Business Org.

II, Corporations
Philippine Law School
Atty. Jose Gerardo A. Medina
Part I
x----------------------------------------------------------------------------x

Philippine Constitution, Article XII, Sec. 16.

The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations.
Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good
and subject to the test of economic viability.

Corporation Code, Section 4. Corporations created by special laws or

charters. Corporations created by special laws or charters shall be governed
primarily by the provisions of the special law or charter creating them or
applicable to them, supplemented by the provisions of this Code, insofar as they
are applicable.

Ex. City Franchise;

Section 106. Educational corporations shall be governed by special laws and
by the general provisions of this Code.

Philippine Society for the Prevention of

Cruelty to Animals v. Commission on
Audit, G.R. No. 169752, [September 25,
2007]

Facts: PSPCA was incorporated as a juridical entity over one hundred years ago by
virtue of Act No. 1285, enacted on January 19, 1905, by the Philippine Commission.
It antedated both the Corporation Law and the constitution of the Securities and
Exchange Commission. PSPCA was initially imbued under its charter with the power
to apprehend violators of animal welfare laws. In addition, the petitioner was to share
one-half (1/2) of the fines imposed and collected through its efforts for violations of the
laws related thereto. In 2004, COA opined that PSPCA was a government entity that
was subject to the audit jurisdiction of respondent COA. PSCPA disputes this.

Ruling: Essentially, the "charter test" as it stands today provides that The test to
determine whether a corporation is government owned or controlled, or private in
nature is simple. Is it created by its own charter for the exercise of a public
function, or by incorporation under the general corporation law? Those with
special charters are government corporations subject to its provisions, and its
employees are under the jurisdiction of the Civil Service Commission, and are
compulsory members of the Government Service Insurance System. x x x
Page 1 of 40
The fact that a certain juridical entity is impressed with public interest does not, by that
circumstance alone, make the entity a public corporation, inasmuch as a corporation
may be private although its charter contains provisions of a public character,
incorporated solely for the public good. This class of corporations may be considered
quasi-public corporations, which are private corporations that render public service,
supply public wants, or pursue other eleemosynary objectives. While purposely
organized for the gain or benefit of its members, they are required by law to discharge
functions for the public benefit. Examples of these corporations are utility, railroad,
warehouse, telegraph, telephone, water supply corporations and transportation
companies. It must be stressed that a quasi-public corporation is a species of private
corporations, but the qualifying factor is the type of service the former renders to the
public: if it performs a public service, then it becomes a quasi-public corporation.

Authorities are of the view that the purpose alone of the corporation cannot be taken
as a safe guide, for the fact is that almost all corporations are nowadays created to
promote the interest, good, or convenience of the public. A bank, for example, is a
private corporation; yet, it is created for a public benefit. Private schools and
universities are likewise private corporations; and yet, they are rendering public
service. Private hospitals and wards are charged with heavy social responsibilities.
More so with all common carriers. On the other hand, there may exist a public
corporation even if it is endowed with gifts or donations from private individuals.

The true criterion, therefore, to determine whether a corporation is public or private is

found in the totality of the relation of the corporation to the State. If the corporation is
created by the State as the latter's own agency or instrumentality to help it in carrying
out its governmental functions, then that corporation is considered public; otherwise,
it is private. Applying the above test, provinces, chartered cities, and barangays can
best exemplify public corporations. They are created by the State as its own device
and agency for the accomplishment of parts of its own public works. x x x

By virtue of the fiction that all corporations owe their very existence and powers to the
State, the reportorial requirement is applicable to all corporations of whatever nature,
whether they are public, quasi-public, or private corporations as creatures of the
State, there is a reserved right in the legislature to investigate the activities of a
corporation to determine whether it acted within its powers. In other words, the
reportorial requirement is the principal means by which the State may see to it that its
creature acted according to the powers and functions conferred upon it. These
principles were extensively discussed in Bataan Shipyard & Engineering Co., Inc. v.
Presidential Commission on Good Government. 26 Here, the Court, in holding that the
subject corporation could not invoke the right against self-incrimination whenever the
State demanded the production of its corporate books and papers, extensively
discussed the purpose of reportorial requirements:

. . . The corporation is a creature of the state. It is presumed to be

incorporated for the benefit of the public. It received certain special
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 privileges and franchises, and holds them subject to the laws of the state
and the limitations of its charter. Its powers are limited by law. It can
make no contract not authorized by its charter. Its rights to act as a
corporation are only preserved to it so long as it obeys the laws of its
creation. There is a reserve[d] right in the legislature to investigate its
contracts and find out whether it has exceeded its powers. It would be a
strange anomaly to hold that a state, having chartered a corporation to
make use of certain franchises, could not, in the exercise of sovereignty,
inquire how these franchises had been employed, and whether they had
been abused, and demand the production of the corporate books and
papers for that purpose. The defense amounts to this, that an officer of
the corporation which is charged with a criminal violation of the statute
may plead the criminality of such corporation as a refusal to produce its
books. To state this proposition is to answer it. While an individual may
lawfully refuse to answer incriminating questions unless protected by an
immunity statute, it does not follow that a corporation vested with special
privileges and franchises may refuse to show its hand when charged
with an abuse of such privileges. (Wilson v. United States, 55 Law Ed.,
771, 780.)

Funa v. Manila Economic & Cultural

Office, G.R. No. 193462, [February 4,
2014], 726 PHIL 63.

Government instrumentalities are agencies of the national government that, by reason

of some "special function or jurisdiction" they perform or exercise, are allotted"
operational autonomy" and are "not integrated within the department
framework." Subsumed under the rubric "government instrumentality" are the
following entities:

1. regulatory agencies,
2. chartered institutions,
3. government corporate entities or government instrumentalities
with corporate powers (GCE/GICP), and
4. GOCCs

x x x x Definition of GOCC under Republic Act No. 10149 or the GOCC Governance
Act of 2011, to wit:

(o) Government-Owned or -Controlled Corporation (GOCC) refers

to any agency organized as a stock or non-stock corporation, vested
with functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government of the Republic
of the Philippines directly or through its instrumentalities either wholly
or, where applicable as in the case of stock corporations, to the
extent of at least a majority of its outstanding capital stock: . . . .
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GOCCs, therefore, are "stock or non-stock" corporations "vested with functions
relating to public needs" that are "owned by the Government directly or through its
instrumentalities." By definition, three attributes thus make an entity a GOCC: first, its
organization as stock or non-stock corporation; second, the public character of its
function; and third, government ownership over the same.

Possession of all three attributes is necessary to deem an entity a GOCC.

In this case, there is not much dispute that the MECO possesses
the first and second attributes. It is the third attribute, which the MECO lacks.

The MECO Is Organized as a Non-Stock Corporation

xxx

The MECO Performs Functions with a Public Aspect.

The public character of the functions vested in the MECO cannot be doubted either.
Indeed, to a certain degree, the functions of the MECO can even be said to partake of
the nature of governmental functions. As earlier intimated, it is the MECO that, on
behalf of the people of the Philippines, currently facilitates unofficial relations with the
people in Taiwan.

Consistent with its corporate purposes, the MECO was "authorized" by the Philippine
government to perform certain "consular and other functions" relating to the
promotion, protection and facilitation of Philippine interests in Taiwan. The full extent
of such authorized functions are presently detailed in Sections 1 and 2 of EO No. 15,
s. 2001:
x x x

A perusal of the above functions of the MECO reveals its uncanny similarity to some
of the functions typically performed by the DFA itself, through the latter's diplomatic
and consular missions. The functions of the MECO, in other words, are of the kind that
would otherwise be performed by the Philippines' own diplomatic and consular organs,
if not only for the government's acquiescence that they instead be exercised by the
MECO.
Evidently, the functions vested in the MECO are impressed with a public aspect.

The MECO Is Not Owned or Controlled by the Government

Organization as a non-stock corporation and the mere performance of functions with

a public aspect, however, are not by themselves sufficient to consider the MECO as a
GOCC. In order to qualify as a GOCC, a corporation must also, if not more importantly,
be owned by the government.

Page 4 of 40
The government owns a stock or non-stock corporation if it has controlling interest in
the corporation. In a stock corporation, the controlling interest of the government is
assured by its ownership of at least fifty-one percent (51%) of the corporate capital
stock. In a non-stock corporation, like the MECO, jurisprudence teaches that the
controlling interest of the government is affirmed when "at least majority of the
members are government officials holding such membership by appointment or
designation" or there is otherwise "substantial participation of the government in the
selection" of the corporation's governing board. x x x

The fact of the incorporation of the MECO under the Corporation Code is key. The
MECO was correct in postulating that, as a corporation organized under the
Corporation Code, it is governed by the appropriate provisions of the said code, its
articles of incorporation and its by-laws. In this case, it is the by-laws of the MECO
that stipulates that its directors are elected by its members; its officers are elected by
its directors; and its members, other than the original incorporators, are admitted by
way of a unanimous board resolution, to wit: x x x

It is significant to note that none of the original incorporators of the MECO were shown
to be government officials at the time of the corporation's organization. Indeed, none
of the members, officers or board of directors of the MECO, from its incorporation up
to the present day, were established as government appointees or public officers
designated by reason of their office. There is, in fact, no law or executive order that
authorizes such an appointment or designation. Hence, from a strictly legal
perspective, it appears that the presidential "desire letters" pointed out by petitioner
if such letters even exist outside of the case of Mr. Basilio are, no matter how strong
its persuasive effect may be, merely recommendatory.

