate Legal Personality – Therefore it can be concluded that the
piercing doctrine is directed at the limited liability attribute of the corporation (in
consonance with the separate juridical personality attribute).The piercing doctrine in a
way undermines the separate juridical personality of a corporation allowing a party to look
behind the veil of corporate fiction to remedy a claim or fraud. In looking behind the veil, a
plaintiff seeks to make somebody liable for a claim either based on tort, breach of
contract, etc. Since a corporation can only act through its agents; it is the same agents
that are to be held liable. Therefore the attribute of limited liability cannot be availed of in
a piercing case since it is this attribute that is undermined so as a wrong can be remedied.
CLV: In viewing the main doctrine of separate juridical personality as to the piercing doctrine,
the main doctrine actually pertains to equity. Equity refers to the part of the rights or interest
an individual has in a corporation. Equity is comprised of two main parts which is (1)
enterprise and (2)assets. It is the enterprise or the conduct of the business which in effect
undermines equity. Assets are those brought in by the stockholders during the formation of
the corporation or may have been acquired during its existence. They are inanimate objects
that require human intervention to move or be used. Thus, it can be said that it is not the
assets that undermine equity which bring about piercing. When an enterprise is conducted in
fraud or in perpetuation of a wrong the equity of the corporation is undermined. Since, a
corporation must act through its agents, so the corporation being the principal, commissions
these agents to act under that special commission. If an agent acts beyond the commission of
the principal (as provided under its by-laws) it is the actor that should be held liable not the
corporation, since the corporation for all of its juridical existence is still abstract and a
corporeal actor acts for it. Also a corporation cannot undermine equity, only the actors. So
when these actors undermine equity, they lose limited liability and may be held liable.
Therefore, the basis of piercing is on the enterprise not on equity or its assets. Piercing
regulates the enterprise of the corporation.
A corporation, upon coming into existence, is invested by law with a personality separate
and distinct from those persons composing it as well as from any other legal entity to which
it may be related. This separate and distinct personality is, however, merely a fiction
created by law for conveyance and to promote the ends of justice. LBP v. Court of Appeals,
364 SCRA 375 (2001).
One of the advantages of a corporate form of business organization is the limitation of
an investor’s liability to the amount of the investment. This feature flows from the legal
theory that a corporate entity is separate and distinct from its stockholders. However, the
statutorily granted privilege of a corporate veil may be used only for legitimate purposes.
On equitable considerations, the veil can be disregarded when it is utilized as a shield to
commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or
serve as a mere alter ego or business conduit of a person or an instrumentality, agency or
adjunct of another corporation. aSan Juan Structural v. Court of Appeals, 296 SCRA 631
(1998).
SAN JUAN STRUCTURAL AND STEEL FABRICATORS v. CA
Facts:
San Juan entered into an agreement with Motorich for the transfer of a parcel of land. San
Juan paid a downpayment of 100,000, balance to be paid on or before March 2, 1989. San
Juan requested for the recomputation of the balance, Motorich’s broker Linda Aduca wrote the
computation. San Juan and Motorich were supposed to meet in the office of San Juan but
Motorich treasurer Mrs. Gruenberg did not appear. Despite repeated demands and in utter
disregard of its commitments had refused toe execute the Transfer of Rights/Deed of
Assignment which is necessary to transfer the certificate of title (title was transferred to
spouses Gruenberg from ACL Corporation) Defendants, president and chairman of Motorich
did not sign the agreement. Mrs. Gruenberg’s signature as treasurer is insufficient. San Juan
knew of this infirmity that is why it did not pay on time. The RTC and CA held that Mrs.
Gruenberg did not have the authority as she did not obtain the signatures of president and
chairman, as such it was not ratified by the corporation.
Issue: WON the doctrine of piercing the corporate veil may be applied.
Held:
The Court finds no reason to pierce the corporate veil of Respondent Motorich. Petitioner
utterly failed to establish that said corporation was formed, or that it is operated, for the
purpose of shielding any alleged fraudulent or illegal activities of its officers or stockholders,
or that the said veil was used to conceal fraud, illegality or inequity at the expense of third
persons like petitioner. Veil can only be disregarded when it is utilized as a shield to commit
fraud, illegality or inequity, defeat public convenience, confuse legitimate issues or serve as a
mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of
another corporation.
In Dulay, the sale of real property was contracted by the President of a close corporation with
the knowledge and acquiescence of its board of directors. In the present case, Motorich is not
a close corporation as previously discussed and the agreement was entered into by the
corporate treasurer without the knowledge of the Board of Directors. The Court is not
unaware that there are exceptional cases where an action by a director who singly is the
controlling stockholder, may be considered a binding corporate act and a board action is
nothing more than a mere formality. The present case is not of them. Granting arguendo that
the corporate veil of Motorich may be pierced, said parcel of land would then be treated as
conjugal property of the spouses Gruenberg, because the same was acquired during the
marriage. There being no indication that said spouses who appear to have been married
before the effectivity of the Family Code have agreed to different property regime, their
property relations would be governed by a conjugal partnership of gains. Neither spouse can
alienate in favor of another his interest in the partnership or in any property belonging to it;
neither spouse can ask for a partition of the properties before the partnership has been
legally dissolved.

3. Applications:
Revised Bagtas Reviewer by Ve and Ocfe 2A 37
(a) Majority Equity Ownership and Interlocking Directorship:
Ownership of a majority of capital stock and the fact that majority of directors of a
corporation are the directors of another corporation creates no employer-employee
relationship with the latter's employees. aDBP v. NLRC, 186 SCRA 841 (1990)

DBP v NLRC

Facts:
Philippine Smelter Corporation obtained a loan in 1983 from DBP to finance its iron smelting
and steel manufacturing business. To secure the loan, PSC mortgaged to DBP real properties
and chattels with its President Marcelo as co-obligor Because of this DBP became the majority
stockholder of PSC with stockholdings of P 31M out of P 60 M subscribed and paid up capital
stock and took over PSC’s management. PSC failed to pay and DBP foreclosed on the
mortgaged realties and chattels. 40 alleged unpaid employees filed a petition for involuntary
insolvency in the RTC against PSC and DBP. Said employees were employed by Olecram
Mining Corp., Jose Panganiban Ice Plant and Cold Storage, Inc. all impleaded as co-
respondent. They filed another complaint with the DOLE against PSC for non-payment of
salaries, 13th month pay, incentive leave and separation pay. DBP was impleaded because the
employees considered DBP as the parent company of PSC. Since the DBP was the biggest
creditor of PSC, it held majority of stock and involved in management through Board of
Directors, DBP was considered to be by the employees as their employer. DBP was invoked
absence of E-E relationship in its Answer. The labor arbiter held DBP as liable for unpaid
wages due to PSC’s foreclosure which it caused as foreclosing creditor. NLRC sustained this,
hence, this petition.
Held:
DBP as foreclosing creditor could not be held liable for unpaid wages, etc. of the employees of
PSC. The fact that DBP is a majority stockholder of PSC and PSC are from DBP does not
sufficiently indicate the existence of an E-E relationship between the terminated employees of
PSC and DBP. Said workers have no cause of action against DBP and the labor arbiter does
not have jurisdiction to take cognizance of said case.
Hence, ownership of a majority of capital stock and the fact the majority of directors of a
corporation are the directors of another corporation creates no E-E relationship with the
latter’s employees.

Mere ownership by a single stockholder or by another corporation of all or nearly


all of the capital stock of a corporation is not of itself sufficient ground for disregarding
the separate corporate personality. Sunio v. NLRC , 127 SCRA 390 (1984); Asionics
Philippines, Inc. v. NLRC, 290 SCRA 164 (1998); Francisco v. Mejia, 362 SCRA 738
(2001); Matutina Integrated Wood Products, Inc. v. CA, 263 SCRA 490 (1996); Manila
Hotel Corp. v. NLRC, 343 SCRA 1 (2000).
Mere substantial identity of incorporators of two corporations does not necessarily
imply fraud, nor warrant the piercing of the veil of corporate fiction. In the absence of
clear and convincing evidence to show that the corporate personalities were used to
perpetuate fraud, or circumvent the law, the corporations are to be rightly treated as
distinct and separate from each other. Laguio v. NLRC, 262 SCRA 715 (1996).
Having interlocking directors, corporate officers and shareholders is not enough
justification to pierce the veil of corporate fiction in the absence of fraud or other
public policy considerations. Velarde v. Lopez, 419 SCRA 422 (2004); Sesbreno v.
Court of Appeals, 222 SCRA 466 (1993).
(b) Being Corporate Officer: Being an officer or stockholder of a corporation does not
by itself make one's property also of the corporation, and vice-versa, for they are
separate entities, and that shareholders are in no legal sense the owners of corporate
property which is owned by the corporation as a distinct legal person. Good Earth
Emporium, Inc. v. CA, 194 SCRA 544 (1991).
The mere fact that one is president of the corporation does not render the property
he owns or possesses the property of the corporation, since that president, as an
individual, and the corporation are separate entities. Cruz v. Dalisay, 152 SCRA 487
(1987); Booc v. Bantuas, 354 SCRA 279 (2001).
It is hornbook law that corporate personality is a shield against personal liability of
its officers—a corporate officer and his spouse cannot be made personally liable under
a trust receipt where he entered into and signed the contract clearly in his official
capacity. Intestate Estate of Alexander T. Ty v. Court of Appeals, 356 SCRA 61 (2001);
Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001).

(c) Dealings Between Corporation and Stockholders:


The fact that the majority stockholder had used his own money to pay part of the
loan of the corporation cannot be used as the basis to pierce. “It is understandable
that a shareholder would want to help his corporation and in the process, assure that
his stakes in the said corporation are secured.” LBP v. Court of Appeals, 364 SCRA 375
(2001).
Use of a controlling stockholder’s initials in the corporate name is not sufficient
reason to pierce the corporate veil, since by that practice alone does it mean that the
said corporation is merely a dummy of the individual stockholder. A corporation may
assume any name provided it is lawful, and there is nothing illegal in a corporation
acquiring the name or as in this case, the initials of one of its shareholders. LBP v.
Court of Appeals, 364 SCRA 375 (2001).
The mere fact that a stockholder sells his shares of stock in the corporation during
the pendency of a collection case against the corporation, does not make such
stockholder personally liable for the corporate debt, since the disposing stockholder
has no personal obligation to the creditor, and it is the inherent right of the
stockholder to dispose of his shares of stock anytime he so desires. Remo, Jr. v. IAC,
172 SCRA 405 (1989); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).
Just because two foreign companies came from the same country and closely
worked together on certain projects would the conclusion arise that one was the
conduit of the other, thus piercing the veil of corporate fiction. Marubeni Corp. v.
Lirag, 362 SCRA 620 (2001).
The creation by DBP as the mother company of the three mining
corporations to manage and operate the assets acquired in the foreclosure
sale lest they deteriorate from non-use and lose their value, does not
indicate fraud or wrongdoing and will not constitute application of the
piercing doctrine. DBP v. Court of Appeals, 363 SCRA 307 (2001).
The facts that two corporations may be sister companies, and that they
may be sharing personnel and resources, without more, is insufficient to
prove that their separate corporate personalities are being used to defeat
public convenience, justify wrong, protect fraud, or defend crime. Padilla v.
Court of Appeals, 370 SCRA 208 (2001). [CLV: In past decisions, such situation
would generally warrant alter-ego piercing.]
(d) On Privileges Enjoyed: The tax exemption clause in the charter of a corporation
cannot be extended to nor enjoyed by even its controlling stockholders. Manila Gas
Corp. v. Collector of Internal Revenue, 62 Phil. 895 (1936).
(e) Obligations and Debts: Corporate debt or credit is not the debt or credit of the
stockholder nor is the stockholder's debt or credit that of the corporation. Traders
Royal Bank v. Court of Appeals, 177 SCRA 789 (1989).
A corporation has no legal standing to file a suit for recovery of certain parcels of
land owned by its members in their individual capacity, even when the corporation is
organized for the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347
Revised Bagtas Reviewer by Ve and Ocfe 2A 39
(1976).
Stockholders have no personality to intervene in a collection case covering the
loans of the corporation since the interest of shareholders in corporate property is
purely inchoate. Saw v. CA, 195 SCRA 740 (1991); and vice-versa Francisco Motors
Corp. v. Court of Appeals, 309 SCRA 72 (1999).
The majority stockholder cannot be held personality liable for the attorney’s fees
charged by a lawyer for representing the corporation. Laperal Dev. Corp. v. Court of
Appeals, 223 SCRA 261 (1993).
Even when the foreclosure on the corporate assets was wrongful done,
stockholders have no standing to recover for themselves moral damages; otherwise, it
would amount to the appropriation by, and the distribution to, such stockholders of
part of the corporation’s assets before the dissolution of the corporation and the
liquidation of its debts and liabilities. APT v. Court of Appeals, 300 SCRA 579 (1998).
The obligations of a stockholder in one corporation cannot be offset from the
obligation of the stockholder in a second corporation, since the corporation has a
separate juridical personality. CKH Industrial and Dev. Corp v. Court of Appeals, 272
SCRA 333 (1997).

B. PIERCING THE VEIL OF CORPORATE FICTION:


1. Source of Incantation: United States v. Milwaukee Refrigerator Transit Co., 142 Fed.
247 (1905).
The notion of corporate entity will be pierced or disregarded and the individuals
composing it will be treated as identical if the corporate entity is being used as a cloak or
cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a
business conduit for the sole benefit of the stockholders. Gochan v. Young, 354 SCRA 207
(2001); DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001).
2. Nature of Doctrine (aTraders Royal Bank v. Court of Appeals, 269 SCRA 15 [1997])

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 Filriter’s 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 3 rd
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 independent corporate entities. In Liddel & Co. Inc. v. CIR mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of a corporation is
not itself a sufficient reason to disregard the fiction of separate corporate personalities.
TRB being a commercial bank which deals with corporate entities with circumstances showing
that the agents are acting in excess of corporate authority may not hold the corporation
liable. This is only fair as everyone must in the exercise of his rights and in the performance of
his duties, act with justice, give everyone his due and observe honesty and good faith.
When the legal fiction of separate corporate personality is abused, such as when the
same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the
corporate veil. Francisco v. Mejia, 362 SCRA 738 (2001).
Piercing the veil of corporation fiction is warranted only in cases when the separate legal
entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime,
such that in the case of two corporations, the law will regard the corporation as merged into
one. Velarde v. Lopez, 419 SCRA 422 (2004).
The legal fiction of separate corporate existence is not at all times invincible and the
same may be pierced when employed as a means to perpetrate a fraud, confuse legitimate
issues, or used as a vehicle to promote unfair objectives or to shield an otherwise blatant
violation of the prohibition against forum-shopping. While it is settled that the piercing of
the corporate veil has to be done with caution, this corporate fiction may be disregarded
when necessary in the interest of justice. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176
(2002).
The nature of the piercing doctrine is to disregard the separate juridical personality of a corporation
and to hold the actors or the stockholders of the corporation liable for a wrong committed or a
liability avoided. In our lessons in corporation law, we distinguish the cause of the piercing because it
would explain of piercing is properly done. The Supreme Court does not go into an explanation or
direct attribution as to cause of the piercing which at times cause confusion, so to clarify matters we
classify the piercing case into three namely: (1) fraud (2) alter ego and (3) remedy.
In the cases of fraud, the piercing is done because there is a wrong committed. Therefore, a person
behind the wrong must be held liable which in a corporation are the directors, since the corporation
acts through them. A piercing of the corporate veil in fraud cases is for the purpose of making the
directors directly liable. In fraud cases, the SC looks into the circumstances of the case searching for
Revised Bagtas Reviewer by Ve and Ocfe 2A 41
elements of malice or evil motive. An absence of such an evil motive, the courts will not allow
piercing. An example would be the case of TRB v. CA where the Court did not allow piercing because
there was no injury caused. Also in the Umali case, the court did not allow piercing because the main
intent was to annul a real estate mortgage under an allegation of fraud and not to hold the Directors
liable. In both cases, piecing was not the proper remedy, even if fraud was actually alleged because
the fraud committed was not attributed directly to the acts of the agents of the corporation.
In alter ego cases, the allegation does not go into fraud or malicious intent but a disrespect for the
corporate fiction. Here, the corporation is being used as a conduit or front for the activities of a
person, whether natural or juridical, in order to avoid liability or gain advantage over another without
really employing fraud. Here, if piercing is allowed then the corporate existence of the conduit
corporation is disregarded and the person or corporation behind the corporation shall be considered
as one and the liability of one is the liability of the other. The main intent here is not to make the
board of directors of the conduit corporation liable but to make the corporation behind the existence
of the conduit liable. It is the objective of the Corporation Code to foster public convenience in
sanctioning the creation of a corporation not as a means or private convenience where it is to be
used by other corporations or individuals as a means to circumvent liability or cause a disruption of
normal business practice in dealing with corporations.
Equity subdivision is the catch-all subdivision. If not fraud or alter ego, the court may grant piercing
as an equitable remedy, but such is usually resorted to as a reason in consonance with fraud or alter
ego cases. As such it is of purely judicial discretion.
The three cases may appear together in one application:
FRAUD – to prevent wrong

PIERCING DOCTRINE ALTER EGO – disrespect for the corporate fiction and 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. aPNB 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. aUmali 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
mortgagee. The Caterpillar Tractorwas 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 of the lots. PM parts through its President, Cervantes sent a letter to the Castillos to vacate the
property. The Castillos refused to do so. Subsequently, Umali the administratix of the properties of
Castillos filed an action for annulment of titles. They countered that all the transaction starting from
the Agreement of Counter-Guaranty with REM are void for being entered into in fraud. They seek to
pierce the veil of corporate entity of Bormaheco, ICP and PM Parts alleging that these corporations
employed fraud in causing the foreclosure and subsequent sale of their land. The lower court ruled in
favor of Umali. This was reversed by the CA.
Held:
The SC is not convinced that the contract entered into by the parties are fraudulent.
Under the doctrine of piecing the veil of corporate entity, when valid ground exists , the following
effects would be produced: (1) legal fiction that a corporation is an entity with a juridical personality
separate and distinct from its members or stockholders may be disregarded (2) in such cases, the
corporation will be considered as a mere association of person (3) the members or stockholders of
the corporation will be considered as the corporation, making them liable directly. It is only
applicable when corporate fiction is: (1) used to defeat public convenience, justify wrong, protect
fraud, or defend crime (2) made as a shield to confuse legitimate issued (3) where a corporation is
the mere alter ego or business conduit of a person (4) where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality., agency , conduit
or adjunct of another corporation.
The SC is of the opinion that piecing the veil is not the proper remedy in order that the foreclosure
proceedings may be declared a nullity under the circumstances in the case at bar. Petitioners are
merely seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained
without having to disregard the aforesaid corporate fiction attaching to the respondent corporations.
Petitioners also fail to establish by clear and convincing evidence that private respondents were
purposely formed and operated, with the sole intention of defrauding the latter. The facts showed
that the surety of ICP is good only for 12 months therefore the surety had already expired. The
failure of ICP to give notice renders ICP to have no right to foreclosure. In this case, piercing need not
be resorted to.
Q: Why is Umali seeking to pierce the corporate entity?
A: Umali is seeking to have the veil pierced because it would have shown that the contracts entered
into were fictitious and simulated, there being a fraudulent intent on the part of Bormaheco, ICP &
PM parts to acquire the property of Umali through the foreclosure of the mortgage by ICP. However,
the court belied such allegation because the mere fact that the business of two or more corporations
are interrelated is not a justification for disregarding their separate personalities, absent a sufficient
showing that the corporate entity was purposely used as a shield to defraud creditors and third
persons of their rights.
Q: Why are we studying Umali?
A: The allegations made by Umali were based on fraud and yet the main objective of the suit was to
annul the foreclosure of the mortgage. The Court found no reason to pierce since the main objective
was not in consonance with the remedy of piercing in a fraud case would do, which was to hold the
Board of Directors liable. Piercing is not allowed unless the remedy sought is to make the officer or
another corporation pecuniary liable for corporate debts.
Q: What if it was based on alter ego?
A: The probative factor show that no alter ego existed since there was no disrespect of the corporate
fiction, the corporations each having its own way of conducting business. Even if it may be that they
compliment one another in their business conduct, it does not form enough basis for their
Revised Bagtas Reviewer by Ve and Ocfe 2A 43
circumvention of any liability.
(c) Purpose of Piercing: Piercing is not allowed unless the remedy sought is to make the
officer or another corporation pecuniarily liable for corporate debts (?). Umali v. CA, 189
SCRA 529 (1990); aIndophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697
(1992).
INDOPHIL TEXTILE MILL WORKERS UNION v CALICA
Facts:
Indophil Union is a legitimate labor organization duly registered with the DOLE and the exclusive
bargaining unit of all rank and file employees of Indophil Textile Mills. On April 1987, the Union and
Indophil excecuted a CBA effective April 1, 1987 to March 31, 1990. On November 1987, Indophil
Acrylic was formed and registered with the SEC. In 1998, Acrylic became international and hired
workers according to its criteria and standards. Sometime in July 1989, the workers of Acrylic
unionize and a duly certified CBA was executed. In 1990, the Union claimed that the plant facilities
built and set up by Acyrlic should be considered as an extension or expansion of Indophil pursuant to
Sec. 1(c) of Art.1 of the CBA to wit: This agreement shall apply to all companies, facilities, and
installations and to any extension and expansion thereat. The union sough that Acrylic be considered
part of the bargaining unit.
Their contention is that the articles of incorporation of the two corporation establish that the two
entities are engaged in the same kind of business, which is the manufacture and sale of yarns of
various counts and kinds and of other materials of kindred character or nature. Furthermore, they
emphasize that the two corporations have practically the same incorporators, directors and officers.
Also the two corporation have their facilities in the same compound. That many of Indophil’s own
machineries such as dyeing machines, reeler, broiler, were transferred to and are now being used by
the Acrylic plant. That services of a number of units, departments or sections of private respondents
are provided by Acrylic and that the employees of Indophil are the same persons manning and
servicing the units of Acrylic. Both parties submitted the issue to LA Calica. Calica ruled for Indophil
and stated that Acrylic is not extension of Indophil an hence their CBA does not extend to the
employees of Acrylic.
Issue: WON Acrylic is a separate and distinct entity from Indophil for purposes of union
representation. WON the operations in Acrylic are an extension or expansion of Indophil.
Held:
Acrylic is not an alter ego or an adjunct or a business conduit of Indophil because it has a separate
legitimate business purpose. Indophil engages in the manufacture of yarns while Acrylic is to
manufacture, buy, sell at wholesale basis, barter, import, export and otherwise deal in various kinds
of yarns. Two corporations cannot be treated as single bargaining unit just because they have
related businesses.
The Union seeks to pierce the veil of Acrylic alleging that the corporation is a device to evade the
application of the CBA. However the CA held that said doctrine is only used on the existence of valid
grounds. In the case at bar, the fact that the business of Indophil and Acrylic are related that
sometimes the employees of Indophil are the same persons manning and providing for auxiliary
services to the units of Acrylic, and that the physical plants, offices, and facilities are situated in the
same compound. It is the SC’s considered opinion that these facts are not sufficient to justify the
piercing of the corporation veil of Acrylic. Furthermore, the legal entity is disregarded only if sought
to hold the officers and stockholders liable. In the instant case, the Union does not seek relief from
Indophil.
LA CAMPANA COFFEE FACTORY v KAISAHAN NG MANGGAGAWA
Facts:
Tan Tong since 1932 has been engaged in the buying and selling gawgaw under the trade
name La Campana Gawgaw Packing. In 1950, Tan Tong and members of his family organized
the family corporation. La Campana Coffee Factory with its principal office located in Gawgaw
Packing. Prior to said information, Tan Tong entered into a CBA with the labor union of La
Campana Gawgaw. Later on, his employees formed Kaisahan ng mga Manggagawa ng La
Campana with an authorization from the DOLE to become an affiliate of the larger union.
Kaisahan with 66 members presented a demand for higher wages and more privileges to La
Campana Starch and Coffee Factory. The demand was not granted and the DOLE certified the
issue to the CIR. La Campana filed a motion to dismiss alleging that the action was directed
against two different entities with distinct personalities. This was denied, hence this petition.

