CORPORATION LAW NOTES

Dean CLV
CHARACTERISTICS OF A CORPORATION
Q: What are the elements of a corporation?
A: Based on Section 2 of the Corporation Code:
1. artificial being
2. creature of law
3. with a right of succession
4. with powers and capacities conferred by law, incident to its existence
Q: What are the attributes of a corporation?
A:
o strong juridical personality
o centralized management
o limited liability
o free-transferability of shares of stock

unlimited liability
limited liability
Powers of corporation are vested to its Board of Directors (stock
corporations) or Trustees (non-stock corporations)
Shareholders are the owners of a corporation.
Equity holders
o owners in a business enterprise
o in a partnership partners
o in a corporation shareholders
o 7 juses of Roman law is with them
A corporation is inconsistent with the principle of property that 7 juses are
with the owners.

Q: What is limited liability doctrine?

A: Shareholders are liable for the debts of the corporation up to the extent of
their contributions or promised contribution.

Q: What do you mean by a corporation being an artificial being?

A: It has a separate juridical personality.
Q: What do you mean by a corporation being a creature of law?
A: A corporations juridical personality must be granted by the state. Even if
there is consent between parties, a corporation will not be formed, unless the
state grants its personality through law. Since it is only the state that can
grant its strong juridical personality, it is only the state that can dissolve its
juridical personality.

Q: What is unlimited liability doctrine?

A: In partnerships, partners are liable for the debts of the business enterprise
beyond what they invested or promise to invest, including properties not
related to the business, insofar as not exempted.
Q: What is the norm of things in contract and property law?
A: Limited liability
Q: What is the doctrine of representation?
A: When an agent acts in behalf of the principal, within the scope of its
authority, the agent is not personally liable; it is the principal who is liable.

Q: Differentiate a partnership from a corporation.

A:
Partnership

Corporation

weak juridical personality (delectus

personae)
consensual (weak)

strong juridical personality (right of

succession)
solemn (strong)

1. Before there were no partnerships, only sole proprietorships. So,

partnerships did not have juridical personalities before; there is only
an aggregate of sole proprietors.
2. And since in sole proprietorships, unlimited liability is the norm,
unlimited liability doctrine also prevailed in partnerships.
But unlimited liability goes against the principle of Contract Law, which is
the Principle of Relativity.

Nevertheless, unlimited liability prevailed in partnerships because the

Civil Code itself says that partners must be unlimitedly liable.
Limited Liability Doctrine
o evolved from the principle of relativity
o juridical personality is just an add-on of legislature

T/F: What brings about limited liability of shareholders in a corporation

is its separate juridical personality.
A: True
Q: Can partners agree to become unlimitedly liable?
A: No, except in limited partnerships.
Q: What brings about the unlimited liability feature in partnerships?
A: Mutual agency of partners; the moment they act as owners, they become
unlimitedly liable.
T/F: To have centralized management and free-transferability of units of
ownership, it must be mandated by law.
A: True

Free-Transferability of Units of Onwership

o In property law, the normal course of things is free-transferability,
pursuant to 7 juses (jus disponendi; jus abutendi, etc)
o delectus personae

Q: What law prevails in juridical entity level?

A: Constitution
Q: What law prevails in intra-corporate entity level?
A: Corporate Law
Q: What law prevails in extra-corporate entity level?
A: Contract Law

Q: Can a corporation invoke the right against self-incrimination?

A: No. The right against self-incrimination may not be invoked by a
corporation. Unlike the right against unreasonable search and seizure, where
its objective is to prevent the abuse of state, the right against selfincriminations objective is to prevent a compulsory testimony from the
person, but corporations.
Also, the right against self-incrimination is the only right with a moral
dimension. Its objective is to prevent a person from lying. Since a corporation
is not a moral person, it cannot invoke right against self-incrimination.
Q: Can a corporation be held liable for damages for negligence
committed by its agents?
A: Yes. Under the Agency Law principle, a principal is liable for the acts of its
agent, if it acted within the scope of its authority, even:
o the negligent acts of the agents
o when agent pursues business in fraudulent manner,
Q: Can a corporation become physically, verbally liable for a crime?
A: No.
Q: Can a corporation recover moral damages?
A: No, because moral damages (besmirched reputation) can only be suffered
by a natural/moral person. Since corporation is not a moral person, it cannot
claim moral damages.

CORPORATE CRIMINAL LIABILITY

Q: Can corporations commit crimes?
A: Yes, but criminal prosecution of corporations is not allowed, since there is
no law providing for procedure in prosecuting corporations. Otherwise, it
would be a violation of a corporations procedural due process. Courts are
not common law courts, so they cannot provide for criminal procedure in
prosecuting corporations

But, technically, a corporation cannot commit a crime, because a corporation

does not have a mind, thus it cannot have malice, which is an important
element in committing a crime under the Revised Penal Code.
Q: Can corporations be held criminally liable?
A: No.
First, it is difficult to impose the penalty to them.
Even when a law provides for a penalty of fine, corporations can still not
be proceeded against as an accused, because a corporation only acts
through its directors. Thus, its directors/officers naturally abet in the
commission of the crime.
Corporations separate juridical personality does not shield its officers
from being held criminally liable, for it is through the officers that a
corporation commits a crime.
Q: What is the public policy that the law aims to deter in holding
corporate agents liable for crimes committed by the corporation?
A: The acts of the agents. Even if a corporation may be penalized by a fine,
Chowdery case tells that it should not be the case, because it does not deter
anything; rather, the officers, who act in behalf of the corporation, should be
the ones held liable. It is the act of the agents that is sought to be deterred.
Q: Can corporations be liable for Illegal Recruitment?
A: Yes (?)Illegal Recruitment is punishable by penalty of fine for corporations.
It is a mala prohibita crime, thus does not require malice. Since corporations
cannot have malice, and Illegal Recruitment does not require malice to
commit the crime, then corporations may be held liable for this.

Westcoast Case

Anti-Money Laundering Act

Since there is no criminal procedure provided for in prosecuting

corporations, then corporations may not be proceeded against
under this law.
Commission of a crime binds all those who participated therein.
o But, personal participation in commission of a crime is
impossible for corporations, so the ones liable should be the
corporations officers, directors/trustees, who directly participated
in the crime.
o

Q: What do you mean by a corporation being a creature of law?

A: Generally, corporations are within the control of the state, its creator,
except if corporations are:
1. not under total control of state, because it is still given
constitutional rights state is also bound by the constitution
Q: Can an officer of a corporation be held civilly liable for an obligation
of a corporation?
A: No. An Agency Principle provides that an agent who enters into a contract
in behalf of a principal within the scope of its authority cannot be held liable.
agent gives the consent of the principal
only the principal is privy to the contract
This Agency Principle is based on the Principle of Relativity that a
contract binds only the parties to such contract; a party who did not give
his consent to the contract is not privy to the contract.
Since officers are agents of the corporation, then generally, they cannot
be held civilly liable for an obligation of a corporation.
That officers of a corporation cannot be held civilly liable for an obligation
of a corporation is not based on the Doctrine of Limited liability, because
this doctrine only pertains to the owners of the corporation
(stokcholders), not the officers.
Q: Can corporate officers or agents be held criminally liable for criminal
offenses committed by the corporation?
A: Yes. Since corporations do not have minds, and thus cannot have malice
to commit crimes, it cannot be held criminally liable for a crime, but since a
corporation acts only through its directors or officers, its officers or directors

can be held criminally liable. This is to uphold the public policy that the acts
of those who participate in the commission of a crime must be deterred.

CORPORATE NATIONALITY
Q: What are the nationality tests?
A: (1) Place of Incorporation Test; (2) Control Test

Q: What is Place of Incorporation Test?

A: A corporation is a national of the country under which laws it is created.
Q: What are nationalized industries?
A: exploitation of natural resources; operation of public utilities; mass media;
advertising
Q: Why does the Corporation Code require 60% ownership (qualified
majority) of Filipinos in corporations?
A: 60% is significant because 5 members is the minimum number required of
a Board, and 60% of 5 is 3, which is a clear majority in a Board composed of
5 members.
Q: Which test prevails, place of incorporation test or control test?
A: Place of incorporation test will always prevail. So, if a corporation is
created under the laws of different country, although 100% Filipino-owned, it
is not a Filipino corporation, because in that case, the corporation will not be
under the control of Philippine State.
[I excluded my notes in Grandfather rule computation. Di ko maintindihan
own notes ko ]

Control test is still prevailing vis--vis the grandfather rule.

DOJ-SEC Ruling

If Filipino ownership is at least 60%, for purposes of

determining the nationality of the corporation for investment,
the corporation is deemed to be 100% Filipino.
o If Filipino ownership is less than 60%, only the shares owned
by Filipino are deemed to be of Filipino nationality.
Narra Case did not overturn Gamboa v. Teves
Narra is applicable even when there is no classification of shares.
Gamboa v. Teves Test (Public Utilities)
o Control Test:
Narra Case Test (Public Utilities)
o Complied with the Control Test of SEC (Gamboa v. Teves
Test)
i. did not distinguish as to the classifications of shares
o Narra Case Test and Gamboa Case Test are complementary
o Narra incorporated DOJ-SEC Investment Control Test
Gamboa v. Teves Test did not reject DOJ-SEC Investment Control
Test (Excerpt from Gamboa v. Teves Case)
o Commercial law; Tests to determine the nationality of a
corporation. There are two acknowledged tests in
determining the nationality of a corporation: the control test
and the grandfather rule.
o DOJ-SEC Ruling, adopts the 1967 SEC Rules which
implemented the requirement of the Constitution and other
laws pertaining to the controlling interests in enterprises
engaged in the exploitation of natural resources owned by
Filipino citizens.
i. The first part of DOJ-SEC Ruling: 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, pertains to
the control test or the liberal rule.
ii. The second part of the DOJ-SEC Ruling: if the
percentage of the Filipino ownership in the
corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage
o

o
o

shall be counted as Philippine nationality, pertains

to the stricter, more stringent grandfather rule.
Application of the Grandfather Rule. Based on the said SEC
Rule and DOJ Opinion, the Grandfather Rule or the second
part of the SEC Rule applies only when the 60-40 Filipinoforeign equity ownership is in doubt or in cases where the
joint venture corporation with Filipino and foreign
stockholders with less than 60% Filipino stockholdings [or
59%] invests in other joint venture corporation which is either
60-40% Filipino-alien or the 59% less Filipino).
Where the 60-40 Filipino-foreign equity ownership is not in
doubt, the Grandfather Rule will not apply.
DOJ-SEC Investment Control Test does not apply in JVs.

Media
o once registered, it already has a secondary franchise
Airline
o secondary franchise is granted by Congress
o once registered, its secondary franchise does not yet exist

1st Case: Narra Nickel Case

1 Narra Case: Control test is still prevailing vis a vis the grandfather rule
st

T/F: The main Narra decision is overturned by Gamboa v. Teves

A: False
Resolution of Narra Case: 3 companies assert that applying the grandfather
rule is contrary to the application of the control test.
SC: The usage of control and grandfather test are complementary rather
than exclusive.
T/F: In other words, Narra is applicable even when there is no
classification of shares and all the shares are voting/non-voting shares.
A: Doctrine in Gamboa as stated in SEC memorandum:

Two levels:
o First Level All voting/common shares should be at least 60%
Filipino-owned (Control Test)
o Second Level Total amount of shares (common or preferred)
should be at least 60% Filipino-owned
if not met, the corporation is not qualified to engage in public
utilities
T/F: Gamboa test contains the beneficial interest test.
A: False
Q: If first test is true and second is not, what happens?
A: It is NOT a foreign corporation but it is NOT qualified to engage in public
utilities.
Q: Is the ruling in Gamboa affirmed in Narra?
A: Not really, Narra only provided for the Grandfather Rule/Test
Q: What is the test to determine if a corporation (target company) is
qualified to own utilities under the Narra ruling?
A: When atleast 60% of the shares of target corporation is owned by Filipinos
Q: is this not the same as Gamboa?
A: Gamboa has 2 tier test but Narra only provides for 1.
o Gamboa: voting test and equity test
o Narra: equity test only, regardless of w/n the shares are voting/ nonvoting
Q: Are they conflicting (Gamboa and Narra Cases)?
A: NO according to Narra they are not contradictory but complementary
Q: If you apply the Gamboa test in the case of Narra, isnt it true that the
voting shares are 60% Filipino and all the shares, w/n voting and nonvoting are 60%. Therefore, isnt Narra qualified?
A:

Q: Did Narra comply with the two tier test?