The MECO Is Not a Government Instrumentality; It Is a Sui Generis Entity

The categorical exclusion of the MECO from a GOCC makes it easier to exclude the
same from any other class of government instrumentality. The other government
instrumentalities i.e., the regulatory agencies, chartered institutions and GCE/GICP
are all, by explicit or implicit definition, creatures of the law. The MECO cannot be any
other instrumentality because it was, as mentioned earlier, merely incorporated
under the Corporation Code.

Hence, unless its legality is questioned, and in this case it was not, the fact that the
MECO is operating under the policy supervision of the DTI is no longer a relevant
issue to be reckoned with for purposes of this case.

For whatever it is worth, however, and without justifying anything, it is easy enough for
this Court to understand the rationale, or necessity even, of the executive branch
placing the MECO under the policy supervision of one of its agencies.

It is evident, from the peculiar circumstances surrounding its incorporation, that the
MECO was not intended to operate as any other ordinary corporation. And it is not.
Page 5 of 40
Despite its private origins, and perhaps deliberately so, the MECO was "entrusted" by
the government with the "delicate and precarious" responsibility of
pursuing "unofficial" relations with the people of a foreign land whose government the
Philippines is bound not to recognize. The intricacy involved in such undertaking is the
possibility that, at any given time in fulfilling the purposes for which it was incorporated,
the MECO may find itself engaged in dealings or activities that can directly contradict
the Philippines' commitment to the One China policy of the PROC. Such a scenario
can only truly be avoided if the executive department exercises some form of
oversight, no matter how limited, over the operations of this otherwise private entity.

Indeed, from hindsight, it is clear that the MECO is uniquely situated as compared with
other private corporations. From its over-reaching corporate objectives, its special duty
and authority to exercise certain consular functions, up to the oversight by the
executive department over its operations all the while maintaining its legal status
as a non-governmental entity the MECO is, for all intents and purposes, sui
generis.

Batas Pambansa Bilang 68

THE CORPORATION CODE OF THE PHILIPPINES

Section 1. Title of the Code. This Code shall be known as "The Corporation
Code of the Philippines."

Benefits:
1. Limited Liability.
2. Enable a group of persons to act as one.
3. Consolidation of resources, raising of capital from the public.
4. Renewable period of existence, to extend or to terminate.
4. Transfer of shares or interests.
5. Undertaking of big projects.

Drawbacks:
1. Nationality requirements and limitations, ex. Constitution and Business abroad.
2. Need for formal proceedings, stockholders quorum sometimes difficult to achieve.
3 Share transfer may result in conflicting interests among shareholders and directors.
4. Majority rule which can marginalize minority.
5. Probability of management monopoly.
6. Need for reportorial requirements, filing of GIS and FS with SEC.
7. Double taxation may ensue.

Corporations Partnerships
Created by operation of law. Created by mere agreement of the
parties.
At least five incorporators. Generally by two or more natural
persons.

Page 6 of 40
 Exercise only powers and functions
expressly granted to it by law or
necessary/incidental to its existence.
Business transacted through board of
directors or persons appointed by the
board.
Right of succession hence, it
continues to exist despite the death,
withdrawal, incapacity or civil
interdiction of the stockholders or
members.
Unless restricted, stockholder can
ordinarily transfer, sell or assign his
shares of stock without the consent of
the other stockholders.
Liability of stockholders limited to their
subscription.
Maximum term is 50 years subject to
renewal.
Dissolved in accordance with law.
Exercises all powers agreed upon
limited only by so long contrary to
law, morals, good customs, public
policy and public order
Generally, any one of the partners
may validly bind the partnership
Death, incapacity, insolvency, civil
interdiction or mere withdrawal of one
partner would result in it dissolution
Transfer of rights or interest in the
partnership will need consent of other
partners and may be cause of
dissolution.
Generally, all partners are liable pro
rata with all their property and after all
the partnership property has been
exhausted, for all partnership liability.
May continue existing after death of
original partners.
May be dissolved at will.

Section 2. Corporation defined. A corporation is an artificial being created by

operation of law, having the right of succession and the powers, attributes and
properties expressly authorized by law or incident to its existence.

a. An artificial being.

i. Separate Personality:

Good Earth Emporium, Inc. v. Court of

Appeals, G.R. No. 82797, [February 27,
1991], 272 PHIL 373.

A corporation has a personality distinct and separate from its individual stockholders
or members. Being an officer or stockholder of a corporation does not make one's
property also of the corporation, and vice-versa, for they are separate entities (Traders
Royal Bank v. CA, G.R. No. 78412, September 26, 1989; Cruz v. Dalisay, 152 SCRA
482). Shareowners are in no legal sense the owners of corporate property (or credits)
which is owned by the corporation as a distinct legal person (Concepcion Magsaysay-
Labrador v. CA, G.R. No. 58168, December 19, 1989). As a consequence of the
separate juridical personality of a corporation, the corporate debt or credit is not the
debt or credit of the stockholder, nor is the stockholder's debt or credit that of the
corporation (Prof. Jose Nolledo's "The Corporation Code of the Philippines, p. 5, 1988
Edition, citing Professor Ballantine).

Page 7 of 40
MAM Realty Development Corp. v.
National Labor Relations Commission,
G.R. No. 114787, [June 2, 1995], 314
PHIL 838-846

Facts: The case originated from a complaint filed with the Labor Arbiter by Celso
B. Balbastro against MAM Realty Development Corporation ("MAM") and its Vice
President Manuel P. Centeno. The NLRC found for Balbastro and held both MAM
and Centeno jointly and severally liable. Was NLRC correct?

Ruling: We agree with petitioners, however, that the NLRC erred in holding
Centeno jointly and severally liable with MAM. A corporation, being a juridical
entity, may act only through its directors, officers and employees. Obligations
incurred by them, acting as such corporate agents, are not theirs but the direct
accountabilities of the corporation they represent. True, solidarily liabilities may at
times be incurred but only when exceptional circumstances warrant such as,
generally, in the following cases:

1. When directors and trustees or, in appropriate cases, the officers of a

corporation

(a) vote for or assent to patently unlawful acts of the corporation;

(b) act in bad faith or with gross negligence in directing the corporate
affairs;
(c) are guilty of conflict of interest to the prejudice of the corporation,
its stockholders or members, and other persons.

2. When a director or officer has consented to the issuance of watered

stock or who, having knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto.

3. When the director, trustee or officer has contractually agreed or

stipulated to hold himself personally and solidarily liable with the
Corporation.

4. When a director, trustee or officer is made, by specific provision of law,

personally liable for his corporate action.

In labor cases, for instance, the Court has held corporate directors and officers
solidarily liable with the corporation for the termination of employment of
employees done with malice or in bad faith.

In the case at bench, there is nothing substantial on record that can justify petitioner
Centeno's solidary liability with the corporation.

Page 8 of 40
Lim v. Court of Appeals, G.R. No.
124715, [January 24, 2000], 380 PHIL
60.

Facts: Respondents Auto Truck Corporation, Alliance Marketing Corporation,

Speed Distributing, Inc., Active Distributing, Inc. and Action Company are
corporations formed, organized and existing under Philippine laws and which
owned real properties covered under the Torrens system. On 11 June 1994, Pastor
Y. Lim died intestate. Herein petitioner, as surviving spouse and duly represented
by her nephew George Luy, filed on a joint petition for the administration of the
estate of Pastor Y. Lim and included in the inventory of the estate of Pastor Y. Lim
properties registered in the name of respondent corporations alleging that Pastor
Lim was the true owner of the respondent corporations and its capital. Are
petitioners correct?

Ruling: Inasmuch as the real properties included in the inventory of the estate of
the late Pastor Y. Lim are in the possession of and are registered in the name of
private respondent corporations, which under the law possess a personality
separate and distinct from their stockholders, and in the absence of any cogency
to shred the veil of corporate fiction, the presumption of conclusiveness of said
titles in favor of private respondents should stand undisturbed.

It is settled that a corporation is clothed with personality separate and distinct from
that of the persons composing it. It may not generally be held liable for that of the
persons composing it. It may not be held liable for the personal indebtedness of its
stockholders or those of the entities connected with it.

Rudimentary is the rule that a corporation is invested by law with a personality

distinct and separate from its stockholders or members. In the same vein, a
corporation by legal fiction and convenience is an entity shielded by a protective
mantle and imbued by law with a character alien to the persons comprising it.