Held:

La Compana Gawgaw and La Campana Factory are operating under one single management or as
one business though with two trade names. The coffee factory is a corporation and by legal fiction,
an entity separate and apart from the persons composing it namely, Tan Tong and his family.
However, the concept of separate corporate personality cannot be extended to a point beyond
reason and policy when invoked in support of an end subversive of this policy and will be disregarded
by the courts.

A subsidiary company which is created merely as an agent for the latter may sometimes
be regarded as identical with the parent corporation especially if the stockholders or officers
of the two corporations are substantially the same or their systems of operation unified. The
facts showed that they had one management, one payroll prepared by the same person,
laborers were interchangeable, there is only one entity as shown by the signboard ad in
trucks, packages and delivery forms and the same place of business.

The attempt to make the two factories appear as two separate businesses when in reality
they are but one, is but a device to defeat the ends of the law and should not be permitted to
prevail.

WHY PIERCE? So that La Campana cannot evade the jurisdiction of CIR since La Campana Gawgaw
has only 14 employees and only 5 are members of Kaisahan.

CONTRASTING THE TWO CASES

Q: Why did the court not also pierce Indophil Acrylic and declare that it is a mere alter ego of Indophil
when in fact the same circumstances in La Campana exist?
A: It may seem that the facts and circumstances are nearly the same between the two cases but the
remedies are different. La Campana sought the protection of separate juridical personality so as it
may not fall under the jurisdiction of the CIR, there being a clear intent to be excused from the
coverage of Labor Laws which conferred the CIR’s jurisdiction over the issue at hand. Although there
was no intent to defraud, the creation of La Campana Coffee Factory was meant to excuse itself from
CIR jurisdiction. However, in Indophil the facts of the case show that there was no clear showing that
Indophil meant to use Acrylic as a means of circumventing Labor Laws. Altough the CBA between
Indophil and its union provides that any expansion of Indophil’s operations would also be covered by
the CBA, Acrylic is an altogether different business. What showed that there was no intent by
Indophil or Acrylic to circumvent labor laws is when Acrylic entered into a CBA with its own
employees. There was clear independence of action between the relation of Indophil and Acrylic as to
their respective employees, each constituting its own bargaining unit.

Q: Could Indophil be considered as have superseded La Campana?


A: CLV pointed out that were no mention of La Campana in the ruling in Indophil whether in support
or in contravention of this doctrine. It can be seen that actually there are no points where Indophil
had substantially changed the ruling in La Campana. La Campana, in fact is being cited in cases
decided by the SC after Indophil, in the same way that Indophil continues to be cited. The criteria
that when it is established that between two corporations which have one set of managers or board
of directors; that there is a common stock ownership of both corporations; similarity of keeping
corporate books and in conducting their businesses are mere probative factors that are to be
considered when the corporate mask may be lifted and the corporate veil pierced. It does not mean
that if these factors exist, piercing is automatically required. There is for one no hard and fast rule
that can be laid down. So that in La Campana, the factors weighed heavily for piercing and in
Indophil, against piercing.
Revised Bagtas Reviewer by Ve and Ocfe 2A 45
Piercing is not available when personal obligations of an individual are to be enforced
against the corporation (?) Robledo v. NLRC, 238 SCRA 52 (1994).
“The rationale behind piercing a corporation’s identity in a given case is to remove
the barrier between the corporation from the persons comprising it to thwart the
fraudulent and illegal schemes of those who use the corporate personality as a shield for
undertaking certain proscribed activities. However, in the case at bar, instead of holding
certain individuals or person responsible for an alleged corporate act, the situation has
been reversed. It is the petitioner as a corporation which is being ordered to answer for
the personal liability of certain individual directors, officers and incorporators concerned.
Hence, it appears to us that the doctrine has been turned upside down because of its
erroneous invocation.” aFrancisco Motors Corp. v Court of Appeals, 309 SCRA 72 (1999).
Piercing doctrine is meant to prevent fraud, and cannot be employed when the net
result would be to perpetrate fraud or a wrong. Gregorio Araneta, Inc. v. Tuason de
Paterno and Vidal, 91 Phil. 786 (1952).
The theory of corporate entity was not meant to promote unfair objectives or
otherwise, nor to shield them. Villanueva v. Adre, 172 SCRA 876 (1989).
(d) Basis Must Be Clear Evidence: To disregard the separate juridical personality of a
corporation, it is elementary that the wrongdoing cannot be presumed and must be
clearly and convincingly established. The organization of the corporation at the time
when the relationship between the landowner and the developer were still cordial cannot
be used as a basis to hold the corporation liable later on for the obligations of the
landowner to the developer under the mere allegation that the corporation is being used
to evade the performance of obligation by one of its major stockholders. Luxuria
Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999).
The mere assertion by a Filipino litigant against the existence of a “tandem”
between two Japanese corporations cannot be the basis for piercing, which can only be
applied by showing wrongdoing by clear and convincing evidence. Marubeni Corp. v.
Lirag, 362 SCRA 620 (2001).
To disregard the separate juridical personality of a corporation, the wrongdoing must
be clearly and convincingly established. It cannot be presumed. In this case, the Court
finds that the Remington failed to discharge its burden of proving bad faith on the part
of Marinduque Mining and its transferees in the mortgage and foreclosure of the subject
properties to justify the piercing of the corporate veil. DBP v. Court of Appeals, 363 SCRA
307 (2001).
The party seeking for the piercing of the corporate veil has the burden of presenting
clear and convincing evidence to justify the setting aside of the separate corporate
personality rule. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).
Application of the doctrine of piercing the corporate veil should be done with caution.
A court should be mindful of the milieu where it is to be applied. It must be certain that
the corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. The wrongdoing must be clearly
and convincingly established; it cannot be presumed. Otherwise, an injustice that was
never unintended may result from an erroneous application. PNB v. Andrada Electric &
Engineering Co., 381 SCRA 244 (2002).
(e) Not Applicable to Theorizing: Piercing of the veil of corporate fiction is not allowed
when it is resorted under a theory of co-ownership to justify continued use and
possession by stockholders of corporate properties. aBoyer-Roxas v. Court of Appeals,
211 SCRA 470 (1992).
 The piercing doctrine is an equitable remedy available only to persons outside the
corporation. It cannot be availed of stockholders within the corporation forming part of the
corporation. In comparison, CLV uses the Story of the Wall. This wall is the main doctrine,
designed both to protect the stockholders by virtue of the attribute of limited liability and to
hide from prying eyes the inner workings of the corporation. Stockholders are inside these
walls. Piercing the veil of corporate fiction is like a battering ram that creates a hole through
this wall to allow third persons to look into the corporation to see if there is a wrong
committed inside those walls. A stockholder being inside the fort are afforded other remedies,
they have intra-corporate remedies to avail of.
The piercing doctrine cannot be availed of to dislodge from SEC’s jurisdiction a
petition for suspension of payments filed under P.D. 902-A, on the ground that the
petitioning individuals should be treated as the real petitioners to the exclusion of the
petitioning corporate debtor. “The doctrine of piercing the veil of corporate fiction
heavily relied upon by the petitioner is entirely misplaced, as said doctrine only applies
when such corporate fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime.” Union Bank v. Court of Appeals, 290 SCRA 198 (1998).
(f) Applicable to “Third-Parties”:
That respondents are not stockholders of the sister corporations does not make
them non-parties to this case, since it is alleged that the sister corporations are mere
alter egos of the directors-petitioners, and that the sister corporations acquired the
properties sought to be reconveyed to FGSRC in violation of directors-petitioners’
fiduciary duty to FGSRC. The notion of corporate entity will be pierced and the
individuals composing it will be treated as identical if the corporate entity is being used
as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego,
an adjunct, or a business conduit for the sole benefit of the stockholders. aGochan v.
Young, 354 SCRA 207 (2001).
(g) Piercing is a power belonging to the court and cannot be assumed improvidently by a
sheriff (?). Cruz v. Dalisay, 152 SCRA 482 (1987).
3. Consequences and Types of Piercing Cases: (Umali v. CA, 189 SCRA 529 [1990])
(a) Application of the doctrine to a particular case does not deny the corporation of legal
personality for any and all purposes, but only for the particular transaction or instance,
or the particular obligation for which the doctrine was applied. Koppel (Phil.) Inc. v.
Yatco, 77 Phil. 496 (1946); Tantoco v. Kaisahan ng Mga Manggagawa sa La Campana,
106 Phil. 198 (1959); Francisco v. Mejia, 362 SCRA 738 (2001).
(b) Classification of Piercing Cases:
Rundown on Piercing Application: This Court pierced the corporate veil to ward
off a judgment credit, to avoid inclusion of corporate assets as part of the estate of the
decedent, to escape liability arising for a debt, or to perpetuate fraud and/or confuse
legitimate issues either to promote or to shield unfair objectives to cover up an
otherwise blatant violation of the prohibition against forum shopping. Only is these and
similar instances may the veil be pierced and disregarded. PNB v. Andrada Electric &
Engineering Co., 381 SCRA 244 (2002).
(i) Fraud Piercing: When corporate entity used to commit fraud or do a wrong
(ii) Alter-ego Piercing: When corporate entity merely a farce since the corporation
is merely the alter ego, business conduit, or instrumentality of
a person or another entity
(iii) Equity Cases: When piercing the corporate fiction is necessary to achieve justice
or equity.
The three cases may appear together in one application. See R.F. Sugay & Co., v.
Reyes, 12 SCRA 700 (1964).

4. Fraud Cases:
When the legal fiction of the separate corporate personality is abused, such as when the
same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the
corporate veil. aFrancisco v. Mejia, 362 SCRA 738 (2001).
In accordance with the foregoing rule, this Court has disregarded the separate
Revised Bagtas Reviewer by Ve and Ocfe 2A 47
personality of the corporation were the corporate entity was used to escape liability to third
parties. In this case, however, we do not find any fraud on the part of the Marinduque
Mining and its transferees to warrant the piercing of the corporate veil. DBP v. Court of
Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001).
a) Acts by Controlling Shareholder: Where a stockholder, who has absolute control
over the business and affairs of the corporation, entered into a contract with another
corporation through fraud and false representations, such stockholder shall be liable
soidarily with co-defendant corporation even when the contract sued upon was entered
into on behalf of the corporation. aNamarco v. Associated Finance Co., 19 SCRA 962
(1967).
 CLV: As a general rule, an agent acting within the scope of his authority cannot be held liable
for acts done in behalf of the principal. However, when a wrong done by a corporation is
through a person in its behalf, piercing makes both of them liable. In fact, an agents who
commits a crime or fraud can be held liable despite the agency relation.
Where the corporation is used as a means to appropriate a property by fraud which
property was later resold to the controlling stockholders, then piercing should be
allowed. Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000).
(b) Avoidance of Taxes: The plea to pierce the veil of corporate fiction on the allegation
that the corporations true purpose is to avoid payment by the incorporating spouses of
the estate taxes on the properties transferred to the corporations: “With regard to
their claim that Ellice and Margo were meant to be used as mere tools for the
avoidance of estate taxes, suffice it to say that the legal right of a taxpayer to reduce
the amount of what otherwise could be his taxes or altogether avoid them, by means
which the law permits, cannot be doubted.” Gala v. Ellice Agro-Industrial Corp., 418
SCRA 431 (2003).
(c) Avoidance of Contractual or Civil Liabilities: One cannot evade civil liability by
incorporating properties or the business. aPalacio v. Fely Transportation Co., 5 SCRA
1011 (1962).
 Q: Why should a case be classified as a fraud case, an alter ego case, etc.?
A: In fraud cases, it is necessary that the petitioners seek to enforce the claim against the
stockholders or corporate officers. Since, in fraud cases only one act of fraud is necessary to
hold them liable whereas in an alter ego case, a series of transaction has to proven before
they may be held liable.
When used to avoid a contractual commitment against non-competition. aVilla Rey
Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).
(e) Avoiding Legal Restrictions:
The corporate veil cannot be used to shield an otherwise blatant violation of the
prohibition against forum-shopping. Shareholders, whether suing as the majority in
direct actions or as the minority in a derivative suit, cannot be allowed to trifle with
court processes, particularly where the corporation itself has not been remiss in
vigorously prosecuting or defending corporate causes and in using and applying
remedies available to it. First Philippine International Bank v. Court of Appeals, 252
SCRA 259 (1996).
(d) Parent-Subsidiary Relations; Affiliates: (Commissioner of Internal Revenue
v. Norton and Harrison, 11 SCRA 704, [1954]; Tomas Lao Construction v. NLRC, 278
SCRA 716 [1997]).
 Q: Why is there an inordinate showing of the alter ego elements?
A: In cases of parent-subsidiary relations, it is necessary that the factual circumstances be
considered in order to distinguish between a case of fraud or alter ego. There may be an
inordinate showing of alter ego elements but that does not necessarily make it an alter ego
case. Therefore, alter ego in fraud cases must be distinguished from pure alter ego. In fraud
cases, the alter ego concept pertains to employing the corporation even for a single
transaction to do evil while in pure alter ego cases, the courts go into systematic findings of
utter disregard and disrespect of the separate juridical personality of the corporation.
(e) Guiding Principles in Fraud Cases:
4Why is there inordinate showing of alter-ego elements? 3
• There must have been fraud or an evil motive in the affected
transaction, and the mere proof of control of the corporation by
itself would not authorize piercing; and
• The main action should seek for the enforcement of pecuniary
claims pertaining to the corporation against corporate officers or
stockholders.

5. Alter-Ego Cases:
(a) Factual Basis: The question of whether a corporation is a mere alter ego is a purely
one of fact, and the burden is on the party who alleges it. PNB v. Andrada Electric &
Engineering Co., 381 SCRA 244 (2002); MR Holdings,Ltd. V. Bajar, 380 SCRA 617
(2002); Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); Concept Builders, Inc.
v. NLRC, 257 SCRA 149 (1996).
(b) Using Corporation as Conduit or Alter Ego:
Where the capital stock is owned by one person and it functions only for the benefit
of such individual owner, the corporation and the individual should be deemed the
same. aArnold v. Willets and Patterson, Ltd., 44 Phil. 634 (1923).
When corporation is merely an adjunct, business conduit or alter ego of another
corporation, the fiction of separate and distinct corporation entities should be
disregarded. Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988).
Where a debtor registers his residence to a family corporation in exchange of
shares of stock and continues to live therein, then the separate juridical personality
may be disregarded. PBCom v. CA, 195 SCRA 567 (1991).
Neither has it been alleged or proven that Merryland is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency
conduit or adjunct of Cardale. Even assuming that the businesses of Cardale and
Merryland are interrelated, this alone is not justification for disregarding their separate
personalities, absent any showing that Merryland was purposely used as a shield to
defraud creditors and third persons of their rights. Francisco v. Mejia, 362 SCRA 738
(2001).
Use of nominees to man the corporation for the benefit of the controlling
stockholder. Marvel Building v. David, 9 Phil. 376 (1951).

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


Employment of same workers; single place of business, etc., may indicate alter ego
situation. aLa Campana Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160
(1953); aShoemart v. NLRC, 225 SCRA 311 (1993).
Where two business enterprises are owned, conducted, and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third persons,
disregard the legal fiction that two corporations are distinct entities and treat them as
identical. Sibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992).
Where corporate fiction was used to perpetrate social injustice or as a vehicle to
evade obligations or confuse the legitimate issues (as in this case where the actions of
management of the two corporations created confusion as to the proper employer of
claimants), it would be discarded and the two corporations would be merged as one.
Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).
Mixing of personal accounts with corporate bank deposit accounts. Ramirez
Revised Bagtas Reviewer by Ve and Ocfe 2A 49
Telephone Corp. v. Bank of America, 29 SCRA 191 (1969).
(d) Avoidance of taxes: aYutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160
(1961); Liddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961).
YUTIVO & SONS INC. v CTA
Facts:
Yutivo is a domestic corporation engaged in the importation and sale of hardware supplies and
equipment. It bought a number of cars and trucks from General Motors Overseas Corporation. GM
paid sales tax on original sales on the basis of its selling price to Yutivo. Yutivo paid no further tax on
its sales to the public. Southern Motors was then organized to engage in the business of selling cars,
trucks, and spare parts with capital stock of 10,000 shares, 2,500 of which were subscribed in equal
proportion by the children of Yutivo’s incorporators. Under this set-up, Yutivo would purchase the
cars and tucks from GM then sell the same to SM which in turn sold them to the general public. Then
GM withdrew its operations from the Philippines. Yutivo took over the importation of trucks and cars.
It likewise continued to have the previous arrangement of selling exclusively to SM which in turn paid
no such sales tax on its sales to the general public. The CIR made an assessment upon Yutivo and
demanded a sum representing deficiency sales tax plus surcharges claiming that the taxable sales
were the retail sales should be between SM to the general public and not the sale at wholesale made
by Yutivo to SM since the two were one and the same corporation, SM being a mere subsidiary of
Yutivo. CTA affirmed such a ruling and further stated that there was no legitimate purpose in the
organization of SM – apparently organized to evade the payment of taxes – and that it was owned
and controlled by Yutivo and is a mere branch, adjunct, conduit, instrumentality or alter ego of
Yutivo.
Issue: WON SM is a mere alter ego of Yutivo meant to defraud government of lawful tax revenues?
Held:
SM was not organized for the purpose of defrauding the government of lawful tax revenues because:
(1) The intention to minimize taxes as in tax evasion when used in the context of fraud, must be
proven to exist by clear and convincing evidence amounting to more than the mere preponderance
of evidence. The evidence of the collector falls short of such standard.
(2) SM was organized at a time when there was not yet tax to evade, when GM was still the importer
and was the one paying the sales tax.
(3) The transactions between Yutivo and SM were and have always been in the open, embodied in
private and public documents, constantly subject to inspection by tax authorities.
(4) A taxpayer has the legal right to decrease the amount of what otherwise would be his taxes
altogether avoid them by means which the law permits.
(5) However, SM was actually owned and controlled by Yutivo to make it a mere subsidiary or branch
of the latter. SM was organized by the leading stockholders of Yutivo. Yutivo was at all times in
control if the majority stock of SM. The principal officers of both corporations are identical. Thus, the
business, financial and management policies of both corporations could be directed towards common
ends. The funds of SM are directly remitted to Yutivo and subject to withdrawal only of Yutivo, SM’s
resources being under Yutivo’s control. The accounting system maintained by Yutivo shows that it
maintained a high degree of control over SM accounts. All transactions between Yutivo and SM are
recorded and effected by mere debit or credit entries against the reciprocal account maintained in
their respective books of accounts and indicate the dependency of SM as a branch of Yutivo.
(6) Thus, SM being a mere instrumentality of Yutivo, the CTA correctly disregarded the technical
defense of separate corporate entity in order to arrive at the true liability of Yutivo.
Q: Can tax avoidance not be considered as a crime thus perpetuated in fraud rather than an alter
ego case? A: The Court had in this case ruled as to the legitimacy of a
corporation to act as to seek means to decrease its tax liability. The difference between Yutivo and
Tan Boon Kong is that in the latter, the court found evidence that Tan Boon Kong acted beyond the
scope of his authority. In the former, evidence was seen to be insufficient as to establish a willful
desire to evade taxes.
(e) Thinly-capitalized corporations: aMcConnel v. CA, 1 SCRA 722 (1961).
 The fact that a corporation has no adequate capital enough basis for piercing. Such
pronouncement limits the advantage of creating a corporation. For example, in cases where
leveraging is undertaken which is considered as a legitimate business practice.
(f) 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 Int’l Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990).
If used to perform legitimate functions, a subsidiary’s 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).
(g) Summary of Probative Factors: aConcept Builders, Inc. v. NLRC, 257 SCRA 149
(1996); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001); Velarde v. Lopez, 419 SCRA
422 (2004).
CONCEPT BUILDERS Inc. v NLRC
Facts:
Concept Builders is engaged in the construction business. Private respondents are employed by the
company as laborers, carpenters and riggers. In November of 1981, private respondents were served
individual notices of termination by the company. It stated that their contract had already expired.
The NLRC discovered that the project for which they were hired was not yet even finished. In addition
to this, Concept had to hire subcontractors whose works are the same as private respondents. A writ
of execution was issued which was partially satisfied through the garnishment of money from MWSS
which is a debtor of Concept and the balance was to be collected from Concept directly. But the
sheriff reported that when the writ was to be served the guard on duty refused it on the ground that
Concept no longer owned the premises and was now occupied by Hydro Pipes, which had the same
Board of Directors as Concept.
Held:
The veil may be pierced when it its just the alter ego of a person of another corporation.
The conditions under which the juridical entity may be disregarded vary according to the peculiar
facts and circumstances of each case. No hard and fast rule can be laid down, but there are some
probative factors of identity that will justify the application of the doctrine.
Summary probative factors: (1) stock membership by one ore common ownership of both (2) identity
of directors and officers (management) (3) manner of keeping corporate books and records
(management) (4) methods of conducting business (management).
While petitioners claimed that it ceased operations in 1986, it filed an Information Sheet with the SEC
in 1987 stating that its office address is their old address. Both information sheets were filed by
Virgilio Casino, the same corporate secretary. They had the same President, Board of Directors and
substantially the same subscribers.
(h) Guiding Principles in Alter-Ego Cases:
• Doctrine applies even in the absence of evil intent, because of
the direct violation of a central corporate law principle of
separating ownership from management;
• Doctrine in such cased is based on estoppel: if stockholders do
not respect the separate entity, others cannot also be expected
Revised Bagtas Reviewer by Ve and Ocfe 2A 51
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: aLipat 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).
(b) When used to raise technicalities. Emilio Cano Ent. v. CIR, 13 SCRA 291 (1965).