A: YES, Narra did not have non-voting shares. Their shares all of the same
kind
Q: What is the distinction between Gamboa and Narra?
A: Gamboa is applied when there are different kinds of shares. Narra is
basically the same as Gamboa ruling, except that Narra did not have different
kinds of shares.
T/F: Gamboa dispensed with the 60% take all rule by the DOJ SEC
A: False Gamboa v. Teves is the DOJ ruling in a multi-layered structure.
2nd case: Register of Deeds v. Ung Sui Si Temple
Doctrine: No exception to foreign corporation owning land. Since this religion
was unincorporated, the nationality of the religion is based on the trustees or
on the ones who will hold title.
Good law or bad law?
3rd case: The Roman Catholic Administrator of Davao v. LRA
Doctrine: a corporation sole is a special kind of corporation so it is not
covered by the constitutional provision prohibiting foreigners from owning
land. It has no nationality.
The Roman Catholic Church existed between the enactment of the
Constitution corporation by prescription

church already has vested interest. Therefore the test has no application and
the church has no nationality.
(Orbiter Dictum): But even if you force it to have a nationality, the best way is
to look not at the incorporators but at the members behind.
Q: Good law or bad law?
A:
Comparing the two rulings
Q: INC puts up a corporation sole with Matalo as a sole corporator.
Matalo is an Irish. The corporation now seeks to purchase land. Can
they?
CLV: Is the beneficial interest the first test?
A: No! It is the title. As far as law is concerned, it is the title-holder not the
beneficial title-holder who is preferred. Ruling on Roman Catholic case does
not apply. The former case was a corporation by prescription. INC was found
after the constitution.
Prevailing ruling (the orbiter in Roman Catholic): In determining the
nationality of a corporation sole/ religious organization, then you look at those
behind the corporation.
CLV: This orbiter is actually wrong. But we have it because we have Catholic
judges.
4th case: People v. Quasha

Q: Why does it have no nationality?

A: The way to determine its nationality is not to look at the nationality of the
incorporators but at the nationality of the members

Doctrine: Nationality test applies only when a corporation applies for a

secondary franchise and NOT for primary franchise.

Q: Why is the corporation sole immune from nationality test?

A (Ratio Decidendi): the whole roman catholic church predates. Therefore it
is a corporation by prescription. When the 1935 constitution was adopted, the

Q: What does Primary Franchise represent?

A: That franchise grants to a corporation the right to exist; it creates the
separate juridical personality.

Q: What does Secondary franchise represent?

A: right to operate a public utility etc.
Q: What are the levels of existence in corporate level?
A: Assets only, business enterprise, juridical entity level
Primary franchise- operates in juridical entity level
Secondary franchise business enterprise level
T/F: Every corporation granted a primary franchise necessarily has a
business enterprise?
A: False
T/F: Every corporation grated a secondary franchise should have a
primary franchise?
A: True
Q: The nationality test applies in which level?
A: secondary franchise business enterprise level
T/F: When a corporation applies for a corporation to be registered as a
corporation that will engage in media, it can register even though it is
100% foreign owned.
A: NO
Q: Does the secondary franchise come about under the registration of
the primary franchise under the purpose clause?
A:
Q: When the purpose clause of an application for a foreign company
(primary franchise) included the right to operate an airlines (secondary
franchise), can it be registered?
A: YES, because for an airline company to be granted a secondary franchise,
it is the congress not the SEC who should grant such. What is granted by
SEC is only the primary franchise.

Note: You have to take People v. Quasha differently because usually the
secondary franchise is imbedded in a the grant of a primary franchise, but
not in the case of an airline company, where the secondary franchise should
be granted by the congress and not by SEC. Secondary franchise here is not
automatically granted together with primary franchise.
5th case: Kilosbayan v. Guingona
Q: Was the nationality of the foreign corporation considered in
determining w/n it can enter into the JV?
A:
Q: If you were going to consider the issues in kilosbayan, the issues
are being tackled at what level of existence? Why is the JV invalid?
A: Business-enterprise level. Under the charter of PCSO the right to operate
an online lottery is EXCLUSIVE to PCSO. In this case the foreign company
acted as partner and participated in the profits and losses. Taking of the risk
of the foreign corporation considered to be definitive of a JV.
6th Case: Tatad v. Garcia
Q: Is there mutual agency between DOTC and the foreign corporation?
Is there a JV? Isnt it the same as the arrangement in Kilosbayan?
A: NO there is a difference. Once must distinguish between the assets only
level and the business enterprise level.
o The first level can be fully owned by foreigners but the second level
(business enterprise) shall be controlled by Filipinos.
o Kilosbayan talks about the business enterprise level (primary
franchise)
o Tatad deals with the assets only level (secondary franchise)
Q: is it possible to have a business enterprise without a juridical entity?
A: YES, a business enterprise can exist without a corporation. Its existence is
not dependent is on juridical entity.

Q: Is it possible to have a corporate juridical entity without a business

enterprise?
A: YES (basis: people v. quasha)
Q: Is it possible to have a juridical entity without a single asset?
A: No, because no corporation can be incorporated without paid up capital.
Q: Is it possible to have business enterprise without assets?
A: Yes. Even if all assets used by the business enterprise are owned by a
foreign corporation, it does not mean that the foreign group (lessor) has
control of the business enterprise. The secondary franchise still belongs to
the DOTC.
o The clearest indication that DOTC retains the business enterprise
they have complete control.
o A corporation may be granted a secondary franchise without any
asset
Q: What is the difference between business enterprise and the assets of
a corporation?
A:
o Assets properties owned by a corporation;
o Business enterprise ability to earn.
o You may have assets that are not capable of earning, but there are
corporations that may lose all their assets but still earn from their
business enterprise.
T/F: Business enterprise is an asset
A: True. It can be considered an asset on itself.
Q: Difference with Kilosbayan and Tatad Cases
A: PCSO charter prohibited JV, while Tatad operated on express consent
(okay lang daw)

SEPARATE JURIDICAL PERSONALITY (SJP)

Q: What are the four great attributes of a corporation

A:
(1) Strong juridical personality
(2) Free transferability of shares
(3) Centralized management
(4) Limited liability
T/F: That a corporation has a strong juridical personality is a common
law feature.
A: False, the strong juridical personality is based on statute.
T/F: Creation of separate juridical personality is an exercise of judicial
power.
A: False, it is legislative.
T/F: The power of legislature to create a juridical personality is plenary.
A: True, except to the limitations provided in the constitution.
o The only limitation provided for in our constitution is that it cannot
grant to a private corporation a special charter.
o It can only grant to private corporations through a general enabling
law.
o EXCEPT special charters to GOCCs (private corporations
owned by the government)
T/F: Centralized management is an attribute that necessarily results
from strong juridical personality. Is it a common law feature?
A: False. It does not flow from separate juridical personality, but it is provided
for by the laws to severe ownership from management.
Q: Without separate juridical personality, can centralized management
exist?
A: No. Centralized management is hinged so much on SJP. But, just because
there is SJP does not mean that ownership is severed from management.
Nevertheless, SJP allows such severance to be valid.
T/F: Limited liability is common law in character.

A: True. Limited liability is not about the corporation but the stockholders.
The stockholders are not liable beyond their investment/what they promised
to invest because the corporation has a SJP (common law doctrine).
Q: Limited liability is countermanded by what doctrine?
A: Piercing the veil of corporate fiction (common law doctrine)
Q: Why did the courts come up with the concept of piercing?
A:
Q: How is piercing (son) related to SJP (father)?
A: Piercing prevents the use of SJP for illegal matters
1 case: LBP v. CA
st

T/F: There is only one type of piercing

A: False. There are three- fraud, alter ego, equity
Q: When is piercing of alter ego applied?
A: When there is disrespect to the separate juridical personality of the
corporation
Q: Whats the most dangerous type of piercing?
A: Equity piercing no fixed standards and based purely in judicial discretion
2nd case: Pacific Rehouse Corp v. CA
(alter ego piercing)
Doctrine: Mere ownership of the equity of the corporation does not authorize
the piercing the veil of corporation in order to make the controller liable.
Issue in the case: Can the alter ego piercing be applied?
A: No, it failed to pass the three prong test.
(1) First prong: Financial and policy-making (goes into business
enterprise entity). If the corporation is managed not by the board but

by another, it is disrespect of the doctrine of centralized

management.
(2) Second prong: Control must be used to commit act
(3) Third prong: Act must produce injury
Q: Why couldnt the prongs apply to this case?
A: They were only able to prove ownership of equity but not control.
Q: Does 100% control of the equity of a corporation allow piercing?
A: No, because of centralized management. Control of the business
enterprise is on the board.
Q: Total control of equity is never a test to apply piercing (not a factor
to application of piercing).
A: No. By itself, mere control over the equity of the corporation does not allow
the piercing of corporate veil. If at all, it shall be decided with other factors.
Q: What is the lesson did you learn that makes you understand the
piercing doctrine better?
A: One cannot just shout fraud. The fraud needs to be proven. You should
prove the state of mind.
3rd case: Lanuza Jr v. BF Corp
(fraud piercing)
Doctrine: Purely fraud piercing case is different from a tort fraud case. In the
first one the board of directors (agents) are deemed to be acting beyond the
scope of their authority while in the latter, the agent is presumed to be acting
within the scope of his authority. Piercing is still needed to make directors
liable!!
Q: Why are we taking up Lanuza?
A:
CLVs thesis (which is btw wrong): Fraud in itself is a cause of action. You
can make the fraudster liable. Therefore when there is a wrong done on a

person based on fraud/gross negligence/mismanagement, you dont need to

pierce to be able to recover damages.

Note: Fraud piercing was concocted by the law to protect VICTIMS (there
should be victims!!!)

Q: Status of contract entered with fraud

A: Voidable valid until annulled

Q: Who is the victim in alter ego piercing?

A:

Q: General rule in agency -> fraud committed by agent will make him
solidarily liable with principal. If the agent (board) is the one liable,
would you need to pierce the veil of the corporation given that its
principal is the corporation.
A: Yes!! Piercing is needed! See doctrine below

Case 1: Francisco Motor Corps v. CA

Note: important case!!!
Case 2: Indophil Textile v. Calica

T/F: Piercing by fraud is illusory. There is so such thing as fraud piercing

since fraud on itself is actionable.

Q: What piercing doctrine is sought to be applied?

A: Public convenience

A: False. In a purely fraud piercing case, it is presumed that the agent

(member of board) is acting beyond the scope of his authority. If it is a tort
case, it is assumed that for the principal to be liable, the agent should be
acting within the scope of his authority.

Q: How is public convenience different from alter ego piercing?

A:

4th case: Traders Royal Bank v.CA

(fraud piercing)
Doctrine: Doctrine of piercing the veil of corporate fiction is an equitable
remedy and it shall be the last remedy. There should be a victim of the
fraud!!!
Q: Is it an alter ego/ fraud piercing?
A: Fraud. The separate juridical personality was used to avoid compliance
with an obligation.
Q: What is the fraud committed?
A: Bank was induced to lend money using the cloak of corporate fiction. Bank
couldnt foreclose on the paper because of separate juridical personality rule

T/F: Any sort of piercing cannot be applied when the purpose is not to
impose liability.
A:
Case 3: La Campana v. Kaisahan ng Manggagawa
Q: What type of piericing:
A: Alter Ego
Q: The determination of w/n a corporation is an alter ego is a question
of fact.
A: True. Alter-ego is still an equitable remedy and there should be proven
clear acts of disrespect
CLV: Reason for piercing is for the public.
Case 4: PNB v. RItratto Group Inc

10

Case 5: Umali v. CA
Q: Why did they need piercing if they could have gotten the remedy
without piercing?
A:
Q: What did Umali tell us that we can take to the grave?
A: Piecing of the veil is an equitable remedy that should be taken at the last
resort. It is an equitable remedy!!
Q: Can fraud piercing be applied when the fraud is alleged but not
proven? (NO) Why?
A:
CLV: flaw in Umali is that it used fraud piercing to prve fraud and not the other
way around
T/F: Piercing can be invoked to make directors liable but cannot make
the corporation itself liable
Case 5: Boyer-Roxas v. CA
T/F: the corporation was used to be able to exercise the property rights
as co-owners
- but this is wrong!!
Co-oweners rights to use a property should be consistent with the nature of
the property
Q: Why is there no equity piercing in this case?
A: There is no inequity here!!
Doctrine: piercing cannot be used to create a right that does not exist. It is
only to rederess inequity.
Case 6: Siain Enterprise v. Cuprtino

Q: What kind of piercing?

