Definition and attributes of a corporation

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. A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "a creature without any existence until it has received the imprimatur of the state acting according to law." A corporation will have no rights and privileges of a higher priority than that of its creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet Corporation) A corporation has four (4) attributes: (1) It is an artificial being; (2) Created by operation of law; (3) With right of succession; (4) Has the powers, attributes, and properties as expressly authorized by law or incident to its existence. CLASSIFICATION OF PRIVATE CORPORATIONS

Stock v. Non-Stock Corporations

Stock Definition Corporations which have capital stock divided into shares and are authorized to distribute to the holders of shares dividends or allotments of the surplus profits on the basis of the shares (3)

Non-Stock All other private corporations (3) One where no part of its income is distributable as dividends to its members, trustees or officers. (87)

Purpose

Primarily to make profits for its shareholders

May be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes like trade, industry, agricultural and like chambers, or any combination thereof. (88)

Distribution of Profits

Profit is distributed to shareholders

Whatever incidental profit made is not distributed among its members but is used for furtherance of its purpose. AOI or by-laws may provide for the distribution of its assets among its members upon its dissolution. Before then, no profit may be made by members. Members

Composition

Stockholders

Scope of right to vote

Each stockholder votes according to the proportion of his shares in the corporation. No shares may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, and as otherwise provided by the Code. (Sec. 6) May be denied by the AOI or the by-laws. (Sec. 89) May be authorized by the bylaws, with the approval of and under the conditions prescribed by the SEC. (Sec. 89)

Each member, regardless of class, is entitled to one (1) vote UNLESS such right to vote has been limited, broadened, or denied in the AOI or by-laws. (Sec. 89)

Voting by proxy

Cannot be denied. (Sec. 58)

Voting by mail

Not possible.

Who exercises Board of Directors or Trustees Corporate Powers 23 Governing Board Board of Directors or Trustees, consisting of 5-15 directors / trustees.

Members of the corporation

Board of Trustees, which may consist of more than 15 trustees unless otherwise provided by the AOI or by-laws. (Sec, 92) Board classified in such a way that the term of office of 1/3 of their number shall expire every year. Subsequent elections of trustees comprising 1/3 of the board shall be held annually, and trustees so elected shall have a term of 3 years. (Sec. 92) Officers may directly elected by the members UNLESS the AOI or by-laws provide otherwise. (Sec. 92)

Term of directors or Directors / trustees shall hold trustees office for 1 year and until their successors are elected and qualified (Sec. 23).

Election of officers

Officers are elected by the Board of Directors (Sec. 25), except in close corporations where the stockholders themselves may elect the officers. (Sec. 97) Any place within the Philippines, if provided for by the by-laws (Sec. 93)

Place of meetings

Generally, the meetings must be held at the principal office of the corporation, if practicable. If not, then anyplace in the city or municipality where the principal office of the corporation is located. (Sec. 51) Generally non-transferable since membership and all rights arising therefrom are personal. However, the AOI or by-laws can provide otherwise. (Sec. 90) See Sec. 94.

Transferability interest membership

of Transferable. or

Distribution of assets in case of dissolution Who may form a corporation (See SEC. 10)

INCORPORATORS Definition

REQUIREMENTS stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof natural persons

COMMENTS compare with Corporators which include all stockholders or members, whether incorporators or joining the corporation after its incorporation.

Characteristic

excludes corporations and partnerships may be more than 15 for non-stock corp. except educational corp. does not prevent the oneman (person) corporation wherein the other incorporators may have only nominal ownership of only one share of stock; not necessarily illegal

Number

not less than 5; not more than 15

Age Residence

of legal age majority should be residents of the Philippines residence a requirement; citizenship requirement only in certain areas such as public utilities, retail trade banks, investment houses, savings and loan associations, schools

Steps in the formation of a corporation

Mutual Agreement to perform certain acts required for organizing a corporation 1- Organize and establish a corporation 2- Comply with requirements of corporation code 3- Contribute capital/resources 4- Mode of use of capital/resource and control/management of capital/resource 5- distribution/disposition of capital/resource (embodied in constitutive documents) FLEISCHER V. BOTICA NOLASCO CO. (47 Phil. 583; 1925) As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objective of the corporation and are not contradictory to the general policy of the laws of the land. Under a statute authorizing by-laws for the transfer of stock, a corp. can do no more than prescribe a general mode of transfer on the corp. books and cannot justify an restriction upon the right of sale.