7. Due Process Clause


(a) Need to bring a new case against the officer. aPadilla v. Court of Appeals, 370 SCRA
208 (2001); McConnel v. Court of Appeals, 1 SCRA 723 (1961).
A suit against individual shareholders in a corporation is not a suit against the
corporation. Failure to implead the corporations as defendants and merely annexing a
list of such corporations to the complaints is a violation of due process for it would in
effect be disregarding their distinct and separate personality without a hearing. PCGG
v. Sandiganbayan, 365 SCRA 538 (2001).
Although both lower courts found sufficient basis for the conclusion that PKA and
Phoenix Omega were one and the same, and the former is merely a conduit of the
other the Supreme Court held void the application of a writ of execution on a judgment
held only against PKA, since the RTC obtained no jurisdiction over the person of
Phoenix Omega which was never summoned as formal party to the case. The general
principle is that no person shall be affected by any proceedings to which he is a
stranger, and strangers to a case are not bound by the judgment rendered by the
court. Padilla v. Court of Appeals, 370 SCRA 208 (2001).
(b) When corporate officers are sued in their official capacity when the corporation was
not made a party, the corporation is not denied due process. Emilio Cano Enterprises
v. CIR, 13 SCRA 291 (1965).
(c) Provided that evidential basis has been adduced during trial to apply the piercing
doctrine. aJacinto v. Court of Appeals, 198 SCRA 211 (1991); Arcilla v. Court of
Appeals, 215 SCRA 120 (1992).
V. xCLASSIFICATIONS OF CORPORATIONS
1. In Relation to the State:
a) Public Corporation (Sec. 3, Act No. 1459).
- one formed or organized for the government or a portion of the state
- its purpose is for general good and welfare

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

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


- one formed for some private purpose, benefit or end.
Government’s majority shares does not make an entity a public corporation. National
Coal Co., v. Collector of Internal Revenue, 46 Phil. 583 (1924).
A corporation is created by operation of law under the Corporation Code while a
government corporation is normally created by special law referred to often as a charter.
Bliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271 (1994).
The test to determine whether a corporation is government owned or controlled, or
private in nature is simple. Is it created by its own charter for the exercise of a public
function, or by incorporation under the general corporation law? Those with special
charters are government corporations subject to its provisions, and its employees are
under the jurisdiction of the Civil Service Commission, and are compulsory members of
the GSIS. Camparedondo v. NLRC, 312 SCRA 47 (1999)
While public benefit and public welfare may be attributable to the operation of the
Bases Conversion and Development Authority (BCDA), yet it is certain that the functions it
performs are basically proprietary in nature—the promotion of economic and social
development of Central Luzon, particularly, and the country’s goal for enhancement.
Therefore, the rule that prescription does not run against the State will not apply to BCDA,
it being said that when title of the Republic has been divested, its grantees, although
artificial bodies of its own creation, are in the same category as ordinary persons.
Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001).
Although Boy Scouts of the Philippines does not receive any monetary or financial
subsidy from the Government, and its funds and assets are not considered government in
nature and not subject to audit by the COA, the fact that it received a special charter from
the government, that its governing board are appointed by the Government, and that its
purpose are of public character, for they pertain to the educational, civic and social
development of the youth which constitute a very substantial and important part of the
nation, it is not a public corporation in the same sense that municipal corporation or local
governments are public corporation since its does not govern a portion of the state, but it
Revised Bagtas Reviewer by Ve and Ocfe 2A 53
also does not have proprietary functions in the same sense that the functions or activities
of government-owned or controlled corporations, is may still be considered as such, or
under the 1987 Administrative Code as an instrumentality of the Government, and it
employees are subject to the Civil Service Law. Boy Scouts of the Philippines v. NLRC, 196
SCRA 176 (1991).
But being a GOCC makes it liable for laws and provisions applicable to the Government
or its entities and subject to the control of the Government. Cervantes v. Auditor General,
91 Phil. 359 (1952).
Beyond cavil, a GOCC has a personality of its own, distinct and separate from that of
the government, and the intervention in a transaction of the Office of the President
through the Executive Secretary does not change the independent existence of a
government entity as it deals with another government entity. PUP v. Court of Appeals,
368 SCRA 691 (2001).
The doctrine that employees of GOCCs, whether created by special law or formed as
subsidiaries under the general corporation law are governed by the Civil Service Law and
not by the Labor Code, has been supplanted by the 1987 Constitution. The present
doctrine in determining whether a GOCC is subject to the Civil Service Law is the manner
of its creation, such that government corporations created by special charter are subject
the Civil Service Law, while those incorporated under the general corporation law are
governed by the Labor Code. PNOC-Energy Development Corp. v. NLRC, 201 SCRA 487
(1991); Davao City Water District v. Civil Service Commission, 201 SCRA 593 (1991).
Section 31 of Corporation Code (Liability of Directors and Officers) is applicable to
corporations which have been organized by special charters since Sec. 4 of Corporation
Code renders the provisions supplementarily applicable to all corporations, including those
with special or individual charters, such as cooperatives organized under P.D. 269, so long
as those provisions are not inconsistent with such charters. Benguet Electric Cooperative,
Inc. v. NLRC, 209 SCRA 55 (1992).
Water districts can validly exists as corporate entities under PD 198, and provided they
are government-owned or controlled, and their board of directors and other personnel are
government employees subject to civil service laws and anti-graft laws. Feliciano v.
Commission on Audit, 419 SCRA 363 (2004).
2. As to Place of Incorporation:
(a) Domestic Corporation
- incorporated in the Philippines

(b) Foreign Corporation (Sec. 123)


- Sec. 123 Definition and rights of foreign corporations – For the purposes of this
Code, a foreign corporation is one formed, organized or existing under any laws other
than those of the Philippines and whose laws allow Filipino citizens and corporations
to do business in its own country or state. It shall have the right to do business in its
own country or state. It shall have the right to transact business in the Philippines
after it shall have obtained a license to transact business in this country in
accordance with this Code and a certificate of authority from the appropriate
government authority.
- incorporated in another country and that country grants the same rights to Filipinos in
terms of doing business there; it shall have the right to transact business in the Philippines
after it shall have obtained a license to transact business in this country in accordance
with this code & a certificate of authority from the appropriate government agency ( SEC
license after obtaining BOI certificate )

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

Religious corporations shall be governed by this Chapter and by the


general provisions on non-stock corporations insofar as they may be
applicable.
Section 116. Religious societies. - Any religious society or religious
order, or any diocese, synod, or district organization of any religious
denomination, sect or church, unless forbidden by the constitution,
rules, regulations, or discipline of the religious denomination, sect or
church of which it is a part, or by competent authority, may, upon
written consent and/or by an affirmative vote at a meeting called for
the purpose of at least two-thirds (2/3) of its membership, incorporate
for the administration of its temporalities or for the management of its
affairs, properties and estate by filing with the Securities and Exchange
Commission, articles of incorporation verified by the affidavit of the
presiding elder, secretary, or clerk or other member of such religious
society or religious order, or diocese, synod, or district organization of
the religious denomination, sect or church, setting forth the following:

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


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

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


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

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


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

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


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

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


established and located, which place must be within the Philippines;
and
The names, nationalities, and residences of the trustees elected by
the religious society or religious order, or the diocese, synod, or district
organization to serve for the first year or such other period as may be
prescribed by the laws of the religious society or religious order, or of
the diocese, synod, or district organization, the board of trustees to be
not less than five (5) nor more than fifteen (15). (160a)

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

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


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

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


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

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


laws, the board of trustees of incorporated schools, colleges, or other
institutions of learning shall, as soon as organized, so classify
themselves that the term of office of one-fifth (1/5) of their number
shall expire every year. Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term, shall hold office
only for the unexpired period. Trustees elected thereafter to fill
vacancies caused by expiration of term shall hold office for five (5)
years. A majority of the trustees shall constitute a quorum for the
transaction of business. The powers and authority of trustees shall be
defined in the by-laws.
For institutions organized as stock corporations, the number and
term of directors shall be governed by the provisions on stock
corporations. (169a)

(d) Charitable, Scientific or Vocational Corporations


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

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


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

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


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

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


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

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


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

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


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

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


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

The articles of incorporation may include any other provision not


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

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


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

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

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


sole may purchase and hold real estate and personal property for its
church, charitable, benevolent or educational purposes, and may
receive bequests or gifts for such purposes. Such corporation may sell
or mortgage real property held by it by obtaining an order for that
purpose from the Court of First Instance of the province where the
property is situated upon proof made to the satisfaction of the court
that notice of the application for leave to sell or mortgage has been
given by publication or otherwise in such manner and for such time as
said court may have directed, and that it is to the interest of the
corporation that leave to sell or mortgage should be granted. The
application for leave to sell or mortgage must be made by petition,
duly verified, by the chief archbishop, bishop, priest, minister, rabbi or
presiding elder acting as corporation sole, and may be opposed by any
member of the religious denomination, sect or church represented by
the corporation sole: Provided, That in cases where the rules,
regulations and discipline of the religious denomination, sect or church,
religious society or order concerned represented by such corporation
sole regulate the method of acquiring, holding, selling and mortgaging
real estate and personal property, such rules, regulations and
discipline shall control, and the intervention of the courts shall not be
necessary. (159a)
Revised Bagtas Reviewer by Ve and Ocfe 2A 57
Section 114. Filling of vacancies. - The successors in office of any chief
archbishop, bishop, priest, minister, rabbi or presiding elder in a
corporation sole shall become the corporation sole on their accession
to office and shall be permitted to transact business as such on the
filing with the Securities and Exchange Commission of a copy of their
commission, certificate of election, or letters of appointment, duly
certified by any notary public.

During any vacancy in the office of chief archbishop, bishop, priest,


minister, rabbi or presiding elder of any religious denomination, sect or
church incorporated as a corporation sole, the person or persons
authorized and empowered by the rules, regulations or discipline of the
religious denomination, sect or church represented by the corporation
sole to administer the temporalities and manage the affairs, estate and
properties of the corporation sole during the vacancy shall exercise all
the powers and authority of the corporation sole during such vacancy.
(158a)

Section 115. Dissolution. - A corporation sole may be dissolved and its


affairs settled voluntarily by submitting to the Securities and Exchange
Commission a verified declaration of dissolution.

The declaration of dissolution shall set forth:

1. The name of the corporation;

2. The reason for dissolution and winding up;

3. The authorization for the dissolution of the corporation by the


particular religious denomination, sect or church;

4. The names and addresses of the persons who are to supervise the
winding up of the affairs of the corporation.
Upon approval of such declaration of dissolution by the Securities and
Exchange Commission, the corporation shall cease to carry on its
operations except for the purpose of winding up its affairs.

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

5. As to Legal Status:
(a) De Jure Corporation
(b) De Facto Corporation (Sec. 20)
Section 20. De facto corporations. - The due incorporation of any
corporation claiming in good faith to be a corporation under this Code,
and its right to exercise corporate powers, shall not be inquired into
collaterally in any private suit to which such corporation may be a
party. Such inquiry may be made by the Solicitor General in a quo
warranto proceeding.
(c) Corporation by Estoppel (Sec. 21)

3Overturning affirmed in Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984); Republic v. IAC, 168
SCRA 165 (1988).
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 non-stock corporation are called members.
(a) Stock Corporation
(b) Non-Stock Corporation
Revised Bagtas Reviewer by Ve and Ocfe 2A 59

VI. CORPORATE CONTRACT LAW


See relevant portion of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No. 2,
June 1994)
INTRODUCTION: Corporate Contract Law à contracts shaped by corporate law.
 Form v. substance à substance prevails
 In the levels of the legal relationship, corporate contract law is used to resolve
issues between the different levels – between the juridical entity level, the contract
relationship level and the business entity level.
Q: Why is there a need to distinguish corporate contract law from contract law?
A: There is a need to distinguish between the two because there are certain instances
where an application of corporate contract law principles are in direct conflict with
contract law principles. An example would be in the situation where a corporation is being
incorporated, the corporation code in certain instances recognize the binding effect of
contracts entered into in the pre-incorporation stage. But if contract law was strictly
applied such a contract would be void since it lacks one vital element which is consent of
the contracting parties. How does a corporation that does not exist yet give consent? This
is where corporate contract law find its relevance. The conflict between the juridical entity
level is reconciled with the contractual relationship level. (DOCTRINE: to validate the
contract entered into by the supposed corporation)
PROMOTER’S CONTRACT à C. BY ESTOPPEL à DE FACTO or DE JURE à DISSOLUTION
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 promoter’s contract principles from the corporation by estoppel doctrine?
A: In both the corporation does not exist. But in promoter’s 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 promoter’s 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 promoter’s 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 promoter’s stage there is no juridical personality until the SEC issues the certificate of
incorporation. Until the certificate is issued, the stage of the de facto corporation has not yet
been reached. Prior to the de facto corporation stage what then is the status of the contract
entered into by a promoter for and in behalf of the person or agent who had undertaken the
transaction?
A: Unenforceable. It is not binding upon the corporation because it has not given consent to the
authority of the person or agent who had undertaken the transaction.
Q: How can ratification be done?
A: Ratification can be done in two ways: (1) express ratification – a mere board resolution
making the corporation liable by accepting the contract and (2) implied ratification – by
accepting of benefits
(b) Nature of Pre-incorporation Agreements (Secs. 60 and 61; Bayla v. Silang Traffic
Co., Inc., 73 Phil. 557 [1942]).
 Sec. 60 Subscription contract – Any contract for the acquisition of unissued stocks in an
existing corporation or a corporation still to be formed shall be deemed as subscription within
the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or
some other contract.
 Sec. 61 Pre-incorporation subscription – A subscription f or shares of stock of a corporation
still to be formed shall be irrevocable for a period of at least six months from the date of
subscription unless all the other subscribers consent to the revocation, or unless the
incorporation of said corporation fails to materialize within said period or within a longer
period as may be stipulated in the contract of subscription: Provided, that no pre-
incorporation subscription may be revoked after the submission of the articles of
incorporation to the SEC.
CLV: Sec. 61 of the Corp. Code governs a pre-incorporation subscription agreement. Sec. 61 says
that a pre-incorporation subscription agreement is irrevocable. The only manner by which you
can revoke it is if ALL of the other subscribing stockholders consent to the revocation. Sec. 61 is a
clear demonstration of the fact that a promoter’s contract can be valid and even irrevocable. In
the case of a pre-incorporation subscription agreement that contract is valid because there are in
fact two parties. The party subscribed and all of the other parties who have subscribed to the
other incorporators and all of them bind themselves together to form the corporation. That is why
it is irrevocable unless the other party which is all of the other subscribers, agree.
(c) Theories on Liabilities for Promoter's Contracts (aCagayan Fishing Dev. Co., Inc. v.
Teodoro Sandiko, 65 Phil. 223 [1937]; aRizal Light & Ice Co., Inc. v. Public Service Comm.,
25 SCRA 285 [1968]; aCaram, Jr. v. CA, 151 SCRA 372 [1987]).
CAGAYAN FISHING DEVELOPMENT CO. INC. v. TEODORO SANDIKO

Facts: Manuel Tabora , as owner of four parcels of land in Cagayan mortgaged the said properties to
secure his loan – 1st mortgage to PNB: P8000; 2nd mortgage to PNB: P7000; and 3rd mortgage to
Bauzon: P2900 which was registered and annotated on the titles of the property. In 1930 Tabora sold
said parcels to Cagayan Fishing Development Co., said to be under process of incorporation, subject
to the mortgages and with the condition that title will not be transferred until the corporation has
paid Tabora’s indebtedness. Cagayan Fishing filed its Articles of Incorporation with the Bureau of
Commerce. The Board of Directors adopted a resolution authorizing its President Ventura to sell the
four parcels of land to Sandiko with the condition that he would shoulder the mortgage debts.
Sandiko issued promissory notes to that effect. When Sandiko failed to comply with the obligation,
the corporation filed a recovery suit. The lower court held that the contract is void since it was
entered into with a corporation that has no corporate existence at the time the properties were
transferred to it.
Issue: WON Sandiko can be held liable for the mortgage debt?
Held: The SC affirmed the decision of the TC. The fact of the matter is Sandiko cannot be held liable
for the mortgage debt since there was no valid sale of the property, since at the time when Cagayan
supposedly acquired the property, it still had no juridical personality to acquire property. There was
no transfer of lots from Tabora to Cagayan since Cagayan was only incorporated five months after
the sale.
1.) A corporation should have full and complete organization and existence as an entity before it can
enter into any kind of contract or transact any business. A corporation until organized has no being,
franchises or faculties nor do those engaged in bringing it into being have no power to bind it by
contract, unless so authorized by the charter.
Revised Bagtas Reviewer by Ve and Ocfe 2A 61
2.) The contract entered into was not between Tabora and the corporation instead it was between
Tabora, as owner and Tabora, wife, plus others, as promoters of a corporation, since the corporation
was still non-existent. These promoters could not have acted as agents for a projected corporation
since that which had no legal existence could have no agent. Although a corporation has no life until
organized, it does not mean that under no circumstances may the act of promoters of a corporation
be ratified by the corporation if and when subsequently organized. But said doctrine of ratification is
not applicable here.
3.) Cagayan could not have and did not acquire the four parcels of land. It follows that it did not
possess any reluctant right to dispose of them by sale to Sandiko. It was not even a de facto
corporation at the time of transfer so that it does not have the personality to enter into contracts.
4.) Some peculiar circumstances: (a) Tabora formed a corporation by himself, wife and others but
subscribed to P45,000 of P48,700 (capital stock subscribed); (b) the lands remained in Tabora’s
name despite the sale to the corporation and Sandiko regarded Tabora as the owner; (c) Ventura
signed the contract in behalf of Tabora; (d) P/N issued by Sandiko was payable to the corporation to
avoid being attached by Tabora’s creditors.
Q: Why are we studying Cagayan?
A: This case espouses the element of contract law which is the lack of the element of consent;
there being one party, the corporation, lacking a juridical personality; the contract was thus
declared void. Cagayan and Rizal provides us the doctrine that promoter’s contract must be
adopted and ratified by the corporation. If the act of the promoter’s is ratified then that act is
binding on the corporation.
CLV: The court here dismissed the action against Sandiko on the basis that at the time the properties
were sold to the corporation, it had no legal existence, therefore, it could not purchase anything.
Having bought nothing when it sold the said properties to Sandiko, it had in fact nothing to sell –
therefore there was no valid assumption of loans and neither were there promissory notes supported
by valid consideration.
Q: What if Sandiko was aware at the time that the contract was entered that the corporation did not
exist? What if the corporation invokes the doctrine of the corporation by estoppel so that Sandiko
could not raise the defense that at the time the fraud was committed, the corporation has no juridical
personality? A: Remember
that the doctrine of corporation by estoppel is only applicable if at least one of the parties knew that
a corporation existed when in fact it did not. In this case, the doctrine cannot apply because nobody
was in the belief that it existed at the time when fraud was being committed. Even Tabora himself
knew from the start that at the time of the transfer, the corporation did not exist.

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

Facts: Rizal Light and Ice Co. Inc. is a domestic corporation granted by the Public Service
Commission, a certificate of public convenience for the installation, operation and management of an
electric light, heat, and power service in Morong, Rizal. PSC required Rizal light to show cause why it
should not be penalized for violation of the conditions of its CPC and for failure to comply with
directions to raise its service voltage, etc. Rizal failed to comply so the PSC ordered the cancellation
and revocation of Rizal’s 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 Rizal’s CPC and forfeiture of its franchise.
PSC found that Rizal failed to comply with its directive and violated the conditions of the CPC. PSC
ordered the cancellation and revocation of Rizal’s CPC and the forfeiture of its franchise.
Later, Morong Electric, having been granted a franchise by the Municipality of Morong, filed with the
PSC an application for CPC. It later brought up the issue that Morong Electric had no legal personality
because its certificate of incorporation was issued only on October 17, 1962, while the application
was filed on September 10,1962. The motion to dismiss was denied on the ground that Morong
Electric is a de facto corporation. Thus, the PSC granted Morong Electric a CPC. Thus, this petition.
Held: Decision affirmed.
Under the law, before any CPC may be granted, three requisites must be present: (1) citizen of the
Philippines or the US or a corporation, co-partnership, association or joint-stock co. constituted and
organized under the laws of the Philippines, 60% at least of the stock or paid up capital of which
belongs entirely to citizens of the Philippines or the US; (2) financially capable of undertaking the
service; (3) prove that the operation of the public service proposed will promote public interest.
Petitioner contend that until a corporation has come into being, by the issuance of a certificate of
incorporation by the SEC, it cannot enter into any contract as a corporation and that its application
was null and void for being done prior to said issuance.
Its contention that Morong Electric, at the moment of application and grant of franchise did not yet
have a legal personality is correct. The legal existence of Morong Electric began upon issuance of the
certificate of incorporation before said time, the incorporators cannot be considered as de facto
corporation.
But the fact that Morong Electric at the moment of the application and grant of franchise was
granted does not render the franchise invalid because Morong later obtained its certificate of
incorporation and accepted the franchise in accordance with the terms and conditions thereof. While
a franchise cannot take effect until the grantee corporation is organized, the franchise, may,
nevertheless be applied for before the company is fully organized.
The incorporation of Morong and its acceptance of the franchise as shown by its action in prosecuting
the application filed with the PSC for the approval of said franchise, not only perfected a contract
between the Municipality of Morong and Morong Electric.
CLV: The theory used here by the SC to validate the contract is the continuing offer theory. A grant of
the franchise according to the SC, prior to the time that the corporation actually existed is like a
conditional grant that will be effective upon the corporation’s becoming a legal entity. Prior to that, it
is merely a continuing offer (on the part of the government).
CARAM Jr. v CA
Facts: Baretto and Garcia contracted the services of plaintiff Arellano to prepare a project study for
the organization of Filipinas Orient Airways. For failure to pay such services, Arellano sued the
corporation, Baretto and Garcia and petitioner Fermin and Rosa Caram as stockholders. They were
held solidarily liable with their co-defendants. Hence, this petition.
Peitioner Canson claims that said decision finds no support because they were mere investors in the
corporation later created. They should not be held solidarily liable with the corporation, who has a
separate juridical personality.
Held: Petition granted.
The services were acquired by virtue of the request of Baretto and Garcia so that a report can be
represented to financiers. Petitioners are not really involved in the initial steps that finally led to the
incorporation of Filipinas Orient Airways which were being directed by Baretto. Petitioners were
merely among the financiers whose interest was to be invited and who were persuaded to invest in
the airline.
There was no showing that Filipinas was a fictitious corporation and did not have a separate juridical
personality to justify making the petitioner, as principal stockholders, responsible for its obligations.
As a bona fide corporation, Filipinas should alone be liable for its corporate acts as duly authorized by
its officers and directors. Thus, petitioner could not have been personally liable for the compensation
claimed by Arellano.
CLV: The case tried to distinguish participation of a promoter from that of a promotee, in a venture
that actually becomes a corporation late on. Not every person, who participates in a venture that will
later become a corporation is a promoter.
Q: How do you distinguish a participation of a promoter from that of a promotee who acts
together to form a corporation?
A: The promotees are merely passive investors. A plan is given to them and if they like it, they
invest. Promoters are the active participants. They found and they organize the corporation.
According to Caram only the promoters should be liable. The SC held that a mere promotee
(those who merely subscribe to the shares of stock) should not be held liable for a promoter’s
Revised Bagtas Reviewer by Ve and Ocfe 2A 63
contract (just as an ordinary stockholder after a corporation has already been incorporated
cannot be held liable for more that beyond his investment).
CLV: Remember that once a corporation is formed, it usually follows that all promoter’s contracts get
ratified because the corporation actually arises out of these contracts. The corporation usually has no
choice. It rarely rejects the contracts for such would be commercial suicide. Once the corporation is
formed, the promoter’s contract of the corporation (if the latter accepts) and not the promoter’s. This
is why the promoter, once the corporation accepts, escapes liability. Remember that a promoter in a
promoter’s contract signs not in his own name but always for and in behalf of the corporation.
Q: What are the three theories in pre-incorporation contracts?
Theory #1 – Therefore, since a promoter’s contract is really the promoter’s own, the only reason why
the corporation, once it is organized becomes liable is when the corporation adopts it as its own. The
promoter’s real contract theory is one of the three theories by which to validate a contract prior to
incorporation.
Theory #2 – The 2nd theory as adopted by Jurisprudence is what is termed as a continuing offer. The
continuing offer that exists as to the time of the issuance of the certificate of incorporation. And if it
is accepted, then the offer means the acceptance, and there arises a contract.
Theory #3 – Once the promoter enters into a contract for and in behalf of a non-existent principal,
the promoter becomes personally liable like an agent who acts without authority from the principal.
The contract entered into then is valid unless the agent acted without authority. But it is possible for
the contract to be adopted by the principal by accepting it.
In all three instances, there is deemed to be a valid contract of a valid offer. That is the basis of the
promoter’s contract – so that the people will be willing to risk without much fear, investing their
money into a venture prior to the incorporation of a company or a corporation.
Q: Promoter v. Agent
A: The promoters are not the corporation itself, and although they may be regarded, for
certain purposes as sustaining to the corporation a relationship similar to that of an agent,
strictly speaking they cannot be regarded as such, there being at that time no existing
principal.
Q: Promoter v. Trustee
A: A promoter is also sometimes likened to a trustee. But a trustee is supposed to be entirely
disinterested, while persons engaged in promotion expect to receive and seek to obtain a liberal
award or profit for their initiative.
3. De Facto Corporation (Sec. 20)
 Sec. 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.
 Every corporation is deemed de jure until proven otherwise.
 De Jure Corporation – formed in accordance with law; perfectly incorporated; consequences:
separate juridical personality and perfect liability.
 De Facto Corporation – formed also in accordance with law but falls short of the requirements
provided by law. Such is awarded a separate juridical personality, it may thus enter into
contracts, it may sue and be sued (note: third parties may sue the corporation, incorporators
may sue but the corporation cannot sue). Note also that such has imperfect liability à only
the actors will be held liable. In proceeding against such, compliance with due process must
be had.
 The doctrine of de facto corporation applies as to the first level relationship (as between the
State and corporations) and also to the third level of relationship (as between third persons
and corporations). If it primarily concerns the first level, why does it draw its vitality from the
third level? Because without such, transactions shall have no effect but with such, despite the
defects, the contracts are valid and enforceable. But because of its primary relation to the
first level, third persons cannot question the legal personality of such de facto corporation.
Only the State through a quo warranto proceeding may do such.
 Not all corporations which lack elements are de facto corporations.
 Elements for Existence of De Facto Corporation:
1) Valid law under which it is incorporated: The Corporation Code
2) Attempt in good faith to incorporate – colorable compliance: The corporation must have filed
its Articles of Incorporation and the SEC duly issued a Certificate of Incorporation. The
minimum requirement for this requisite is the issuance of a certificate such that even if you
honestly believed that you incorporated (and all the other requisites are present), it is still not
a de facto corporation.
 The above is need to prove reliance in good faith.
 If any of the above element is absent can the principle be invoked by third persons?
No, but they may have a remedy under the principle of corporation by estoppel. Can
such be used in all instances? No, when both parties knew that no corporation existed,
such may not be invoked.
 Issuance of certificate of incorporation – minimum requirement under this number.
3) Assumption of corporate powers: Minimum requirement: election of the Board of Directors.
Q: Why must there be an election of the BoD?
A: The basic principle is a de facto corporation is a mutual going about of the transaction in good
faith. Since the corporation has a juridical personality, the only way by which it can be said that
there was good faith in entering a transaction is that there must be a BoD by which a corporation
can act. If there is no BoD there is no good faith on the part of the corporation because it knows
that it can only act through the BoD not on the part of the parties dealing with the corporation
because it knows that there must be BoD for the corporation to bind itself. This is also important
because this is by which the corporation manifests itself. (Remember: notion of a ghost – A ghost
manifest itself through signs, in the same manner, a corporation manifests its existence through
the existence of the BoD).
(a) Elements: aArnold Hall v. Piccio, 86 Phil. 634 (1950).