A: alterego piercing; in fraud piercing there should be malice!!
Case 7: General Credit v. Alsons Development
Q: What type of piercing?
A: alter ego piercing
T/F: Ownership of two companies give rise to piercing
A: False!!
Q: Why is it that even though owning 100% of equity is not a proof of
malice/disrespect?
A: because equity does not control the business enterprise (see sec.23).
However, control of equity together with other factors can show
malice/disrespect.
Case 8: Concept Builders v. NLRC
Q: Whats the piercing applied?
A: fraud piercing -> there was an allegation of malice because they created
another corporation to avoid judgment
Q: What sub species of fraud piercing?
A: To avoid positive obligation
BUUTTTT: Its alter ego piercing according to the court
Probative test (4)
1) there should be stock ownership by one or both of the corporation.
2) Identity of corporation and employees
3) Manner of book-keeping and method of doing business

Three tier test

(1) Control of business enterprise

11

(2) Use of control

(3) Proximate cause of injury
Q: Are these essential to fraud piercing??
A: No
o if one of those probative tests are not present, they can still be
pierced under fraud piercing because of malice
o Accion pauliana- remedy when party(debtor) transfer properties to
third parties to avoid liability rescissible contract!!
o piercing is not about equity, it is about using the business enterprise
to avoid liability clearest indication of alter ego but not necessary
for fraud piercing
CLV: This is fraud piercing!!!!

CORPORATE CONTRACT LAW

-

represents the statutory rulings and common law doctrines that have
evolved where common law had to decide in situations when there
are conflict between contract law that contradicts a policy in
corporate law.

Three levels by which corporate contract law operate

1. Pre-incorporation contracts promoters contract
- Contracts entered into with corporations that does not
have a corporate juridical personality
- De Jure v. De Facto corporation doctrine
- Corporation by estoppel doctrine
2. Post-incorporation contracts
- Trust fund doctrine (transcends post-incorporation and
dissolution stage)
- Trust fund doctrine is absed on the pricnciple that once a
person enters into a contract the obligor is made bound
but he is not to pay with his life (wtf??)

Obligation is personal but binding only on two

persons who have juridical personality
o General rule: once a person binds himself he
binds all his estate (except those exempt from
execution).
o All properties of a person is made liable
regardless of w/n it is personal or business ->>
based on single proprietorship
o Why would a single proprietors segretaged
properties be liable as well -> because when the
business enterprise profits, it all goes to the sole
proprietor. All profits -> all loses.
Once a partnership is insolvent, first in line for
partnership assets would the creditors.
o When partnership profits, it all goes back to
them.
In a corporate setting
o board of directors are agents of the corporation it
is through
o sec 36: bod are the trustees where the beneficial
title is in the shareholders and control is with the
board
o obligations arising from exercise of trust are not
enforceable upon beneficial title holder.
o You can enforce it against the trustee but only up
to the extent to the trust peroperty he is holding
o Trustee is liable to all trust obligations personally
but to the extent of trust properties he has.
o The reason why shareholders not liable is
because of the principle of privity
o Why BOD is not liable: Agents who acts in the
name of his principal is not liable
Therefore: limited liability is the natural, jurdirical, logical
consequence of the juridicial personality vested in a
corporation
o

12

In corporation, there is no delectus personae. Owners

has nothing to do at all with the operations.
Piercing is a common law doctrine developed in order to
ensure that separate juridical personality will only be
used to do legitimate business.
Piercing is not a structural doctrine. When there is no
basis to pierce, piercing does not destroy
Because it is an equitable doctrine, it can only be
invoked when there is equity to be done.
STRUCTURAL in character

3. Dissolution stage contracts

TRUST FUND DOCTRINE
1st Case: Halley v. Printwell, Inc.
Doctrine: when the corporation becames insolvent, all receivables are
deemed demandable regardless of what is stated in the subscription
contract.
Q: Doctrine of separate juridical personality pertains to whom?
A: corporation
Q: Do stockholders have conditional propriety rights?
A: none at all
Q: When stockholders have direct propriety interest on corporation
assets?
A: dissolution and payment of debts
T/F: doctrine of limited liability is statutory in character
A: false. It is a consequence of separate juridical personality
Q: Doctrine of Limited Liability

A: Stockholders or members of a corporation are not liable for the debts of

the corporation, except to the extent of their contributions or promised
contributions to the corporation.
Q: Once it is shown that the members of corporations still have
promised contribution, do they become liable?
A: Yes. (Trust fund doctrine)
- does not contradict unlimited liability because liability is still limited to what
they promised
Q: For whose benefit is the trust fund doctrine?
A: creditors
Q: What is the Trust Fund Doctrine?
A: The assets of a corporation to the extent that they come from capital stock
constitute a trust to be held by the corporation for the benefit of the
stockholders. (retained earnings not included!!)
Q: two acts which would be void even if with the consent of the BOD
because it goes against trust fund doctrine
A: return contributed capital stock to stockholders
Q: partner contributed land. Does he have propriety lands over the
land?
A: no only managerial rights
Q: Is it possible for a partner to get back that land?
A: yes with the consent of the other partners
Q: Stockholder delivers property to the corporation. Who owns that
piece of land?
A: corporation
Q: Does the stockholder have any propriety claim?
A: No

13

Q: But if he wants it back, can it be given to him by the bod through an

official resolution approved by all stockholders?
A: NO it would violate the trust fun doctrine. Creditors cannot do anything
that would prejudice the capital stock. All assets of corporation representing
the capital stock is trust fund for all stockholders.
The moment a corporation becomes insolvent, all receivables become
demandable. It is illegal for the corporation to suspend enforcement of
subscription agreement/ execute waiver.
Q: what happens to the binding contract? (ex: if it is said that payment
is due in 10 years)
A: it will no longer apply because all assets of the corporation representing
capital stocks, including receivables, form part of the trust fund. Trust fund is
placed so high that other contracts are put aside. In order to protect creditors,
they will set aside any conditions/period provided for in the subscription
agreement.
*upon dissolution of corporation, ALL assets must be given first to creditors

A: yes because there is partial breach there has already been default
Q: what is the use of knowing that a contract of sale is bilateral and
reciprocal?
A: the moment one fails to comply upon the compliance of the other is ind
default. And once there is default there is breach
Q: Should rescission be granted to the this?
A: no because it would violate the trust fund doctrine. Unpaid subscription
forms part of the receivables. Although the conditions of the subscription
contract are valid, they are set-aside under the trust fund doctrine because
priority should be given to the creditors and not to the stockholders.
Q: Why is there a trust fund doctrine?
A: everything that is owned by a corporation are called assets (liabilities +
capital stock + retained earnings).
Year 1
Assets = liabilities +
220 M
50M

capital stock
100M

+ retained earnings
70M

2nd case: Ong Yong v. Tiu

Year 2 loss of 20M
Q: why should we invoke the trust fund doctrine when the beneficiaries
are not even involved in the case?
A: trust fund doctrine is so panoramic that it involves to all situations
involveing the capital stock. Trust fund doctrine is so constitutional in
character that you cannot violate it even if the beneficiaries does not claim
damage.

o
Q: The capital stocks of a corporation constitutes what?
A: Trust for stock-holders
Q: supposing the ongs promised that they would pay the subscription
within 30 day. At the time the rescission was brought, they havent paid
a single centavo. Can the tius file for rescission

Trust fund doctrine says that the CS of the corporation is a trustfund for
the benefit of the creditors. And therefore, it is unlawful to put a single
peso back to the hands of the stockholders (VOID). it is unlawful for the
corporation to waive the payment of unpaid shares because it is taking
out assets from the trust fund.
Any condition that actually prevents the corporation from enforcing a
subscription agreement is VOID. Something that would be valid in an
ordinary contract of sale is void here in the corporation setting

(using example above)

Q: Why is retained earnings not included under the trust fund doctrine?
A: dividends belong to stockholders under their contract with the corporation

14

Q: why do you need to reserve the 100M capital stock if you have
retained earnings that you can declare as dividends?
A: Retained earnings go to stockholders through dividends. When there is a
loss, the loss is also sustained by the stockholders. One who benefits from
the profit is also the one who takes the loss. Therefore, if you remove the
cushion of the R/E, the loss is absorbed by the CS but the CS belongs to the
creditors. Therefore, there is the trustfund doctrine to protect the CS, which
belongs to the creditors, from absorbing the loss beyond the retained
earnings.
o The CS absorbing the losses is UNFAIR to the creditors!
o Capital stock represents a trust for the benefit of the CREDITORS.
Therefore it is void to do any act which undermines the ability of the
corporation to collect on the stockholders so that the creditors will be
paid. Owners are liable first for the losses.
o Without the trust fund doctrine, all you give to the creditors is to the
ability to make habol. Trust fund doctrine ensures that at the first
instance, the creditors are protected and acts compromising their
rights are immediately void.

Q: whats the difference between de jure and de facto corporation? (see

sec.22)
A: de jure corporation is a corporation where there is no defect in the manner
of its incorporation. In defacto, there is a corporation but theres a defect in
the incorporation process.
Q: what is the corporation by estoppel doctrine?
A: there is no corporation but the parties are not allowed to raised the nonexistence of the corporation
Q: how different are de facto and de jure corporations for the purposes
of commercial transactions?
A:

Q: can one who is a party to a contract with a de facto corporation raise

the fact that it is a de facto corporation?
A: No
T/F: for purposes of looking at contracts, there is no distinction
between de facto and de jure corporations
A: none
Therefore, why does the law need to define what a de facto corporation is?
What is the value of defining a defacto corp as distinguished from a de jure
corp?
A: De Facto Corporation
Q: Does a De facto corporation lose the limited liability feature, strong
juridical personality?
A: No (?)
Q: Is a de facto corporation exactly like a de jure corp?
A: No, see Sec. 20 of the Corporation Code
Even if the elements are all proven, does it make a difference as to its being
a de facto
Elements of De Facto Corporation
1) under this jurisdiction (?)
2) juridical personality w/ defects
3) assumption of corporation powers
Q: Even if all of these are proven, does it make a difference as to the
corporations being a de facto corporation?
A: These cannot be raised at all.
Q: Are the contracts entered into under de facto corporations void?
A:

15

Q: Contracts entered into when one party does not exist, what is the
status of the contract?
A: Under the Contract Law, the contract is void. Under the corporation code
(corporation by estoppel; de facto corporation), even if there is no
corporation, contracts entered into by a party is valid.
Q: Corporation by estoppel doctrine is a great attribute?
A: No, it defies the principle of separate juridical personality of a corporation,
by upholding the sanctity of the contract.
Corporate Contract Law contract law behaving in a corporate setting
Corporation Code wants to ensure that the purpose of the corporation is to
be a means of having a business enterprise.
Q: among all the levels of corporate existence, which is the most
important?
A: extra-corporate level
*The fact that a corporation is defective does not undermine the contract.

The pre-incorporation contracts/promoters contracts

o These are contracts entered into with a corporation, knowing it
does not yet exist or it just about to be created.
1st Case: Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko

Doctrine: If a promoter entered into a contract prior to the incorporation of a

company, and the company does not ratify the said contract, the contract
would not be binding.
Q: Initial sale was void, does that undermine the sale of the company to
Sandiko?
A: Yes, because the corporation never acquired title to the land.

