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Classification of Corporations

FRED M. HARDEN V. BENGUET CONSOLIDATED MINING COMPANY


G.R. No. L-37331 March 18, 1933

Facts:
1. The Benguet Consolidated Mining Co. (BCMC) was organized in June, 1903, as
a sociedad anonima in conformity with the provisions of Spanish law; while
the Balatoc Mining Co. (BMC) was organized in December 1925, as a
corporation, in conformity with the provisions of the Corporation Law (Act No.
1459). Both entities were organized for the purpose of engaging in the mining
of gold in the Philippine Islands, and their respective properties are located
only a few miles apart in the subprovince of Benguet. The capital stock of the
Balatoc Mining Co. consists of one million shares of the par value of one peso
(P1) each.
2. BMC entered into an agreement with BCMC wherein the latter would
construct facilities for the mining operations of the former in exchange for
600,000 shares of BMC to be offset from the balance of the worth of facilities
constructed by BCMC and the balance thereof was paid in cash.
3. Petitioners, as shareholders of BMC, contests the contract entered into by the
two companies, and seeks to annul the same, as Act No. 1459, the
Corporation Law, provides that it shall be unlawful for any member of a
corporation engaged in agriculture or mining and for any corporation
organized for any purpose except irrigation to be in any wise interested in
any other corporation engaged in agriculture or in mining.
Issue:
1. Whether or not the aforementioned law applies to BCMC which is a Sociedad
Anonima formed under the old Spanish laws and not under the current
Corporation Law
Ruling:
The Supreme Court Stated that the petitioners had no legal standing to
question the validity of the contract between the two companies. The provision of
law cited by the petitioners have been amended by the legislature as to put only a
limit on the percentage of shares that can be held by a mining or agricultural
company of another mining and agricultural company only up to fifteen percent as a
means to regulate the grant of mining rights. The argument of petitioners make it
seem as though only BCMC is at fault upon entering the contract when in fact it was
BMC who initiated the negotiations between the two parties as it was unable to
perform its corporate duties on its own due to its own inability. The plaintiffs would
then have the court apply the second paragraph of Article 1305 of the Civil Code
which declares that an innocent party to an illegal contract may recover anything
he may have given, while he is not bound to fulfill any promise he may have made.
But, supposing that the first hurdle can be safely vaulted, the general remedy

supplied in Article 1305 of the Civil Code cant be invoked where an adequate
special remedy is supplied in a special law. The court no longer delved into the issue
whether a Sociedad Anonima is a corporation as defined in the Corporation Law.

Classification of Corporations
PHILIPPINE STOCK EXCHANGE, INC. V. THE HONORABLE COURT OF
APPEALS, ET AL.
G.R. No. 125469

October 27, 1997

Facts:
1. The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had
sought to offer its shares to the public in order to raise funds allegedly to
develop its properties and pay its loans with several banking institutions. In
January, 1995, PALI was issued a Permit to sell its shares to the public by the
Securities and Exchange Commission (SEC). To facilitate the trading of its
shares among investors, PALI sought to course the trading of its shares
through the Philippine Stock Exchange, Inc. (PSE), for which purpose it filed
with the said stock exchange an application to list its shares, with supporting
documents attached.
2. Upon deliberation of the application of PALI, the Board of Governors of PSE
received a letter by the Heirs of the Former President Ferdinand Marcos
stating that they claim ownership of the some of the real properties of stated
by PALI as part of their assets. Due to the controversy involving the assailed
properties that it even involves investigation by the Philippine Commission on
Good Governance (PCGG), the application of PALI for its shared to be listed
was denied.
3. PALI then sent a letter to the SEC invoking the exercise of the Commissioners
supervisory and regulatory powers over stock exchanges under Section 6(j) of
P.D. No. 902-A. The SEC then rendered a decision reversing the decision of
the PSE to deny the application of PALI of its shares to be listed which the
Court of Appeals upheld.
4. PSE now contests the decision of the SEC on reversing its denial of PALIs
application. Stating that although the SEC does have supervisory and
regulatory powers but such powers are limited as compared to its authority
over ordinary corporations.
Issue:
Whether or not the SECs exercise of its supervisory and regulatory powers
over PSE in reversing the latters denial of PALIs application
Ruling:

The Supreme Court stated that although the SEC does have supervisory and
regulatory powers over the PSE, the said rule precludes the reversal of the decision
of the PSE to deny PALIs listing application, absent a showing of bad faith on the
part of the PSE. Under the listing rules of the PSE, to which PALI had previously
agreed to comply, the PSE retains the discretion to accept or reject applications for
listing. Thus, even if an issuer has complied with the PSE listing rules and
requirements, PSE retains the discretion to accept or reject the issuers listing
application if the PSE determines that the listing shall not serve the interests of the
investing public. Furthermore, the PSE is a corporation which is authorized by its
corporate franchise to engage in its proposed and duly approved business. One of
the PSEs main concerns, as such, is still the generation of profit for its stockholders.
Moreover, the PSE has all the rights pertaining to corporations, including the right to
sue and be sued, to hold property in its own name, to enter (or not to enter) into
contracts with third persons, and to perform all other legal acts within its allocated
express or implied powers.
A corporation is but an association of individuals, allowed to transact under
an assumed corporate name, and with a distinct legal personality. In organizing
itself as a collective body, it waives no constitutional immunities and perquisites
appropriate to such a body. As to its corporate and management decisions,
therefore, the state will generally not interfere with the same. Questions of policy
and of management are left to the honest decision of the officers and directors of a
corporation, and the courts are without authority to substitute their judgment for
the judgment of the board of directors. The board is the business manager of the
corporation, and so long as it acts in good faith, its orders are not reviewable by the
courts.

Piercing the Veil of Corporate Fiction


BIBIANO O. REYNOSO, IV V. HON. COURT OF APPEALS AND GENERAL
CREDIT CORPORATION
G.R. Nos. 116124-25 November 22, 2000
Facts:
1. Commercial Credit Corporation (CCC) is a financing and investment firm. It
organized several franchise companies wherein they hold 30% equity of said
franchises. One of these franchises was Commercial Credit Corporation
Quezon City (CCC-QC) wherein petitioner Bibiano as the resident manager
thereof. CCC and CCC-QC entered into an exclusive management contract
wherein CCC would be in charge of the management and operations of CCCQC. In order to boost the performance of CCC-QC, petitioner placed his own
money in said company.
2. Thereafter, a new regulation was issued by the Central Bank of the
Philippines, and in order to avoid compliance with said regulations it is
alleged that CCC-Equity ordered its subordinates to commit unlawful and
fraudulent acts. Opposed to said business practices of his employer,
petitioner withdrew his funds from CCC-QC which led to the latter filing a case
of estafa and embezzlement against petitioner for allegedly using company
funds for personal purposes and stated that as proof of said allegation the
house and lot which petitioner and his wife bought was purchased using said
embezzled funds.
3. The trial courts in that case ruled in favor of petitioner and ordered the
payment of damages. There was no embezzlement of funds or estafa as what
petitioner used was his own money that he withdrew from CCC-QC and not
the funds of the company. The decision of the trial courts became final and
executory against CCC-QC. CCC-Equity then changed its name to General