ARNOLD HALL v. PICCIO


Facts: Petitioner Arnold Hall and Bradley Hall and respondent Fred Brown, Emma Brown, Hipolita
Chapman and Ceferino Abella signed and acknowledged the Articles of Incorporation of the Far
Eastern Lumber and Commercial Co., Inc. a general lumber business. 23,428 shares of stock were
subscribed and fully paid for and certain properties were transferred to the corporation.
The Articles of Incorporation were filed with the SEC for the issuance of the corresponding certificates
of incorporation. The corporation proceeded to do business.
Pending the issuance of the certificates by SEC, the respondents Brown et. al. filed before the CFI of
Leyte a civil case entitled “Fred Brown v. Arnold Hall” alleging among others, that the Far Eastern
Lumber and Commercial Co. was an unregistered partnership; that they wish to have it dissolved
because of a bitter dissension among the members, mismanagement and fraud by the managers and
heavy financial losses. Hall, et. al. filed a motion to dismiss alleging the lack of jurisdiction by the
court. Judge Piccio ordered the dissolution of the company.
Held: The SEC had not issued the corresponding certificate of incorporation. All of them know or
ought to know that the personality of a corporation begins to exist only from the moment such
certificate is issued, not before. Here, the complaining associate have not represented to the others
that they were incorporated any more than the defendant had made similar representations. Since
nobody was led to believe anything to his prejudice and damage, the principle of estoppel does not
apply.
The section on de facto corporations does not apply in this case: (1) First, Far Eastern Lumber, even
its stockholders, may not probably claim in “good faith” to be a corporation not having obtained the
certificate of incorporation. Thus the immunity of collateral attack granted to corporations claiming in
Revised Bagtas Reviewer by Ve and Ocfe 2A 65
good faith to be a corporation does not apply here. (2) Second, this suit is not one in which the
corporation is a party. This is a litigation between stockholders of the alleged corporation for the
purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in
a private suit for its dissolution between stockholders, without intervention of the State.
CLV: The de facto doctrine was formulated to safeguard the security of commercial transactions
whenever they involve the corporation. Parties dealing with said corporation are secured by the fact
that the transactions entered into with said corporations may be sued upon and they can recover.
That is why aside from the other two requisites there must be a set of officers (i.e. assumption of
corporate powers) or directors because of the principle that a corporation can only act through its
officers.
 Effect as to both parties: (1) cannot deny its existence (2) liable as general partners.
 Not applicable to intra-corporate disputes, why? (1) it is a third level doctrine (2) public is not
expected to know, while the above are expected to know.
 If the other party knows of the non-existence of the corporation à there is no estoppel.
3. Corporation by Estoppel (Sec. 21; aSalvatierra v. Garlitos, 103 Phil. 757 [1958]; aAlbert v.
University Publishing Co., 13 SCRA 84 [1965]; Asia Banking Corp. v. Standard Products, 46
Phil. 145 [1924]; Madrigal Shipping Co., v. Ogilvie, 55 O.G. No. 35, p. 7331)
 Sec. 21 Corporation by estoppel – All persons who assume to act as a corporation knowing it to
be without authority to do shall be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided, however, that when any such ostensible
corporation is sued on any transaction entered by it as a corporation or any tort committed by it
as such, it shall not be allowed to use as a defense its lack of corporate personality.
SALVATIERRA v. GARLITOS

Facts: Salvatierra owned a parcel of land in Leyte. She entered into a contract of lease with Philippine
Fibers Producers Co., Inc. allegedly a corporation duly organized and existing under the Philippine
laws, as represented by its President Refuerzo. The land will be leased for ten years and the lessor
would be entitled to 30% of the net income accruing from the harvest of any crop.
The alleged corporation did not comply with said obligation. Salvatierra filed with the CFI a complaint
against PFPC for accounting, rescission and damages. The corporation defaulted and the court
rendered judgment in favor of Salvatierra. The court issued a writ of execution and the three parcels
of land under the name of Refuerzo were attached because no property of PFPC was found available.
Refuerzo filed a motion claiming that the decision was null and void since there was no allegation of
his personal liability. The court granted the motion and released his land from attachment. Hence,
this petition by Salvatierra.
Held: The failure of Salvatierra to specify Refuerzo’s personal liability was due to the fact that
Salvatierra was under the impression that PFPC, represented by Refuerzo was a duly registered
corporation, but subsequently, inquiry with the SEC yielded otherwise. While as a general rule, a
person who has contracted or dealt with an association in such a way as to recognize its existence as
a corporate body is estopped from denying the same in an action arising out of such transaction or
dealing. Yet, this doctrine is inapplicable where fraud takes a part in said transaction. Here Refuerzo
gave no confirmation of denial as to PFPC’s juridical personality and Salvatierra was made to believe
that the corporation was duly organized.
The grant of separate juridical personality to corporations refer merely to registered corporations and
cannot be made applicable to the liability of members of an unincorporated association. Since an
organization which, before the law, is non-existent and has no personality and would be
incompetent to act and appropriate for itself the power and attributes of a corporation, it cannot
create agents or confer authority on another to ct in its behalf, thus, those who act or purport to act
as its representatives or agents do so without authority and at their own risk.
A person acting or purporting to act in behalf of a corporation which has no valid existence assumes
such privileges and obligations and becomes personally liable for contracts entered into or for other
acts performed as such agent.
Here, Refuerzo as president of the unregistered corporation was the spirit behind the consummation
of the lease contract, thus, his liability cannot be limited or restricted to that imposed upon corporate
SH’s. In acting on behalf of a corporation, which he knew to be unregistered, he assumes the risk of
reaping the consequential damages or resultant rights, if any arising from the transaction.

ALBERT v. UNIVERSITY PUBLISHING CO.

Facts: The University Publishing Co. Inc. through its President Jose Aruego entered into a contract
with Mariano Albert whereby the corporation agreed to pay a certain sum in installments for the
exclusive right to publish his revised commentaries in the RPC and for his share in the previous sale
of the book’s first edit edition. The corporation failed to pay the second installment thereby making
the whole amount due and demandable (i.e. there was an acceleration clause). Albert then sued the
corporation.
The lower court rendered judgment in favor of Albert and a writ of execution was issued against the
corporation. Albert however, petitioned for a writ of execution against Aruego, as the real defendant,
stating that there is no such entity as University Publishing Co. Inc. Albert annexed to his petition a
certification from the SEC saying that their records contain no such registered corporation.
The corporation countered by saying that Aruego is not a party to this case and that, therefore,
Albert’s petition should be denied. The corporation countered by saying that Aruego is not a party to
this case, and that therefore, Albert’s petition should be denied. The corporation, actually did not
want Aruego to be declared a party to the present case is because there would be no need to
institute a separate action against Aruego to be declared a party to the present case is because
there would then be a need to institute a separate action against Aruego; and if this is done, Aruego
can set up the defense of prescription under the Statute of Limitations.
Held:
1.) The corporation cannot invoke the doctrine of estoppel. The fact of non-registration of the
corporation has not been disputed because the corporation only raised the point that it and
not Aruego is the party defendant thereby assuming that the corporation is an existing
corporation with an independent juridical personality. HOWEVER, precisely on account of non-
registration, it cannot be considered a corporation not even a corporation de facto. It has
therefore no personality separate from Aruego; it cannot be sued independently. The estoppel
doctrine has not been invoked and even if it had been, it is not applicable to the case at bar:
(a) Aruego had represented a non-existing entity and induced not only Albert but also the
court to believe in such representation (b) He signed the contract as president of the
corporation stating that this was a corporation duly organized and existing under the laws of
the Philippines. One who induced another to act upon his willful misrepresentation that a
corporation was duly organized and existing under the law, cannot thereafter set up against
his victim the principle of corporation by estoppel.
2.) Aruego is the real defendant as he had control over the proceedings. Had Aruego been named
as party defendant instead of or together with the corporation, there would be no room for
debate as to his personal liability. Since he was not so named, matters of due process have
arisen. Parties to a suit are persons who have a right to control the proceedings, to make
defense, to adduce and cross-examine witnesses and to appeal from a decision. In the case at
bar, Aruego, was and in reality, the one who answered and litigated through his own firm as
counsel. He was in fact, if not on name, the defendant. Clearly then Aruego had his day in
court as the real defendant and due process of law has been substantially observed.
3.) Aruego is the real party in interest because he reaped the benefits from the contract.

(a) Nature of Doctrine


Founded on principles of equity and designed to prevent injustice and unfairness, the
doctrine applies when persons assume to form a corporation and exercise corporate
Revised Bagtas Reviewer by Ve and Ocfe 2A 67
functions and enter into business relations with third persons. Where no third person is
involved in the conflict, there is no corporation by estoppel. A failed consolidation
therefore cannot result in a consolidated corporation by estoppel. Lozano v. De Los
Santos, 274 SCRA 452 (1997)
A party cannot challenge the personality of the plaintiff as a duly organized
corporation after having acknowledged same when entering into the contract with the
plaintiff as such corporation for the transportation of its merchandise. Ohta Dev. Co. v.
Steamship Pompey, 49 Phil. 117 (1926).4
A person who accepts employment in an unincorporated charitable association is
estopped from alleging its lack of juridical personality. Christian Children’s Fund v. NLRC,
174 SCRA 681 (1989).
One who deals with an organization which is not duly incorporated is not estopped to
deny its corporate existence when his purpose is not to avoid liability. aInt’l Express
Travel v. Court of Appeals, 343 SCRA 674 (2000).
INTERNATIONAL EXPRESS TRAVEL v. CA
Facts: Philippine Football Federation got tickets from petitioner travel agency for the SEA games and
trips to China and Brisbane. Two partial payments were made. Petitioners wrote to Kahn (president
of the federation) demanding the completion of the payment. Federation, through Project Gintong
Alay paid the amount of P 31,000. Then Kahn issued a personal check for P 50,000. After that, no
further payments were made.
Petitioner then sued Kahn in his personal capacity and as president of the federation for the unpaid
balance for the purchased tickets as Kahn allegedly guaranteed the said obligation. Kahn maintained
that he did not guarantee the payment but merely acted as an agent of the Federation which has a
separate and distinct juridical personality.
RTC: Kahn is personally liable because neither the travel agency nor Kahn adduce any evidence
proving the corporate existence of the federation. Being the president, its corporate existence is
within the knowledge of Kahn and could have easily denied specifically the assertions of petitioner
that it is a mere sports association. Voluntary unincorporated associations have no power to enter
into, or to ratify, a contract. The contract entered into by its officers or agents in behalf of the
association is not binding or enforceable against it. Agents and officers personally liable. CA:
reversed.
Held: RA 3135 and PD 604 recognized the juridical existence of national sports associations. The
power to adopt a constitution, raise funds, acquire property, etc. indicate that the associations may
acquire juridical personality. However, such does not automatically take place by the passage of the
laws. 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. Nowhere can it be found in the 2 above
mentioned laws any provision creating the Philippine Football Federation.
Before an entity may be considered as a national sports association, such entity must be recognized
by the accrediting organizations – Philippine Amateur Athletic Federation (RA 3135) and Dept. of
Youth and Sports Development (PD 604). Although a copy of the constitution of the federation was
presented in court, thye same does not prove that it had been recognized. Therefore, the federation
is not a national sports association within the purview of the laws and that Kahn is personally
responsible for the obligation.
Under the law on estoppel including that under Sec. 21 of Corporation Code, those
acting on behalf of an ostensible corporation and those benefited by it, knowing it to be
without valid existence, are held liable as general partners. aLim Tong Lim v. Philippine
Fishing Gear Industries, Inc., 317 SCRA 728 (1999).

LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES

4The same principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil. 1 [1911] but that case
pertained to a commercial partnership which required registration in the registry under the terms of the Code of
Commerce).
Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. entered into a contract with
Phil. Fishing Gear Industries Inc. for the purchase of fishing nets and floats. They claimed that they
were a fishing venture with Lim Tong Lim who was however not a signatory to the contract. They
failed to pay and so PFGI filed a collection case with a prayed for a writ of preliminary attachment.
The case was filed against Chua, Yao and Lim because it was found that Ocean Quest was a non-
existent corporation as shown by the certification from SEC. Chua admitted liability and Yao waived
his right to cross-examine and present evidence because he failed to appear while Lim filed a
counterclaim and a cross-claim. Court granted the writ of attachment and ordered the Auction Sale
of the F/B Lourdes which was previously attached. Trial court ruled that PFGI was entitled to the Writ
and Chua, Yao and Lim were jointly liable as general partners.
Held:
4.) Lim was contesting that the CA ruled that there was a partnership in the Compromise
Agreement and alleges that he had no direct participation in the negotiations and was merely
leasing F/B Lourdes to Chua and Yao à Facts found by the TC and CA showed that there was
a partnership formed by the three of them. They initially purchased two boats through a loan
from Lim’s brother and as security, was placed in the name of Lim Tong Lim. The repairs and
supplies were shouldered by Chua and Yao. A civil case was filed by Chua and Yao against Lim
for nullity of commercial documents, reformation of contracts and declaration of ownership of
fishing boats…which was settled amicably. In the Compromise Agreement, it was revealed
that they intended to pay the loan from Jesus Lim by selling the boats and to divide among
them the excess or loss. Therefore it was clear that a partnership existed which was not solely
based on the agreement. It was merely an embodiment of the relationship among parties.
5.) Lim alleges that he was merely a LESSOR by showing the Contract of Lease and registration
papers of the boats, including F/B Lourdes where the nets were found à As found by the
lower courts, the boats were registered to Lim only as security for the loan that was granted
to the partnership by the brother of Lim, which was not an uncommon practice. Aside from
the fact that it was absurd for Lim to sell the boats to pay the debt he did not incur, if needed
he was merely leasing the boats to Chua and Yao.
6.) Lim contests his liability by saying that only those who dealt in the name of the ostensible
corporation should be held liable. His name was not in any of the contracts and never dealt
with PFGI à Sec. 21 – All persons who assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof; Provided however that when any such ostensible
corporation is sued, on any transaction entered by it as a corporation or ant tort committed
by it as such, it shall not be allowed to use as a defense its lack of corporate personality. Even
if the ostensible corporate entity is proven to be non-existent, a party may be estopped from
denying its corporate existence because an unincorporated association has no personality
and would be incompetent to act and appropriate for itself the power and attributes of a
corporation as provided by law. It cannot create agents or confer authority on another to act
on its behalf. Thus, those who act or purport to act as its representatives do so without
authority and at their own risk. Clearly, Lim benefited from the use of the nets found inside
F/B Lourdes which was proved to be an asset of the partnership. He in fact questioned the
attachment because it has effectively interfered with the use of the vessel. Though
technically, he did not directly act on behalf of the corporation, however, by reaping the
benefits of the contract entered into by persons he previously had an existing relationship
with, he is deemed part of said association and is covered by the doctrine of corporation by
estoppel.
CLV: Pioneer case à actors who knew of corporation’s non-existence are liable as general partners
while actors who did not know are liable as limited partners, passive investors are not liable; Lim
teaches us that even passive investors should be held liable provided they benefited from such
transactions.

(b) Two Levels: (i) With “Fraud;” and (ii) Without “Fraud”
Revised Bagtas Reviewer by Ve and Ocfe 2A 69
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: aOng Yong v. Tiu, 401 SCRA 1 (2003).
ONG YONG v. TIU
Facts: In 1994, the construction of the Masagana Citimall in Pasay City by First Landlink Asia
Development Corporation (FLADC) owned by the Tiu family was threatened by the foreclosure by the
PNB for their P 190 M debt. In order to stave off the threat the Tiu family together with the Ong
family agreed to restructure FLADC and created a pre-subscription agreement and each were to
maintain equal shareholdings. The Ong family invested a total sum of P 190 M to the corporation
while the Tiu family included several real estate properties as added capital for the restructured
corporation. The Ong and Tiu families now owned 1,000,000 shares each of FLADC. After all the
debts were paid, the peace between Ong and Tiu did not last. Tiu claimed rescission based on
substantial breach by Ong upon the pre-subscription agreement. Ong, on the other hand maintained
that it was Tiu who committed the breach because one of the properties that they were supposed to
include in the agreement was in fact already in the real estate owned by FLADC. The SEC approved
the rescission (both parties were return to status quo, P 190 M to the Ong family and all the
remaining FLADC assets to the Tiu family, which included the now finished mall valued at more than
P 1B) and the CA affirmed the decision with slight modifications.
Held:
1.) Is rescission the proper remedy for an intra-corporate dispute à No, the Corporation Code,
SEC rules and even the Rules of Court provide for appropriate and adequate intra-corporate
remedies, other than rescission, in situations like this. Rescission is certainly not one of them,
specially if the party asking for it has no legal personality to do so (because it is a corporation,
Tiu family is not the corporation) and the requirements of the law therefore have not been
met. A contrary doctrine will tread on extremely dangerous ground because it will allow just
any stockholder, for just about any real or imagined offense, to demand rescission of his
subscription and call for the distribution of some part of the corporate assets to him without
complying with the requirements of the Corp. Code.
2.) Granting rescission is a proper remedy, does it violate the TFD à Yes it will violate the TFD
and the procedures for valid distribution of assets and property under the Corp. Code. The
TFD provides that subscription to the capital stock of a corporation constitute a fund to which
the creditors have a right to look for the satisfaction of their claims. The doctrine is the
underlying principle in the procedure for the distribution of capital assets, in the Corp. Code
which allows the distribution of corporate capital only in three instances: (1) amendments of
the Articles of Incorporation to reduce the authorized capital stock (requires Board Resolution
and stockholders’s meeting) (2) purchase of redeemable shares by the corporation,
regardless of the existence of unrestricted retained earnings and (3) dissolution and eventual
liquidation of the corporation. In the instant case, the rescission of the pre-subscription
agreement will effectively result in the unauthorized distribution of the capital assets and
property of the corporation, thereby violation the TFD and the Corp. Code, since the rescission
of a subscription agreement is not one of the instances when distribution of capital assets and
property of the corporation is allowed.

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 representing said shares.
 Sec. 41 Power to acquire own shares – A stock corporation shall have the power to
purchase or acquire its own shares for a legitimate corporate purpose or purposes,
including but not limited to the following cases: Provided, that the corporation has
unrestricted retained earnings in its books to cover the shares to be purchased or
acquired: (1) to eliminate fractional shares arising out of stock dividends; (2) to collect or
compromise an indebtedness to the corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shared sold during said sale; and 3) to pay
dissenting or withdrawing stockholders entitled to the payment for their shares under the
provisions of this Code.
 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 dividends due on delinquent stocks shall first be applied to the
unpaid balance on the subscription plus costs and expenses, while stock dividends shall
be withheld from the delinquent stockholder until his unpaid subscription is fully paid:
Provided further, That no stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds 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 one hundred
Revised Bagtas Reviewer by Ve and Ocfe 2A 71
(100%) per cent of their paid-in capital stock, except: (1) when justified by definite
corporate expansion projects or programs approved by the board of directors; or (2) when
the corporation is prohibited under any loan agreement with any financial institution or
creditor, whether local or foreign, from declaring dividends without his/her consent and
such consent has not yet been secured; or (3) when it can be clearly shown that such
retention is necessary under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies.
 Sec. 122 Corporate Liquidation – Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued as a body
corporate for three (3) years after the time when it would have been dissolved, for the
purpose of prosecuting and defending suits by or against it and enabling it to settle and
close it affairs, to dispose of and convey its property and to distribute its assets, but not
for the purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and empowered to
convey all of its property to trustees for the benefit of stockholders, members, creditors,
and other persons in interest. From and after any such conveyance by the corporation of
its property in trust for the benefit of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the property terminates, the legal
interest vests in the trustees, and the beneficial interest in the stockholders, members,
creditors or other persons in interest.
Upon the winding up of corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated to the city
or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation
shall distribute any of its assets or property except upon lawful dissolution and after
payment of all its debts and liabilities.
(d) Rescission of Subscription Agreement Based on Breach
The violation of terms embodied in a subscription agreement, with are personal
commitments, do not constitute legal ground to rescind the subscription agreement
since such would violate the Trust Fund Doctrine and the procedures for the valid
distribution of assets and property under the Corporation Code. “In the instant case,
the rescission of the Pre-Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and property of the corporation, thereby
violating the Trust Fund Doctrine and the Corporation Code, since the rescission of a
subscription agreement is not one of the instances when distribution of capital assets
and property of the corporation is allowed.” Ong Yong v. Tiu, 401 SCRA 1 (2003).
(e) Distribution of Corporate Assets
“The distribution of corporate assets and property cannot be made to depend on the
whims and caprices of the stockholders, officers or directors of the corporation, or even,
for that matter, on the earnest desire of the court a quo ‘to prevent further squabbles and
future litigations’ unless the indispensable conditions and procedures for the protection of
the corporate creditors are followed. Otherwise, the ‘corporate peace’ laudably hoped for
by the court will remain nothing but a dream because this time, it will be the creditors’
turn to engage in ‘squabbles and litigations’ should the court order an unlawful
distribution in blatant disregard of the Trust Fund Doctrine.” Ong Yong v. Tiu, 401 SCRA 1
(2003).
 The trust fund doctrine applies in the following cases: (1) where the corporation has
distributed its capital among the stockholders without providing for the payment of creditors
(2) where it had released subscribers to capital stock from their subscription receivables (3)
where it had transferred corporate property in fraud of its creditors and (4) where the
corporation is insolvent.
 Statutory references: (1) Sec. 122 of the Corp. Code governing dissolution of corporations and
their liquidation when it provides that “except by decrease of capital stock and as otherwise
allowed by this Code, no corporation shall distribute any of its assets or property except upon
lawful dissolution and after payment of all its debts and liabilities.” (2) SEC Rules governing
Redeemable and Treasury Shares expressly adopts the doctrine as follows, “the outstanding
capital stock of a corporation, including unpaid subscriptions, shall constitute a trust fund for
the benefit of its creditors which shall not be returned to the stockholders by repurchase of
shares or otherwise, except in the manner as provided for under the Corporation Code and
this rules.
 Coverage of Trust Fund Doctrine – adopted the two precursors of the trust fund doctrine which
is the a.) capital impairment rule and the b.) profit rule. A fixed capital must be preserved for
protecting the claims of creditors so that dividend distributions to stockholders should be
limited to profits earned or accumulated by the corporation. In a solvent corporation, the trust
fund doctrine encompasses only the capital stock.
1.) Coverage of capital stocks – covers “capital stock;” the protection by the doctrine upon
corporation not in a state of insolvency but only up to the extent of the “capital stock” of the
corporation.
2.) Retained earnings – although part of the stockholder’s equity, do not constitute part of the
“capital stock.” It is not covered by the doctrine. The corporation is at liberty to declare and
pay out dividends from its assets.
3.) Outstanding capital stock – total shares of stock issued to subscribers or stockholders
whether or not fully or partially paid (as long as there is a binding subscription agreement)
except treasury shares (Sec. 137 ).
4.) Par value stock – capital stock represented by aggregate par value of all shares issued and
subscribed. If par value shares are sold at premium, excess is not treated as legal
capital/capital stock but can be declared as stock dividends. This stock dividends fall within
the ambit of the Trust Fund doctrine.
5.) No par value stock – legal capital = total consideration received for the shares of stock. Entire
consideration for no par value stock treated as capital and not available for distribution as
dividends.
Funds received by a corporation – to cover subscription payment on increase in authorized capital
stock prior to approval thereof of the SEC would not be covered by the TFD. As a TF, this money is
still withdrawable by any of the subscribers at any time before issuance of the corresponding shares
of stock, unless there is a pre-subscription to the contrary.