Philippine National Bank v. Andrada

Electric & Engineering Co., G.R. No.
142936, [April 17, 2002], 430 PHIL 882-
903

Andrada Electric previously entered into a construction contract with Pampanga Sugar
Mills (PASUMIL in short) and as of 1973 had an unpaid balance amounting to
P527,263.80. The Development Bank of the Philippines (DBP) subsequently
foreclosed on the assets of PASUMIL. PNB thereafter acquired the assets of
PASUMIL from the DBP which were place in NASUDECO, a company organized by
PNB to take ownership and possession of the assets and ultimately to nationalize and
consolidate its interest in other PNB controlled sugar mills. Affirming the trial court, the
CA held that it was offensive to the basic tenets of justice and equity for a corporation

Page 9 of 40
to take over and operate the business of another corporation, while disavowing or
repudiating any responsibility, obligation or liability arising therefrom.

Ruling: Succinctly put, the aforesaid errors boil down to the principal issue of whether
PNB is liable for the unpaid debts of PASUMIL to respondent.

As a rule, a corporation that purchases the assets of another will not be liable for the
debts of the selling corporation, provided the former acted in good faith and paid
adequate consideration for such assets, except when any of the following
circumstances is present: (1) where the purchaser expressly or impliedly agrees to
assume the debts, (2) where the transaction amounts to a consolidation or merger of
the corporations, (3) where the purchasing corporation is merely a continuation of the
selling corporation, and (4) where the transaction is fraudulently entered into in order
to escape liability for those debts.

Piercing the Corporate Veil Not Warranted. A corporation is an artificial being created
by operation of law. It possesses the right of succession and such powers, attributes,
and properties expressly authorized by law or incident to its existence. It has a
personality separate and distinct from the persons composing it, as well as from any
other legal entity to which it may be related. This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or of
another corporation. For reasons of public policy and in the interest of justice, the
corporate veil will justifiably be impaled only when it becomes a shield for fraud,
illegality or inequity committed against third persons.

Hence, any application of the doctrine of piercing the corporate veil should be done
with caution. A court should be mindful of the milieu where it is to be applied. It must
be certain that the corporate fiction was misused to such an extent that injustice, fraud,
or crime was committed against another, in disregard of its rights. The wrongdoing
must be clearly and convincingly established; it cannot be presumed. Otherwise, an
injustice that was never unintended may result from an erroneous application.

This Court has pierced the corporate veil to ward off a judgment credit, to avoid
inclusion of corporate assets as part of the estate of the decedent, to escape liability
arising from a debt, or to perpetuate fraud and/or confuse legitimate issues either to
promote or to shield unfair objectives or to cover up an otherwise blatant violation of
the prohibition against forum-shopping. Only in these and similar instances may the
veil be pierced and disregarded.

The question of whether a corporation is a mere alter ego is one of fact. Piercing the
veil of corporate fiction may be allowed only if the following elements concur: (1)
control not mere stock control, but complete domination not only of finances, but
of policy and business practice in respect to the transaction attacked, must have been
such that the corporate entity as to this transaction had at the time no separate mind,
Page 10 of 40
will or existence of its own; (2) such control must have been used by the defendant to
commit a fraud or a wrong to perpetuate the violation of a statutory or other positive
legal duty, or a dishonest and an unjust act in contravention of plaintiff's legal right;
and (3) the said control and breach of duty must have proximately caused the injury
or unjust loss complained of.

We believe that the absence of the foregoing elements in the present case precludes
the piercing of the corporate veil. First, other than the fact that petitioners acquired the
assets of PASUMIL, there is no showing that their control over it warrants the disregard
of corporate personalities. Second, there is no evidence that their juridical personality
was used to commit a fraud or to do a wrong; or that the separate corporate entity was
farcically used as a mere alter ego, business conduit or instrumentality of another
entity or person. Third, respondent was not

ii. Piercing the veil:

Kukan International Corporation v.

Reyes, G.R. No. 182729, [September
29, 2010], 646 PHIL 210.

Facts: Kukan, Inc. conducted a bidding for the supply and installation of signages in a
building being constructed in Makati City. Morales tendered the winning bid and was
awarded the PhP5 million contract. Despite his compliance with his contractual
undertakings, Morales was not fully paid leading to Morales filing a Complaint with the
RTC where a judgment was entered in his favor via default as Kukan, Inc. no longer
appeared and participated in the proceedings before the trial court.

The sheriff then levied upon various personal properties found at what was supposed
to be Kukan, Inc.'s office at Unit 2205, 88 Corporate Center, Salcedo Village, Makati
City. Alleging that it owned the properties thus levied and that it was a different
corporation from Kukan, Inc., Kukan International Corporation (KIC) filed an Affidavit
of Third-Party Claim. Notably, KIC was incorporated in August 2000, or shortly after
Kukan, Inc. had stopped participating in Civil Case No. 99-93173.

Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of
Corporate Fiction to declare KIC as having no existence separate from Kukan, Inc.
Against Whom Can a Final and Executory Judgment Be Executed.

Ruling: Whether or not the trial and appellate courts correctly applied the principle of
piercing the veil of corporate entity called also as disregarding the fiction of a
separate juridical personality of a corporation to support a conclusion that Kukan,
Inc. and KIC are but one and the same corporation with respect to the contract award
referred to at the outset. x x x

Page 11 of 40
In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations
Commission, the Court revisited the subject principle of piercing the veil of corporate
fiction and wrote:

Under the doctrine of "piercing the veil of corporate fiction," the court looks at
the corporation as a mere collection of individuals or an aggregation of persons
undertaking business as a group, disregarding the separate juridical personality
of the corporation unifying the group. Another formulation of this doctrine is that
when two business enterprises are owned, conducted and controlled by the
same parties, both law and equity will, when necessary to protect the rights of
third parties, disregard the legal fiction that two corporations are distinct entities
and treat them as identical or as one and the same.

Whether the separate personality of the corporation should be pierced hinges

on obtaining facts appropriately pleaded or proved. However, any piercing of
the corporate veil has to be done with caution, albeit the Court will not hesitate
to disregard the corporate veil when it is misused or when necessary in the
interest of justice. . . . (Emphasis supplied.)

The same principle was the subject and discussed in Rivera v. United Laboratories,
Inc.:

While a corporation may exist for any lawful purpose, the law will regard it as
an association of persons or, in case of two corporations, merge them into one,
when its corporate legal entity is used as a cloak for fraud or illegality. This is
the doctrine of piercing the veil of corporate fiction. The doctrine applies only
when such corporate fiction is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, or when it is made as a shield to confuse the
legitimate issues, or where a corporation is the mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation.

To disregard the separate juridical personality of a corporation, the wrongdoing

must be established clearly and convincingly. It cannot be presumed.
(Emphasis supplied.) xxx

. . . the doctrine of piercing the veil of corporate fiction comes to play only during the
trial of the case after the court has already acquired jurisdiction over the corporation.
Hence, before this doctrine can be applied, based on the evidence presented, it is
imperative that the court must first have jurisdiction over the corporation. . . .
(Emphasis supplied.)

The implication of the above comment is twofold: (1) the court must first acquire
jurisdiction over the corporation or corporations involved before its or their separate
personalities are disregarded; and (2) the doctrine of piercing the veil of corporate
Page 12 of 40
entity can only be raised during a full-blown trial over a cause of action duly
commenced involving parties duly brought under the authority of the court by way of
service of summons or what passes as such service. x x x

In any event, the principle of piercing the veil of corporate fiction finds no application
to the instant case.

As a general rule, courts should be wary of lifting the corporate veil between
corporations, however related. Philippine National Bank v. Andrada Electric
Engineering Company explains why:

A corporation is an artificial being created by operation of law. . . . It has a personality

separate and distinct from the persons composing it, as well as from any other legal
entity to which it may be related. This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or of
another corporation. For reasons of public policy and in the interest of justice, the
corporate veil will justifiably be impaled only when it becomes a shield for fraud,
illegality or inequity committed against third persons.

Hence, any application of the doctrine of piercing the corporate veil should be done
with caution. A court should be mindful of the milieu where it is to be applied. It must
be certain that the corporate fiction was misused to such an extent that injustice, fraud,
or crime was committed against another, in disregard of its rights. The wrongdoing
must be clearly and convincingly established; it cannot be presumed. Otherwise, an
injustice that was never unintended may result from an erroneous application.

This Court has pierced the corporate veil to ward off a judgment credit, to avoid
inclusion of corporate assets as part of the estate of the decedent, to escape liability
arising from a debt, or to perpetuate fraud and/or confuse legitimate issues either to
promote or to shield unfair objectives or to cover up an otherwise blatant violation of
the prohibition against forum-shopping. Only in these and similar instances may the
veil be pierced and disregarded. (Emphasis supplied.)