GOVT. OF P.I. V. EL HOGAR Is a provision in the by-laws allowing the BOD, by vote of absolute majority, to cancel shares valid? No. It is a patent nullity, being in direct conflict with Sec. 187 of the Corp. Law which prohibits forced surrender of unmatured stocks except in case of dissolution. Is a provision in the by-laws fixing the salary of directors valid? Yes. Since the Corporation Law does not prescribe the rate of compensation, the power to fix compensation lies with the corporation. Is a provision requiring persons elected to the Board of Directors to own at least P 5,000 shares valid? LOYOLA GRAND VILLAS v. CA (276 SCRA 681) ISSUE: Whether the failure of a corporation to file its by-laws within one (1) month from the date of its incorporation, as mandated by Art. 46 of the Corporation Code, results in the corporation's automatic dissolution. RULING: No. Failure to file by-laws does not result in the automatic dissolution of the corporation. It only constitutes a ground for such dissolution. (Cf. Chung Ka Bio v. IAC, 163 SCRA 534) Incorporators must be given the chance to explain their neglect or omission and remedy the same.

THE CORPORATE ENTITY

The Theory of Corporate Entity

When does the corporations existence as a legal entity commence? Upon issuance by the SEC of the certificate of incorporation (Sec. 19) What rights does the corporation acquire? The right to: 1) 2) 3) 4) sue and be sued; hold property in its own name; enter into contracts with third persons; & perform all other legal acts.

Since corporate property is owned by the corporation as a juridical person, the stockholders have no claim on it as owners, but have merely an expectancy or inchoate right to the same should any of it remain upon the dissolution of the corporation after all corporate creditors have been paid. Conversely, a corporation has no interest in the individual property of its stockholders, unless transferred to the corporation. Remember that the liability of the stockholders is limited to the amount of shares. SAN JUAN STRUCTURAL & STEEL FABRICATORS v. CA (296 SCRA 631) A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporation's Board of Directors. In this case, the sale of a piece of land belonging to Motorich Corporation by the corporation treasurer (Gruenberg) was held to be invalid in the absence of evidence that said corporate

treasurer was authorized to enter into the contract of sale, or that the said contract was ratified by Motorich. Even though Gruenberg and her husband owned 99.866% of Motorich, her act could not bind the corporation since she was not the sole controlling stockholder. STOCKHOLDERS OF F. GUANZON V. REGISTER OF DEEDS (6 SCRA 373) 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. A share of stock only typifies an aliquot part of the corporation's property or the right to share in its proceeds to that extent when distributed according to law and equity, but its holder is not the owner of any part of the capital of the corporation. Nor is he entitled to the possession of any definite portion of its property or assets. The act of liquidation made by the stockholders of the corp of the latters assets is not and cannot be considered a partition of community property, but rather a transfer or conveyance of the title of its assets to the individual stockholders. Since the purpose of the liquidation, as well as the distribution of the assets, is to transfer their title from the corporation to the stockholders in proportion to their shareholdings, that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance. CARAM V. CA (151 SCRA 373; 1987) The case of the unpaid compensation for the preparation of the project study. The petitioners were not involved in the initial stages of the organization of the airline. They were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the strength of the project study, to invest in the proposed airline. There was no showing that the Airline was a fictitious corp and did not have a separate juridical personality to justify making the petitioners, as principal stockholders thereof, responsible for its obligations. As a bona fide corp, the Airline should alone be liable for its corporate acts as duly authorized by its officers and directors. Granting that the petitioners benefited from the services rendered, such is no justification to hold them personally liable therefor. Otherwise, all the other stockholders of the corporation, including those who came in late, and regardless of the amount of their shareholdings, would be equally and personally liable also with the petitioner for the claims of the private respondent. PALAY V. CLAVE (124 SCRA 640; 1983) The case of the reliance on a default provision of the contract granting automatic extra-judicial rescission. The court found no badges of fraud on the part of the president of the corporation. The BOD had literally and mistakenly relied on the default provision of the contract. As president and controlling stockholder of the corp, no sufficient proof exists on record that he used the corp to defraud private respondent. He cannot, therefore, be made personally liable because he appears to be the controlling stockholder. 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. MAGSAYSAY V. LABRADOR (180 SCRA 266) The case of the assignment by Senator Magsaysay of a certain portion of his shareholdings in SUBIC granting his sisters the right to intervene in a case filed by the widow against SUBIC. The words "an interest in the subject," to allow petitioners to intervene, mean a direct interest in the cause of action as pleaded, and which would put the intervenor in a legal position to litigate a fact alleged in the complaint, without the establishment of which plaintiff could not recover. Here, the interest, of petitioners, if it exists at all, is indirect, contingent, remote, conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations.