VII. ARTICLES OF INCORPORATION


See relevant portions of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No. 2,
June 1994).
The article of incorporation is:
1.) A CONTRACT – an agreement that gives rise to obligations:
a.) Between the corporation and the state (because it is under the AI by which the
state grants the primary franchise.) à state manifests its consent through the SEC
while the corporation manifests its consent by the filing of the AI, through the
incorporators and eventually through the Board of Directors.
b.) Between the state and stockholders
c.) Between the corporation and stockholders à the stockholders manifest their
Revised Bagtas Reviewer by Ve and Ocfe 2A 73
consent through their subscription of stocks and through voting à as against the
corporation, the stockholders do not have individual standing but only standing as
a group.
d.) Among stockholders à in this situation they now have individual standing.
e.) Between the 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. aGovernment 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.
The charter of a corporation is a contract between three parties: (1) it is a contract between the
state and the corporation to which the charter is granted (2) it is a contract between stockholders
and the state (3) it is a contract between the corporation and its stockholders. A special charter
constitutes a contract between the corporation and the government and as such are both equally
bound by its provisions. For the State to impose an obligation or a duty upon the respondent
corporation, not expressly provided in the charter would amount to a violation of said contract.
The provisions of Act 1459 relate to the number of wires which the government may place upon
poles of the company are different and more onerous than the provisions of the charter.
NOTE: Articles of Incorporation cannot prevail over statutory provisions. Such cannot overcome
the law. However in the case of GPI, its special charter overruled the Gen. Law on the ground that
the former is both a contract and a law. Thus, its charter as a law creates an amendment to all
other laws. In the same manner, if the former were a mere contract then the case would have
been decided differently.

2. Procedure and Documentary Requirements (Sec. 14 and 15)


 Sec. 14 Contents of the Articles of Incorporation – All corporations organized under this code
shall file with the SEC articles of incorporation in any of the official languages duly signed and
acknowledged by all of the incorporators, containing substantially the following matters,
except as otherwise prescribed by this Code or by special law.
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being incorporated. Where a
corporation has more than one stated purpose, the articles of incorporation shall state
which is the primary purpose and which is/are the secondary purpose or purposes:
Provided, that a non-stock corporation may not include a purpose which would change or
contradict its nature as such;
3. The place where the principal office of the corporation is to be located, which must be
within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors and trustees which shall not be less than five nor more than
fifteen;
7. The names, nationalities and residences of persons who shall act as directors or trustees
until the first regular directors or trustees are duly elected and qualified in accordance
with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of
the Philippines, the number of shares to which it is divided, and in case the share are par
value shares, the par value of each, the names, nationalities and residences of the original
subscribers, and the amount subscribed and paid by each on his subscription, and if some
or all of the shares are without par value, such fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and
residences of the contributors and the amount contributed by each; and
10. Such other matters as are not inconsistent with law and which the incorporators may
deem necessary and convenient.
The SEC shall not accept the articles of incorporation of any stock corporation unless
accompanied by a sworn statement of the Treasurer elected by the subscribers showing that
at least twenty-five percent (25%) of the authorized capital stock of the corporation has been
subscribed and at least twenty-five percent (25%) of the total subscription has been fully paid
to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-
five percent (25%) of said subscription, such paid-up capital being not less than P5,000.
 Sec. 15 Forms of Articles of Incorporation – Unless otherwise prescribed by special law,
articles of incorporation of all domestic corporations shall comply substantially with the
following form: …
NOTE: The form goes into the validity and enforceability of the Articles of Incorporation.
a) As to Number and Residency of Incorporators (Sec. 10);
 Sec. 10 Number and Qualifications of Incorporators – Any number of natural person not less
than five but not more than fifteen, all of legal age and a majority of whom are residents of
the Philippines, may form a private corporation for any lawful purpose or purposes. Each of
the incorporators of a stock corporation must own or be a subcriber to at least one share of
the capital stock of the corporation.
NOTE: Incorporators must be warm-blooded individuals for purposes of accountability. They must
not be more than fifteen for pragmatic reasons, and they must be less than five because two and
four create a deadlock, while three is not as efficient as five. (Institution of the Board of Directors
is a clear embodiment of the corporation’s centralized management.)
b) Corporate Name (Secs. 18, 14(1) and 42; Red Line Trans. v. Rural Transit, 60 Phil. 549
[1934]).
Revised Bagtas Reviewer by Ve and Ocfe 2A 75
 Sec. 18 Corporate Name – No corporate name may be allowed by the SEC if the proposed
name is identical or deceptively confusing or similar to that of any existing corporation or to
any other name already protected by law or is patently deceptive, confusing or contrary to
existing laws. When a change in the corporate name is approved, the Commission shall issue
an amended certificate of incorporation under the amended name.
 Sec. 42 Power to invest corporate funds in another corporation or business or for any other
purpose – Subject to the provisions of this Code, a private corporation may invest its funds in
any other corporation or business or for any other purpose other than the primary purpose for
which it was organized when approved by a majority of the board of directors or trustees and
ratified by the stockholders representing 2/3 of the outstanding capital stock or at least 2/3 of
the members in case of non-stock corporations, at a stockholders’ or members meeting duly
called for the purpose. Written notice of the proposed investment and the time and place of
the meeting shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addresse in the post office with
postage prepaid, or served personally: Provided: That any dissenting stockholder shall have
appraisal right as provided in this Code: Provided, however, That where the investment by the
corporation is reasonably necessary to accomplish its primary purpose as stated in the
articles of incorporation, the approval of the stockholders or members shall not be necessary.
Parties organizing a corporation must choose a name at their peril; and the use of a
name similar to one adopted by another corporation, whether a business or a nonprofit
organization, if misleading or likely to injure the exercise of its corporate functions,
regardless of intent, may be prevented by the corporation having a prior right. Ang Mga
Kaanib sa Iglesia ng Dios Kay Kristo Hesus v. Iglesia ng Dios Kay Dristo Jesus, 372 SCRA
171 (2001).
Similarity in corporate names between two corporations would cause confusion to the
public especially when the purposes stated in their charter are also the same type of
business. Universal Mills Corp. v. Universal Textile Mills Inc., 78 SCRA 62 (1977).
Section 18 of Corporation Code expressly prohibits the use of a corporate name which
is “identical or deceptively or confusingly similar to that of any existing corporation or to
any other name already protected by law or is patently deceptive, confusing or contrary
to existing laws.” The policy behind the foregoing prohibition is to avoid fraud upon the
public that will occasion to deal with the entity concerned, the evasion of legal obligations
and duties, and the reduction of difficulties of administration and supervision over
corporations. Industrial Refractories Corp. v. Court of Appeals, 390 SCRA 252 (2002);
Lyceum of the Philippines v. Court of Appeals, 219 SCRA 610, 615 (1993).
A corporation has no right to intervene in a suit using a name, not even its acronym,
other than its registered name, as the law requires and not another name which it had not
registered. Laureano Investment and Dev. Corp. v. Court of Appeals, 272 SCRA 253
(1997).
There would be no denial of due process when a corporation is sued and judgment is
rendered against it under its unregistered trade name, holding that “[a] corporation may
be sued under the name by which it makes itself known to its workers.” Pison-Arceo
Agricultural Dev. Corp. v. NLRC, 279 SCRA 312 (1997).
A corporation may change its name by the amendment of its articles of incorporation,
but the same is not effective until approved by the SEC. Philippine First Insurance Co. v.
Hartigan, 34 SCRA 252 (1970).
A change in the corporate name does not make a new corporation, and has no effect
on the identity of the corporation, or on its property, rights, or liabilities. Republic Planters
Bank v. Court of Appeals, 216 SCRA 738 (1992).
 The name of a corporation is very important, the incorporators constituting as body politic
and corporate under the name stated in the articles of incorporation for the period of time
mentioned therein. Such name is fatal in commercial transactions. The public may only know
the corporation through its name.
 The name of a corporation is (1) essential to its existence (2) it cannot change its name
except in the manner provided by the statute (3) by that name alone is it authorized to
transact business and (4) it is through its name that a corporation can sue and be sued and
perform all other legal acts.
 SEC reserves the right to order a corporation to change name when it appears that there is an
identical name.
 Guidelines on Corporate Names:
1.) Name must contain “Corp.” or “Inc.”
2.) Name must not tend to mislead or confuse the public and must not contain such
descriptive words as “excellent” “fair” “good”, etc.
3.) Name must not be similar to a name already used by another partnership or corporation.
4.) If proposed name contains a word similar to a word already used as a part of the firm
name of a registered corporation, proposed name must contain two other words different
from the name of the company already registered.
5.) If name or surname used as part of corporate name, the incorporators must have a basis
for such surname; it being one of the incorporators: Otherwise, consent of the person whose
name is being used must be submitted.
6.) If it contains initials, it must contain an explanation of the meaning and relevance or
reason thereof.
7.) The use of the words “State” “Maharlika” and “Baranggay” are prohibited and reserved for
the government.
The following words when used must at least relate to the line of business namely: Financing
and Investment. The following words are prohibited from being used namely: National,
Engineer, Architect.

c) Purpose Clause (Secs. 14(2) and 42; Uy Siuliong v. Director of Commerce and Industry,
40 Phil. 541 [1919])
 Sec. 42 Power to invest corporate funds in another corporation or business or for any other
purpose – Subject to the provisions of this Code, a private corporation may invest its funds in
any other corporation or business or for any other purpose other than the primary purpose for
which it was organized when approved by a majority of the board of directors or trustees and
ratified by the stockholders representing 2/3 of the outstanding capital stock or at least 2/3 of
the members in case of non-stock corporations, at a stockholders’ or members meeting duly
called for the purpose. Written notice of the proposed investment and the time and place of
the meeting shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addresse in the post office with
postage prepaid, or served personally: Provided: That any dissenting stockholder shall have
appraisal right as provided in this Code: Provided, however, That where the investment by the
corporation is reasonably necessary to accomplish its primary purpose as stated in the
articles of incorporation, the approval of the stockholders or members shall not be necessary.
“The best proof of the purpose of a corporation is its articles of incorporation and by-
laws. The articles of incorporation must state the primary and secondary purposes of
the corporation, while the by-laws outline the administrative organization of the
corporation, which, in turn, is supposed to insure or facilitate the accomplishment of
said purpose.” Therefore, the Court brushed aside the contention that the corporations
were organized to illegally avoid the provisions on land reform and to avoid the
payment of estate taxes, as being prohibited collateral attack. Gala v. Ellice Agro-
Industrial Corp., 418 SCRA 431 (2003).
 Significance: It confers as well as limits the powers which a corporation may exercise. Other
reasons: (1) prospective investors shall know the kind of business the corporation deals with
(2) management shall know the limits of its action (3) a third party can know whether his
dealing with the corporation is within the corporate functions and powers (4) also, for the
Revised Bagtas Reviewer by Ve and Ocfe 2A 77
administrative supervision and monitoring of the State, to determine which particular agency
shall have jurisdiction over the operations of the corporation.
 The purpose must be lawful, having only one primary purpose and many secondary purposes.

d) Corporate Term (Sec. 11)


 Sec. 11 Corporate Term – A corporation shall exist for a period not exceeding fifty years (50)
from the date of incorporation unless sooner dissolved or unless said period is extended. The
corporate term as originally stated in the articles of incorporation may be extended for
periods not exceeding fifty years (50) in any single instance by an amendment of the articles
of incorporation in accordance with this Code; Provided, that no extension can be made
earlier than five years (5) prior to the original or subsequent expiry dates unless there are
justifiable reasons for an earlier extension as may be determined by the SEC.
 The purpose of the limit emphasizes the contractual nature of the corporation – the extension
must be approved by the State.
No extension of term can be effected once dissolution stage has been reached, as it
constitutes new business. Alhambra Cigar v. SEC, 24 SCRA 269 (1968).
e) Principal Place of Business (Sec. 51)
 Sec. 51 Place and time of meetings of stockholders or members – Stockholders’ or members’
meetings, whether regular or special, shall be held in the city or municipality where the
principal office of the corporation is located and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a
city or municipality.
Notice of meetings shall be in writing, and the time and place thereof stated therein.
All proceedings had and any business transacted at any meeting of the stockholders or
members, if within the powers or authority of the corporation shall be valid even if the
meeting be improperly held or called, provided all the stockholders or members of the
corporation are present or duly represented at the meeting.
 IMPORTANCE: For jurisdictional purposes. The corporation cannot be allowed to file an action
in a place other than that place or in the place of residence of the defendant.
Place of residence of the corporation is the place of its principal office. Clavecilla Radio
System v. Antillon, 19 SCRA 379 (1967)
The residence of its president is not the residence of the corporation because a
corporation has a personality separate and distinct from that of its officers and
stockholders. Sy v. Tyson Enterprises, Inc., 119 SCRA 367 (1982).
f) Minimum Capitalization (Sec. 12)
 Sec. 12 Minimum capital stock required of stock corporation – Stock corporations incorporated
under this Code shall not be required to have any minimum authorized capital stock except as
otherwise specifically provided for by special law, and subject to the provisions of the
following section.
 Sec. 13 Amount of capital stock to be subscribed and paid for the purposes of incorporation –
At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of
incorporation must be subscribed at the time of incorporation and at least twenty-five percent
(25%) of the total subscription must be paid upon subscription, the balance to be payable on
a date or dates fixed in the contract of subscription without need of call, or in the absence of
a fixed date or dates, upon call for payment by the Board of Directors: Provided however, that
in no case shall the paid-up capital be less than five thousand pesos (P5,000).
 Q: Does the Corp. Code expressly provide for a minimum requirement of the authorized
capital stock?
A: Under Sec. 12 there is no minimum requirement but the Code says that “in no case shall
the paid up capital be less than P5,000 (Sec. 13). Thus it turns out that P5,000 is the
minimum.
 Q: Why is the maximum capitalization required to be indicated?
A: (1) To protect the stockholders and also it limits the issuance of capital stock and the
extent of the voting power or capacity of a stockholder (2) Because of accountability. Whether
a corporation is going to do good or bad will depend upon the assets its holds. The only way
by which the State can look at the accountability of a corporation in terms of assets it
receives is to get a maximum so that if the corporation wants to go beyond that, it has to go
back to the State.
g) Subscription and Paid-up Requirements (Sec. 13)
 Sec. 13 Amount of capital stock to be subscribed and paid for the purposes of incorporation –
At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of
incorporation must be subscribed at the time of incorporation and at least twenty-five percent
(25%) of the total subscription must be paid upon subscription, the balance to be payable on
a date or dates fixed in the contract of subscription without need of call, or in the absence of
a fixed date or dates, upon call for payment by the Board of Directors: Provided however, that
in no case shall the paid-up capital be less than five thousand pesos (P5,000).
 Q: What is the 25%-25% rule?
A: It means that of the authorized capital stock applied for, 25% thereof must be subscribed.
Of the 25% subscribed thereof must be paid up. Example, a corporation is by 5 individuals
and they ask for an authorized capital stock of P2M, how much must each subscribe to?
P125,000. RATIONALE: The purpose of such a requisition is that the State may be assured of
the successful prosecution of the work and that creditors of the company may have to the
extent, at least, of the required subscription, the means of obtaining satisfaction for their
claims.
 Q: Must each subscribe equally?
A: No.
 NOTES:
1.) Capital Stock – the amount fixed in the AI procured to be subscribed and paid up. It is
settled that shares issued in excess of the authorized capital stock are void.
2.) Capital – the actual property or estate of the corporation whether in money or property. It
may be higher or lower than the capital stock.
3.) Subscribed Capital Stock – the portion of the capital stock subscribed (procured to be paid)
whether or not fully paid.
4.) Subscription – the mutual agreement of the corporation and the subscriber to take and pay
for the stock of the corporation.
5.) Pre-incorporation – the stage in which each incorporator or stockholder agrees to
contribute to a proposed corporation.
6.) Par value share – one in the certificate of stock of which appears an amount in pesos as
the nominal value of shares; must be stated in the AI and par value share cannot be issued at
less than such par value, which may only be changed by amendment.
7.) No par value share – stated in the AI that it would be issued by the corporation and its
consideration cannot be less than the issued value, which cannot be less than five pesos (P5).
Value may be fixed in any of the three ways: (1) by the articles of incorporation (2) by the
board of directors when so authorized by said articles or by the by-laws (3) by the
stockholders representing at least a majority of the controlling stockholders.
h) Steps and Documents Required in SEC
 In addition to the AI, documents required are:
1.) Treasurer’s Affidavit – accompanied by a sworn statement of the Treasurer that at
least 25% of the capital stock authorized is subscribed and at least 25% of such have
been fully paid in cash or property – fair valuation of which is equal at least to 25% of
the said subscription, such paid-up capital not being less than P5,000.
Revised Bagtas Reviewer by Ve and Ocfe 2A 79
2.) Certificate of deposit
3.) Letter of authority for the SEC authorizing it to examine the bank deposit, books of
account and supporting records as to the existence and utilization of the paid-up
capital stock
4.) Written undertaking to change their partnership or corporate name in case there is
another person, firm, entity wit a prior right to use of the said income or one similar to
it.

1. Grounds for Disapproval (Sec. 17)

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


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

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

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

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

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

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


quasi-banking institutions, building and loan associations, trust companies and other financial
intermediaries, insurance companies, public utilities, educational institutions and other
corporations governed by special laws shall be accepted or approved by the Commission
unless accompanied by a favorable recommendation of the appropriate government agency
to the effect that such articles or amendment is in accordance with law.
When the proposed articles show that the object is to organize a barrio into a separate
corporation for the purpose of taking possession and having control of all municipal property
within the incorporated barrio and administer it exclusively for the benefit of the residents,
the object is unlawful and the articles can be denied registration. Asuncion v. De Yriarte, 28
Phil. 67 (1914).
It is well to note that, if a corporation’s 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).
 SEC’s duty is not merely ministerial – It has been granted by PD 902-A the powers to examine
and approve or disapprove the articles of incorporation and registration of a corporation.
4. Amendments to the Articles of Incorporation (Sec. 16).
 Sec. 16 Amendment of Articles of Incorporation – Unless otherwise prescribed by this Code or
by special law and for legitimate purposes, any provision or matter stated in the articles of
incorporation may be amended by a majority vote of the board of directors or trustees and
the vote or written assent of the stockholders representing at least 2/3 of the outstanding
capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance
with the provisions of this Code, or the vote or written assent of at least 2/3 of the members if
it be a non-stock corporation.
The original and amended articles together shall contain all provisions required by law to set
out in the articles of incorporation. Such articles, as amended shall be indicated by
underscoring the change or changes made, and a copy thereof duly certified under oath by
the corporate secretary and a majority of the directors or trustees stating the fact that said
amendment or amendments have been duly approved by the required vote of the
stockholders or members shall be submitted to the SEC.
The amendments shall take effect upon their approval by the SEC or from the date of the
filing with the said Commission if not acted upon within six (6) months from the date of filing
for a cause not attributable to the corporation.
 NOTES: The matter to be amended, even if it does not concern the Board, must always be
concurred with by the Board. More importantly, the impetus to amend must always come
from the Board. The stockholders merely ratify such amendment. Such is the case because
the Board constitutes the centralized management. The impetus of the Board comprises the
obligatory force of the contracts entered into.
 2/3 votes are needed in AI while a majority is needed in amending by laws à Such is the case
to make it easier to amend by-laws.

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


Sec. 19 Commencement of corporate existence – A private corporation formed or organized
under this Code commences to have corporate existence and juridical personality and is deemed
incorporated from the date the SEC issues a certificate of incorporation under its official seal and
thereupon the incorporators, stockholders/members and their successors shall constitute a body
politic and corporate under the name stated in the articles of incorporation for the period of time
mentioned therein, unless said period is extended or the corporation is sooner dissolved in
accordance with law.
Gokongwei vs. SEC

Revised Bagtas Reviewer by Ve and Ocfe 2A 81

VIII. BY-LAWS
See relevant portions of VILLANUEVA, "Corporate Contract Law," 38 ATENEO L.J. 1 (No. 2,
June 1994).
1. Nature and Functions (aGokongwei v. SEC, 89 SCRA 337 [1979]; aPeña v. CA, 193 SCRA
717 [1991])

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 SH’s 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 SH’s amended the by-laws of SMC, Gokongwei contends
that:
1. the BoD acted without authority & in usurpation of the power of the SH’s since the
computation of 2/3 vote was based on the authorized capital stock as of 1961 & not as of
1976
2. The authority granted in 1961 was also extended in 1962 & 1963 when said authority was
supposed to cease to exist
3. Prior to said amendment, petitioner had all the qualifications as Director & that as a
substitute SH he has the right to vote & be voted as director & that in amending the by-
laws, the corp. purposely provided for Gokongwei’s disqualification& deprived him of his
vested right.
4. Gokongwei further alleges that the corp. has no inherent power to disqualify a SH & that
provision allowing the BoD to consider such factors as business & family relations is
unreasonable & oppressive, thus void.
Gokongwei prays that the amended by laws be declared null & void. He also wanted to
inspect and get a copy of certain documents pertaining to the corp. The SEC allowed him to see the
minutes of the meeting only. So he filed an MR & a petition with the SC due to the alleged deliberate
inability of the SCE to action on his petition.
The SEC had earlier ruled in denying the MR, allowing Gokongwei to run as director but he
should not sit as such if elected until there is a decision on the validity of the by-laws.
The SMC answered by saying that he is engaged in a business antagonistic to SMC & that in
allowing him to sit in the BoD, he would have access to SMC trade secrets and plans. It says that the
amended by laws were adopted to preserve & protect SMC from danger which was based in its right
for self-preservation.
ISSUE: Whether or not the amended by-laws of SMC disqualifying a competitor from nomination or
election to the BoD of SMC are valid and reasonable?
HELD:
1. Every corp. has the inherent right to adopt by-laws for its internal government & to
regulate the conduct & prescribe the rights and duties of its members towards itself &
among themselves in reference to the management of its affairs. This is expressly
recognized by Sec. 21 of the Corp. Code & has been enunciated in Gov’t vs. El Hogar.
2. Any person who buys stocks in a corp. does so with the knowledge that its affairs are
dominated by a majority of the stockholders & that he impliedly contracts that the will of
the majority shall govern in all matters within the limits of the AoI & By-laws. A
stockholder is said to have parted with his right to regulate the disposition of his property
which he invested in the corporation. Thus, no contract between the SHs and corp. was
infringed.
3. Pursuant to Sec. 18 of the Corp. Law, any corp. may amend its AoI by a vote or written
assent of the Sh’s representing at least t 2/3 of the subscribed capital stock. If it changes,
diminishes or restricts the rights of SHs, the dissenting minority has only the right to
object in writing & demand payment of their share. Petitioner has no vested right to be
elected director.
4. A director stands in a fiduciary relation to the corp. & its SHs. He has control & guidance
of corporate affairs & property & hence, of the property interests of SHs. Equity
recognizes that SHs are properties of corporate interest & are ultimately the only
beneficiaries thereof. Thus, he cannot serve 2 adverse masters without detriment to one
of them He cannot utilize his inside information & strategic position to his own
preferment.
5. An amendment to the by-laws which renders a SH ineligible to be a director, if he be also a
director in a competitor corp. has been sustained valid. This is based on the principle that
where the director is employed in the service of a rival corp he cannot serve both but
must betray one or the other. Such an enactment merely advances the benefit of the corp
& for its own good. Corporate officers are not permitted to use their position of trust &
confidence to further their private interests.
6. DOCTRINE OF CORPORATE OPORTUNITY – rests on the unfairness of an officer or director
taking advantage of an opportunity for his own personal profit where the interest of the
corporation calls for protection. Here BoD members have access to marketing strategies,
pricing structure, budget for expansion, R&D sources of funding, availability of personnel,
mergers & tie-ups, etc. The questioned amendment of the y-laws was done to prevent the
creation or an oppositor for an officer or director of SMC, also an officer of a competing
corp. from taking advantage of the information which he as director to promote his
individual corporate interests to the detriment of SMC, it would be hard to avoid any
possibility of Gokongwei’s taking advantage of his position as SMC director.
7. The SC grants the petition regarding Gokongwei’s petition to examine the book and
records of SMC
Pe?a vs. CA

Revised Bagtas Reviewer by Ve and Ocfe 2A 83


8. However, it sustained the validity of the amendment to the by-laws without prejudice to
the question of actual disqualification of Gokongwei to run if elected to sit as SMC director
being decided, after proper hearing by the SMC BoD, whose decisions shall be appealable
to the SEC & to the SC, unless disqualified, the prohibiton in the said by-laws will not apply
to Gokongwei.