In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear
and convincing proof that the separate and distinct personality of the corporation was
purposefully employed to evade a legitimate and binding commitment and perpetuate
a fraud or like wrongdoings. To be sure, the Court has, on numerous occasions, 38
applied the principle where a corporation is dissolved and its assets are transferred to
another to avoid a financial liability of the first corporation with the result that the
second corporation should be considered a continuation and successor of the first
entity.

In those instances when the Court pierced the veil of corporate fiction of two
corporations, there was a confluence of the following factors:
Page 13 of 40
1. A first corporation is dissolved;

2. The assets of the first corporation is transferred to a second corporation to avoid a

financial liability of the first corporation; and

3. Both corporations are owned and controlled by the same persons such that the
second corporation should be considered as a continuation and successor of the
first corporation.

In the instant case, however, the second and third factors are conspicuously absent.
There is, therefore, no compelling justification for disregarding the fiction of corporate
entity separating Kukan, Inc. from KIC. In applying the principle, both the RTC and the
CA miserably failed to identify the presence of the abovementioned factors. x x x

As is apparent from its disquisition, the RTC brushed aside the separate corporate
existence of Kukan, Inc. and KIC on the main argument that Michael Chan owns 40%
of the common shares of both corporations, obviously oblivious that overlapping stock
ownership is a common business phenomenon. It must be remembered, however, that
KIC's properties were the ones seized upon levy on execution and not that of Kukan,
Inc. or of Michael Chan for that matter. Mere ownership by a single stockholder or by
another corporation of a substantial block of shares of a corporation does not, standing
alone, provide sufficient justification for disregarding the separate corporate
personality. 40 For this ground to hold sway in this case, there must be proof that Chan
had control or complete dominion of Kukan and KIC's finances, policies, and business
practices; he used such control to commit fraud; and the control was the proximate
cause of the financial loss complained of by Morales. The absence of any of the
elements prevents the piercing of the corporate veil. 41 And indeed, the records do
not show the presence of these elements. x x x

It bears reiterating that piercing the veil of corporate fiction is frowned upon.
Accordingly, those who seek to pierce the veil must clearly establish that the separate
and distinct personalities of the corporations are set up to justify a wrong, protect fraud,
or perpetrate a deception. In the concrete and on the assumption that the RTC has
validly acquired jurisdiction over the party concerned, Morales ought to have proved
by convincing evidence that Kukan, Inc. was collapsed and thereafter KIC purposely
formed and operated to defraud him. Morales has not to us discharged his burden.

Philippine National Bank v. Hydro

Resources Contractors Corp., G.R. No.
167530, 167561, 167603, [March 13,
2013], 706 PHIL 297,

Facts: Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages
made on the properties of Marinduque Mining and Industrial Corporation (MMIC). As
a result of the foreclosure, DBP and PNB acquired substantially all the assets of MMIC
Page 14 of 40
and resumed the business operations of the defunct MMIC by organizing NMIC. DBP
and PNB owned 57% and 43% of the shares of NMIC, respectively, except for five
qualifying shares.

Subsequently, NMIC engaged the services of HRCC Inc., for NMIC's Mine Stripping
and Road Construction Program in 1985 for a total contract price. An unpaid balance
P8,370,934.74.

The RTC ruled in favor of HRCC and pierced the veil of corporate fiction finding that
the business of NMIC was then also being conducted and controlled by both DBP and
PNB. In fact, it was Rolando M. Zosa, then Governor of DBP, who was signing and
entering into contracts with third persons, on behalf of NMIC citing "where it appears
that the business enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third persons,
disregard legal fiction that two (2) corporations are distinct entities, and treat them as
identical." (Phil. Veterans Investment Development Corp. vs. CA, 181 SCRA 669).

The Court of Appeals rendered the Decision dated November 30, 2004, affirmed the
piercing of the veil of the corporate personality of NMIC and held DBP, PNB, and APT
(as DBP and PNBs transferee) solidarily liable with NMIC. In particular, the Court of
Appeals found that it is indubitable that NMIC was owned by appellants DBP and PNB
to the extent of 57% and 43% respectively; that said two (2) appellants are the only
stockholders, with the qualifying stockholders of five (5) consisting of its own officers
and included in its charter merely to comply with the requirement of the law as to
number of incorporators; and that the directorates of DBP, PNB and NMIC are
interlocked.

Ruling: A corporation is an artificial entity created by operation of law. It possesses

the right of succession and such powers, attributes, and properties expressly
authorized by law or incident to its existence. It has a personality separate and distinct
from that of its stockholders and from that of other corporations to which it may be
connected. As a consequence of its status as a distinct legal entity and as a result of
a conscious policy decision to promote capital formation, a corporation incurs its own
liabilities and is legally responsible for payment of its obligations. In other words, by
virtue of the separate juridical personality of a corporation, the corporate debt or credit
is not the debt or credit of the stockholder. This protection from liability for
shareholders is the principle of limited liability.

Equally well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or of
another corporation. For reasons of public policy and in the interest of justice, the
corporate veil will justifiably be impaled only when it becomes a shield for fraud,
illegality or inequity committed against third persons.

However, the rule is that a court should be careful in assessing the milieu where the
doctrine of the corporate veil may be applied. Otherwise an injustice, although
Page 15 of 40
unintended, may result from its erroneous application. Thus, cutting through the
corporate cover requires an approach characterized by due care and caution:

Hence, any application of the doctrine of piercing the corporate veil

should be done with caution. A court should be mindful of the milieu
where it is to be applied. It must be certain that the corporate fiction was
misused to such an extent that injustice, fraud, or crime was committed
against another, in disregard of its rights. The wrongdoing must be
clearly and convincingly established; it cannot be presumed.

Sarona v. National Labor Relations Commission has defined the scope of application
of the doctrine of piercing the corporate veil:

The doctrine of piercing the corporate veil applies only in three (3) basic
areas, namely: 1) defeat of public convenience as when the corporate
fiction is used as a vehicle for the evasion of an existing obligation; 2)
fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime; or 3) alter ego cases, where a
corporation is merely a farce since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.
(Citation omitted.)

Here, HRCC has alleged from the inception of this case that DBP and PNB (and the
APT as assignee of DBP and PNB) should be held solidarily liable for using NMIC as
alter ego. The RTC sustained the allegation of HRCC and pierced the corporate veil
of NMIC pursuant to the alter ego theory when it concluded that NMIC "is a mere
adjunct, business conduit or alter ego of both DBP and PNB." The Court of Appeals
upheld such conclusion of the trial court. In other words, both the trial and appellate
courts relied on the alter ego theory when they disregarded the separate corporate
personality of NMIC.

In this connection, case law lays down a three-pronged test to determine the
application of the alter ego theory, which is also known as the instrumentality
theory, namely:

(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice
in respect to the transaction attacked so that the corporate entity as
to this transaction had at the time no separate mind, will or existence
of its own;
(2) Such control must have been used by the defendant to commit fraud
or wrong, to perpetuate the violation of a statutory or other positive
legal duty, or dishonest and unjust act in contravention of plaintiff's
legal right; and
Page 16 of 40
 (3) The aforesaid control and breach of duty must have proximately
caused the injury or unjust loss complained of. (Emphases omitted.)

The first prong is the "instrumentality" or "control" test. This test requires that the
subsidiary be completely under the control and domination of the parent. It examines
the parent corporation's relationship with the subsidiary. It inquires whether a
subsidiary corporation is so organized and controlled and its affairs are so conducted
as to make it a mere instrumentality or agent of the parent corporation such that its
separate existence as a distinct corporate entity will be ignored. It seeks to establish
whether the subsidiary corporation has no autonomy and the parent corporation,
though acting through the subsidiary in form and appearance, "is operating the
business directly for itself."

The second prong is the "fraud" test. This test requires that the parent corporation's
conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. It
examines the relationship of the plaintiff to the corporation. It recognizes that piercing
is appropriate only if the parent corporation uses the subsidiary in a way that harms
the plaintiff creditor. As such, it requires a showing of "an element of injustice or
fundamental unfairness."

The third prong is the "harm" test. This test requires the plaintiff to show that the
defendant's control, exerted in a fraudulent, illegal or otherwise unfair manner toward
it, caused the harm suffered. A causal connection between the fraudulent conduct
committed through the instrumentality of the subsidiary and the injury suffered or the
damage incurred by the plaintiff should be established. The plaintiff must prove that,
unless the corporate veil is pierced, it will have been treated unjustly by the
defendant's exercise of control and improper use of the corporate form and, thereby,
suffer damages.