While a share of stock represents a proportionate or aliquot interest in the property of the corp, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable and beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corp as a distinct legal person.

PIERCING THE CORPORATE VEIL

Q: What is the theory of corporate entity? A: That a corporation has a personality distinct from its stockholders, and is not affected by the personal rights, obligations and transactions of the latter. Q: When Can the Veil of Corporate Entity be Pierced? A: The veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice, or for purposes that could not have been intended by law that created it or to defeat public convenience, justify wrong, protect fraud or defend crime or to perpetuate fraud or confuse legitimate issues or to circumvent the law or perpetuate deception or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. Q: What are the effects of disregarding the corporate veil? (1) Stockholders would be personally liable for the acts and contracts of the corporation whose existence at least for the purpose of the particular situation involved is ignored. (2) Court is not denying corporate existence for all purposes but merely refuses to allow the corporation to use the corporate privilege for the particular purpose involved. Contrary to law / public policy; evasion of liability to government STATE V. STANDARD OIL (49 Ohio, St., 137, N.E. 279, 15; 1892) Where all or a majority of stockholders comprising a corporation do an act which is designed to affect the property and business of the company, as if it had been a formal resolution of its Board of Directors and the acts done is ultra vires, the act should be regarded as the act of the corporation, and may be challenged by the state in a quo warrranto proceeding. LAGUNA TRANS V. SSS (107 Phil. 833; 1960) Where the corporation was formed by and consisted of the members of a partnership whose business and property was conveyed to the corporation for the purpose of continuing its business, such corporation is presumed to have assumed partnership debts. MARVEL BLDG. CORP. V. DAVID (94 Phil. 376; 1954) The fact that: certificates in possession of Castro were endorsed in blank; Castro had enormous profits and had motive to hide them; other subscribers had no incomes of sufficient magnitude; and directors never met;

shows that other shareholders may be considered dummies of Castro. Hence, corporate veil may be pierced.