Q: By corporations selling the land to Sandiko, is that not ratification

after the fact of its incorporation?
A:
Q: Is the sale to Sandiko a promoters contract?
A: Yes, because when the land was transferred to the corporation, the
corporation did not yet exist.
Q: What is the status of a sale to a corporation by an agent that does
not exist (promoters contract) under contract law?
A: Unenforceable; it is valid only if ratified. It is similar to a contract of an
agent acting in behalf of an undisclosed principal (agent is liable). It is the
agent who becomes liable under promoters contract.
Q: In a promoters contract, the supposed principal is who/what?
A: The corporation
Q: In this case, is the promoters contract valid?
A: Yes it is only unenforceable; there must be an act of ratification on the part
of the corporation.
Q: When the corporation sold the land to Sandiko, is that an act of
ratification?
A: Yes
Q: Is the sale of the corporation to Sandiko valid even the corporation
had no title?
A: Yes, because title of the seller is only material upon delivery/tradition. The
validity of a sale is only affected during the perfection stage.
Q: When a corporation is validly incorporated, what type of corporation
is that?
A: De Jure Corporation
Q: What corporation is incorporated with defects?
A: De Facto Corporation

16

Q: Every contract entered into in behalf of the corporation is always

done through an agent.
A: True, because the corporation cannot act on itself without an agent; A
corporation is only a contemplation of the mind. It can only act through a
natural person acting at its agent. Every promoters contract is done through
an agent. That agent is called a promoter.
Q: What determines the character of the contract?
A: Time of sale.
Q: Why would be the sale to Sandiko void?
A: If the corporation never had title to the land;
Q: Can Sandiko assail the validity of the sale of land due to the failure
of the corporation to be incorporated?
A: No, pursuant to the corporation by estoppel doctrine.
Q: What is the corporation by estoppel doctrine?
A: One cannot invoke the failure of a corporation to be incorporated to assail
the validity of a contract.
CLV: The case is wrong, because the SC therein declared the sale of the
corporation to Sandiko as void, but this is contrary to the doctrine of
corporation by estoppel.
2nd Case: Rizal Light & Ice Co. v. Public Service Commission
Q: What is the general rule in promoters contracts?
A: A promoters contract is always void, because under the Contract Law,
consent is lacking (Cagayan). It is only unenforceable, subject to ratification
of the corporation. It is valid as a contract as to the agent, but it is void as to
the corporation.
Q: Promoters contract v. De Facto Corporation Doctrine v. Corporation
by Estoppel Doctrine.
A:

o
o

Promoters Contract Law on Agency governs;

Corporation by Estoppel Estoppel applies

Q: What is the rationale/public policy behind the De Facto Corporation

Doctrine?
A: Those who deal with people with colorable authority have the right to
expect that their dealings with such are valid.
Q: What is the general rule on promoters contracts?
A: Every promoters contract is unenforceable and does not bind the
corporation unless it ratifies.
Q: Name a corporation contract where promoters contract is valid.
A:
(1) Pre-incorporation Subscription Agreement
a. The subject matter is unissued shares of stock.
b. The seller is always the corporation.
(2) Post-incorporation Subscription Agreement
Q: When a suspensive condition does not happen, is there a valid sale?
A: Yes, but the contract is deemed to have not existed.
Q: When a contract subject to a suspensive condition is a valid
contract, prior to the happening of the condition.
A: True. There is a contract, but the contract is deemed to have not existed if
the suspensive condition does not happen.
Q: A subscription agreement, is a species of genus sale?
A: Yes, because it involves the transfer of ownership and delivery of
possession of an intangible personal property.
Q: Why is a subscription agreement special, and thus suspensive
conditions are not allowed?
A: Because it is the center of the Trust Fund Doctrine.

17

ARTICLES OF INCORPORATION (AOI)

Q: When does the Articles of Incorporation become the charter of the
corporation?
A: Upon the issuance of the Articles of Incorporation by the SEC
Q: What does the AOI provide?
A: Corporations
1. Existence
2. Purpose
3. Capacity to contract
Q: What is the character of AOI?
A: Public document. AOI is a contract that binds not only the stockholders but
also the public.

A: AOI prevails
Q: What is the greatest proof that AOI has a higher hierarchical value
than by-laws?
A: It is the contract among the parties of the AOI; in order to amend AOI, it
needs the consent of the following parties:
(1) (Corporation) BODs majority vote
(2) stockholders 2/3 concurrence
(3) (State) SECs approval

It is easier to amend by-laws:

(1) BODs majority vote
(2) stockholders majority vote
(3) It can be delegated by the BOD to the stockholders (?)
(4) (State) SECs approval for regulatory purposes of State

Q: Are by-laws contracts?

A: Yes, it governs the intra-corporate relationships of the corporation;
between and among the stockholders and the corporation; the board of
directors and stockholders.
o It is a public document, but it does not bind the public, unless the
third parties have actual knowledge about it.

Q: The AOI is what type of contract?

A: solemn (w/ certain forms), because it needs to be approved by the SEC
and must comply with (Sec. 14 of the Corporation Code)

Q: Why do by-laws generally do not bind third parties?

A: Because these are only for the internal affairs of the corporation

Q: What are the contents of the AOI?

A:
(1) name
(2) principal place of business
(3) term of existence
(4) names, addresses of the incorporators
(5) purpose clause (primary and secondary)
(6) incorporators data (at least 5)
(7) number of directors (5-15) and names of incorporating directors
(8) authorized capital stock
(9) subscribed capital stock (25%)
(10)paid-up capital (25% of subscribed capital stock)
(11)name of treasurer

T/F: Lack of knowledge of the contents of the by-laws of the

corporation does not bind the person dealing with that corporation.
A: Generally True, but the purpose of by-laws is to let the public know about
the corporations capacity. By-laws do not bind the public for things irrelevant
to them, unless they have actual knowledge about such things.
Q: AOI v. Statutory Law
A: Law prevails
Q: AOI v. By-laws

Q: All contracts (real, solemn) must first be a consensual contract.

A: Yes

18

Q: A juridical person cannot exist without a name.

A: True, because it is only through this name that a corporations existence
can be verified.
o It is through this name that a public is able to deal with the
corporation.
o It is through the name that the spirit of the corporation can be
invoked
o SEC can regulate the names allowed
Q: Principal place of business importance
A:
(1) venue
(2) taxation
(3) jurisdictional
Q: Term
A: 50 years, extendible for another 50 years. This is because there is a time
value for investments.
Q: Purpose Clause
A: This is due to the fact that corporations are juridical persons with limited
powers. This defines the corporations capacity.
Q: Incorporators
A:
(1) natural persons
(2) majority must be residents of the Philippines
Q: Can a registered juridical person act as an incorporator?
A: No, only natural persons can incorporate. They are the persons who hold
equity during the process of incorporation.
Q: Why must the Board of Directors (BOD) be composed of not less
than 5 people?

A: If 4, there would be a tie; 5 is the smallest number to make an efficient

decision;
Q: Why must the BOD be not more than 15 people?
A: It would be difficult to come up with an agreement
Q: 12 Rose, Inc. is this a valid name?
A: Yes
Q: Can a corporations name be changed just by correcting it due to
mere typographical error?
A: No, you must go to SEC and undergo the process of amending the AOI.
Q: Does a defective name make the corporation de facto?
A: No, it is a de jure corporation.
T/F: A corporation without a name is a de facto corporation.
A: False, it is neither a de facto nor de jure (?)
Q: A De Facto Corporation is subject to public execution.
A: True.
Q: A De Jure Corporation is subject to public execution.
A: False, it is against the right of the corporation to due process (public
purpose; reasonable means)

Q: Why is there a need to give juridical personality?

A: To confer capacity to contract.

PUBLIC POLICY: There is a great societal policy that contracts entered

into with juridical persons must have the same validity and enforceability
with those entered into with individuals
I.
Pre-incorporation doctrines
II.
Post incorporation doctrine
III.
Dissolution/ liquidation doctrine

19

Said social value conflicts with the definition under sec.2 that
corporations are creatures of limited powers.
The ability of an individual to enter into any enterprise that he wishes is
the reverse in a corporation creature of limited powers (classical
definition of corporation)
Therefore, that has brought in jurisprudence the ULTRA VIRES
DOCTRINE outside of corporate powers
Violation of doctrine of limited powers
Ultra vires contracts are VOID on two parameters:
1. Entered into by non-existent person; therefore no consent (contract
law)
2. Entered into against public policy (corporate law)
Old rule: ultra vires is meant to implement a great corporate principle->
corporation is creature of limited powers. It is consistent with the theory
of concession.
Ultra-vires affects first level of relationship (as a juridical person in
relation with the state)
Third level- affects also the publics (who deals in good faith) right to
expect that contracts will be valid
Corporation is a created to protect the sanctity of contracts -> note of
principles of mutuality and obligatory force
End will always wins, means will always lose. Therefore, ultra-vires
(sec.45) is a doctrine of last resort. It has little effect on people who deal
in good faith with the corporation.
Whole corporation law is anti-corporate when it deals with public
expectation. Because the corporation code is supposed to regulate the
corpotion as to meet public expectations.
Three types of ultra-vires
1. Classical entered into outside of express/implied powers (juridical
personality)

2. Doctrine of centralized management acts within powers but

contract entered into without authority
3. Contracts against the law, morals, public policy (general principle of
freedom to contract)

Express power provided by law/charter (see sec.26)

o Based on enterprise

Implied/incidental powers powers that a corporation has because of its

express powers; those that you can find in articles of incorporation.
o Possessed by a corporation because of its juridical personality,
regardless of its business enterprise
o Simply because it can enter into contracts (ex: to loan)
Express power connects to SPECIAL powers

1st case: Salvatierra v. Garlitos

Q: Better principle would be to apply the principle of agency? If we
have that principle we dont need the estoppel doctrine?
A: Salvatierra only applies when there is fraud or misrepresentation, so in
that case the doctrine is limited.
Q: What makes it a fraud/ bad faith situation?
A: When the association actually knows that no corporation exists
Q: Why is there a need for fraud in order for the law on agency to apply
(person who acts for principal who does not exists becomes personally
liable, w/wo malice)?
A:
Q: Does the law on agency making an agent liable when in fact there is
no principal apply only when there is fraud?
A:
2nd case: Albert v. University Publishing Co.
Q: What is the difference of this case to Salvatierra case?

20

A:
Q: How do you establish the liability of Aruego?
A: establish and then pierce
Q: How can piercing doctrine be invoked when corporation by estoppel
is applicable?
A: The Court only provided for hypothetical reasoning
Q: Corporation by estoppel
A: A person who acts in behalf of a corporation which does not exist cannot
later on set up the lack of juridical personality in order to avoid the contracts
entered into.
A person who enters into a contract believing that a corporation exists cannot
also invoke the lack of juridical personality to avoid the contracts entered into.
Q: what is the urpose of corporation by estoppel at that time?
A: One purpose is to validate the contract.
Q: Salvatierra corporation by estoppel doctrine
A:
Q: Today, under the new corporation by estoppel doctrine, do you make
an actor acting without fraud liable?
A: No- he is not personally liable but limitedly liable (sec.21)
Q: Therefore, if parties acted with fraud and they are made liable as
general partners, it satisfies expectations of contract law. Why?
A: YES fraud piercing makes them liable.
Q: If there is no fraud, they are made limited partners. Is it consistent
with contract law expectations?
A: YES- limited liability that they are only liable up to the extent of their
contribution

Q: The whole limited liability exposure of those who act without fraud is
not consistent with contract law principles (agency)?
A: NO (because even if agent did not know of the fraud, he violated his duty
of diligence)
- limited liability is consistent that person who breached liable up to the extent
of damage
Q: effect of liability of fiduciary who breaches duty of liability
A: he must return ALL
3rd case: Asia Banking Corp v. Standard Products
T/F: If at the beginning when the corporation sought to enforce the
contract and the borrower already questioned the legal existence, will it
prosper?
A:
Q: When you sue a corporation, do you have to establish the legal
existence before raising cause of action?
A:
Q:When can you question legal existence of a corporation to attack the
claim?
A: NONE- legal existence cannot be invoked to avoid a contract.
- juridical personality is between corporation and state, you have
no business
- you are estopped!!
- Cannot be used to undermine contract
4th Case: Pioneer Insurance v. CA
Q: What is the cause of action of Pioneer Insurance from ?
A:
Q: Failed to incorporate is there a partnership?

21

A: It does not constitute a partnership because the they cannot be deemed to

institute a partnership without the intent.
Q: Are stockholders liable?
A: NO- they are unlimitedly liable because they never gave their consent to a
partnership.
Q: Should they be limitedly liable under the corporation by estoppel
doctrine? (NO) why not?
A: Court cannot apply estoppel doctrine because it is utterly inapplicable with
the facts because pioneer already knew that it was dealing with a sole
proprietor. There was no presentation of a purported corporation.
Corporation by estoppel only applies when a contract is entered into in the
name of a purported corporation.
Therefore, the rules on corporation of estoppel under sec.23 do not apply.
They are not even limitedly liable
5th Case: Lim Tong Lim v. Philippine Fishing Gear
Q: Legal basis for not being liable (according to lim)
A: he is not a party to the contract, he is not even a party to the partnership
Q: When five or more persons bind themselves to enter into a business
venture through a corporation and the corporation is not registered. Is
a partnership constituted?
A: No (according to pioneer)
No pa din (according to lim tong lim)
Q: In the end, was lim tong lim held liable?
A: YES (as general or limited??)
T/F: Lim Tong Lim, as the latter case, has overturned Pioneer
A: False when you give your consent to be stockholder, you do not become
a proprietor, you do not manage- thus, there cannot be a partnership.