FACTS:
PAMBUSCO original owners of the lots in question, mortgaged the same to DBP in
consideration of P935,000. This mortgage was foreclosed and said properties were awarded to
Rosita Peña as highest bidder in the foreclosure sale. The Board of PAMBUSCO, through three of its
members resolved to assign its to one of its members, Atty. Joaquin Briones, to execute and sign a
deed of assignment for and in behalf of PAMBUSCO in favor of any interested party. Thus, Briones
executed a deed of Assignment of PAMBUSCO’s redemption right over the subject lots in favor of
Marelino Enriquez. The latter then redeemed the said properties and a certificate of redemption
dated Aug. 15, 1975 was issued. Enriquez executed a deed of absolute sale of the subject properties
in favor of plaintiff-appellants, the spouses Rising T. Yap and Catalina Lugue.
Peña wrote the sheriff notifying him that the redemption was not valid as it was made under a
void deed of assignment. She then requested the recall of the said redemption and a restraint on
any registration or transaction regarding the lots. Defendant Peña through counsel wrote the sheriff
asking for execution of a deed of final sale in her favor on the ground that the one year period of
redemption has long elapsed without any valid redemption having been exercised. Plaintiff Yap
wrote defendant Peña asking for payment for back rentals in the amount of P42,750.00 for the use
and occupancy of the land and house. Later, the spouses Yap were prompted to file the instant case
on the ground that being registered owners, they have the right to enforce their right to possession
against defendant who has been allegedly in unlawful possession thereof.
It was contended that plaintiffs could not have acquired ownership over the subject properties
under a deed of absolute sale executed in their favor by one Marcelino Enriquez who likewise could
not have become the owner of the properties in question by redeeming the same under a void deed
of assignment. The defense was that since the deed of assignment executed by PAMBUSCO in favor
of Enriquez was void ab initio for being an ultra vires act of its board of directors and for being
without any valuable consideration, it could not have had any legal effect. TC found for petitioner.
CA reversed.
HELD:
In order that the SEC can take cognizance of a case, the controversy must pertain to any of
the following relationships:
a. between corp., partnership or assoc. and the public
b. between the corp. and its SH, members, officers
c. between corp. and the state in so far as its franchise, permit or license to operate is
concerned
d. among the stockholders, partners or associates themselves.
Neither petitioner nor respondents Yap spouses are stockholders or officers of PAMBUSCO.
Consequently, the issue of the validity of the series of transactions may be resolved only by
the regular courts.
The by-laws of a corporation are its own private laws which substantially have the same
effect as the laws of the corporation. They are in effect written into the charter. In this sense,
they become art of the fundamental law of the corporation which the corporation and its
directors and officers must comply with. Only three out of five directors of PAMBUSCO
convened on November 19, 1974 by virtue of a prior notice of a special meeting. There was
no quorum to validly transact business since, under Section 4 of the amended by-laws herein
above reproduced, at least 4 members must be present to constitute a quorum in a special
meeting of the BoD. The AoI or by-laws of the corp. may fix a greater number than the
majority than the majority of the number of board members to constitute the quorum
necessary for the valid transaction f business. Being a dormant corp. for several years, it was
highly irregular, if not anomalous, for a group of three individuals representing themselves to
be the directors of respondent PAMBUSCO to pass a resolution disposing of the only
remaining asset of the corporation in favor of a former corporate officer. The latest list of SH
of respondent PAMBUSCO on file with the SEC does not show that the said alleged directors
were among the SHs of respondent PAMBUSCO. Since the disposition of said redemption right
of PAMBUSCO by virtue of the questions ed resolution was not approved by the required
number of SHs under the law, the said resolution, as well as the subsequent assignment
executed assigning to respondent Enriquez the said right of redemption should be struck
down as null and void.
As the “rules and regulations or private laws enacted by the corporation to regulate,
govern and control its own actions, affairs and concerns and its stockholders or members and
directors and officers with relation thereto and among themselves in their relation to it,” by-
laws are indispensable to corporations. These may not be essential to corporate birth but
certainly, these are required by law for an orderly governance and management of
corporations. Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 (1997).

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.

(a) Common Law Limitations on By-Laws


(i) By-Laws Cannot Be Contrary to Law and Charter
A by-law provision granting to a stockholder permanent seat in the Board of
Directors is contrary to the provision in Corporation Code requiring all members of the
Board to be elected by the stockholders. Even when the members of the association
may have formally adopted the provision, their action would be of no avail because no
provision of the by-laws can be adopted if it is contrary to law. Grace Christian High
School v. Court of Appeals, 281 SCRA 133 (1997).
(ii) By-Law Provisions Cannot Be Unreasonable or Be Contrary to the Nature of
By-laws. Government of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927).
Authority granted to a corporation to regulate the transfer of its stock does not
empower the corporation to restrict the right of a stockholder to transfer his shares,
but merely authorizes the adoption of regulations as to the formalities and procedure
to be followed in effecting transfer. Thomson v. Court of Appeals, 298 SCRA 280
China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).

Revised Bagtas Reviewer by Ve and Ocfe 2A 85


(1998).
By-laws are intended merely for the protection of the corporation, and prescribe
regulation, not restriction; they are always subject to the charter of the corporation.
Rural Bank of Salinas, Inc. v. CA, 210 SCRA 510 (1992).
(iii) By-Law provisions cannot discriminate
(b) Binding Effects on By-laws: aChina Banking Corp. v. Court of Appeals, 270 SCRA 503
(1997).

FACTS:
Calapatia, a stockholder of PR Valley Golf and Country Club pledged his Stock Certificate
to petitioner China Banking. Petitioner wrote VGCCI requesting that the aforementioned
pledge agreement be recorded in its books. Later, Calapatia obtained a loan of P20,000 from
petitioner, payment of which was secured by the aforestated pledge agreement still existing
between Calapatia and petitioner. Due to Calapatia’s failure to pay his obligation, petitioner
filed a petition for extra-judicial foreclosure. Petitioner informed VGCCI of the above-
mentioned foreclosure proceedings and requested that the pledged stock be transferred to its
name. However, VGCCI wrote petitioner expressing its inability to accede to petitioner’s
request due to Calapatia’s unsettled accounts with the club.
Despite the foregoing, Notary Public de Vera held a public auction and petitioner emerged as
the highest bidder, VGCCI sent Calapatia a notice demanding full payment of his overdue account in
the amount of P18,783.24. VGCCI caused to be published in the newspaper Daily Express a notice of
auction sale by VGCCI of its subject share of stock and thereafter filed a case with the RTC of Makati
for the nullification. The RTC dismissed the case for lack of jurisdiction over the subject matter on
the theory that it involves an intra-corporate dispute.
Petitioner filed a complaint with the SEC. The Commission en banc believed that appellant-
petitioner had a prior right over the pledged share and because of pledgor’s failure to pay the
principal debt upon maturity, appellant-petitioner could proceed with the foreclosure sale of the
pledged share. The auction sale conducted by appellee-respondent Club was declared null and void.
The CA rendered its decision nullifying and setting aside the orders of the SEC and its hearing
officers on the ground of lack of jurisdiction over the subject. The CA declared that the controversy
between CBC and VGCCI is not intra-corporate.
HELD:
VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art. VIII of its by-
laws which provides that after a member shall have been posted as delinquent, the Board may order
his/her/its share sold to satisfy the claims of the club. It is pursuant to this provision that VGCCI also
sold the subject share at public auction, of which it was the highest bidder. VGCCI caps its argument
by asserting that its corporate by-laws could prevail. The SEC therefore took proper cognizance of
the instant case.
Moreover, VGCCI completely disregarded petitioner’s right as pledgee. It even failed to give
petitioner notice of said auction sale. Such actuations of VGCCI thus belie its claim of good faith. In
defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues that
the G.R. is that third persons are not bound by the by-laws of a corporation since they are not privy
to thereto. The exception to this is when 3rd persons have actual or constructive knowledge of the
same. In the case at bar, petitioner had actual knowledge of the by-laws of private respondent when
petitioner foreclosed the pledge made by Calapatia and when petitioner purchased the share
foreclosed. Thus, the petitioner purchased the said share subject to the right of the PR to sell the
said shares for reasons of delinquency and the right of PR to have a first lien on said shares as these
rights are provided for in the by-laws very clearly.
In order to be bound, the 3rd party must have acquired knowledge of the pertinent by-laws at
the time the transaction or agreement between said 3rd party and the shareholder was entered into,
in this case, at the time the pledge agreement was executed. Petitioner’s belated notice of said by-
laws at the time of the foreclosure will not suffice. By-laws signify the rules and regulations of
private laws enacted by the corporation to regulate, govern and control its own actions, affairs and
concerns and its stockholders or members and directors and officers with relation thereto and among
themselves in their relation to it. The purpose of a by-law is to regulate the conduct and define the
duties of the members towards the corporation and among themselves.
Note: Knowledge of the by-laws must be present at the time of the perfection of the contract. Such is
not the case here, knowledge of the by-laws was had only during the proceedings, as such, it cannot
bind China Bank. However, one may argue in the same way in Land Titles, where banks are required
to go beyond the face of the title as they are institutions endowed with public interest; in this case
China Bank should have inquired into such by-laws before entering into the transactions mentioned.

“Neither can we concede that such contract would be invalid just because the
signatory thereon was not the Chairman of the Board which allegedly violated the
corporation’s by-laws. Since by-laws operate merely as internal rules among the
stockholders, they cannot affect or prejudice third persons who deal with the
corporation, unless they have knowledge of the same.” aPMI Colleges v. NLRC, 277
SCRA 462 (1997).

PMI COLLEGES v. NLRC

FACTS:
PMI is an educational institution offering courses on basic seaman training and other marine-
related courses hired private respondent as contractual instructor with an agreement that the latter
shall be paid at an hourly rte of P30 t P50. PR then organized classes in marine engineering. PR and
other instructors were compensated for services rendered during the first three periods of the above-
mentioned contract. However, for reasons unknown to PR, he stopped receiving payment for the
succeeding rendition of services.
Repeated demands having likewise failed, PR was soon constrained to file a complaint
seeking payment for salaries earned. PMI contended that classes in the courses offered which
complainant claimed to have remained unpaid were not held in the school premises of PMI. Only PR
knew whether classes were indeed conducted. Later in the proceedings, petitioner manifested that
Mr. Tomas Cloma Jr., a member of the petitioners BoD wrote a letter to the Chairman of the Board
clarifying the case of PR and stating therein that under PMI’s by-laws, only the Chairman is
authorized to sign any employment contract. A decision was rendered by the Labor Arbiter finding
for PR. The NLRC affirmed.

HELD:
The contract would be invalid just because the signatory was not the chairman which
allegedly violated PMI by-laws but since by-laws operate merely as internal rules among the stock
holders, they cannot affect or prejudice 3rd persons who deal with the corporation in good faith unless
they have knowledge of the same. No proof appears on record that PR ever knew anything about the
provisions of said by-laws. Petitioner itself merely asserts the same without even bothering to attach
a copy or excerpt thereof to show that there is such a provision. That this allegation has never been
denied by PR does not necessarily signify admission.

2. Adoption Procedure (Sec. 46)

Section 46. Adoption of by-laws. - Every corporation formed under this


Code must, within one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its government not
inconsistent with this Code. For the adoption of by-laws by the
corporation the affirmative vote of the stockholders representing at
least a majority of the outstanding capital stock, or of at least a
majority of the members in case of non-stock corporations, shall be
necessary. The by-laws shall be signed by the stockholders or
members voting for them and shall be kept in the principal office of the
Revised Bagtas Reviewer by Ve and Ocfe 2A 87
corporation, subject to the inspection of the stockholders or members
during office hours. A copy thereof, duly certified to by a majority of
the directors or trustees countersigned by the secretary of the
corporation, shall be filed with the Securities and Exchange
Commission which shall be attached to the original articles of
incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws


may be adopted and filed prior to incorporation; in such case, such by-
laws shall be approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission, together with
the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the by-laws
are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any
bank, banking institution, building and loan association, trust company, insurance company, public utility, educational
institution or other special corporations governed by special laws, unless accompanied by a certificate of the
appropriate government agency to the effect that such by-laws or amendments are in accordance with law. (20a)
There can be no automatic dissolution simply because the incorporators failed to file the
required by-laws under Sec. 46 of Corporation Code. There is no outright “demise” of
corporate existence. Proper notice and hearing are cardinal components of due process in any
democratic institution, agency or society. In other words, the incorporators must be given the
chance to explain their neglect or omission and remedy the same.” Loyola Grand Villas
Homeowners v. CA, 276 SCRA 681 (1997).
3. Contents (Sec. 47)

Section 47. Contents of by-laws. - Subject to the provisions of the


Constitution, this Code, other special laws, and the articles of
incorporation, a private corporation may provide in its by-laws for:

1. The time, place and manner of calling and conducting regular or


special meetings of the directors or trustees;

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


meetings of the stockholders or members;

3. The required quorum in meetings of stockholders or members and


the manner of voting therein;

4. The form for proxies of stockholders and members and the manner
of voting them;

5. The qualifications, duties and compensation of directors or trustees,


officers and employees;

6. The time for holding the annual election of directors of trustees and
the mode or manner of giving notice thereof;

7. The manner of election or appointment and the term of office of all


officers other than directors or trustees;

8. The penalties for violation of the by-laws;

9. In the case of stock corporations, the manner of issuing stock


certificates; and
10. Such other matters as may be necessary for the proper or
convenient transaction of its corporate business and affairs. (21a)
4. Amendments (Sec. 48)
- Power to amend may be delegated to the BoD

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


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

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


amendment or new by-laws shall be attached to the original by-laws in
the office of the corporation, and a copy thereof, duly certified under
oath by the corporate secretary and a majority of the directors or
trustees, shall be filed with the Securities and Exchange Commission
the same to be attached to the original articles of incorporation and
original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the
Securities and Exchange Commission of a certification that the same are not
inconsistent with this Code. (22a and 23a)

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

IX. CORPORATE POWERS, AUTHORITY AND ACTIVITIES


1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45;
Land Bank of the Philippines v. COA, 190 SCRA 154 [1990])
 Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and regulations of
their organization.
 Sec. 36 Corporate powers and capacity – Every corporation incorporated under this Code has
the power and capacity:
1. To sue and be sued in its corporate name;
Revised Bagtas Reviewer by Ve and Ocfe 2A 89
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporations in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals or public policy, and to amend or repeal
the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transactions of the lawful business of the corporation may
reasonably and necessary require, subject to the limitations prescribed by law and the
Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or hospital or
charitable, cultural, scientific, civic or similar purposes: Provided, That no corporation,
domestic or foreign shall give donations in aid of any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation.
 Sec. 45 Ultra vires acts of corporations – No corporation under this Code shall possess or
exercise any corporate powers except those conferred by this Code or by its articles of
incorporation and except such as necessary or incidental to the exercise of the powers so
conferred.
A corporation has only such powers as are expressly granted to it by law and by its
articles of incorporation, those which may be incidental to such conferred powers, those
reasonably necessary to accomplish its purposes and those which may be incident to its
existence. Pilipinas Loan Company v. SEC, 356 SCRA 193 (2001).
a) Classification of Corporate Powers: Express; Implied; and Incidental
EXPRESS IMPLIED INCIDENTAL
These powers given to a Those powers that exist as a Those powers that:
corporation either: necessary consequence of:
a.) attach to a
a.) By clear or express a.) the exercise of corporation at the
provision of the law. express powers of the moment of its
corporation or creation
 Some of the other
powers expressly b.) the pursuit of its b.) without regard to its
granted under Sec. 36 purpose as provided express powers or
are considered to be for in the article of particular primary
inherent or incidental incorporation purposes and
powers which even if
 the c.) is said to be inherent
not given by express
management in it as a legal entity
grant are
of a or a legal
nevertheless deemed
corporation, in organization.
to be within the
the absence of
capacity of the  Powers that go into
express
foreign entities (such the very nature and
restrictions,
as the power to adopt extent of a
has
by-laws) discretionary corporation’s juridical
authority to entity cannot be
b.) By the charter or articles
enter into presumed to be
of incorporation.
contracts or
incidental or inherent
 Express grant of transactions
which may be powers. This juridical
authority from the
board of directors deemed entity is State-grant
needed to validly bind reasonably and cannot be altered
the corporation. necessary or or amended without
incidental to State authority (egs.
 Thus the SC held that its business
absent any board right of succession,
purpose.
resolution authorizing right to merger)
an officer or any
person to exercise
express powers given
to a corporation such
as filing a suit on its
behalf, such an action
is invalid.
 The power of a
corporation to sue
and be sued in any
court is lodged with
the board of directors
that exercise its
corporate powers.
 By-laws are not a
source of powers.
 Art. 46 of the Civil  Sub-paragraph 11 of Sec. 2 of the Corp. Code
Code expressly Sec. 36 provide that a provides the corporation as
provides for the corporation has the having “the powers,
powers of a power and capacity to attributes and properties
corporation as a “exercise such expressly authorized by law
juridical personality powers as may be
possesses. or incident to its existence.”
essential or necessary
 Sec. 36 of the to carry out its
Corporation Code purpose or purposes
expressly enumerates as stated in its
the ten powers which articles of
a corporation may incorporation.
exercise.
 Sec. 45 of the
Corporation Code
recognizes other
powers provided in
the Article of
Incorporation.

 Generally exercised  Generally, purely Generally, purely members


by the Board of members of the Board of the Board of Directors
Directors with of Directors exercise exercise this.
exception to certain this.
instances where
shareholders’ assent
are needed.
Revised Bagtas Reviewer by Ve and Ocfe 2A 91
 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).

2. ULTRA VIRES DOCTRINE


See relevant portions of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No. 2,
June 1994).
(a) Concept and Types (Sec. 45)
 Sec. 45 Ultra vires acts of corporations – No corporation under this Code shall possess or
exercise any corporate powers except those conferred by this Code or by its articles of
incorporation and except such as necessary or incidental to the exercise of the powers so
conferred.
 Sec. 45 of the Corporation Code is the statutory embodiment of the Ultra Vires Doctrine that
provides that the corporation cannot exercise powers beyond what had been granted to it by
statute or by its articles of incorporation except such as necessary or incidental to the
exercise of powers so conferred. It was meant to control and regulate the actions of
corporations.
 BASIS OF ULTRA VIRES DOCTRINE (Two Corporate Principles)
1. A corporation is a creature of the law and has only such powers and privileges as are
granted by the State – the ultra vires doctrine is a product of the theory of concession as
provided in Sec. 2.
2. The doctrine upholds the fiduciary duty of directors and officers to the stockholders or
members – such duty dictates that the corporation engage only in transactions to which the
stockholders and members bind themselves by way of the provisions of the purposes clause.
This is also necessarily include an obligation not to enter into transactions which violate the
law.
 TEST TO DETERMINE ULTRA VIRES – Whether the act in question is in direct and immediate
furtherance of the corporation’s business, fairly incident to the express powers and
reasonably necessary to their exercise. The strict terms “direct and immediate” refers to the
business of the corporation while the liberal terms “fairly incident” and “reasonably
necessary” with reference to the powers of the corporation. With regard to the business of the
corporation as the reference point, much latitude is given to the corporation to enter into
various contracts as long as they have logical relation to the pursuit of such business. On the
other hand, when the purpose clause used limiting words that Court will hold such corporation
to such limited business.
 POLICIES SUPERVENING IN ULTRA VIRES ISSUES – Acts not per se illegal, liberal interpretation.
1.) PUBLIC CONVENIENCE – if corporation contracts are strictly construed, the public would be
inconvenienced by having to verify and enter into contractual safeguards when entering into
contracts with corporations. As such liberal construction is afforded to such corporate
contracts.
2.) CONTRAVENTIONOF CONTRACTUAL EXPECTATIONS – setting aside the corporate contract
on the ground of ultra vires would contravene the expectations of both parties who entered
into the contract expecting to be bound.
3.) PRINCIPLE OF BUSINESS JUDGMENT – the court will not sit in judgment to substitute their
business judgment for that of the directors; and that as much as possible, directors in the
exercise of their business judgment, should be given leeway to adopt corporate policies and
to engage in transactions as they deem best for the corporation.
4.) NATURE OF BUSINESS OF OPERATIONS – it is impossible to anticipate all possible
contingencies at the time the Articles are drawn thus there would be a need to amend or
revise the Articles to keep abreast with the various aspects of the business.
 ULTRA VIRES ACTS DISTINGUISHED FROM ACTS WHICH ARE ILLEGAL PER SE
 Illegal acts of a corporation are those acts which are contrary to law, morals, or public
order or contravenes some rule of public policy or public duty are void. Such acts or
contracts cannot be the basis of any court action nor acquire validity by performance,
ratification or estoppel.
 Ultra vires acts are those which are not illegal and void ab initio but are within the
scope of the articles of incorporation are merely voidable and may become binding
and enforceable when ratified by stockholders. Said ratification cures the infirmity of
the corporate act and makes it valid and enforceable.
 TYPES OF ULTRA VIRES CASES
1.) acts or contracts which are per se illegal as being contrary to law à VOID
2.) acts done beyond the powers of the corporation as provided for in the law or its articles of
incorporation; and à VOID or VOIDABLE?
3.) acts or contracts entered into in behalf of the corporation by persons who have no corporate
authority à UNENFORCEABLE
 Ultra vires acts of the second type are void as between the corporation and the State or in the
first level of corporate existence while it is merely voidable in the third level because of public
Revised Bagtas Reviewer by Ve and Ocfe 2A 93
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.” aAtrium
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.
De Leon on the other hand was negligent in confirming that such checks were issued to ET
Henry as payment for their company’s debt with the former. That is why she was held to be
personally liable to Atrium.
Second Type Ultra Vires: When the President enters into speculative contracts,
without prior board approval, and without subsequent submission of those contracts to the
Board for approval or ratification, nor were the transactions included in the reports of the
corporation, such contracts do not bind the corporation. It must be pointed out that the
Board of Directors, not the President, exercises corporate powers. Safic Alcan & Cie v.
Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001).
(b) Ratification of Ultra Vires Acts: (aPirovano v. De la Rama Steamship Co., Inc., 96 Phil.
335 [1954]; Carlos v. Mindoro Sugar Co., 57 Phil. 343 [1932]; Republic v. Acoje Mining
Co., 3 SCRA 361 [1963]; aCrisologo Jose v. Court of Appeals, 177 SCRA 594 [1989];
aHarden v. Benguet Consolidated Mining Co., 58 Phil. 140 [1933]).