Evasion of liability to creditors TAN BOON BEE CO. V. JARENCIO (163 SCRA 205; 1988) Tan BBC (T) supplies paper to Graphics Publishing Inc (G) but the latter fails to pay. G's printing machine levied upon to satisfy claim but PADCO, another corpo intercedes, saying it is the owner of the machine, having leased such to G. Printing machine was allowed by the Court to satisfy G's liability. Both G and PADCO's corporate entities pierced because they have: the same board of directors, PADCO owns 50% of G, PADCO never engaged in the business of printing. Obviously, the board is using PADCO to shield G from fulfilling liability to T. NAMARCO v. AFCorp (19 SCRA 962; 1967) Associated Financing Corp. (AFC), through its pres. F. Sycip (who together with wife, own 76% of AFC) contracts with NAMARCO for an exchange of sugar (raw v. refined). N delivers, AFC doesn't since it did not have sugar to supply in the first place. N sues to recover sum of money plus damages. Sycip held jointly and severally liable with AFC. AFC's corporate veil was pierced because it was used as Sycip's alter ego, corpo used merely as an instrumentality, agency or conduit of another to evade liability. JACINTO V. CA (198 SCRA 211) Jacinto, president/GM and owner of 52% of corpo, owes MetroBank sum of money, signs trust receipts therefor. Jacinto absconds. Jacinto ordered to jointly and severally pay MetroBank. Corpo veil pierced because it was used as a shield to perpetuate fraud and/or confuse legitimate issues. There was no clear cut delimitation between the personality of Jacinto and the corporation. Evasion of liability / obligation to employees CLAPAROLS V. CIR (65 SCRA 613; 1975) Both predecessor and successor were owned and controlled by petitioner and there was no break in the succession and continuity of the same business. All the assets of the dissolved Plant were turned over to the emerging corporation. The veil of corporate fiction must be pierced as it was deliberately and maliciously designed to evade its financial obligation to its employees. INDOPHIL TEXTILE MILL WORKERS UNION V. CALICA (205 SCRA 698) Rule: The doctrine of piercing the veil of corporate entity applies when corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime, or when it is made as a shield to confuse the legitimate issues or where a corporation is the mere alter ego or business conduit of a person, or 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. Case at bar: Union sought to pierce corporate veil alleging that the creation of Acrylic is a devise to evade the application of the CBA Indophil had with them (or it sought to include the other union in its bargaining leverage). SC: Legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. Union does not seek to impose such claim against Acrylic. Mere fact that businesses were related, that some of the employees of Indophil are the same persons manning and providing for auxiliary services to the other company, and that physical plants, officers and facilities are situated in the same compound - not sufficient to apply doctrine.

NAFLU V. OPLE (143 SCRA 125; 1986) Libra/Dolphin Garments was but an alter ego of Lawman Industrial, therefore, the former must bear the consequences of the latter's unfair acts. It cannot deny reinstatement of petitioners simply because of cessation of Lawman's operations, since it was in fact an illegal lock-out, the company having maintained a run-away shop and transferred its machines and assets there. Here, the veil of corporate fiction was pierced in order to safeguard the right to self-organization and certain vested rights which had accrued in favor of the union. Second corporation sought the protective shield of corporate fiction to achieve an illegal purpose. ASIONICS PHILS. v. NLRC (290 SCRA 164) A corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. 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. Where there is nothing on record to indicate the President and majority stockholder of a corporation had acted in bad faith or with malice in carrying out the retrenchment program of the company, he cannot be held solidarily and personally liable with the corporation. Evasion of liability on contract VILLA-REY TRANSIT V. FERRER (25 SCRA 849; 1968) Jose M. Villarama, operator of a bus company, Villa Rey Transit, which was authorized to operate 32 units from Pangasinan to Manila and vice-versa, sold 2 CPCs to Pantranco. One of the conditions included in the contract of sale was that the seller (Villarama) "shall not, for a period of 10 years from the date of the sale, apply for any TPU service identical or competing with the buyer (Pantranco)." Barely 3 months after the sale, a corporation called Villa Rey Transit, Inc. was organized, with the wife of Jose M. Villarama as one of the incorporators and who was subsequently elected as treasurer of the Corporation. Barely a month after its registration with the SEC, the corporation bought 5 CPCs and 49 buses from one Valentin Fernando, and applied with the Public Service Commission (PSC) for approval of the sale. Before the PSC could take final action on the said application, however, 2 of the 5 CPCs were levied upon pursuant to a writ of execution issued by the CFI in favor of Eusebio Ferrer, judgment creditor, against Valentin Fernando, judgment debtor. During the public sale conducted, Ferrer was the highest bidder, and a certificate of sale was issued in his name. Shortly thereafter, he sold the said CPCs to Pantranco, and they jointly submitted their contract of sale to the PSC for approval. The PSC issued an order that pending resolution of the applications, Pantranco shall have the authority to provisionally operate the service under the 2 CPCS that were the subject of the contract between Ferrer and Pantranco. Villa Rey Transit took issue with this, and filed a complaint for annulment of the sheriff's sale of the CPCs and prayed that all the orders of the PSC relative to the dispute over the CPCs in question be annulled. Pantranco filed a third-party complaint against Jose M. Villarama, alleging that Villarama and Villa Rey Transit are one and the same, and that Villarama and/or the Corporation is qualified from operating the CPCs by virtue of the agreement entered into between Villarama and Pantranco. Given the evidence, the Court found that the finances of Villa-Rey, Inc. were managed as if they were the private funds of Villarama and in such a way and extent that Villarama appeared to be the actual owner of the business without regard to the rights of the stockholders. Villarama even admitted that he mingled the corporate funds with his own money. These circumstances negate Villarama's claim that he was only a part-time General Manager, and show beyond doubt that the corporation is his alter ego. Thus, the restrictive clause with Pantranco applies. A seller may not make use of a corporate entity as a means of evading the obligation of his covenant. Where the Corporation is substantially the alter ego of one of the parties to the covenant or the restrictive agreement, it can be enjoined from competing with the covenantee.