- pioneer was not liable because they did not present themselves as a
corporation
-The reason why Lim Tong Lim was made liable was because there was a
representation that they were a corporation
- all those who present themselves as a corporation knowing that
no corporation exists are liable as general partners
Therefore, failed corporation does NOT result to a partnership. They only
apply the liability as general partners.
6th case: Gokongwei v. SEC
Q: three principles that apply on how to judge validity of by laws:
A: 1) By-laws cannot contravene the constitution, laws, charter. Any provision
that is contrary will be VOID. In the hierarchy of things, articles of
incorporation occupy a higher position. Therefore if by-laws are contrary to
the articles, the latter govern.
2) By-law provisions cannot discrimitate, but shall treat all share-holders
equally.
3) By-law provisions cannot be unreasonable or be contrary to the nature of
by-laws
Q: Why is it that the fact that you are an association gives you the
inherent right to form by-laws?
A: Corporation needs by-laws to govern processes within. Because it is an
association, there is a need for self-preservation as a matter of order.
T/F: It arises from the fact that there is juridical personality
A: false
T/F: Unincorporated association has no right to adapt by-laws
A: False- as a matter of self-preservation
Ruling: by-law provision is valid but there should have been a hearing first

22

Gokongwei is one of the few cases where the court was able to
rule using corporate law and not through civil law
7th Case: Pea v. CA

T/F: Pea is a stupid case. Is it doctrinally correct?

A:
8th case: China Banking c. CA

1st Case: Hall v. Piccio

De facto doctrine only applies to extra-corporators, whether it involves public
corporations.
Q: What sector does de facto doctrine protect?
A: The public. This is not an in re proceeding. This is meant to protect that
contracts of the people dealing with the public authority. De facto doctrine
does not apply to intra-corporate situations.
Q: If there were certificate of corporation showed (misrepresentation
that a corporation exists), would it have changed the end? Would it
have changed their position?
A: No, because they have an intra-corporate relationship, did not involve the
public or third parties. The Corporation by estoppel doctrine is meant to
benefit those who deal in good faith with the corporation.
T/F: Both de facto and corporation by estoppel doctrines are doctrines
that occupy the extra-corporate level, thus nothing to do with the intracorporate level.
A: True.
T/F: basis of corporation by estoppel doctrine is good faith. Whose
part?
A: True, on part of the 3rd party who deals with the corporation.

T/F: The corporation by estoppel doctrine applies in a situation where

the de facto doctrine does not apply.
A:
T/F: In a de facto corporation situation, a corporation in fact exists.
A: True.
T/F: De Jure v. De Facto are the same
A: True.
Q: Thus, The corporation by estoppel doctrine can be invoked.
A: No, because for corporation by estoppel
T/F: For De facto doctrine to apply, there must be certificate of
incorporation. (Piccio case)
A: True, there must be the issuance of the certificate of incorporation. Since
there is no certificate of incorporation, good faith cannot be invoked, because
ignorance of the law excuses no one.
Q: What is the de facto corporation doctrine?
A: If there is a defect in the manner of incorporating a corporation is not a
defense by the corporation to avoid the obligations arising from the contract it
entered into. It cannot be used to collaterally attack a contract.
Requisites (?) for De Facto Corporation Doctrine under Piccio Case
1) Corporation Code gave power to SEC
2) Colorable fulfillment of the requirements, which must end up with the
certificate of incorporation
3) Dealing of the corporation with the public
Q: Can third parties invoke good faith when there is no certificate of
incorporation?
A: No, misrepresentation cannot be invoked if one is deemed to know
something, thus he cannot be a victim of misrepresentation.

23

T/F: Without certificate of incorporation, corporation by estoppel

doctrine cannot apply.
A: True, because this only applies when there is no corporation, and a de
facto corporation is in fact a corporation.
Any party dealing with the corporation is mandated to know the law Piccio
case: de facto corporation doctrine does not apply, if there is no certificate of
incorporation third parties must
T/F: Corporation by estoppel doctrine is the same, with or without
fraud.
A: True?
T/F: No matter how defective the corporation is, corporation by
estoppel doctrine cannot apply.
A: ?
T/F: If certificate of incorporation is not(?) issued, corporation by
estoppel doctrine cannot apply.
A: True, because there is in fact a corporation at the very least.
T/F: CBED when no certificate of incorporation, thus CBED is always
with fraud. There is no corporation by estoppel doctrine without fraud
(thus always with fraud).
A: True, according to Piccio case (Obiter).
Piccio ruling is obiter only, because De facto doctrine and CBED apply only
to extra corporate situations. In this case, no third party was involved.
CLV: The passive investors at the time of formation, they dont go out to the
world to represent the corporation but the authorize their agents, thus the
agents are deemed to be general partners, but those who did not represent
the corporation (passive investors) are limitedly liable.

CORPORATE POWERS AND AUTHORITY

The capacity of a contract is determined primarily by its articles of

incorporation sets distinction between primary and secondary
purposes.

Q: Why is there a distinction between primary purpose and secondary

purposes.
A: There exists a public policy that every stockholder has the right to except
that all assets and HR are devoted to the corporation.
Q: is an ultravires act void or unenforceable?
A: Void from policy standpoint.
However, even if a contact has been entered into by the board but it is
outside its powers -> void because it violates public policy by going outside
its powers
CLV: looking at jurisprudence, real answer is UNENFORCEABLE -> void as
far as the principal is concerned but may be valid on one level, or because all
policies violated cannot overcome the great public policy that everyone who
deals in good faith the corporation has the right to expect that contracts they
entered into are valid and enforceable.
Contractual expectation > policies of corporate law

3rd ultra vires act: against law, morals, public policy

Q: when private persons enter into contract which are against law,
morals, public policy
A: VOID -> not ratifiable
Q: why is there no curing effect for ratified contracts?
A: because there is no contract in the first place -> void contracts are nonexistent contracts
Q: legal effect of in pari delicto application

24

A: void contracts although non-existent produce effects. They allow people to

move but they cannot amove because of pari delicto.

Harden v. Benguet Consolidated Mining

Q: What does Harden say about ultra vires?

A: Where contracts are illegal per se, when only public or government policy
is at stake and NO PRIVATE wrong, the courts will leave the parties as they
are in accordance with their original contractual expectatsions. The only
contracts the courts will touch are contracts which are void for being illegal
per se.

Q: Public policy of expectancy of contracts superseded what public

policy in Harden?
A: foreigners should not be controlling majority of natural resources of the
country

Sec 23: BoD UNLESS OTHERWISE PROVIDED FOR BY LAW -> there
is a reservation of power from BoD. BoD power is primary but not
plenary.
Whenever they appoint sub-agents, sub-agents cannot bind the
corporation without an SPA,
Power to Sue one of the powers under SPA under agency law.
General rule: Power to sue and be sued found in the board
o EXCEPT: Derivative suit
Angeles v. Santos

T/F: de facto corporation and corporation estoppel has application in

intra corporate level
A: FALSE they are doctrines involved by law to benefit the contractual
expectations of third parties who deal with the corporation.
Q: intra-corporate relationship exist beyond contractual relationship
A:

Express powers of Corporations:

1) sue and be sued
2) borrow money
3) buy and sell land

But even if they are not mentioned in art.36, their capacity to contract
granted by their separate juridical personality makes such powers
inherent.

Borrow money and sell land -> needs SPA

o *although such powers are inherent to a person, they are not
deemed granted to an agent except when there is an SPA
In corporation law, the BoD is so powerful that everything the corporation
can do, the BoD can do.
If somebody by an act of disposition becomes a trustee, then he has all
powers, The moment you are constituted as a trustee, he becomes a
naked title holder. Therefore if you look at the BoD as a trustee, they
dont need any enabling mode in order to exercise it powers.

*intra-coroprate level:
1) Corporation and its agents
2) Corporation and stockholders
a. By subscription agreement
3) Shareholders and corporate directors
a. Trust agreement stockholders hold beneficial title to
corporate property granted to the board
4) Shareholders in a common venture
a. By-law contractual relationship. Stockholders are bound by
the by-law by associationg with the corporation.
THEORIES ON SOURCES OF BOARD POWER
1) Theory of delegated powers
a. Source of power: stockholders
b. Fiduciary relationship
c. Works under the contract of agency
2) Theory of directly vested power

25

a. Source of power: state

b. Works under the contract of TRUST

Q: when a contract contrary to sec 23 has been entered into, what is the
status of the contract
A: Void for being ultra vires of the second kind

Theory covered by sec 23: theory of delegated powers

Q: What is the value of Angeles v. Santos?
A: the case institutionalizes the theory of delegated power.
T/F: BoD is created by stockholders?
A: No, but BoD is elected by stockholders. Once they are elected, they
occupy the position of agents.
Therefore, there is derivate representation. Therefore, because it is
representative in character, relationship of agent to principal is
fiduciary. Because it is fiduciary, the agency is essentially revocable.
When the board no longer complies with the purpose of the
corporation, the stockholders can replace them.
Even using the trust theory, relationship is still fiduciary in character.
(but it is not revocable in character!! But see below its still irrevocable
when there is breach of trustiukj)
T/F: does the trustee owe the duty of obedience to the beneficiaries?
A: NO trust is a property relationship meaning that the trustee does not
need directive from anyone. Therefore it is IRREVOCABLE character and
there must be substantial breach before one can ask for rescission. EXCEPT
for BREACH OF TRUST one can destroy the relationship even without
substantial breach.
Board of Liquidators v. Kalaw
T/F: contract within the powers of the corporation entered into by the
janitor is valid
A: unenforceable
Q: if a complete stranger gives consent for a corporation
A: unenforceable -> void as to the principal

Q: what is the one characteristic of unenforceable contract

A: void as to the principal but subject to ratification
Q: Why would unenforceable characterization under contract law trump
the void characterization under ultra vires law?
A: greater public policy to protect the contractual expectation of third parties
who deal in good faith
Therefore, when the issue involves extra-corporate relationship then the
public policy of unenforceability trumps ultra vires doctrine
T/F: Public policy of unenforceability ALWAYS trumps ultra vires
doctrine.
FALSE: when it does not involve third parties suit is only in the intracorporate level
Q: Is the Kalaw case an extra-corporate or intra-corporate case?
A:
*there is no violation of by-laws because there was ratification from the board
Q: is the by-law a public instrument?
A: yes -> registered with the SEC. But it is not binding to the public
T/F: articles of incorporation is a contract with the public
A: False the public has not given its consent. (but see below)
Q: When is the articles binding upon the public?
A: Upon publication
Q: Those who deal with contracts without board resolution, are they
bound by the provisions of the articles? Who would win? corporation
or contracting parties?

26

A: Contracting parties
Even with the articles of incorporation, they will still be bound because in the
corporate world, the principal has no mind and the mind of the principal is
exactly the mind of the board. Therefore, in the end, inspite of the articles of
incorporation, the BoD as the mind of the corporation knew of the contract
and therefore it is deemed ratified.
Q: are contracts entered into without board resolution unenforceable?
A: extra-corporate level -> Yes; juridical entity level-> no, contract is VOID
Pirovano v. De la Rama Steamship
Q: renumerative donation is given not for services but out by reason of
qualification. consideration is still out of liberality.
For an ultra vires act to be ratified:
1) consummated and not executory
2) shall not be prejudicial to crediotrs
3) not against public policy
4) with consent of stockholders
Renumerative donation is not in the implied powers of corporation because
the business of every stock corporation is to make money.
Q: what is the primary duty of BoD in every stock corporation?
A: make profit for stockholders -> STOCKHOLDERS THEORY
Therefore, purpose of any business enterprise is to earn profit. If it is the
main purpose of the medium, the fiduciary duty of BoD is the maximization of
shs value.
Thats why partnership is in pursuit of profit EXCEPT when it is in pursuit of
profession.