Credit Corporation (GCC). CCC-QC did not comply with the court decision
which led to petitioner filing for an action for a writ of execution, the sheriff
then attached the property of GCC for the execution of the judgment in favor
of petitioner. GCC contends that it cannot be held liable as to the judgment
against CCC-QC as both are corporations that are separate and distinct from
each other.
Issue:
Whether or not GCC can be held liable for the execution of the judgment
against CCC-QC
Ruling:
The Court will not hesitate to use its supervisory and adjudicative powers
where the corporate fiction is used as an unfair device to achieve an inequitable
result, defraud creditors, evade contracts and obligations, or to shield it from the
effects of a court decision. The corporate fiction has to be disregarded when
necessary in the interest of justice. It is obvious that the use by CCC-QC of the
same name of Commercial Credit Corporation was intended to publicly identify it
as a component of the CCC group of companies engaged in one and the same
business, i.e., investment and financing. CCC had dominant control of the
business operations of CCC-QC. The exclusive management contract insured
that CCC-QC would be managed and controlled by CCC and would not deviate
from the commands of the mother corporation. In addition to the exclusive
management contract, CCC appointed its own employee, petitioner, as the
resident manager of CCC-QC. The change of name of CCC to GCC does not
affect its liability as its personality is still the same.
Piercing the Veil of Corporate Fiction
SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC. V. COURT OF
APPEALS, ET AL.
G.R. No. 129459
September 29, 1998
Facts:
1. Petitioners allegedly entered into an agreement with defendants Motorich
Sales Corporation (Motorich) to purchase a parcel of land. Motorich then
refused to transfer the title of said parcel of land to petitioner, stating through
its Treasuer, Nenita Gruenberg, that the agreement between petitioner and
Motorich was not approved by its board and therefore not valid. The land was
later sold by Motorich to ACL Development Company, both corporations were
impleaded to compel the transfer of the title to petitioner.
2. Motorich averred that petitioner only transacted with Nenita Gruenberg who
is the Corporate treasurer and that the sale of property was not agreed upon
and signed by the Chairman of the board Reynaldo Gruenberg therefore it is
not a valid action of the corporation. Petitioner on the other hand contends
that the veil of corporate fiction must be pierced in order to hold Motorich
liable for the actions of Nenita arguing that the Spouses Gruenber owns

99.866% of the subscribed capital stock of Motorich and therefore there is no


need for approval of the board as the Spouses are technically the corporation
itself.
Issues:
1. Whether or not there is a valid agreement between petitioner and Motorich
2. Whether or not the veil of corporate fiction should be pierced to hold Motorich
liable
Ruling:
1. A corporation is a juridical person separate and distinct from its stockholders
or members. Accordingly, the property of the corporation is not the property
of its stockholders or members and may not be sold by the stockholders or
members without express authorization from the corporation's board of
directors. Indubitably, a corporation may act only through its board of
directors or, when authorized either by its bylaws or by its board resolution,
through its officers or agents in the normal course of business. The general
principles of agency govern the relation between the corporation and its
officers or agents, subject to the articles of incorporation, bylaws, or relevant
provisions of law. As a general rule, the acts of corporate officers within the
scope of their authority are binding on the corporation. But when these
officers exceed their authority, their actions "cannot bind the corporation,
unless it has ratified such acts or is estopped from disclaiming them. Because
Motorich had never given a written authorization to Respondent Gruenberg to
sell its parcel of land, we hold that the February 14, 1989 Agreement entered
into by the latter with petitioner is void under Article 1874 of the Civil Code.
Being inexistent and void from the beginning, said contract cannot be
ratified.
2. The Court has consistently ruled that when the fiction is used as a means of
perpetrating a fraud or an illegal act or as vehicle for the evasion of an
existing obligation, the circumvention of statutes, the achievement or
perfection of a monopoly or generally the perpetration of knavery or crime,
the veil with which the law covers and isolates the corporation from the
members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individual. We stress that the
corporate fiction should be set aside when it becomes a shield against
liability for fraud, illegality or inequity committed on third persons. The
question of piercing the veil of corporate fiction is essentially, then, a matter
of proof. In the present case, however, the Court finds no reason to pierce the
corporate veil of Respondent Motorich. Petitioner utterly failed to establish
that said corporation was formed, or that it is operated, for the purpose of
shielding any alleged fraudulent or illegal activities of its officers or
stockholders; or that the said veil was used to conceal fraud, illegality or
inequity at the expense of third persons like petitioner.