To summarize, piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements x x x

This Court finds that none of the tests has been satisfactorily met in this case. In
applying the alter ego doctrine, the courts are concerned with reality and not form,
with how the corporation operated and the individual defendant's relationship to that
operation. With respect to the control element, it refers not to paper or formal control
by majority or even complete stock control but actual control which amounts to "such
domination of finances, policies and practices that the controlled corporation has, so
to speak, no separate mind, will or existence of its own, and is but a conduit for its
principal." In addition, the control must be shown to have been exercised at the time
the acts complained of took place. x x x

While ownership by one corporation of all or a great majority of stocks of another

corporation and their interlocking directorates may serve as indicia of control, by
themselves and without more, however, these circumstances are insufficient to
establish an alter ego relationship or connection between DBP and PNB on the one
Page 17 of 40
hand and NMIC on the other hand, that will justify the puncturing of the latter's
corporate cover. This Court has declared that "mere ownership by a single stockholder
or by another corporation of all or nearly all of the capital stock of a corporation is not
of itself sufficient ground for disregarding the separate corporate personality." This
Court has likewise ruled that the "existence of interlocking directors, corporate officers
and shareholders is not enough justification to pierce the veil of corporate fiction in the
absence of fraud or other public policy considerations." x x x

In this case, nothing in the records shows that the corporate finances, policies and
practices of NMIC were dominated by DBP and PNB in such a way that NMIC could
be considered to have no separate mind, will or existence of its own but a mere conduit
for DBP and PNB. On the contrary, the evidence establishes that HRCC knew and
acted on the knowledge that it was dealing with NMIC, not with NMIC's stockholders.
xxx

In relation to the second element, to disregard the separate juridical personality of a

corporation, the wrongdoing or unjust act in contravention of a plaintiff's legal rights
must be clearly and convincingly established; it cannot be presumed. Without a
demonstration that any of the evils sought to be prevented by the doctrine is present,
it does not apply. x x x

There being a total absence of evidence pointing to a fraudulent, illegal or unfair act
committed against HRCC by DBP and PNB under the guise of NMIC, there is no basis
to hold that NMIC was a mere alter ego of DBP and PNB. As this Court ruled in
Ramoso v. Court of Appeals:

As a general rule, a corporation will be looked upon as a legal entity,

unless and until sufficient reason to the contrary appears. When the
notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an
association of persons. Also, the corporate entity may be disregarded in
the interest of justice in such cases as fraud that may work inequities
among members of the corporation internally, involving no rights of the
public or third persons. In both instances, there must have been fraud,
and proof of it. For the separate juridical personality of a corporation to
be disregarded, the wrongdoing must be clearly and convincingly
established. It cannot be presumed.

As regards the third element, in the absence of both control by DBP and PNB of NMIC
and fraud or fundamental unfairness perpetuated by DBP and PNB through the
corporate cover of NMIC, no harm could be said to have been proximately caused by
DBP and PNB on HRCC for which HRCC could hold DBP and PNB solidarily liable
with NMIC.

iii. Veil Pierced -

Page 18 of 40
Livesey v. Binswanger Phils., Inc., G.R.
No. 177493, [March 19, 2014], 730 PHIL
99.

Facts: In December 2001, petitioner Eric Godfrey Stanley Livesey filed a complaint for
illegal dismissal with money claims against CBB Philippines Strategic Property
Services, Inc. (CBB) and Paul Dwyer. CBB denied liability. It alleged that it engaged
Livesey as a corporate officer in April 2001: he was elected Vice-President (with a
salary of P75,000.00/month), and thereafter, he became President (at
P1,200,000.00/year). It claimed that Livesey was later designated as Managing
Director when it became an extension office of its principal in Hongkong. Thereafter,
the parties entered into a compromise agreement.

CBB paid Livesey the initial amount of US$13,000.00, but not the next two installments
as the company ceased operations. Livesey then filed a motion for the issuance of an
alias writ of execution, alleging that in the process of serving respondents the writ, he
learned "that respondents, in a clear and willful attempt to avoid their liabilities to
complainant . . . have organized another corporation, [Binswanger] Philippines,
Inc." He claimed that there was evidence showing that CBB and Binswanger
Philippines, Inc. (Binswanger) are one and the same corporation, pointing out that
CBB stands for Chesterton Blumenauer Binswanger. Invoking the doctrine of
piercing the veil of corporate fiction, Livesey prayed that an alias writ of execution be
issued against respondents Binswanger and Keith Elliot, CBB's former President, and
now Binswanger's President and Chief Executive Officer (CEO). Is piercing the veil of
corporate fiction proper?

Ruling: Shortly after Elliot forged the compromise agreement with Livesey, CBB
ceased operations, a corporate event that was not disputed by the respondents. Then
Binswanger suddenly appeared. It was established almost simultaneously with CBB's
closure, with no less than Elliot as its President and CEO. Through the confluence of
events surrounding CBB's closure and Binswanger's sudden emergence, a
reasonable mind would arrive at the conclusion that Binswanger is CBB's alter ego or
that CBB and Binswanger are one and the same corporation. There are also
indications of badges of fraud in Binswanger's incorporation. It was a business strategy
to evade CBB's financial liabilities, including its outstanding obligation to Livesey. x x

It has long been settled that the law vests a corporation with a personality distinct and
separate from its stockholders or members. In the same vein, a corporation, by legal
fiction and convenience, is an entity shielded by a protective mantle and imbued by
law with a character alien to the persons comprising it. Nonetheless, the shield is not
at all times impenetrable and cannot be extended to a point beyond its reason and
policy. Circumstances might deny a claim for corporate personality, under the
"doctrine of piercing the veil of corporate fiction."

Piercing the veil of corporate fiction is an equitable doctrine developed to address

situations where the separate corporate personality of a corporation is abused or used
Page 19 of 40
for wrongful purposes. Under the doctrine, the corporate existence may be
disregarded where the entity is formed or used for non-legitimate purposes, such as
to evade a just and due obligation, or to justify a wrong, to shield or perpetrate fraud
or to carry out similar or inequitable considerations, other unjustifiable aims or
intentions, in which case, the fiction will be disregarded and the individuals composing
it and the two corporations will be treated as identical.

In the present case, we see an indubitable link between CBB's closure and
Binswanger's incorporation. CBB ceased to exist only in name; it re-emerged in the
person of Binswanger for an urgent purpose to avoid payment by CBB of the last
two installments of its monetary obligation to Livesey, as well as its other financial
liabilities. Freed of CBB's liabilities, especially that owing to Livesey, Binswanger can
continue, as it did continue, CBB's real estate brokerage business.

Livesey's evidence, whose existence the respondents never denied, converged to

show this continuity of business operations from CBB to Binswanger. It was not just
coincidence that Binswanger is engaged in the same line of business CBB embarked
on: (1) it even holds office in the very same building and on the very same floor where
CBB once stood; (2) CBB's key officers, Elliot, no less, and Catral moved over to
Binswanger, performing the tasks they were doing at CBB; (3) notwithstanding CBB's
closure, Binswanger's Web Editor (Young), in an e-mail correspondence, supplied the
information that Binswanger is "now known" as either CBB (Chesterton Blumenauer
Binswanger or as Chesterton Petty, Ltd., in the Philippines; (4) the use of Binswanger
of CBB's paraphernalia (receiving stamp) in connection with a labor case where
Binswanger was summoned by the authorities, although Elliot claimed that he bought
the item with his own money; and (5) Binswanger's takeover of CBB's project with the
PNB.

While the ostensible reason for Binswanger's establishment is to continue CBB's

business operations in the Philippines, which by itself is not illegal, the close proximity
between CBB's disestablishment and Binswanger's coming into existence points to an
unstated but urgent consideration which, as we earlier noted, was to evade CBB's
unfulfilled financial obligation to Livesey under the compromise agreement.

This underhanded objective, it must be stressed, can only be attributed to Elliot as it

was apparent that Binswanger's stockholders had nothing to do with Binswanger's
operations as noted by the NLRC and which the respondents did not deny. Elliot was
well aware of the compromise agreement between Livesey and CBB, as he "agreed
and accepted" the terms of the agreement for CBB. He was also well aware that the
last two installments of CBB's obligation to Livesey were due on June 30, 2003 and
September 30, 2003. These installments were not met and the reason is that after the
alleged sale of the majority of CBB's shares of stock, it closed down.

x x x This wrongful intent we cannot and must not condone, for it will give a premium
to an iniquitous business strategy where a corporation is formed or used for a non-

Page 20 of 40
legitimate purpose, such as to evade a just and due obligation. We, therefore, find
Elliot as liable as Binswanger for CBB's unfulfilled obligation to Livesey. S

Bibiano O. Reynoso, IV, Petitioner, vs.

Hon. Court Of Appeals and General
Credit Corporation, Respondents. G.R.
Nos. 116124-25. November 22, 2000

Facts: Sometime in the early 1960s, the Commercial Credit Corporation (hereinafter,
"CCC"), a financing and investment firm, organized franchise companies in different
parts of the country, wherein it shall hold thirty percent (30%) equity. Employees of the
CCC were designated as resident managers of the franchise companies. Petitioner
Bibiano O. Reynoso, IV was designated as the resident manager of the franchise
company in Quezon City, known as the Commercial Credit Corporation of Quezon City
(hereinafter, "CCC-QC").

On account of the restrictions imposed by the Central Bank policy by virtue of the
DOSRI Rule, CCC decided to form CCC Equity Corporation, (hereinafter, "CCC-
Equity"), a wholly-owned subsidiary, to which CCC transferred its thirty (30%) percent
equity in CCC-QC, together with two seats in the latter's Board of Directors.