Therefore every act of the board not in pursuit of profit is ultra vires. Except if
it is a NON-STOCK corporation (they are precisely made for charitable
purposes.
Q: when it is a donation deemed reasonable?
A: when it is done in line with profit making
When a donation is truly just a donation, it is unreasonable because it goes
against profit making.
T/F: unreasonable donation to the heir of Pirovano is ultra vires
A: True ultra vires of the first kind
Those who deal with corporation as third parties but at the same time are
members of the corporation, cannot keep from themselves the misdealings
of the corporation. (ask Chris!!)
-> there is bad faith
the only thing that the protection of contractual expectation protects are
BUSINESS DEALINGS
-> you cannot expect it to apply to non-business dealings because it will then
harm the right of the stock-holders
Q: what if the board resolution is ratified by the stockholders?
A: corporation (pirovano) wins; such transaction does not violate the trust
fund doctrine because consent of stockholders obtained
(but it still violates trust fund doctrine because it decreases funds for creditor)

Q: if Sec. 36 does not exist, will the corporation still have these
powers?
A: Yes, because corporation is defined as artificial being with limited powers,
only those

27

#1 in Sec. 36, they would be incidental powers if not stated, because of

corporations juridical personality and these are usual acts of persons
(sue, sell, etc.)
#2 succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation
o this supports the corporations strong juridical personality
#3 adopt a corporate seal this is used to make a document official
association of individuals incidental power, but it is stipulated in
corporation code to be regulated; if you dont adopt by-laws, then the
revision would not be proper
#6 essential for juridical persons?
#7
#8 merger and consolidation
#9 and #10 if a corporation acted through its BOD, it has the power to
donate assets to others,
if a corporation has a power, it is exercised by the Bod centralized
management
third parties do not need to check the authority of the BOD in dealing with
the corporations

Q: Can BOD, in behalf of the corporation, take assets of corporation

and donate them to charity?
A:
1st School of Thought: NO, because the corpus can only be for the benefit of
the beneficiary. Trustees must act for the benefit of the beneficiary, otherwise
it breaches its duty. Thus, BOD cannot donate the assets of corporation to
charity.
2 School of Thought: Yes, BOD can donate assets of the corporation
whenever it is reasonable, in order to build up the good will of the
corporation.
A corporation, being a creature of law, w/ protection of state must act as a
good citizen, thus must benefit those who good will earn more for the
benefit of the stockholders synthesis of contradictory theories in #8 and
#9, except donations to political parties
nd

Q: Can BOD be charitable with their employees at the expense

A: #10, Yes, pensions of officers and BOD. loyalty, and greater benefit of
corporation and stockholders
#9 & #10 for the good of others also for the good of the corporation and
its stockholders

SECTION 23
- agent of principal (Agency Law)
- Section 23 not same w/ Agency Law it is not the corporation that
chooses the BOD, it is the law that created the trust to the BOD.

In a corporation, stockholders are the beneficiaries (holds beneficiary

title) of the corporation, while BOD are the trustees (holds naked title)
BOD goes out into the world as agents of corporation.
BOD assigns officers and these officers go out to the world and becomes
the sub-agents of the corporation.

T/F: Because a corporation has a separate juridical personality,

therefore it has plenary powers to pursue its business, enter into
partnership in pursuit of business endeavors.
A:
Q: Does a corporation have an inherent power to buy, sue, defend itself
even without Section 36?
A: Yes
Q: Does a corporation have an inherent power to borrow money?
A: Yes
Q: Power to lend money, buy, lease, sell. Are these incidental powers
too?
A: Yes

28

Q: Is it possible for a corporation to have express power to enter into

partnership?
A: Yes, in its charter
Q: power to enter into partnership can it be an incidental power of a
corporation, emanating from its business?
A: No, because it is not
Q: can a corporation enter into a business even without power to
borrow, buy?
A: No
1st Case: Tuason Co. v. Bolanos

Doctrine: Although corporations cannot enter into partnerships,

corporations can enter into joint ventures, when the nature of the
business is in line with its charter.
Doctrine of Mutual Agency is integral in every partnership setting. This is
contrary to the Doctrine of Centralized Management (only the BOD of the
corporation can bind the corporations and act for the benefit of the
stockholders)
By entering into partnerships, the doctrine of centralized management is
violated.

Q: Mutual agency does not exist in joint ventures, that is why

corporations can enter into JVs?
A: False
Q: Corporations cannot enter into partnerships because of the doctrine
of centralized managements inconsistency with the doctrine of mutual
agency under a partnership setting.
A: True
Q: When a contract is entered into by the corporation by people other
than the BOD, what is the effect to the contract?

A: It involves a 2nd type of ultra vires contracts entered into by the

corporation by people who do not have authority to do so
Q: Why can corporations enter into JVs but not into partnerships?
A: Because in JVs, corporations are able to evaluate the risks of the
business, unlike in partnerships.
Q: SEC (old rule) a corporation cannot enter into a partnership as a
limited partner; corporation has to be a general partner. Why did SEC
say that?
A:
Q: SEC (new rule) a corporation can now enter into a partnership as
a limited partner. Why?
A: So that corporation can participate in the management of the business.
This is related to limited liability and centralized management.
Q: Why do corporations have to participate in the management of the
business in a JV?
A: So that properties of the BOD would be within the control of the BOD.
But, without an enabling clause, they can still enter into general partnerships.
2nd Case: De La Rama v. Ma-Ao Sugar
Q: when a power of a corporation is express, implied, incidental, that is
exercised by the BOD.
A: True
Q: All powers of the BOD are plenary.
A: True, only when they are not allowed by law that its power is limited.
Q: Power to invest in an equity. What kind of power is that?
A: Implied power, because it is in pursuit of its primary purpose/business.
Q: The general rule: power to invest is a plenary power of the BOD.

29

A: True. Section 42 power to invest corporate funds to other businesses

(partnerships or corporations)
Q: When a corporation engages in a business connected with its
primary purpose it is allowed through a mere resolution of BOD
Q: When a corporation engages in a business not connected to its
primary purpose of corporation but found in its secondary purpose, is
it allowable by mere resolution of the BOD?
A: No, the BOD needs to:
1) resolution of BOD
2) ratification of the stockholders representing 2/3 of the outstanding
capital stock
Q: What is the status of the contract if the contract is approved only by
mere BOD resolution and a corporation engages in a business not
connected to its primary purpose but found in its secondary purpose?
A: The contract is void for being contrary to public policy. Section 42 contains
a public policy the stockholders have the right to expect that their
investment would be use according to the primary purpose of the corporation
and that in the event that their investment is not used for its primary purpose,
their consent (stockholders representing 2/3 of the outstanding capital stock)
would have to be obtained. w/o their consent, the resulting contract would
be void
Q: Outside Section 42, power to invest is plenary.
A: True
Q: if ratification of stockholders is needed, what is the type of
investment of the corporation?
A: it is investment not in pursuit of the corporations primary purpose but
pursuant to its secondary purpose only
Q: If a sugar central corporation (Ma-Ao) has P2B assets, with no
authority from stockholders regarding its secondary purpose, it
decided to invest P100M to San Miguel Beer, a large brewery

corporation. De La Rama objects on same ground (that there is no

ratification of 2/3 stockholders required in investing in a business
pursuant to a corporations secondary purpose) Who wins?
A: investment in San Miguel Corp, the investing corporation will not
participate in the management, BOD is out of its primary purpose
business judgment does not prevail over public policy
Q: If a sugar central corporation (Ma-Ao) has P2B assets, with no
authority from stockholders regarding its secondary purpose, it
decided to invest P100M to a smaller brewery, a sole proprietorship. De
La Rama objects, same ground. Who wins?
A: investment in small brewery, corporation will participate in the
management
T/F: To get out of Section 42, a corporation has to invest in a business
connected with its primary purpose.
A: True.
Section 42 investment and expect money to earn
So if a corporation invests in something not in primary purpose, corporation
has to work for it violation of public policy under

1) Processes in Corporation Code are jurisdictional in character.

Noncompliance is fatal to the corporation.
2) General Rule: When a contract is perfected, all the doctrines of
Contract Law (relativity, mutuality, etc.) become effective at one.
3) The most solemn contract in Corporation Law Articles of
incorporation is the charter of the corporation; it is a contract
between the State and corporation
a. to amend this, consent of both state and corporation (Board
and stockholders consent) are needed
b. states consent SEC
c. corporations consent through its Board of Directors
d.
4) Stockholders do not have individual standing

30

a. they stand as a group party

AMENDMENT OF ARTICLES OF INCORPORATION (SEC. 16)
1) 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 two-thirds (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 two-thirds (2/3) of the members if it
be a non-stock corporation.
2) The original and amended articles together shall contain all
provisions required by law to be 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 Securities and
Exchange Commission.
3) The amendments shall take effect upon their approval by the
Securities and Exchange Commission or from the date of 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.
AMENDMENT OF BY-LAWS (SEC. 48)
1) 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.
2) The owners of two-thirds (2/3) of the outstanding capital stock or twothirds (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.
3) 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.
4) 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.

Q: What is the proof that AOI are higher than by-laws?

A:
1) AOI concurrence of 2/3 stockholders; by-laws concurrence of
majority of stockholders
Q: why is certification from SEC needed for the effectivity of by-laws
amendment, whereas for articles of incorporation, the mere inaction of
SEC is sufficient?
A: (?)
T/F: Every amendment of AOI always gives rise to dissenters right of
appraisal.
A: False.
T/F: In the amendment of AOI, every dissenting stockholder has a right
to exercise his right of appraisal.
A:

31

Q: What is the right of appraisal?

A: The right of a dissenting stockholder to sell his shares to the corporation at
its fair market value.

Q: Sale of property by corporation through its Board is valid, EXCEPT:

A: When it involves sale of all or substantially all of the corporations property.

T/F: The corporation has the obligation to buy the shares of a

dissenting stockholder, in his exercise of his appraisal right, at its fair
market value
A: True. EXCEPTION Trust Fund Doctrine: unrestricted retained earnings

Q: Disposition and Encumbrance (Section 40)

General Rule: Section 23. What is the exception?
A: Section 40 (sale, lease, mortgage); it is not exercised by the Board solely.
This needs the 2/3 vote of the stockholders. No need of SECs approval.

Stockholders equity: 1) capital stock; 2) retained earnings

T/F: All properties of a corporation are co-owned by the stockholders.

A: False, because the corporation has a separate juridical personality from
its stockholders.

Q: What kind of property are shares of stock?

A: Intangible property
Section 42 Power of corporation to invest in a non-primary business
enterprise
T/F: Power to purchase is an incidental power.
A: True
T/F: Purchase is plenary to the board
A: True.
T/F: Generally, sale of property by board would be valid and binding.
True. EXCEPT: purchase of equity of another business this needs the
concurrence of stockholders; it is not within the plen
T/F: Power to sell means power to purchase.
A: False
T/F: Power of corporation to sell its properties is incidental.
A: True
T/F: Whatever be the business, the moment a corporation sells a land,
the sale is valid and binding, even if a corporation incurs losses.
A: True, by virtue of the Boards business judgment.

Q: Who represents the corporation in entering into contracts of sale,

lease, etc.
A: The Board through a board resolution.
Q: In a 15-man board, how many votes are needed for a board
resolution?
A: 8
Q: Do stockholders have a proprietary interest to the assets of the
corporation?
A: Generally, no. EXCEPT when all or substantially all of the assets of the
corporation (the business enterprise)
Q: What is a business enterprise?
A: It is the very reason why a corporation is profitable.
Q: P10 billion. San Miguel decides to sell all of its assets for P220
billion, except its formula for the beer. Is this a valid sale?
A: Valid.
Q: If the formula of the beer is sold, does that need the stockholders
consent?

32

A: Yes, because without this formula, the corporation would not be profitable
anymore. Sale of this formula would render the corporation incapable of
continuing the business or accomplishing the purpose for which it was
incorporated (Section 40).
Q: If it is in the usual course of business, does it need the stockholders
consent?
A: No.
Q: What is the opposite of usual course of business
A: Not in the usual course of business or extraordinary transaction.
Q: Bulk Sales Law. Does it need the stockholders consent?
A: Yes, because they have proprietary interest in this sale.
1. sale of all merchandise not in the ordinary course of business
2. sale of furniture/equipment
3) sale of business itself

Q: Purchase of business enterprise needs stockholders ratification

(Section 42) Why?
A:
Q: Sale of business enterprise does not need stockholders ratification
(Section 40) Why?
A:
T/F: Trust Fund Doctrine does not cover retained earnings.
A: True
Q: What are the sources of retained earnings?
A: Profits of the corporation
Q: What is the machine that churns out the corporation?
A: The business enterprise (that activity that makes a company profitable on
a long-term basis)

Q: What is the right of a dissenting stockholder in a sale of all or

substantially all of corporations properties.
A: Appraisal right. (Section 40 and 42)
Section 40: Sale of all or substantially all of corporations assets
Section 42: purchase of another corporations business enterprise

Q: What is the convention under Section 42?