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 Director’s resolution was an ultra vires act?
Held:
The grant or donation in question is remunerative in nature and was given in consideration of the
services rendered by the heirs’ father to the corporation. The donation has already been perfected
such that the corporation could no loner rescind it. It was embodied in a Board Resolution.
Representatives of the corporation and even its creditors as the NDC have given their concurrence.
The resolution was actually carried out when the corporation and Estefania entered into an
agreement that the proceeds will be entered as a loan. Estefania accepted the donation and such
was recorded by the corporation. The Board of Directors approved Estefania’s purchase of the house
in New York. Company stockholders formally ratified the donation.
The donation was a corporate act carried out by the corporation not only with the sanction of the
Board of Directors but also of its stockholders. The donation has reached a stage of perfection which
is valid and binding upon the corporation and cannot be rescinded unless there exists legal grounds
for doing so. The SEC opinion nor the subsequent Board Resolution are not sufficient reasons to
nullify the donation.
The donation is also not an ultra vires act. The corporation was given broad and unlimited powers to
carry out the purpose for which it was organized which includes the power to (1) invest and deal with
corporate money not immediately required in such manner as from time to time may be determined
(2) aid in any other manner to any person, association or corporation of which any obligation is held
by this corporation. The donation undoubtedly comes within the scope of this broad power.
An ultra vires act is (1) an act contrary to law, morals, or public order or contravene some rules of
public policy or duty. It cannot acquire validity by performance, ratification, estoppel. It is essentially
void (2) those within the scope of the Articles of Incorporation and not always illegal. It is merely
voidable and may become binding and enforceable when ratified by stockholders.
Since it is not contended that the donation is illegal or contrary to any of the expressed provisions of
the Articles of Incorporation nor prejudicial to the creditors of the corporation, said donation even if
ultra vires is not void and if voidable, its infirmity has been cured by ratification and subsequent atcs
of the corporation. The corporation is now estopped or prevented from contesting the validity of the
donation. To allow the corporation to undo what it has done would be most unfair and contravene the
well-settled doctrine that the defense of ultra vires cannot be se up or availed of in any completed
transaction.
NOTE: The ratification of the stockholders of the donation made is the key in this case. Because such
Revised Bagtas Reviewer by Ve and Ocfe 2A 95
ratification is meant to protect the contractual relationship or interest of stockholders.

CRISOLOGO-JOSE v. COURT OF APPEALS

Facts: Atty. Benares was the President of Movers Enterprise while Ricardo Santos Jr. was the Vice-
President. 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 Crisologo-
Jose. 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 cashier’s check and gave it to the plaintiff to be applied as
payment of the dishonored check. RTC held that it was not persuaded to believe that consignation is
applicable here. So the complaint was dismissed. CA reversed and set aside such decision. Petitioner
contends that the accommodation party in this case is Mover Enterprises and not private respondent
who merely signed the check in a representative capacity.
Issue: Assuming that Mover Enterprises is the accommodation party, WON it may be held liable on
the accommodation instrument.
Held: No. Corporation is not liable. The provisions of the NIL which holds an accommodation party
liable on the instrument to a holder for value, although such holder at the time of taking the
instrument knew him to be only an accommodation party, it does not apply to corporations which are
accommodation parties This is because issue or endorsement of negotiable paper by a corporation
without consideration and for the accommodation is an ultra vires act.
By way of a corporation, an officer or agent may do so ONLY IF specifically authorized to do so. But
where the facts show that the accommodation involved was for their personal account, undertaking
or purpose and the creditor was aware thereof.
NOTE: That while the public is not required to know that one is authorized or not to bind the
corporation for a certain obligation and that while the contract may be enforced even without
authority because the public dealing in good faith has the right to expect that the obligation entered
into shall be complied with, such doctrine does not apply when the dealing public in the first place is
in bad faith, as in this case; that is why the corporation was not bound to such accommodation
agreement.

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 been performed on both sides and there is no possibility of undoing what has been done.
Plaintiffs then invoke Art. 1305 which declares that an innocent party to an illegal contract may
recover anything that he may have given while he is not bound to fulfill any promise he may have
made. Supposing this is applicable, the general remedy provided by Art. 1305 cannot be invoked
where a special remedy is supplied in special law.
In as much as the corporation law prohibits the acquisition by one mining corporation of any interest
in another and that these were enacted in the exercise of general police power of the government, it
results that where a corporation does so, the stockholders cannot maintain an action to annul the
contract by which such interest was acquired. The remedy must be sought in a criminal proceeding
or quo warranto action instituted by the government. Until thus assailed in a direct proceeding, the
contract by which the interest was acquired will be treated as valid as between the parties.
NOTE: We are studying Harden because of the pronouncement that even where corporate contracts
are illegal per se, when only public or government policy is at stake and no private wrong is
committed, the courts will leave the parties as they are in accordance with their original contractual
expectations. (The only contracts that the courts will touch are contracts which are void for being
illegal per se.)

(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 latter’s 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
Revised Bagtas Reviewer by Ve and Ocfe 2A 97
done earlier, or the negligence or omission to assert a right within a reasonable time,
warrants a presumption that the party entitled to assert it either has abandoned it or
declined to assert it. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002).
 PRINCIPLE OF ESTOPPEL à It being merely voidable, an ultra vires act can be enforced or
validated if there are equitable grounds for taking such action. Here it is fair that the
resolution be upheld at least on the ground of estoppel.
 Ratification (a) the act must be consummated and not executory (b) creditors are not
prejudiced or all of them have given their consent (c) rights of the public or the State are not
involved (d) all the stockholders must give their consent.
(ii) Theory of Apparent Authority (Art. 1883, Civil Code;aPrime White Cement Corp. v.
IAC, 220 SCRA 103, 113-114 [1993]; aFrancisco v. GSIS, 7 SCRA 577 [1963]; aYao Ka
Sin Trading v. CA, 209 SCRA 763 [1992]).
 Outward appearance, the agent’s apparent representation yields to the principal’s true
representation and the contract is considered as entered into between the principal and the
third person.
 Due what seems to be and what happens otherwise.
 Q: Upon whom is placed the burden of discovering that the agent has no authority?
A: In view of the authority of apparent authority, the third person dealing with the corporation
is not given the burden of discovering whether the agent has authority or not. It is also
therefore reasonable in a case where an officer of a corporation has made a contract in its
name, that the corporation should be required, if it denies the authority of the officer, to state
such defense in its answer, since it allows the plaintiff to be appraised of the fact that the
agent’s authority is contested; and he is given an opportunity to adduce evidence showing
either that the authority existed or that the contract was ratified and approved.
 NOTE: The theory of apparent authority is classified into two types by which such may be
manifested or proved, which are by position and by circumstance. The burden of proof
mentioned above applies to the second classification.

PRIME WHITE CEMENT CORP. v INTERMEDIATE APPELLATE COURT

Facts: A director (Te) entered into an agreement of Dealership agreement with PWCC, signed by its
chairman and president of the corporation to supply 20,000 bags of white cement per month for five
years at a fixed price of P9.70 per bag. Subsequently, the Board refused to abide by the contract
unless new conditions are accepted providing for a new price formula. The dealing director sued for
specific performance on the contract.
Held: The Court held that under both the Corporation Law then and the present Corporation Code,
the doctrine is that all corporate powers shall be exercised by the Board of Directors, except as those
provided by law. Although it cannot completely abdicate its powers and responsibility to act for the
juridical entity, the Board may expressly delegate specific powers to its president or any of its
officers. In the absence of such express delegation, a contract entered into by its President on behalf
of the corporation may still bind the corporation if the Board should ratify the same expressly or
impliedly.
Implied ratification takes various forms (1) silence or acquiescence (2) by acts showing approval or
adoption of the contract or (3) by acceptance and retention of the benefits flowing therefrom.
Even in the absence of express or implied authority by ratification, the President as a general rule
may bind the corporation by a contract in the ordinary course of business, provided the same is
reasonable under the circumstances. These rules are basic but general and flexible. Applies where
the President is dealing with third persons but different where a director is dealing with his own
corporation.
The court herein held that the director holds a position of trust and as such he owes a duty of loyalty
to his corporation and his contracts with the corporation must always be at reasonable terms,
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.
NOTE: The President as the highest office of the corporation, by practice and jurisprudence embodies
apparent authority. On the other hand, the general manager on its own may or may not embody
such authority depending on the circumstances that go with it. The corporate secretary and lawyer
enjoy no such presumption because their positions do entail much commercial significance.

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 OR’s 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.
Francisco’s 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 Andal’s 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.
As between two innocent parties, the one who made it possible for the wrong to be done should be
Revised Bagtas Reviewer by Ve and Ocfe 2A 99
the one t bear the resulting loss.
YAO KA SIN TRADING v. COURT OF APPEALS

Facts:
Maglana, the president and chairman of PWCC sent a letter to Yao Ka Sin Trading represented by its
manager Yao. It quoted the following P24.30/94 lbs. Bag net FOB CEBU; P24.30/94 lbs. Bag FOB
Asturias; 45,000 bags (15,000/month). On June 30, 1973 Mr. Yao accepted the letter offer and issued
a check for P243,000, PWCC Board of Directors disapproved the same. On July 5, 1973 PWCC
informed YKS of the disapproval. However with respect to the 10,000 bags of cement. YKS accepted
without protest. On August 4, 1973 PWCC wrote a letter to YKS stating that it is withdrawing or taking
delivery of not less than 10,000 bags of cement. On September 10, 1973 YKS insisted on the delivery
of the 45,000 bags of cement. On December 7, 1973 PWCC only delivered 9,775 bags. YKS filed an
action for specific performance with the CFI. It was discovered that PWCC by-laws give the Chairman
and the President the power to execute and sign for and in behalf of the corporation all contracts or
agreements which the corporation enters into subject to the qualification that all his actuations shall
be given to the Board of Directors of the corporation. PWCC contends that Mr. Maglana was not
authorized to make any offer and sign a contract in behalf of the corporation and only the Board has
the power to do so. The lower court ruled in favor of YKS but the CA reversed. Hence, this peition.
Issue: WON the contract originally entered into by PWCC through President Maglana, binds the
corporation despite the rejection of the Board of Directors.
Held:
The by-laws do not confer upon the President, the authority to enter into contracts independently of
the Board of Directors. The fact that contracts are signed through the President was only meant to
expedite its execution but still presupposes a prior act of the corporation, through the Board of
Directors. No greater authority can be implied from such express, but limited, delegated authority. It
may be presumed that the President has authority to make contracts if he is given general control
and supervision over affairs of the corporation. But here, there is a general manager charged with
direct management of the business which Mr. Maglana was not involved in.
The doctrine on apparent authority provide that if a private corporation intentionally or negligently
clothes its officers or agents with apparent power to perform acts for it, the corporation will be
estopped to deny that such apparent authority is real, as to innocent 3rd persons dealing in good faith
with such officers or agents. This apparent authority may result from: (1) the general manager by
which the corporation holds out an officer or agents as having power to act (2) the acquiescence in
his acts of a particular nature, with actual or constructive knowledge thereof, whether with or without
the scope of power. However, YKS failed to prove that PWCC indeed clothed Mr. Maglana with
apparent power. PWCC also showed that no contract can be signed by the President without the
Board of Directors’ approval (and clearance from the NIDC representative and legal counsel). The
first contract is at most unenforceable.
The first contract was disapproved and rejected by the Board of Directors which at the same time
considered the P243,000 received by Maglana as payment for 10,000 bags of cement, treated as an
entirely different contract. YKS had in fact agreed to this by accepting the delivery receipt without
protest.
NOTE: Under the doctrine of apparent authority and under the sub-classification of apparent
authority by circumstance, the first contract is unenforceable because PWCC effectively proved
through clear and convincing evidence that their President cannot bind the corporation without
authorization from the Board of Directors, so not the burden shifted upon YKS for him to provide for
such circumstances which have led him to believe that the President has such apparent authority to
bind the corporation; however such was not effectively discharged by YKS, that is why the first
contract is unenforceable. Also, it is most important to note, that the contract for 10,000 bags of
cement is enforceable because such is a contract of sale entered into by the President in the regular
course of business of the corporation. However, the 45,000 bags contract is unenforceable because it
is a contract of dealership which is in the extraordinary course of the business of the corporation.,
hence, not within the purview of the apparent authority of the President.
NOTE: By-laws can bind third parties only when they have knowledge of such, otherwise, such may
not bind third parties. In the same manner, knowledge of a third person of such by-laws may bind the
corporation.

If a corporation knowingly permits one of its officers to act within the scope of an
apparent authority, it holds him out to the public as possessing the power to do those
acts, the corporation will, as against anyone who has in good faith dealt with it through
such agent, be estopped from denying the agent’s authority. Soler v. Court of Appeals,
358 SCRA 57 (2001).
The authority of a corporate officer dealing with third persons may be actual or
apparent . . . the principal is liable for the obligations contracted by the agent. The
agent’ apparent representation yields to the principal's true representation and the
contract is considered as entered into between the principal and the third person. First
Philipine International Bank v. Court of Appeals, 252 SCRA 259 (1996).
Persons who deal with corporate agents within circumstances showing that the
agents are acting in excess of corporate authority, may not hold the corporation liable.
Traders Royal Bank v. Court of Appeals, 269 SCRA 601 (1997).
Apparent authority may be ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act, or, in other words
the apparent authority to act in general with which is clothes them; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, within or beyond the scope of his ordinary powers. Inter-Asia Investment
Industries v. Court of Appeals, 403 SCRA 452 (2003).
When a banking corporation, when an officers arranges a credit line agreement and
forwards the same to the legal department at its head officer, and the bank did no
disaffirm the contract, then it is bound by it. Premier Dev. Bank v. Court of Appeals,
G.R. No. 159352, 14 April 2004.
A corporation cannot disown its President’s act of applying to the bank for credit
accommodation, simply on the ground that it never authorized the President by the lack
of any formal board resolution. The following placed the corporation and its Board of
Directors in estoppel in pais: Firstly, the by-laws provides for the powers of the
President, which includes, executing contracts and agreements, borrowing money,
signing, indorsing and delivering checks; secondly, there were already previous
transaction of discounting the checks involving the same personalities wherein any
enabling resolution from the Board was dispensed with and yet the bank was able to
collect from the corporation. aNyco Sales Corp. v. BA Finance Corp., 200 SCRA 637
(1991).
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. The discounting
process agreed upon was that Nyco through Yao endorsed the check to BA Finance then BA Finance
would issue a check payable to Nyco for which Nyco would then endorse it to Sanshell. With the
exchange of checks, the parties agreed to a Deed of Assignment executed by Nyco in favor of BA
Finance the subject of which was the check. The Deed contained a Continuing Suretyship Agreement
at the back whereby the Fernandezes unconditionally guaranteed to BA Finance full and prompt
payment and discharge of any and all indebtedness of Nyco. BPI check was dishonored which
therefore led BA Finance to report it to the Fernadezes. They then issued another check, this time
from Security Bank which was also dishonored. Despite repeated demands, Nyco and Fernandezes
failed to settle their obligation which prompted BA Finance to file an action in court. TC ruled against
Nyco and the Fernandezes to pay jointly and severally. Nyco’s cross-claim against the Fernadezes
Revised Bagtas Reviewer by Ve and Ocfe 2A 10
was denied they were not declared in default in connection with the cross-claim and that no 1
evidence was presented (it was also mentioned that Nyco should have impleaded Sanshell by way of
a third party complaint and not a cross-claim). CA affirmed the TC with modifications.
Issue: WON Nyco can be held liable for its President unauthorized acts.
Held:
Nyco as an assignor-vendor warranted that both the credit itself (its existence and legality) and the
person of the debtor (his solvency) according to Article 1628of the NCC. Therefore, any breach of the
warranties, the assignor should be held answerable. It is of no question that the assignor is liable for
the invalidity of whatever he assigned. The deed of assignment executed by Nyco in favor of BA
Finance with Sanshell as debtor. BA Finance is actually enforcing the assignment. The check is
merely an incidental matter and so Nyco is not being held liable for both the BPI and the Security
Bank check but rather the deed of assignment. The issue on no notice of dishonor was given is belied
not only by the formal demand letter but also the findings of the TC that Yao and the Fernandezes
had frequent contacts before, during and after dishonor. There is no novation because there was no
express agreement that BA Finance;s acceptance with Security Bank check will discharge Nyco from
liability. Neither is there incompatibility because both checks were given precisely to terminate a
single obligation.
Nyco disowned the President’s acts claiming that it had not authorized Yao to apply to BA Finance for
credit accommodation saying that it did not issue a board resolution giving such authority. However,
the by-laws clearly provide for the power of its President, which include executing contracts and
agreements, borrowing money, signing, indorsing and delivering checks, all in behalf of the
corporation. Also, there was already a prior transaction of discounting checks involving the same
parties wherein any enabling resolution from Nyco was dispensed with and yet BA was still able to
collect from Nyco and Sanshell was able to discharge of its liabilities. Therefore, that places Nyco
under estoppel in pais which arises when one, by his acts, representations or admissions, or by his
silence when he ought to speak out, intentionally or through culpable negligence, induce another to
believe certain facts to exist and such other rightfully relies on such belief, so that he will be
prejudiced if the former is permitted to deny the existence of such fact..
Per its Secretary’s Certificate, the foundation had given its President ostensible and
apparent authority to inter alia deal with the respondent Bank, and therefore the
foundation is estopped from questioning the President’s authority to obtain the subject
loans from the respondent Bank. Lapulapu Foundation, Inc., v. Court of Appeals, G.R.
No. 126006, 29 January 2004.