Under the new set-up, several officials of Commercial Credit Corporation, including
petitioner Reynoso, became employees of CCC-Equity. While petitioner continued to
be the Resident Manager of CCC-QC, he drew his salaries and allowances from CCC-
Equity. Furthermore, although an employee of CCC-Equity, petitioner, as well as all
employees of CCC-QC, became qualified members of the Commercial Credit
Corporation Employees Pension Plan.

In 1980, CCC-QC filed a case against Reynoso and his wife for alleged embezzlement
of funds amounting to to PhP1,300,593.11. The case was dismissed against the
Reynosos and the courts warded the REynosos their counterclaim which became final.
Accordingly, a Writ of Execution was issued and subsequently petitioner filed a Motion
for Alias Writ of Execution, Examination of Judgment Debtor, and to Bring Financial
Records for Examination to Court. CCC-QC filed an Opposition to petitioner's
motion, alleging that the possession of its premises and records had been taken over
by CCC. Meanwhile, in 1983, CCC became known as the General Credit Corporation.
General Credit Corporation filed a Special Appearance and Opposition on December
2, 1991, alleging that it was not a party to the case, and therefore petitioner should
direct his claim against CCC-QC and not General Credit Corporation. Can execution
be enforced against GCC?

Ruling: The only issue to be resolved in the instant petition is whether or not the
judgment in favor of petitioner may be executed against respondent General Credit
Corporation. The latter contends that it is a corporation separate and distinct from
CCC-QC and, therefore, its properties may not be levied upon to satisfy the monetary
judgment in favor of petitioner. In short, respondent raises corporate fiction as its
Page 21 of 40
defense. Hence, we are necessarily called upon to apply the doctrine of piercing the
veil of corporate entity in order to determine if General Credit Corporation, formerly
CCC, may be held liable for the obligations of CCC-QC.

A corporation is an artificial being created by operation of law, having the right of

succession and the powers, attributes, and properties expressly authorized by law or
incident to its existence. It is an artificial being invested by law with a personality
separate and distinct from those of the persons composing it as well as from that of
any other legal entity to which it may be related. It was evolved to make possible the
aggregation and assembling of huge amounts of capital upon which big business
depends. It also has the advantage of non-dependence on the lives of those who
compose it even as it enjoys certain rights and conducts activities of natural persons.
Precisely because the corporation is such a prevalent and dominating factor in the
business life of the country, the law has to look carefully into the exercise of powers
by these artificial persons it has created. x x x

. . . this Court has pierced the veil of corporate fiction in numerous cases where it was
used, among others, to avoid a judgment credit; to avoid inclusion of corporate assets
as part of the estate of a decedent; to avoid liability arising from debt; when made
use of as a shield to perpetrate fraud and/or confuse legitimate issues; or to promote
unfair objectives or otherwise to shield them. x x x

The defense of separateness will be disregarded where the business affairs of a

subsidiary corporation are so controlled by the mother corporation to the extent that it
becomes an instrument or agent of its parent. But even when there is dominance over
the affairs of the subsidiary, the doctrine of piercing the veil of corporate fiction applies
only when such fiction is used to defeat public convenience, justify wrong, protect fraud
or defend crime.

We stated in Tomas Lao Construction v. National Labor Relations Commission, that

the legal fiction of a corporation being a judicial entity with a distinct and separate
personality was envisaged for convenience and to serve justice. Therefore, it should
not be used as a subterfuge to commit injustice and circumvent the law. x x x

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.
Aside from CCC-Quezon City, other franchise companies were organized such as
CCC-North Manila and CCC-Cagayan Valley. The organization of subsidiary
corporations as what was done here is usually resorted to for the aggrupation of
capital, the ability to cover more territory and population, the decentralization of
activities best decentralized, and the securing of other legitimate advantages. But
when the mother corporation and its subsidiary cease to act in good faith and honest
business judgment, when the corporate device is used by the parent to avoid its liability
for legitimate obligations of the subsidiary, and when the corporate fiction is used to
perpetrate fraud or promote injustice, the law steps in to remedy the problem. When
Page 22 of 40
that happens, the corporate character is not necessarily abrogated. It continues for
legitimate objectives. However, it is pierced in order to remedy injustice, such as that
inflicted in this case.

Factually and legally, the 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.

Petitioner's designation as "resident manager" implies that he was placed in CCC-QC

by a superior authority. In fact, even after his assignment to the subsidiary corporation,
petitioner continued to receive his salaries, allowances, and benefits from CCC, which
later became respondent General Credit Corporation. Not only that. Petitioner and the
other permanent employees of CCC-QC were qualified members and participants of
the Employees Pension Plan of CCC.

There are other indications in the record which attest to the applicability of the identity
rule in this case, namely: the unity of interests, management, and control; the transfer
of funds to suit their individual corporate conveniences; and the dominance of policy
and practice by the mother corporation insure that CCC-QC was an instrumentality or
agency of CCC.

As petitioner stresses, both CCC and CCC-QC were engaged in the same principal
line of business involving a single transaction process. Under their discounting
arrangements, CCC financed the operations of CCC-QC. The subsidiary sold,
discounted, or assigned its accounts receivables to CCC. x x x

Paraphrasing the ruling in Claparols v. Court of Industrial Relations, reiterated

in Concept Builders Inc. v. National Labor Relations, it is very obvious that respondent
"seeks the protective shield of a corporate fiction whose veil the present case could,
and should, be pierced as it was deliberately and maliciously designed to evade its
financial obligation of its employees."

If the corporate fiction is sustained, it becomes a handy deception to avoid a judgment

debt and work an injustice. The decision raised to us for review is an invitation to
multiplicity of litigation. As we stated in Islamic Directorate vs. Court of Appeals, the
ends of justice are not served if further litigation is encouraged when the issue is
determinable based on the records.

A court judgment becomes useless and ineffective if the employer, in this case CCC
as a mother corporation, is placed beyond the legal reach of the judgment creditor
who, after protracted litigation, has been found entitled to positive relief. Courts have
been organized to put an end to controversy. This purpose should not be negated by
an inapplicable and wrong use of the fiction of the corporate veil. t be negated by an
inapplicable and wrong use of the fiction of the corporate veil.
Page 23 of 40
Y-I Leisure Philippines, Inc., Yats
International Ltd. and Y-I Clubs and
Resorts, Inc., Petitioners, V. James Yu,
Respondent. G.R. No. 207161,
September 08, 2015.

In A.D. Santos, Inc. v. Vasquez, a taxi driver filed a suit for workmen's compensation
against the petitioner corporation therein. The latter's defense was that the taxi driver's
employer was Amador Santos, and not the corporation. Initially, the taxi driver was
employed by City Cab, a sole proprietary by Amador Santos. The taxi business was,
however, transferred to the petitioner. Applying the piercing doctrine, the Court held
that the petitioner must still be held liable due to the transfer of the business and should
not be allowed to confuse the legitimate issues.

In Buan v. Alcantara, the Spouses Buan were the owners of Philippine Rabbit Bus
Lines. They died in a vehicular accident and the administrators of their estates were
appointed. The administrators then incorporated the Philippine Rabbit Bus Lines. The
issue raised was whether the liabilities of the estates of the spouses were conveyed
to the new corporation due to the transfer of the business. Utilizing the alter-ego
doctrine, the Court ruled in the affirmative and stated that:

As between the estate and the corporation, the intention of incorporation

was to make the corporation liable for past and pending obligations of
the estate as the transportation business itself was being transferred to
and placed in the name of the corporation. That liability on the part of
the corporation, vis-a-vis the estate, should continue to remain with it
even after the percentage of the estate's shares of stock in the
corporation should be diluted.

In San Teodoro Development Enterprises v. SSS, the petitioner corporation therein

attempted to avoid the compulsory coverage of the Social Security Law by alleging
that it was a distinct and separate entity from its limited partnership predecessor, Chua
Lam & Company, Ltd. The Court, however, upheld the findings of the SSS that the
entire business of the previous partnership was transferred to the corporation
ostensibly for a valuable consideration. Hence, "[t]he juridical person owning and
operating the business remain the same even if its legal personality was changed."

Similarly, in Laguna Trans. Co., Inc. v. SSS, the Court held that the transferee
corporation continued the same transportation business of the unregistered
partnership therein, using the same lines and equipment. There was, in effect, only a
change in the form of the organization of the entity engaged in the business of
transportation of passengers.

b. Created by operation of law, i.e., juridical person as opposed to a natural

person.