A: A stockholder has a right to expect that the board would pursue the
primary purpose of the corporation. In the event that the BOD decide to
invest money or resource not in accordance with the corporations primary
business, then it would require the stockholders ratification.

Q: Effect of lack of consent of stockholders in sale of all or

substantially all of corporations properties.
A: Void sale

Q: Investment
A: Specie of sale(?)

T/F: For section 40 to apply, what must be sold must be a primary

business enterprise.
A: False.

Q: What is the convention under Section 40?

A: In the event that the BOD sells all or substantially all of its business
enterprise, then it must be ratified by stockholders representing 2/3 of its
outstanding capital stock.

T/F: Sale of a corporations secondary purpose is void if by mere board

resolution.
A: True.

Q: Is 2/3 of stockholders same as stockholders representing the 2/3

outstanding capital stock of a corporation
A: No.

33

Q: Section 40 business enterprise; Section 42 secondary purpose.

Why?
A:
Section 44: Management Contracts
Q: Power of board to appoint agents is plenary in character.
A: True. EXCEPT Section 44: when they appoint another corporation to
manage their business; it violates the centralized management doctrine;
stockholders expectation that BOD would manage the corporation is not met.
Thus, the consent of stockholders is needed.

2nd Case: Ong Yong v. Tiu, 401 SCRA 1 (2003)

The right of people to associate includes the power to refuse to associate.
Business Judgment Rule When the Board of Directors, in behalf of the
corporation, enters into transactions within its powers, courts cannot
substitute its judgment for that of the board, even acting upon the petition of
stockholders. In the same manner, courts also do not have the power to
compel corporations to enter into certain transactions.
3rd Case: Lipat v. Pacific Banking Corp.

1. Commercial Law adopted by Civil Law (Agency) agent has

inherent power to appoint sub-agent, unless otherwise prohibited
2. Power of BOD authorizes them to appoint sub-agents, committees.
3. Rebus Sic Stantibus
a. Principle in international law, expressed in civil code.
b. Treaties changes of conditions substantially due to
unforeseen things parties are excused.
c. this goes against the mutuality clause
4. Whenever right of appraisal is exercised, the majority decision is
imposed upon all members of the corporation, except when it is not
within the contemplation of the parties, thus dissenting stockholders
may exercise their right of appraisal the sale of stockholders
share to the corporation
a. e.g. it is not within the contemplation of the dissenting
stockholders that the majority of stockholders decide to sell
the business enterprise dissenting stockholders may
exercise its right of appraisal
b. right of first refusal comes from statutory law, not common
law
1st Case: Montelibano v. Bacolod-Murcia Miling Co., Inc.
Doctrine: Even if one proves that a decision of a board would lead to losses,
the court cannot substitute its decision to that of the board, because it is in
the nature of a business to take risks. (business judgment doctrine)

Q: If a contract is entered into within the powers of the corporation, but

not through its BOD, what is the status of the contract?
A: ultra vires of the 2nd type
Q: Ultra vires of the 1st Type: contract entered into outside the powers
of the corporation. Why is it void?
A: It violates the Corporation Law doctrine of a Corporation being Creature of
Limited Powers
Q: Ultra vires of the 2nd Type: contract entered into not by the BOD of
corporation. Why is it void?
A: It violates the doctrine of Centralized Management
Q: Ultra vires of 3rd Type: contract entered into by the BOD, within the
powers of the corporation, but contrary to law, morals, public policy.
Why is it void?
A: It violates the doctrine under:
Civil Code Art. 1409 (on void contracts)
Corporation Law Creature of the State/Law must follow the laws of
the State
4th Case: Woodchild Holdings, Inc. v. Roxas Electric Constructions Co.,
Inc.,

34

Doctrine of estoppel and ratification is related to Doctrine of Apparent

Authority
Q: Harden Case did not declare the ultra vires contracts void (?)
A:
1) Doctrine of Estoppel
2) Doctrine of Apparent Authority
3) Doctrine of Ratificatio
Q: Sale is void because of lack of authority in writing. What type of ultra
vires is this?
A: 3rd type
Q: Sale of land by a corporation through BOD must be in writing,
otherwise it is void.
A: False, that is valid because it is not under the Law of Agency, Corporation
Law allows it.

o Other stake holders: suppliers, banks , lenders

When you assume to handle the properties of other people, there is
always fiduciary duty. Therefore, the BoD assumes fiduciary duties
as trustees. Question is, who has the standing to go to the court
when the BoD breaches its fiduciary duties?
o STT: bod owes fiduciary duties only to the stockholders
o SHT: bod owe fiduciary duties to all of those who are
deemed to be stake holders (especially to the employees)
BUT stakeholders theory cannot attain EQUILIBRIUM -> balance
between all stake holders
New way of determining fiduciary duties:
Governance
o
o
o
o

GOOD CORPORATE GOVERNANCE

o

Disciplines two theories: STAKEholders theory v. STOCKholders

theory
Theory in the corporation code: stockholders theory
o best interest for stock holders: $$$ maximization of
stockholders value
o You have no social responsibility
Stakeholders theory is equilibrium where we can judge w/n the
fiduciary duties have been done
o Stockholders are not the only stakeholders.
o Obligation of the board is not only to commercially operate
the firm. But to take into account not only the interest of the
stockholders $$$ but also of the other stakeholders
(workers).
o One of the stakeholders is the community where the
corporation operates it is not an act of charity but an act of
good business judgment to go into CSR

Good Corporate

No permanent seats in the board (annual election)

Bod not to small, not to big (atleast 5)
BoD does not have power of life and death over stockholders
Bod should be qualified and should not possess any
disqualifications
Power to terminate/suspend members of the BoD is on the
stockholders
Compensation should be set by by-laws/stockholders
resolution

Statutory requirements
o Owner of atleast one share -> to align directors interest with
that of the stockholders
o Must not have been convicted of a crime, violation of the
corporation code chu chu chu
o other qualifications set-out in the by-laws

Position of BoD is actually quasi-public in character a form of public

service because:
o they are not entitled to renumerations but only for reasonable
per diems

35

only way for the BoD to have compensation is by reason of

by the by-laws or it should be allowed for by the stockholders
in a meeting
this is good corporate governance because it makes sure
that bod wont conspire to fix the compensation and that they
will govern the corporation under its fiduciary duties.

What is it all about corporate governance? the board is a policy

determining body it has no business running its day to day affairs. It
is management (CEO) that runs the day to day management. It is the
obligation of the BoD to find good managers and afterwards not to
interfere with management.
Corporate governance says that although the day to day affairs are
with the management, it is the board itself liable to the stakeholders.
The management liable to the board.
Francisco v. GSIS

It is the principal act that creates estoppel and in a corporation it is the

bod.
Apparent authority applies only if the act falls under the ordinary course
of business
Appointment of a president/other relevant officer implies authority (basis
of apparent authority)
Advance Paper v. Arma Traders

Q: President and secretary obtained a loan from a bank without any

resolution. They pocked it and it wasnt used by the corporation. Can
the corporation be liable?
A: NO- a banking institution is required to observe extra-ordinary diligence in
dealing with the public. They should have asked for a resolution.

A: estoppel, ratification, apparent authority -> these work only on the extracorporate level
Westmont Bank v. Inland Construction
Q: Bank has always dealt with the most inferior accounts officer/
receptionist. Is there apparent authority?
A:
Francisco is not the same as this case. In Francisco, there was a general
manager.
An account manager does not have the power to bind the bank, but there
acts from the bank showing apparent authority.
Associated Bank v. Pronstroller
Q: What if the acts were made by the lawyer himself (member of the
board, corporate secretary) without even knowledge from the bank?
A: contract still valid apparent authority. Board by having assigned to him
the position has given him the power to enter into the contract.
There was no need for external manifestations, his position itself shows
implied authority. applies to senior officers
Lee v. CA
Q: What happens when the directors place their rights to a voting trust
agreement?
A: They automatically lose their seat in the board
On the case: he wasnt president anymore thats why summons was not
validly served. If he wasthe

Q:Three doctrines that are counter-intuitive to the first or second type

of ultra-vires
1ST CASE: Valle Verde Country Club, Inc. v. Africa

36

Q: Why is the hold-over principle is important?

A: It is the means by which a corporation can continue its operations if there
is failure to elect its board of directors, because when there is a failure to
elect, then there would
T/F: When members of the BOD are elected and qualified, they are
called as de jure BOD.
A: True.
T/F: When a bogus board decide among themselves to be the board, 1)
are they a valid/de jure BOD?
2) are they de facto BOD?
A:
1. No
2. Yes
Q: What is the source of the BODs being de jure?
A: Annual election

A: The fact that there is a defect in the manner of the BOD members election
but there is a colorable compliance.
Q: What makes a corporation de facto?
A: The fact that there is a defect in the manner by which it is constituted.
Q: What is the difference between a De Jure and De facto officer?
A: None, so far as the public is concern, dealings/transactions with a de facto
(corporation; BOD member) is a valid, unless declared by Supreme Court as
de facto (?)
T/F: When a De jure BOD exceeded its term of 1 year, they become a de
facto BOD.
A: False, they are still De Jure Board by virtue of hold-over principle. Thus,
there is no defect in the manner of the BODs members election.
T/F: No such thing as de facto BOD.
A: False (Valle Verde v. Africa)
2nd Case: Premium Marble Resources v. CA

T/F: If BOD is not elected, no corporate powers.

A: True.
T/F: If the BOD act without corporate powers, it results into an ultra
vires act of the BOD. What is the status of the contract?
A: True, of the 2nd type. Void under corporate law, because they are against
the principles of Corporate Law. Unenforceable, for Contract Law.
T/F: When there is an expiration of term of board of directors, a
vacancy is created.
A: False, because of the hold-over principle.
T/F: The hold-over principle creates a de facto BOD.
A: True.
Q: What makes a de facto BOD?

Q: In what meeting do the members of BOD get elected?

A: Annual stockholders meeting
Q: What is a General Information Sheet (GIS)?
A: A General Information Sheet of SEC pertains to the corporations
information and its directors and stockholders profiles. The one that is filed in
SEC is the one binding.
Q: If both groups filed within 30 days. Which GIS is binding?
A: The group that proves that they were duly elected during the annual
stockholders meeting wins the de jure board mandated by the minutes
of the meeting.
3rd Case: Western Institute of Technology, Inc. v. Salas

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Q: What is the general rule as to the compensation of BOD members of

private corporations?
A: BOD of private corporations is not entitled to receive compensation,
except reasonable per diems, a reimbursement of expenses. Per diems are
not compensation of BOD members; these are expenses of members of
BOD for attending meetings.
Q: If BOD members are to be compensated, how is it done?
A: By-laws or stockholders agreement.
Q: Conflict of interest situation
A: Power to hire and compensate is part of the BOD. When the BOD
provides compensation for themselves, there is a conflict of situation. They
have to decide for the interest of both the corporation and themselves.
Q: BOD decides to compensate its officers who are also part of its
BOD. Is there a conflict of interest?
A: Yes, thus, BOD should not participate in such deliberation.
Q: If compensation are provided acting as such, then the compensation
is void.
A: True. Only stockholders can provide compensation for BOD.
T/F: Powers to compensate, punish, remove, reward lie with the
stockholders.
A: True, because BOD members are accountable to the stockholders, the
beneficiaries of the BOD.
Q: BOD passes a resolution compensating a president, corporate
secretary, treasurer, chairman of the board,(members of the board). The
resolution is adopted without these officers participation. Is the
compensation valid?
A: Valid
Q: Is chairman an officer position?