3. Express Powers
a) Enumerated Powers (Secs. 36)
 Sec. 36 Corporate powers and capacity – Every corporation incorporated under this Code has
the power and capacity:
1.) To sue and be sued in its corporate name;
2.) Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3.) To adopt and use a corporate seal;
4.) To amend its articles of incorporations in accordance with the provisions of this
Code;
5.) To adopt by-laws, not contrary to law, morals or public policy, and to amend or
repeal the same in accordance with this Code;
6.) In case of stock corporations, to issue or sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this Code; and to admit
members to the corporation if it be a non-stock corporation;
7.) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds
of other corporations, as the transactions of the lawful business of the corporation
may reasonably and necessary require, subject to the limitations prescribed by law
and the Constitution;
8.) To enter into merger or consolidation with other corporations as provided in this
Code;
9.) To make reasonable donations, including those for the public welfare or hospital or
charitable, cultural, scientific, civic or similar purposes: Provided, That no
corporation, domestic or foreign shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
10.)To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
11.)To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation.
b) Extend or Shorten Corporate Term (Secs. 37 and 81 [1])
Sec. 37 Power to extend or shorten corporate term – A private corporation may extend or
shorten its term as stated in the articles of incorporation when approved by majority vote of
the board of director or trustees and ratified at a meeting by the stockholders representing at
least 2/3 of the outstanding capital stock or by at least 2/3 of the members in case of non-
stock corporation. Written notice of the proposed action and of the time and place of the
meeting shall be addressed to each stockholder or member at his place of residence as shown
on the books of the corporation and deposited to the addressee in the post office with
postage prepaid or served personally. Provided, that in case of extension of corporate term,
any dissenting stockholder may exercise his appraisal right under the conditions provided in
this code.
Sec. 81[1] Instances of appraisal right – Any stockholder of a corporation shall have the right
to dissent and demand payment of all the fair value of his shares in the following instances: In
case any amendment to the articles of incorporation has the effect of changing or restricting
the rights of any stockholders or rights of any stockholder class of shares, or of authorizing
preferences in any respect superior to those outstanding shares of any class, or of extending
or shortening the term of the corporate existence.
 Such power only concerns the Juridical Entity Level – such extending or shortening of the term
of the corporation tampers with the powers given the corporation by the State.
 Q: Why should such extension or shortening require the ratificatory vote of stockholders when
this does not concern the business enterprise level but the juridical entity level?
A: Such in effect is an amendment of the articles of incorporation, and any amendment to
such would always require the consent of the State and of the corporation’s stockholders.
They also have a say in this because the extension or shortening of the corporate term
affects these stockholder’s investments.
 Q: Why do stockholders not have appraisal right with respect to the shortening of the
corporate term whereas they do in the extension of the corporate term?
A: Actually, there is a seeming conflict between Sec. 37 which makes no mention of
stockholder’s appraisal right with respect to the shortening of the corporate term while Sec.
81(1) refers to such. CLV tells us that stockholders should be afforded an appraisal right even
in the case of the shortening of the corporate term because it is not enough to talk of free
transferability of interests when you dissent to the decrease because such concerns ones
expectations with respect to the business enterprise.
c) Increase or Decrease Capital Stock (Sec. 38)
Sec. 38 Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness – No corporation shall increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority vote of the board of
directors and, at a stockholder’s meeting duly called for the purpose, 2/3 of the outstanding
capital stock shall favor the increase or diminution of the capital stock, or the incurring,
creating, or increasing ant bonded indebtedness. Written notice of the proposed increase or
Revised Bagtas Reviewer by Ve and Ocfe 2A 10
diminution of the capital stock or of the incurring, creating, or increasing of any bonded 3
indebtedness and of the time and place of the stockholders meeting at which the proposed
increase or diminution of the capital stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of directors of the corporation and
countersigned by the chairman and the secretary of the stockholders’ meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of
no-par stock thereof actually subscribed the names, nationalities, residences of the
persons subscribing, the amount of capital stock or number of no-par stock subscribed
by each., and the amount paid by each on his subscription in cash or property, or the
amount of capital stock or number of shares of no-par stock allotted to each
stockholder if such increase is for the purpose of making effective stock dividend
thereof authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring,
creating, or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing any
bonded indebtedness shall require prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange Commission and attached to the original
articles of incorporation. From and after approval by the Securities and Exchange Commission
and the issuance by the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing any bonded indebtedness
authorized, as the certificate of filing may declare Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the corporation lawfully holding
office at the time of the filing of the certificate, showing that at least 25% of such increased
capital stock has been subscribed and that at least 25% of the amount subscribed has been
paid either in actual cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to 25% of the subscription: Provided
further, that no decrease of the capital stock shall be approved by the Commission if its effect
shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness or increase the same with
the approval by a majority vote of the board of trustees and of at least 2/3 of the members in
a meeting duly called for that purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof.
 The policy behind the non-granting of appraisal right with respect to the increase and
decrease of the capital of the corporation is the fact that every stockholder should come into
the corporation setting aware that the expediencies of corporate life may require that
eventually the corporation may need to increase capitalization to fund its operations or
expansions, and needs to look primarily into its equity investors to fund the same.
 In the increase, a stockholder may always sell his stock if he dissents to the increase of the
capital stock. Moreover, such appraisal right may defeat the purpose of the corporation in
increasing the funds; by increasing the funds for survival, if you grant the appraisal right in
effect you pay out capital when you seek to keep more money inside.
 In the decrease of capital stock, why appraise when in effect you will be returning capital to
your stockholders.
Despite the board resolution approving the increase in capital stock and the receipt of
payment on the future issues of the shares from the increased capital stock, such funds do
not constitute part of the capital stock of the corporation until approval of the increase by
SEC. Central Textile Mills, Inc. v. National Wages and Productivity Commission, 260
SCRA368 (1996).
A reduction of capital to justify the mass layoff of employees, especially of union
members, amounts to nothing but a premature and plain distribution of corporate assets
to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital
through the years, and would constitute unfair labor practice. Madrigal & Co. v. Zamora,
151 SCRA 355 (1987).
 Why do you need the consent of the stockholders when you increase or decrease capital
stock? When you increase the capital stock, stockholders have to put in more money to
maintain their proportionate interest in the corporation, as such the increase dilutes the value
of the stock they have prior to such increase. Moreover, such increase affects their rights as
in their voting capacity, their sharing in the dividends, their participation in the management,
the extent of their participation in the dissolution of the corporation, etc. The consent of the
stockholders is needed because such change once again affects their contractual expectation
when they first entered into the corporation.
 But in decreasing capital stock, why do you again need the consent of the stockholders
whereas in effect they will be receiving part of their investment? Such once again affects their
contractual expectation when they first entered into the corporation.
d) Incur, Create or Increase Bonded Indebtedness (Sec. 38)
Sec. 38 Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness – No corporation shall increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority vote of the board of
directors and, at a stockholder’s meeting duly called for the purpose, 2/3 of the outstanding
capital stock shall favor the increase or diminution of the capital stock, or the incurring,
creating, or increasing ant bonded indebtedness. Written notice of the proposed increase or
diminution of the capital stock or of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholders meeting at which the proposed
increase or diminution of the capital stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of directors of the corporation and
countersigned by the chairman and the secretary of the stockholders’ meeting, setting forth:
1. That the requirements of this section have been complied with;
2. The amount of the increase or diminution of the capital stock;
3. If an increase of the capital stock, the amount of capital stock or number of shares of
no-par stock thereof actually subscribed the names, nationalities, residences of the
persons subscribing, the amount of capital stock or number of no-par stock subscribed
by each., and the amount paid by each on his subscription in cash or property, or the
amount of capital stock or number of shares of no-par stock allotted to each
stockholder if such increase is for the purpose of making effective stock dividend
thereof authorized;
4. Any bonded indebtedness to be incurred, created or increased;
5. The actual indebtedness of the corporation on the day of meeting;
6. The amount of stock represented at the meeting; and
Revised Bagtas Reviewer by Ve and Ocfe 2A 10
7. The vote authorizing the increase or diminution of the capital stock, or the 5
incurring, creating, or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing any
bonded indebtedness shall require prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange Commission and attached to the original
articles of incorporation. From and after approval by the Securities and Exchange Commission
and the issuance by the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing any bonded indebtedness
authorized, as the certificate of filing may declare Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the corporation lawfully holding
office at the time of the filing of the certificate, showing that at least 25% of such increased
capital stock has been subscribed and that at least 25% of the amount subscribed has been
paid either in actual cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to 25% of the subscription: Provided
further, that no decrease of the capital stock shall be approved by the Commission if its effect
shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness or increase the same with
the approval by a majority vote of the board of trustees and of at least 2/3 of the members in
a meeting duly called for that purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof.
 Bond – security representing denominated units of indebtedness issued by a corporation to
raise money or capital obliging the issuer to pay the maturity value at the end of a specified
period which should be not less than 360 days. That is why not all indebtedness of the
corporation require the ratification of the stockholders, only bonded indebtedness require the
ratification of the stockholders.
 A bond in contrast to a promissory note represents a unit of a large indebtedness, whereas a
promissory note represents a single indebtedness and may stand on its own. Mostly all
properties of the corporation i.e. the business enterprise comprise of the security of such
bonded indebtedness.
 The SEC also require that a company has a minimum net worth of P25 M at the time of the
filing of the application and must have been in operation for three years.
(e) Sell or Dispose of Assets (Sec. 40)
Sale by Board of Trustees of the only corporate property without compliance with Sec.
40 of Corporation Code requiring ratification of members representing at least two-thirds
of the membership, would make the sale null and void. Islamic Directorate v. Court of
Appeals, 272 SCRA 454 (1997); Peña v. CA, 193 SCRA 717 (1991).
Sec. 40 Sale or other disposition of assets – Subject to the provisions of existing law on illegal
combination and monopolies, a corporation may by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially
all of its property and assets including its goodwill, upon such terms and conditions and for
such consideration, which may be money, stocks, bonds or other instruments for the payment
of money or other property or consideration as its board of directors or trustees deem
expedient, when authorized by the vote of stockholders representing at least 2/3 of the
outstanding capital stock, or in the case of non-stock corporation, by the vote of at least 2/3
of the members, in a stockholders’ or members’ meeting duly called for that purpose. Written
notice of the proposed action and of the time and place of the meeting shall be addressed to
each stockholder or members at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid paid, or
served personally: Provided, that any dissenting stockholder may exercise his appraisal right
under the conditions provided for in the Code.
A sale or other disposition shall be deemed to cover substantially all the corporate property
and assets if thereby the corporation would be rendered incapable of continuing the business
or accomplishing the purpose for which it was organized.
After such authorization or approval by the stockholders or members, the board of directors
or trustees, may nevertheless, in its discretion, abandon such sale, lease, exchange,
mortgage, pledge or other disposition of property and assets subject to the rights of third
parties under any contracting relating thereto without further action or approval by the
stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or
otherwise dispose of any of its property and assets if the same is necessary in the usual and
regular course of business of said corporation or if the proceeds of the sale or other
disposition of such property and assets be appropriated for the conduct of its remaining
business.
In non-stock corporations where there are no members with voting rights, the vote of at least
a majority of the trustees in office will be sufficient authorization for the corporation to enter
into any transaction authorized by this section.
 NOTE: When the transaction is in the normal course of business, it only needs the majority of
the quorum of the Board of Director to approve such transaction. However, when such is in
the extraordinary course of the business as in the disposition of all or substantially all of the
assets of the corporation, such needs the vote of the absolute majority of the Board of
Directors plus the ratification of 2/3 vote of stockholders representing at least 2/3 of the
outstanding capital stock of the corporation in case it is a stock corporation, or in the case of
a non-stock corporation, 2/3 of the members.
 This case is one of the exceptions to the rule where the stockholders have proprietary
interests in the business enterprise. This is also an exception to the rule that generally the
Board of Directors have the power to bind the, and transact for the corporation.
 If transactions are entered into relating to this section without the ratification of the
stockholders, such transaction is void for it is illegal per se as it runs contrary to Sec. 40 of the
Corporation Code.
 Example: San Miguel decides to sell its Pale Pilsen formula, but retains all of its P 4B worth of
investment, will such transaction need the ratification of the stockholders and the absolute
majority vote of the Board? Yes, since it concerns substantially all of the assets of the
corporation as such formula pertains to the capacity of the corporation to earn. The absence
of such ratification violates the social compact as between the stockholders and the
corporation. Such sale violates the contractual expectation of these stockholders, and as
such, their ratification must be availed of before it may be entered into. The same is also the
case, if San Miguel decides to share the P 4B and retain the Pale Pilsen formula.
(f) Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 42; aDe la Rama
v. Ma-ao Sugar Central Co., 27 SCRA 247 [1969])
Sec. 42 Power to invest corporate funds in another corporation or business or for any other
business purpose – Subject to the provisions of this Code, a private corporation may invest its
funds in any other corporation or business or for any purpose other than the primary purpose
for which it was organized when approved by a majority of the board of directors or trustees
and ratified by the stockholders representing at least 2/3 of the outstanding capital stock, or
at least by 2/3 of the members in the case of non-stock corporations, at a stockholders’ or
members’ meeting duly called for that purpose. Written notice of the proposed investment
and the time and place of the meeting shall be addressed to each stockholder or member at
his place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid or served personally: Provided, That any
dissenting stockholder shall have appraisal right as provided in this Code: Provided however,
That where the investment by the corporation is reasonably necessary to accomplish its
primary purpose as stated in the articles of incorporation, the approval of the stockholders or
members shall not be necessary.
Revised Bagtas Reviewer by Ve and Ocfe 2A 10
7

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


Facts:
De la Rama et.al. contend that Ma-ao Sugar Central through its President, subscribed P300,000 worth
of capital stock of the Philippine Fiber Processing Co. Inc. They allege that the time of the first two
payments were made there was no board resolution authorizing the investment and that it was only
before the third payment that the President was so authorized by the Board of Directors. De la Rama
also contends that even assuming, arguendo, that the said Board Resolutions are valid, the
transaction is still wanting in legality, no resolution having been approved by the affirmative vote of
the stockholders holding shares in the corporation, entitling them to at least 2/3 of the voting power.
Issue: WON the investment of corporate funds of Ma-ao were in violation of corporation law.
Held:
Investment of corporate funds in another corporation if done in pursuance of the corporate purpose,
does not need the approval of the stockholders, but where the purchase of the shares of another
corporation is done solely for investment and not to accomplish the purpose of its incorporation, the
vote of approval of the stockholders is necessary. The investment made in Philippine Fiber was
upheld by the SC. Philippine Fiber was engaged in the manufacture of bags or investments in another
corporation engaged in the manufacture of bags. Since the sugar central is engaged in the
manufacture of sugars, sugar bags necessarily would come under the purview of its needs under the
regular course of business
 Any corporation whatever its primary purpose has a choice of placing such fund either in a
savings or time deposit account or in money market placements, or treasury bills, or even in
shares of stocks of other corporations which are traded in the stock exchange. The exercise of
such business judgment on the part of the board in consistency with the primary purpose,
since it is expected even from the stockholders to believe, that it is within the ordinary
business discretion of the Board to place the corporation’s investible fund in the form of
investment that would yield the best possible return to the corporation and would not require
the ratification of the stockholders or members each time.
 Hotel Corporation invest 2M in 10M Bagoong Company à in this case while it contemplates a
situation where the Board exercises ordinary business discretion, such investment would run
contrary to the relationship of the Board to the stockholders whereby they engaged to
manage the hotel corporation alone, and whereby they vowed to devote all their time and all
their effort in such corporation. By investing in 20% of another corporation, said Board
obtained a very big role in the management of such corporation, hence such would run
contrary to its obligation to the stockholders to take care of the business enterprise of the
hotel corporation and not any other corporation’s business enterprise. As such, it would need
a ratificatory vote of 2/3 of the stockholders.
 Hotel Company invest 2M in 100B San Miguel Corporation à in this case, the ratificatory vote
is not needed since such is really within the ordinary business discretion of the Board. And by
investing only in a relatively minimal share in the assets of another company, it does not
really engage in the business enterprise of another corporation, hence, they still afford priority
to the business enterprise of the hotel corporation.
(g) Declare Dividends (Sec. 43; aNielson & Co. v. Lepanto Consolidated Mining Co., 26
SCRA 540 [1968])
Sec. 43 Power to declare dividends – The board of directors of a stock corporation, may
declare dividends out of the unrestricted retained earnings which shall be payable in cash, in
property or in stock to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividend due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock dividends shall be withheld
from the delinquent stockholder until his paid subscription is fully paid: Provided further, that
no stock dividend shall be issued without the approval of stockholders representing not less
than 2/3 of the outstanding capital stock at a regular or special meeting duly called for that
purpose.
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.
NIELSON & CO. v. LEPANTO CONSOLIDATED MINING CO.
Facts:
In 1937, Lepanto entered into a management contract with Nielson. In this agreement, Nielson was
to manage and operate the Mankayan mining claim of Lepanto in consideration for (a) P2,500 a
month and (b) 10% of dividends declared and paid. In 1941, Lepanto declared dividends amounting
to P175,000 10%of which Nielson was entitled to P17,500. Lepanto however never paid Nielson a
cent. During the liberation in 1945, Lepanto unilaterally terminated the management contract with
Nielson. In 1958, Nielson instituted an action for its 10% share in the dividends declared by Lepanto
in 1941. The suit reached the SC and it decided against Lepanto in 1941. The suit between Nielson
and Lepanto was suspended in 1942 when the US Army bombarded the Mankayan mining claims,
thus preventing Nielson from complying with its obligation (i.e. operating and managing the claim).
The tribunal further said that the contract remained suspended even after the war was over in 1945
until 1948 when the mines were fully operational; and that the management contract still had five
years to go from 1948. Thus, the SC stated that Nielson was entitled to 10% of the dividend
declarations in 1949 and 1950 worth P3M. Lepanto sought reconsideration of SC’s decision in 1966. It
raised two main points at issue namely: (1) What is the nature of the management contract? Is it one
of agency and hence terminable at the principal’s will or is it a contract of lease of services which
may be terminated only upon agreed causes? (2) Is Nielson entitled to 10% of the stock dividend
even though Lepanto is not a stockholder?
Held:
The management contract is a contract for lease of service. (1) The theory of agency was raised only
on reconsideration which is a belated move by Lepanto (2) Agency is premised on representation
while lease of service is based on employment. While an agent can execute juridical acts in behalf of
his principal ; an employee under a lease of service can only perform non-juridical acts or only
material acts. (3) Since the acts of Nielson (exploration, purchase, etc.) are subject to general control
and approval of the Board of Directors of Lepanto and cannot create, modify, extinguish business
relations between Lepanto and Nielson, these acts can only be considered as material acts done for
an employer for compensation. The contract, is therefore, a contract of lease of services. Being such
a contract, it cannot be revocable at the will of the employer. The contract specifically provided that
Lepanto can cancel the contract only: a.) upon the 90-day written notice and b.) for Nielson’s failure
to operate and develop the mining claims for any cause except those causes due to the acts of God.
(4) Since the war and the bombardment constitute acts of God, they cannot be considered as
grounds to terminate the contract. In fact, the contract is deemed suspended from 1942 to 1948
when neither of the parties could comply with their obligations under it. Under its terms, the contract
is suspended in cases of fortuitous events. And such terms must be interpreted to mean that a
period equal to the period of suspension must be added to the original term of the contract by way of
extension. Thus, from 1948 the contract still had five more years. And by virtue of this extension,
Nielson is entitled to 10% of the dividends declared in 1949 and 1950.
Stock dividend is the amount that the corporation transfers from its surplus profit
account to its capital account. It is the same amount that can loosely be termed as the
“trust fund” of the corporation. NTC v. CA, 311 SCRA 508 (1999).
h) Enter into Management Contracts (Sec. 44; aNielson & Co., Inc. v. Lepanto
Consolidated Mining, 26 SCRA 540 [1968]; Ricafort v. Moya, 195 SCRA 247 [1991]). Why
the difference in rule between entity and individual?
Sec. 44 Power to enter into management contracts – No corporation shall conclude a
management contract with another corporation unless such contract shall have been
approved by the board of directors and by stockholders owning at least the majority of the
Revised Bagtas Reviewer by Ve and Ocfe 2A 10
outstanding capital stock, or by at least a majority of the members in the case of a non-9
stock corporation of both managing and the managed corporation at a meeting duly called for
that purpose: Provided, That (1) where a stockholder or stockholders representing the same
interest of both the managing and managed corporations own or control more than 1/3 of the
total outstanding capital stock 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 the
management contract must be approved by the stockholders of the managed corporation
owning at least 2/3 of the total outstanding capital stock entitled to vote, or by at least 2/3 of
the members in the case of a non-stock corporation. No management contract shall be
entered into for a longer period than five years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a
corporation undertakes to mange or operate all or substantially all of the business of another
corporation, whether such contracts are called service contracts, operating agreements or
otherwise: Provided however, That such service contracts or operating agreements which
relate to exploration, development, exploitation or utilization of natural resources may be
entered into for such periods as may be provided by the pertinent laws or regulations.

4. Implied Powers
When the articles expressly provide that the purpose of the corporation was to “engage in
the transportation of person by water,” such corporation cannot engage in the business of
land transportation, which is an entirely different line of business, and, for which reason, may
not acquire any certificate of public convenience to operate a taxicab service. Luneta Motor
Co. v. A.D. Santos, Inc., 5 SCRA 809 (1962).
A corporation whose primary purpose is to generate electric power has no authority to
undertake stevedoring services to unload coal into its pier since it is not reasonably necessary
for the operation of its power plant. NPC v. Vera, 170 SCRA 721 (1989).
A corporation organized to engage as a lending investor cannot engage in pawbroker.
Philipinas Loan Co. v. SEC, 356 SCRA 193 (2001).
A mining company has not power to engage in real estate development. Heirs of Antonio
Pael v. Court of Appeals, 372 SCRA 587 (2001).
An officer who is authorized to purchase the stock of another corporation has implied
power to perform all other obligations arising therefrom such as payment of the shares of
stock. Inter-Asia Investments Industries v. Court of Appeals, 403 SCRA 452 (2003).

5. Incidental Powers
The act of issuing checks is within the ambit of a valid corporate act, for it as for securing
a loan to finance the activities of the corporation, hence, not an ultra vires act. Atrium
Management Corp. v. CA, 353 SCRA 23 (2001).

6. Other Powers
a) Sell Land and Other Properties
When the corporation’s primary purpose is to market, distribute, export and import
merchandise, the sale of land is not within the actual or apparent authority of the
corporation acting through its officers, much less when acting through the treasurer.
Likewise Articles 1874 and 1878 of Civil Code requires that when land is sold through an
agent, the agent’s authority must be in writing, otherwise the sale is void. San Juan
Structural v. CA, 296 SCRA 631 (1998); AF Realty & Dev., Inc. v. Dieselman Freight
Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA
190 (2003).
b) Borrow Funds
The power to borrow money is one of those cases where even a special power of
attorney is required under Art. 1878 of Civil Code. There is invariably a need of an
enabling act of the corporation to be approved by its Board of Directors. The argument
that the obtaining of loan was in accordance with the ordinary course of business
usages and practices of the corporation is devoid of merit because the prevailing
practice in the corporation was to explicitly authorize an officer to contract loans in
behalf of the corporation. China Banking Corp. v. Court of Appeals, 270 SCRA 503
(1997).
a. Power to Sue
Under Sec. 36 of Corporation Code, in relation to Sec. 23, where a corporation is an
injured party, its power to sue is lodged with its Board of Directors. A minority stockholder
who is a member of the Board has no such power or authority to sue on the corporation’s
behalf. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001); Shipside Inc. v. Court of Appeals,
352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002).
Where the corporation is real party-in-interest, neither administrator or a project
manager could sign the certificate against forum-shopping without being duly authorized
by resolution of the Board of Directors (Esteban, Jr. v. Vda. De Onorio, 360 SCRA 230
[2001]), nor the General Manager who has no authority to institute a suit on behalf of the
corporation even when the purpose is to protect corporate assets. (Central Cooperative
Exchange Inc. v. Enciso, 162 SCRA 706 [1988]).
When the power to sue is delegated by the by-laws to a particular officer, such officer
may appoint counsel to represent the corporation in a pre-trial hearing without need of a
formal board resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993).
For counsel to sign the certification for the corporation, he must specifically be
authorized by the Board of Directors. BPI Leasing Corp. v. CA, 416 SCRA 4 (2003);
Mariveles Shipyard Corp. v. CA, 415 SCRA 573 (2003).
(d) Provide Gratuity Pay for Employees
Providing gratuity pay for employees is an express power of a corporation under the
Corporation Code, and cannot be considered to be ultra vires to avoid any liability arising
from the issuance of resolution granting such gratuity pay. Lopez Realty v. Fontecha, 247
SCRA 183, 192 (1995).
(e) Donate
(f) Enter Partnership or Joint Venture. aTuason & Co. v. Bolanos, 95 Phil. 106 (1954); SEC
Opinion, dated 29 February 1980.
TUASON & CO. v. BOLANOS

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

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

Held:

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

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

QUICK REFERENCE ON THE POWERS OF THE CORPORATION

POWER STATUTORY PROCEDURE WITH OR WITHOUT


REQUIREMENT APPRAISAL RIGHT

Power to shorten or  Approved by a  Written notice to  Extension à Yes,


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

Power to increase  Approved by a  Written notice to  Increase à None,


capital stock and also majority vote of the each stockholders dilutes the worth of
the power to decrease Board of Directors  Special the stock, defeats
capital stock (Sec. 38) (majority of documentary the purpose of the
quorum) requirements increase.
 Ratified by at least  Prior approval of Decrease à None,
2/3 of the OCS the SEC; SEC shall because in effect there
not accept for filing is a return of part of
unless with a sworn
investments of the
statement by
treasurer that 25- stockholders
25 rule complied
with
 SEC approval
triggers effectivity
Power to incur, create  Approved by a  Written notice None – drains the
or increase majority vote of the  Prior approval of corporation of financial
indebtedness (Sec. 38) Board of Directors the SEC resources contrary to
(majority of the purpose for which
 Supporting
quorum) the power is exercised.
documents
 Ratified by at least required:
2/3 of the OCS 1) trust indenture
SEC INTERIM with a trustee
GUIDELINES à bank
Corporation must have: 2) underwriting
 Minimum net worth agreement
of P25 M at the  Bonds registered
time of the filing of with the SEC
the application
 Have been in
operation for at
least 3 years
 Must fulfill financial
ratio mandated by
SEC in interim
guidelines
Power to sell, dispose, 1) Of all or (1) Must Yes, such a sale does
lease, encumber (Sec. substantially all of comply with the not necessarily leas to
40) its property Bulk Sales Law a dissolution of the
 Majority vote of  Listing the corporation and return
ALL à Quantitative Board of Directors corporate creditors
of the residual value of
Test (majority of and the amount
quorum) and nature of their the corporation. Such is
SUBSTANTIALLY ALL à
Qualitative Test  Ratified or claims afforded as a matter of
(purpose for which it approved by 2/3 of  Failure renders equity and fairness.
was incorporated) the OCS or 2/3 of transaction void
the members (2) If no ratificatory
 Relates to the vote of stockholders, it
primary purpose. is an utra vires act of
2) Exception to Sec. the third kind
40 – if the sale is
necessary in the
usual and regular
course of business
or if proceeds of
the sale or other
disposition of such
property and assets
be appropriated for
the conduct of its
remaining
businesses
 Majority vote of
Board of Directors
(business judgment
rule
 Does not relate to
primary or
secondary purpose
Power to purchase own  Must be for a legitimate purpose – example: None
shares (Sec. 41) (1) eliminate fractional shares arising out
of stock dividends
Buy back of shares (i) (2) collect or compromise an
decrease the cost of indebtedness to the corporation
doing business (ii) arising out of unpaid subscription in a
perpetuate control of delinquency sale, and to purchase
the enterprise. delinquent shares during said sale and
(3) to pay dissenting or withdrawing
Revised Bagtas Reviewer by Ve and Ocfe 2A 11
stockholders exercising their 3
appraisal right
 Taken from URE only except redeemable
shares
Power to invest  Approved by a  Written notice of Yes, because minus
corporate funds in majority vote of the proposed the ratificatory vote
another corporation or the Board of investment and the contract or
business or for any Directors (majority the time and place transaction falls under
other purpose (Sec. of quorum) of meeting shall the realm of ultra
42)  Ratified by at least be addressed to
vires transactions of
2/3 of the OCS each stockholder
or member at his the third type.
 As a general rule, place of residence
section 42 applies as shown in the
if the investment books of the
is for secondary or corporation and
other than the deposited to the
primary purpose. addressee in the
 Except if the Post Office with
investment is postage prepaid or
reasonably served personally.
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 Board of
Directors
Power to declare  Cash dividends  Sec. 43 prohibits Yes.
dividends (Sec. 43) (1) stock corporation
Absolute from retaining
majority of surplus profits in
Board of excess of 100% of
Directors à in their paid-up
accordance capital stock,
with the EXCEPT:
Business (1) When
Judgment Rule justified by
(2) Only declared out definite
of the URE which shall corporate
be payable in cash, in expansion
property or in stock projects or
(3) However, cash programs as
dividends due on approved by
delinquent shares the Board of
shall be first applied Directors
to the unpaid balance (2) When corporation
while stock dividends is prohibited under
shall be withheld until any loan agreement
fully paid from declaring
 Stock dividends à dividends without its
approval of 2/3 of consent and such
the OCS at a consent has not yet
regular or special been secured or
meeting called for (3) When it can be
that purpose. 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
management contracts of Directors
(Sec. 44)  Approved by stockholders owning majority of
the OCS

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.