Effects of an Unincorporated Transaction


PIONEER INSURANCE & SURETY CORPORATION V. THE HON. COURT OF
APPEALS, ET AL.
G.R. No. 84197 & 84157
July 28, 1989
Facts:
1. Jacob S. Lim was engaged in the airline business as the owner-operator of
Southern Air Lines (SAL) as a single proprietorship. Jacob, doing business as
SAL, then procured two aircrafts from Japan Domestic Airlines (JDA) and the
necessary spare parts for its operation. Petitioner as surety executed and
issued security bonds in favor of JDA, in behalf of its principal, Jacob, for the
balance price of the aircrafts and spare parts.

2. Border Machinery and Heavy Equipment Company, Inc. (BORMAHECO),


Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana
contributed funds to Jacob for the purchase of the two aircrafts believing that
there contribution was to be used for the formation of a new corporation.
3. Jacob, operating under the name and style of SAL, executed a chattel
mortgage over the two aircrafts in favor of petitioner as security for the
issuance of the security bonds. Jacob then defaulted on the payment of the
two aircrafts with JDA which led to petitioners paying for the balance thereof
as surety. Petitioner then foreclosed the chattel mortgage on the aircrafts.
BORMAHECO, the Cervanteses, and Maglana then filed a third party
complaint stating that they are co-owners of the aircraft and sought damages
against Jacob and the recovery of their contributions.
Issue:
What is the relationship between Jacob and BORMAHECO, the Cervanteses,
and Maglana?
Ruling:
The Supreme Court stated that where persons associate themselves together
under articles to purchase property to carry on a business, and their organization
is so defective as to come short of creating a corporation within the statute, they
become in legal effect partners inter se, and their rights as members of the
company to the property acquired by the company will be recognized. However,
this rule only applies to those stockholders or shareholders of the field or
defectively incorporated corporation who shall act for a common purpose or for
the representation of each other as a corporation. In this case Jacob denied
acceptance of any amount from the aforementioned parties, however, evidence
presented to the court shows otherwise. It is therefore clear that Jacob merely
used as a lure to entice the aforementioned parties to part with their money the
supposed creation of a corporation. As Jacob was acting only for his own behalf
when he transacted with petitioner and JDA as SAL, there is no partnership inter
se or de facto partnership formed between him and BORMAHECO, the
cervanteses and Maglana. Being no partnership was created, the
aforementioned parties do not have to share in the losses incurred by Jacob.
Thus, Jacob is liable for the return of the contributions of said parties.

Chartered Government Owned and Controlled Corporations


KILOSBAYAN, ET AL. V. TEOFISTO GUINGONA, JR., Et AL.
G.R. No. 113375 May 5, 1994
Facts:
1. In 1993 the Philippine Charity Sweepstakes Office (PCSO) planned to establish
an on-line lottery system in the country and opened the public bidding for the
same.