Page 24 of 40
Hall v. Piccio, G.R. No. L-2598, [June 29,
1950], 86 PHIL 603-607

SEC Registration is essential for domestic corporations. All the parties are informed
that the Securities and Exchange Commission has not, so far, issued the
corresponding certificate of incorporation. All of them know, or ought to know, that the
personality of a corporation begins to exist only from the moment such certificate is
issued - not before

Section 20. De facto corporations. The due incorporation of any

corporation claiming in good faith to be a corporation under this Code, and
its right to exercise corporate powers, shall not be inquired into collaterally
in any private suit to which such corporation may be a party. Such inquiry
may be made by the Solicitor General in a quo warranto proceeding. (n)

Compaia Agricola de Ultramar v.

Reyes, G.R. No. 1184, [April 22,
1904], 4 PHIL 2-32

From the petition of the plaintiff and the bill of exceptions it appears that the
defendants failed and refused to pay the rent for the years 1899, 1900, and 1901.
It does not appear whether or not the defendants had failed or refused to pay the
rent for any of the years previous to 1899. Assuming, without finding it to be a fact,
that the defendants had paid the rent for previous years, then they thereby
recognized the plaintiff company as an entity and are thereby now estopped from
setting up the contrary.

While conditions precedent must always be performed, in order that a corporation

may have a legal existence, it does not by any means follow that objection to the
existence of a corporation on this ground alone can be raised by any and every
person, and in every proceeding. This objection can always, with few exceptions,
be raised by the State. (Attorney-General vs. Hanchett, 42 Mich., 436; People vs.
Water Co., 97 Cal., 276.)

Persons who assume to form a corporation or business association, and exercise

corporate functions, and enter into business relations with third persons, are
estopped from denying that they constitute a corporation. So also are the third
persons who deal with such a de facto association or corporation, recognizing it
as such and thereby incurring liabilities, estopped, when an action is brought on
such obligations, from denying the juristic personality of such corporations or
associations. (Scheufler vs. Grand Lodge, 45 Minn., 256; Farmers' Loan and
Trust Co. vs. Ann Arbor Ry. Co., 67 Fed. Rep., 49.)

Where there is a corporation de facto, with no want of legislative power to its due
and legal existence, when it is proceeding in the performance of a corporate
function, and third persons are dealing with it on the supposition that it is what it
Page 25 of 40
professes to be, and the questions are only whether the law has been strictly
followed in its organization, it is plainly a dictate alike of justice and public policy,
that in controversies between the de facto corporation and those who have
entered into contractual relations with it, as corporations or otherwise, such
questions should not be suffered to be raised. (Swarthout vs. Michigan, etc., Ry.
Co., 224 Mich., 390.)

Where a shareholder of an association is called upon to respond to a liability as

such, and where a party has contracted with a corporation and is sued upon the
contract, neither is permitted to deny the existence or the legal validity of such
corporation. To hold otherwise would be contrary to the plainest principles of
reason and good faith. Parties must take the consequences of the position they
assume. (Casey vs. Galli, 94 U. S., 673; Bliss on Code Pleading, secs. 252-254.)

Seventh Day Adventist Conference

Church of Southern Phil. Inc. v.
Northeastern Mindanao Mission of
Seventh Day Adventist, Inc., G.R. No.
150416, [July 21, 2006], 528 PHIL
647.

Facts: On April 21, 1959, the spouses Cosio donated 1,069 sq. m. lot covered by
Transfer Certificate of Title (TCT) No. 4468 in Bayugan, Agusan del Sur to the
South Philippine Union Mission of Seventh Day Adventist Church of Bayugan
Esperanza, Agusan (SPUM-SDA Bayugan). The donation was allegedly accepted
by one Liberato Rayos, an elder of the Seventh Day Adventist Church, on behalf
of the donee. Twenty-one years later, however, on February 28, 1980, the same
parcel of land was sold by the spouses Cosio to the Seventh Day Adventist Church
of Northeastern Mindanao Mission (SDA-NEMM). TCT No. 4468 was thereafter
issued in the name of SDA-NEMM.

Claiming to be the alleged donee's successors-in-interest, SPUM-SDA Bayugan

asserted ownership over the property. This was opposed by SDA-NEMM who
argued that at the time of the donation, SPUM-SDA Bayugan could not legally be
a donee because, not having been incorporated yet, it had no juridical personality.
Neither were individual petitioners members of the local church then, hence, the
donation could not have been made particularly to them. Should SDA-NEMM's
ownership of the lot covered by TCT No. 4468 be upheld?

Ruling: Donation is an act of liberality whereby a person disposes gratuitously of a

thing or right in favor of another person who accepts it. The donation could not
have been made in favor of an entity yet inexistent at the time it was made. Nor
could it have been accepted as there was yet no one to accept it.

Page 26 of 40
The deed of donation was not in favor of any informal group of SDA members but
a supposed SPUM-SDA Bayugan (the local church) which, at the time, had neither
juridical personality nor capacity to accept such gift.

Declaring themselves a de facto corporation, petitioners allege that they should

benefit from the donation.

But there are stringent requirements before one can qualify as a de

facto corporation:

(a) the existence of a valid law under which it may be incorporated;

(b) an attempt in good faith to incorporate; and
(c) assumption of corporate powers.

While there existed the old Corporation Law (Act 1459), a law under which SPUM-
SDA Bayugan could have been organized, there is no proof that there was an
attempt to incorporate at that time.

The filing of articles of incorporation and the issuance of the certificate of

incorporation are essential for the existence of a de facto corporation. We have
held that an organization not registered with the Securities and Exchange
Commission (SEC) cannot be considered a corporation in any concept, not even
as a corporation de facto. Petitioners themselves admitted that at the time of the
donation, they were not registered with the SEC, nor did they even attempt to
organize to comply with legal requirements.

Corporate existence begins only from the moment a certificate of incorporation is

issued. No such certificate was ever issued to petitioners or their supposed
predecessor-in-interest at the time of the donation. Petitioners obviously could not
have claimed succession to an entity that never came to exist. Neither could the
principle of separate juridical personality apply since there was never any
corporation to speak of. And, as already stated, some of the representatives of
petitioner Seventh Day Adventist Conference Church of Southern Philippines, Inc.
were not even members of the local church then, thus, they could not even claim
that the donation was particularly for them.

"The de facto doctrine thus effects a compromise between two conflicting

public interest[s] the one opposed to an unauthorized assumption of
corporate privileges; the other in favor of doing justice to the parties and of
establishing a general assurance of security in business dealing with
corporations."

Generally, the doctrine exists to protect the public dealing with supposed
corporate entities, not to favor the defective or non-existent corporation.

Page 27 of 40
In view of the foregoing, petitioners' arguments anchored on their supposed de
facto status hold no water. We are convinced that there was no donation to
petitioners or their supposed predecessor-in-interest

Section 21. Corporation by estoppel. All persons who assume to act as a

corporation knowing it to be without authority to do so shall be liable as
general partners for all debts, liabilities and damages incurred or arising as
a result thereof: Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation or on
any tort committed by it as such, it shall not be allowed to use as a defense
its lack of corporate personality.

On who assumes an obligation to an ostensible corporation as such, cannot

resist performance thereof on the ground that there was in fact no
corporation. (n)

Albert v. University Publishing Co.,

Inc., G.R. No. L-19118, [January 30,
1965]

Facts: On September 24, 1949, Mariano A. Albert sued University Publishing Co.,
Inc. Plaintiff alleged that defendant was a corporation duly organized and existing
under the laws of the Philippines; that on July 19, 1948, defendant, through Jose
M. Aruego, its President, entered into a contract with plaintiff; that defendant had
thereby agreed to pay plaintiff P30,000.00 for the exclusive right to publish his
revised Commentaries on the Revised Penal Code and for his share in previous
sales of the book's first edition. The lower court found for plaintiff and ordered
defendant to pay the administrator Justo R. Albert, the sum of P23,000.00 with
interest. During execution, plaintiff's counsel and the Sheriff of Manila discovered
that there is no such entity as University Publishing Co., Inc. and petitioned that
the judgment be executed against Jose M. Aruego.

Ruling: The fact of non-registration of University Publishing Co., Inc., in the

Securities and Exchange Commission has not been disputed. Defendant would
only raise the point that "University Publishing Co., Inc.," and not Jose M. Aruego,
is the party defendant; thereby assuming that "University Publishing Co., Inc." is
an existing corporation with an independent juridical personality. Precisely,
however, on account of the non-registration it cannot be considered a corporation,
not even a corporation de facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no
personality separate from Jose M. Aruego; it cannot be sued independently.

The corporation-by estoppel doctrine has not been invoked. At any rate, the same
is inapplicable here. Aruego represented a non-existent entity and induced not only
the plaintiff but even the court to believe in such representation. He signed the
contract as "President" of "University Publishing Co., Inc.," stating that this was "a
corporation duly organized and existing under the laws of the Philippines," and
Page 28 of 40
obviously misled plaintiff (Mariano A. Albert) into believing the same. One who has
induced another to act upon his wilful misrepresentation that a corporation was
duly organized and existing under the law, cannot thereafter set up against his
victim the principle of corporation by estoppel (Salvatiera vs. Garlitos, 56 Off. Gaz.,
3069). x x x

"University Publishing Co., Inc." purported to come to court, answering

the complaint and litigating upon the merits, But as stated, "University
Publishing Co., Inc." hasno independent personality; it is just a name.
Jose M. Aruego was, in reality, the one who answered and litigated,
through his own law firm as counsel. He was in fact, if not in name, the
defendant.