DISTINGUISH CLOSE CORPORATIONS FROM REGULAR CORPORATIONS.

Close Corporation No. of stockholders Management Not more than 20 (Sec. 96) Can be managed by the stockholders (Sec. 97) May be dispensed with (Sec. 101)

"Regular" Corporation No limit Managed by Board of Directors Actual meetings are required.

Meetings

Quorum and Voting

Greater quorum and voting requirements allowed. (Sec. 97) Extends to all stock, including Does not extend treasury shares (Sec. 102) treasury shares. Must be > par value (Sec. 105) SEC has the power to arbitrate disputes in case of deadlocks, upon written petition by any stockholder. (Sec. 104) This includes the power to appoint a provisional director, as well as to dissolve the corporation. May be < par value to

Pre-emptive right

Buy-back of shares

Resolution of deadlocks

Dissolution

May be petitioned by any stockholder whenever any of the acts of the directors or officers or those in control of the corporation is illegal, fraudulent, dishonest, oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted. (Sec. 105)

Generally requires a 2/3 vote of the stockholders and a majority vote of the BOD. (Note however that in case of involuntary dissolution under Sec. 121, a corporation may be dissolved by the SEC upon filing of a verified complaint and after proper notice and hearing.)

WHAT IS A PROVISIONAL DIRECTOR? (Sec. 104) A provisional director is an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose qualifications, if any, may be determined by the SEC. He is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. However, he has all the rights and powers of a duly-elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the SEC or by all the stockholders. (Sec. 104)

COMPARE APPRAISAL RIGHT AND WITHDRAWAL RIGHT IN CLOSE CORPORATIONS. ( Sec. 105)

Withdrawal Right Type corporation involved of Close corporation

Appraisal Right "Regular" corporation

When availed of

For any reason (Sec. Only the grounds 105) enumerated in Sec. 81 and Sec. 42 May be < par or issued value

Fair value shares

of Must be > par or issued value (Sec. 105)

Miscellaneous Provisions (Sec. 137-149)

The SEC has the power to issue rules and regulations reasonably necessary to enable it to perform its duties under the Code, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers. (Sec. 143) Whenever the SEC conducts any examination of the operations, books and records of any corporation, the results thereof must be kept strictly confidential, unless the law requires them to be made public or where they are necessary evidence before any court. (Sec. 142) All domestic and foreign corporations doing business in the Philippines must submit an annual report to the SEC of its operations, with a financial statement of its assets and liabilities and such other requirements as the SEC may impose. (Sec. 141) No right or remedy in favor of or against, nor any liability incurred by, any corporation, its stockholders, members, directors, trustees or officers, may be removed or impaired by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of the Code. (Sec. 145) Violations of the Corporation Code not otherwise specifically penalized therein are punishable by a fine of not less than P 1,000.00 but not more than P 10,000.00 or by imprisonment for not less than 30 days but not more than 5 years, or both, in the discretion of the court. If the violation is committed by a corporation, the same may be dissolved in appropriate proceedings before the SEC. (Sec. 144)