2. A multinational company, the Berjaya Group Berhad, one of the biggest


companies in Malaysia, started and incorporated the Philippine Gaming
Management Corporation (PGMC) in the Philippines part of which is
comprised of Filipino Shareholders to comply with the nationality requirement
of 40% Filipino ownership for gambling enterprises in the Philippines as
provided by the Negative List in pursuance of the Foreign Investment Act.
3. PGMC was granted the contract by the government and then president, Fidel
V. Ramos, announced through a public declaration that said corporation
would establish the on-line lottery system in the country. PCSO and PGMC
entered into an agreement entitled as a Contract of Lease, wherein the
latter would be in charge of the construction, maintenance and operations of
the facilities needed in establishing an on-line lottery system in the
Philippines, and among those that should be constructed by PGMC is a
telecommunication system throughout the whole country that would facilitate
said system.
4. Petitioners challenged the validity of the Contract of Lease stating that PGMC
does not meet the required Filipino ownership of gambling enterprises and
that the contract gives full control to PGMC of the facilities which is contrary
to the charter of PCSO which states that the PCSO is prohibited from holding
and conducting charity sweepstakes races, lotteries, and other similar
activities in collaboration, association or joint venture with any person,
association, company or entity, foreign or domestic. Also that the
construction of a telecommunication system in the Philippines requires a
franchise as it is a public utility.
5. Defendants contends that there is no collaboration, association, or joint
venture in the agreement as it is only that of a lease wherein PGMC would
establish the system and only lease it for a period of 15 years.
Issue:
Whether or not the Contract of Lease is a valid agreement between PCSO and
PGMC
Ruling:
The Supreme Court stated that it is not the title of the contract that should be
controlling but the contents and intent of the parties which are found in the contract
itself. Thus, the Contract of Lease entered into by PGMC and PCSO is void as it is
contrary to the charter of PCSO which prohibits any collaboration, association or
joint venture with any person, association, company or entity, foreign or domestic
for the operation of gambling enterprises in the country. A closer look at the
Contract of Lease shows that not only is PGMC to establish and hold as lessor the
facilities required in the on-line lottery system, they should also manage and
operate the same and even provide the expertise on how to manage and operate
the same parallel to the same activities with the PCSO. The agreement entered into
by PCSO and PGMC was likened to a joint venture by the courts as it provides that
both parties actions and actuations toward the on-line lottery system is necessary
and indispensable. As the agreement is contrary to the charter of PCSO, R.A. No.

1169, as amended by B.P. Blg. 42, which is the one that gives life to the corporation
and provides for it duties, powers and limitations. Therefore, the corporation cannot
do any act which is contrary to its charter. As for the other issues of nationality and
franchise requirements, the court stated that the nationality requirement has been
belatedly complied with and that there is no need to discuss the franchise
requirement as the agreement itself between PCSO and PGMC is invalid.

Articles of Incorporation specifying the Powers of the Corporation

CHARLES W. MEAD V. E.C. McCULLOUGH, ET AL. AND THE PHILIPPINE


ENGINEERING AND CONSTRUCTION COMPANY
G.R. No. 6217 December 26, 1911
Facts:
1.

Charles W. Mead, Edwin C. McCullough, Thomas L. Hartigan, Frank E. Green,


and Frederick H. Hilbert incorporated the as a sociedad anonima The
Philippine Engineering and Construction Company with the purposes of
salvaging sunken Spanish vessels by the Americans. The plaintiff, Mead, was
elected to be the General Manager of the company and that all the
incorporators shall form the board thereof.

2. Sometime after Mead resigned as general manager and left the country to
accept a position of engineer at the Canton and Shanghai Railway Company.
During his time in China, the other 4 incorporators conducted a meeting
wherein they discussed the current situation of the company and decided to
sell all of the interest in the company to McCullough as the company was not
already unstable financially.
3. Mead then filed an action against the 4 namely, Green, Hartigan, Hilbert, and
McCullough, claiming unpaid wages as general manager of the company, his
share in the profits, and the nullification of the sale of the company interest
to McCullough as it was not made by all the directors of the board as he was
not part of the meeting and deliberations. Mead claims that what is required
in their articles of incorporation that all members of the board should
unanimously decide in matters concerning the alienation of company assets.
Issue:
Whether or not the act of the 4 other board members of selling all company
interests to McCullough is valid
Ruling:
A perusal of the articles of incorporation shows that what is given to the
directors are general and ordinary powers and that what is needed in a vote for
matters discussed in stockholders meetings is a majority vote of the stockholders.
There were only five stockholders in this corporation at any time, four of whom were
the directors who made the sale, and the other the plaintiff, who was absent in
China when the said sale took place. The sale was, therefore, made by the
unanimous consent of four-fifths of all the stockholders. Under the articles of
incorporation, the stockholders and directors had general ordinary powers. There is
nothing in said articles which expressly prohibits the sale or transfer of the
corporate property to one of the stockholders of said corporation. The powers and
purposes of a corporation and the powers of its directors are granted and limited by
its articles of incorporation, thus as there is no provision in the articles of
incorporation of said company that supports the claim of Mead, the sale to
McCullough is valid.

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