A: Depends, if the by-laws says that he is an officer, then he is such. Thus,

he can be compensated.
4th Case: Strategic Alliance Dev. Corp. v. Radstock Inc.
Q: What are the three-fold duties of the members of the BOD?
A:
(1) Duty of Obedience
(2) Duty of Diligence
(3) Duty of Loyalty
Q: What is the Duty of Loyalty?
A: BOD and officers should prioritize the corporations interest over their own.
The moment they prioritize their own interests, they breach their duty of
loyalty.
Q: What are the consequences of breach of duty of loyalty?
A:
1) agent loses commission
2) agent should account for all profits acquired
3) agent loses its position
Q: What is the Duty of Diligence?
A: BOD shall not knowingly commit:
(1) patently unlawful acts
(2) bad faith
(3) gross negligence
Q: What is the Duty of Obedience?
A: BOD members must perform acts according to the purposes of the
corporation
Q: Corporation is a creature of limited powers. And that has
applications both on the juridical level and for those who act in behalf
of the corporation.
A: Duty of Obedience implements the Doctrine of Creature of limited powers.

38

Q: What happens when BOD members breach their duty of obedience?

A: They become personally liable for damages caused. Obedience to States
injunction, not to the corporation, because there is no duty of obedience to
the corporation.

Q: If directors and officers are agents of the corporation, can they be

personally liable to third parties when they act within the scope of its
authority?
A: No, except when there is bad faith; GROSS negligence = bad faith.

The Ultra Vires Doctrine (Section 45) of the first type also implements the
Duty of Loyalty of BOD members.

For Agency Law, mere negligence is enough to hold the agents personally
liable to third parties.

Q: What is the status of the contract entered into under ultra vires act
of the first type?
A: Void because it is against public policy publics expectation that
contracts entered into with the corporation is valid

For Corporation Law, there must be gross negligence before directors and
officers become personally liable to third parties.

T/F: Duty of Obedience is a dead doctrine in the Philippines.

A: True. EXCEPT as to the State Creature of the State When
corporation contradicts its creator, its creator wins. It is only in this aspect that
duty of obedience applies.
Q: Consequences of breach of duty of diligence
A: personally liable for damages suffered by the corporation
Q: Duty of diligence, obedience, loyalty are covered under what
sections?
A:
Duty of Diligence (Section 31)
Duty of Loyalty (Sections 31 and 34)
Duty of Obedience (Section 25)
Q: The fiduciary relationship between the BOD and the stockholders is
borne out of the contract of?
A: Trusts
Q: The fiduciary relationship between the BOD and the corporation is
borne out of the contract of?
A: Agency

Q: Why must there be gross negligence before directors and officers

become personally liable to third parties?
A: Business Judgment Rule:
General Rule: BOD members do not become personally liable for damages
suffered by the corporation when they have exercised their business
judgment.
All contracts entered into by the BOD in the exercise of their business
judgment, even if it results to damages and losses to the corporation, are
valid and binding. EXCEPT when they act in bad faith, gross negligence
(Section 31)
Public policy providing for damnum absque injuria is meant to promote the
greater public policy of:
(1) preserving the sanctity of contracts with the public
(2) BOD and officers cannot be held personally liable for losses and
damages suffered by the corporation (if without bad faith/gross
negligence) stockholders and corporation absorb the damage
Q: What is the greater public policy than making all the BOD and
officers fiduciary?
A: A business is generally risky and the job of BOD and officers is to take
risks or exercise business judgment but act with diligence

39

Business judgment of BOD and officers are part of business costs of a

corporation, because BOD and officers would not accept such positions if
they would be made held liable, especially they are not compensated.

T/F: In the absence of any stipulation of the corporation code, the

power of the BOD is plenary.
A: True.

T/F: Joint tortfeasors are always solidarily liable.

A: True

Q: Whatever the BOD decides pursuant to its business judgment is the

law.
A: True

T/F: When an agent acts in the name of the principal within the scope of
its authority but with negligence, the agent and principal are liable to
the third party.
A: Yes
T/F: Sections 31 and 34 cover exactly the duty of loyalty. Why does the
law repeat itself?
A: True.
Section 31:
Section 34:
Duty of Loyalty is breached when BOD member or officer took a business
opportunity that should have been for the corporation.
Q: Which is kinder, Section 31 or 34?
A: Section 31, because the BOD can waive the liability under its business
discretion (1st branch business judgment rule). Section 34 is harsher,
because the power to forgive is with the stockholders, not the BOD. The
power to forgive of stockholders under Section 34 is plenary.
Section 31, the BOD has the power to forgive, under Section 34, the BOD
does not; the business judgment rule does not run in Section 34.
Q: Which prevails, Section 31 or 34, when there is breach of loyalty?
A: No conflict because:
Section 34: applies only to stock corporations applies to directors only
Section 31: applies to both non-stock and stock corporations applies to
directors, trustees

T/F: General Rule: BOD members can be removed by majority of the

board
A: False, only stockholders representing 2/3 of OC can remove a member of
the BOD, with or without cause. BOD members have no power to remove its
members.

1st Case: Steinberg v. Velasco

Q: If you look at the equity of stockholders, what are two accounts?
A: 1) capital stock; 2) retained earnings
Q: What does the Trust Fund Doctrine cover?
A: Subscribed capital stock only.
Q: Why does the Trust Fund Doctrine not cover the retained earnings?
A: The Corporation Code allows the retained earnings to be distributed to
stockholders through dividends. (Section 43)
Q: What happens if a corporation has no retained earnings?
A: Deficit
Q: When corporation has deficit, can BOD declare dividends?
A: No.
Q: What is a deficit?
A: It is a deduction from the stockholders equity.
Losses tends to decrease stockholders equity.

40

If you declare dividends if there is a deficit, then the corporation is returning

investment to the stocholders.

A deficit is a deduction from stockholders equity.

Q: What are retained earnings?

A: net profit from operations

Q: What makes retained earnings restricted?

A: There must be a legal basis to restrict the retained earnings.
Q: What are the reasons for BOD to restrict retained earnings?
A:
- Corporation wants to invest
- Corporation has contingent liabilities
T/F: All retained earnings are always unrestricted unless otherwise
restricted.
A: True.
Q: When there is a declaration of dividends from restricted retained
earnings
A: Violation of duty of diligence, loyalty (conflict of interest)
T/F: Buying back ones shares amounts to a violation of the trust fund
doctrine.
A: False, because there is a situation when a corporation wants to decrease
their capital stock through buying back their shares (redeemable shares), but
there must be an amendment of the articles of corporation.
T/F: Declaration of dividends from illusory restricted retained earnings
buying back of shares amounts to a violation of trust fund doctrine.
A: True

2 Case: Smith v. Van Gorkam,

nd

Doctrine: When a BOD makes a decision not based on an informed

judgment, then the BOD members becomes personally liable.
General Rule: When the BOD undertakes a transaction for the benefit of
the corporation should not be held personally liable for the losses of the
corporation, unless they acted with bad faith, gross negligence.
Duty to inform stockholders is another duty of BOD. Stockholders are
supposed to be informed about the market through their agents.

T/F: Stockholders approval/ratification is not needed for BOD to

exercise business judgment rule by virtue of the 2 nd branch of business
judgment rule
A: True.
T/F: BOD does not exercise good or informed business judgment if they
do not understand the finances of the corporations transactions, thus
a violation of their duty of diligence.
A: True. It is not expected that BOD knows everything. The BOD must at
least consult from financial specialists if they do not have knowledge or
expertise about the finances of the corporations transactions, as exercise of
their duty of diligence.
T/F: Chairs enjoy the 2nd branch of the business judgment rule.
A: No, because BOD members are not expected to be chairs, they are
expected to govern.
DELAWARE
1. big corporations want to register in Delaware because Delaware is
one of the rare states where practitioners, legislators, etc. flock that
provide an atmosphere which is pro-management pro laissez faire

3rd Case: Prime White Cement Corp. v. IAC

General Rule: Whenever an officer of a corporation enters into a transaction
is a potential conflict of interest situation

41

CUMULATIVE VOTING
T/F: Every director, trustee, officer who finds himself under a conflict of
interest situation violated his duty of loyalty.
A: False.

Q: What is the cumulative voting for?

A: It allows minority stockholders to elect directors in the Board.

T/F: A conflict of interest situation of a director, trustee and officer does

not violate a duty of loyalty unless there is a physical manifestation.
A: True.

Q: What is your authority that BOD members are beyond the control of
the majority even some are obnoxious, etc.
A: Section 28

Q: What is a conflict-in-interest situation?

A: There is an interest adverse to that of the corporation.

T/F: Can a BOD member be removed without cause?

A: True, provided the minority stockholders do not elect this member, where
their removal must be with cause. Power to remove of stockholders is almost
absolute.

Q: When does a director violate its duty of loyalty?

A: Only when he takes that opportunity.
Q: How can a director, trustee, officer avoid violating his duty of loyalty
when there is a conflict of interest situation?
A: Follow Section 32 to avoid breaching a duty of loyalty
T/F: When a BOD member has a contract with the corporation, which is
fair and reasonable, it is unlawful for him when he participates in the
board meeting, thus tainting the contract
A: False. Section 32. However, mere presence of that BOD member already
influences the other BOD members, so such BOD member should desist.
T/F: Section 32 applies only to stock corporations.
A: False, trustees are bound by the same duties of loyalty, diligence,
obedience, just as directors of stock corporations do.

4TH Case: Mead v. McCullough

Q: What type of piercing doctrine is involved in this case?
A: 3rd Type (Equity)

Q: How does one find out the number of directors to be voted?

A: at the articles of incorporation
1 share (x) 5 (number of directors to be elected) = the number of the votes
T/F: The power of cumulative voting must be stated in the articles of
incorporation to be valid.
A: False, because it is already provided in the Corporation Code.
T/F: If there is a by-law provision which provides that there should be
no cumulative voting, the by-law prevails.
A: False, because articles of incorporation and by-laws that are contrary to
laws are void.
T/F: Straight voting is the normal/default voting for non-stock
corporations.
A: True
Cumulative Voting majority that takes the majority
Straight Voting majority takes the Board
T/F: Cumulative voting is the default voting in stock corporations.

42

A: True

T/F: Cumulative voting is not allowed in non-stock corporations.

A: False, it can be provided in the articles or by-laws.

1) COLES FORMULA not so reliable because:

1. it is not applicable when there are 2 or more blocs already
2. No strategy power for optimal voting
3. It is not consistent when it is big number already
4.

S1 = (S x D1/D + 1) + 1
Authorized Capital = Subscribed and Paid Up Capital
1. Subscribed/Outstanding Capital Stock =
2. Paid up capital Stock =
Subscribed Capital stock Paid Up Capital Stock = Unpaid Capital Stock
(Subscription Receivable)
Outstanding (Unissued) capital stock

Q: Which among the 5 shares of stocks have the voting power for
purposes of determining the standing of a stockholder?
A: Outstanding/subscribed capital stock

Q: Agent, VP IT does not have capacity to bind corporation, not found

in the by-laws
A: Yes, because not every officer needs the capacity to bind the corporation,
and yet he is bound by his fiduciary duties
T/F: Floor Manager has fiduciary duties
A: False

the general rule exercise of business judgment rule without malice is

always final

the power to hire and fire is so critical to success of corporation is that it

may be unfettered
Upon the release of the labor code, there came security of tenure that
one cannot be fired without cause.
Before, corporations hire based on w/n it will create money.
labor code: employees of the private sector shall also have security of
tenure
remember in the guerrera case (1958) the general rule on the power to
hire/fire is plenary.
with the constitution, the SC began to issue exceptions similar to civil
service. the other thing that the case is trying to take off:
o social legislation -> workers
o business judgment rule - officers
gurrea line: if you are an officer defined by law/by laws that means your
position is so critical that you are an agent of the board. you must be
subject to bjr because success of the corp is based on being able to
hire/fire the right people.
those not identified by bylaws covered by security of tenure clause
therefore: would you like to be a corporate officer/employee??
o be a corporate officer outside the by laws
o you are bound by fiduciary duties, you can bind the
corporation but you are covered by secuiryt of tenure clause
o you can only be removed for cause
Therefore, the issue on gurrea case has nothing to do with the
seriousness of what you do. only question is are you covered by bjr or
security of tenure?
if you want a janitor to be a corporate officer, you put him in the by-laws.
but this will be abuse and the SC will apply gurrea.
but it doesnt mean that you are a corporate officer = you are fiduciary
bound. it doesnt mean also that just because you are not in the
enumeration of officers, you are not bound by fiduciary duties. there are
positions that exercise positions that enter into acts as substitute for
board of trustees. they owe fiduciary duties to the stockholders to
manage the corporation.

43

Q: how would you know if a person is a corporate officer? (ex: janitor in

by-laws)
A: if you put a janitor in the bylaws, he is a corporate officer. but this is odd.
everything must be in good faith. the by laws cannot contravene the
constitution.

44