Even with regard to corporations duly organized and existing under the law, we
have in many a case pierced the veil of corporate fiction to administer the ends of
justice.* And in Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person acting
or purporting to act on behalf of a corporation which has no valid existence
assumes such privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such agent". Had Jose M.
Aruego been named as party defendant instead of, or together with, "University
Publishing Co., Inc.," there would be no room for debate as to his personal liability.
Since he was not so named, the matters of "day in court" and "due process' have
arisen.

In this connection, it must be realized that parties to a suit are "persons who have
a right to control the proceedings, to make defense, to adduce and cross-examine
witnesses, and to appeal from a decision" (67 C.J.S. 887) - and Aruego was, in
reality, the person who had and exercised these rights. Clearly, then, Aruego had
his day in court as the real defendant; and due process of law has been
substantially observed. X x x

The evidence is patently clear that Jose M. Aruego, acting as representative of a

non-existent principal, was the real party to the contract sued upon; that he was
the one who reaped the benefits resulting from it, so much so that partial payments
of the consideration were made by him; that he violated its terms, thereby
precipitating the suit in question; and that in the litigation he was the real defendant.
Perforce, in line with the ends of justice, responsibility under the judgment falls on
him.

Lozano v. De los Santos, G.R. No.

125221, [June 19, 1997], 340 PHIL
563-570)

Corporation by estoppel is founded on principles of equity and is designed to

prevent injustice and unfairness. It applies when persons assume to form a
corporation and exercise corporate functions and enter into business relations with
Page 29 of 40
 third persons. Where there is no third person involved and the conflict arises only
among those assuming the form of a corporation, who therefore know that it has
not been registered there is no corporation by estoppel.

c. Right of succession. Its existence not affected by the death of shareholders.

d. Powers, attributes and properties expressly authorized by law or incident to its

existence.

Filipinas Broadcasting Network, Inc. v.

Ago Medical & Educational Center-Bicol
Christian College of Medicine, G.R. No.
141994, [January 17, 2005], 489 PHIL
380.

Right to Moral Damages: FBNI contends that AMEC is not entitled to moral damages
because it is a corporation.

A juridical person is generally not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or moral shock. The Court of Appeals
cites Mambulao Lumber Co. v. PNB, et al. to justify the award of moral damages.
However, the Court's statement in Mambulao that "a corporation may have a good
reputation which, if besmirched, may also be a ground for the award of moral
damages" is an obiter dictum.

Nevertheless, AMEC's claim for moral damages falls under item 7 of Article 2219 of
the Civil Code. This provision expressly authorizes the recovery of moral damages in
cases of libel, slander or any other form of defamation. Article 2219 (7) does not qualify
whether the plaintiff is a natural or juridical person. Therefore, a juridical person such
as a corporation can validly complain for libel or any other form of defamation and
claim for moral damages.

Section 10. Number and qualifications of incorporators. Any number of natural

persons not less than five (5) but not more than fifteen (15), all of legal age and
a majority of whom are residents of the Philippines, may form a private
corporation for any lawful purpose or purposes. Each of the incorporators of s
stock corporation must own or be a subscriber to at least one (1) share of the
capital stock of the corporation. (6a)

Section 11. Corporate term. A corporation shall exist for a period not
exceeding fifty (50) years from the date of incorporation unless sooner
dissolved or unless said period is extended. The corporate term as originally
stated in the articles of incorporation may be extended for periods not
exceeding fifty (50) years in any single instance by an amendment of the articles
of incorporation, in accordance with this Code; Provided, That no extension can
Page 30 of 40
be made earlier than five (5) years prior to the original or subsequent expiry
date(s) unless there are justifiable reasons for an earlier extension as may be
determined by the Securities and Exchange Commission. (6)

Section 12. Minimum capital stock required of stock corporations. Stock

corporations incorporated under this Code shall not be required to have any
minimum authorized capital stock except as otherwise specifically provided for
by special law, and subject to the provisions of the following section.

See: SEC Minimum Paid-Up Requirements

Section 13. Amount of capital stock to be subscribed and paid for the purposes
of incorporation. At least twenty-five percent (25%) of the authorized capital
stock as stated in the articles of incorporation must be subscribed at the time
of incorporation, and at least twenty-five (25%) per cent of the total subscription
must be paid upon subscription, the balance to be payable on a date or dates
fixed in the contract of subscription without need of call, or in the absence of a
fixed date or dates, upon call for payment by the board of directors: Provided,
however, That in no case shall the paid-up capital be less than five Thousand
(P5,000.00) pesos. (n)

Section 14. Contents of the articles of incorporation. All corporations

organized under this code shall file with the Securities and Exchange
Commission articles of incorporation in any of the official languages duly
signed and acknowledged by all of the incorporators, containing substantially
the following matters, except as otherwise prescribed by this Code or by special
law:

1. The name of the corporation;

2. The specific purpose or purposes for which the corporation is being

incorporated. Where a corporation has more than one stated purpose, the
articles of incorporation shall state which is the primary purpose and
which is/are the secondary purpose or purposes: Provided, That a non-
stock corporation may not include a purpose which would change or
contradict its nature as such;

3. The place where the principal office of the corporation is to be located,

which must be within the Philippines;

4. The term for which the corporation is to exist;

5. The names, nationalities and residences of the incorporators;

6. The number of directors or trustees, which shall not be less than five (5)
nor more than fifteen (15);
Page 31 of 40
 7. The names, nationalities and residences of persons who shall act as
directors or trustees until the first regular directors or trustees are duly
elected and qualified in accordance with this Code;

8. If it be a stock corporation, the amount of its authorized capital stock in

lawful money of the Philippines, the number of shares into which it is
divided, and in case the share are par value shares, the par value of each,
the names, nationalities and residences of the original subscribers, and
the amount subscribed and paid by each on his subscription, and if some
or all of the shares are without par value, such fact must be stated;

9. If it be a non-stock corporation, the amount of its capital, the names,

nationalities and residences of the contributors and the amount
contributed by each; and

10. Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and convenient.

The Securities and Exchange Commission shall not accept the articles of
incorporation of any stock corporation unless accompanied by a sworn
statement of the Treasurer elected by the subscribers showing that at least
twenty-five (25%) percent of the authorized capital stock of the corporation has
been subscribed, and at least twenty-five (25%) of the total subscription has
been fully paid to him in actual cash and/or in property the fair valuation of which
is equal to at least twenty-five (25%) percent of the said subscription, such paid-
up capital being not less than five thousand (P5,000.00) pesos.

(STOCK)

ARTICLES OF INCORPORATION

of

____(Company Name)____

Know All Men By These Presents:

The undersigned incorporators, all of legal age and majority of whom are residents
of the Philippines, have this day voluntarily agreed to form a stock corporation under
the laws of the Republic of the Philippines.

THAT WE HEREBY CERTIFY:

Page 32 of 40
 FIRST: The name of this corporation shall be:

Please provide us with three choices for the corporate name

SECOND: A. The primary purpose of this corporation is to engage in the

business of exporting knowledge based and computer enabled services.

B. The corporation shall have all the express powers of a

corporation as provided under Section 36 of the Corporation Code of the Philippines.

THIRD: The place where the principal office of the corporation to be

established is at:

No./Street: Please provide an exact address.

City/Town: _______________ Province: _____

FOURTH: The term for which the corporation is to exist is fifty (50) years from
and after the date of issuance of the certificate of incorporation.

FIFTH: The names, nationalities, and residences of the incorporators are as

follows:

Name Nationality Residence

Incorporator 1 Must be a resident

Incorporator 2 Must be a resident

Incorporator 3 Must be a resident

Incorporator 4 May be a non- resident

Incorporator 5 May be a non- resident

SIXTH: That the number of directors of said corporation shall be five (5)
and that the names, nationalities and residences of the first directors who are to serve
until their successors are elected and qualified as provided by the by-laws are as
follows:

Name Nationality Residence

Director 1 Must be a resident

Director 2 Must be a resident

Page 33 of 40
 Director 3 Must be a resident

Director 4 May be a non- resident

Director 5 May be a non- resident

SEVENTH: That the authorized capital stock of said corporation is ONE

MILLION PESOS (P1,000,000.00), Philippines Currency; and said capital-stock is
divided into FIVE HUNDRED THOUSAND SHARES (500,000) shares with a Par
Value of TWO PESOS (PhP2.00) per share.

EIGHTH: That at least 25% of the authorized capital stock has been
subscribed and at least 25% of the total subscription has been paid as follows:

Name Nationality No. of Amount Amount

Shares Subscribed Paid
Subscribed

Stockholder Fil- 1,200 2,400 2,400.00

1

Stockholder Fil 50 100 10.00

2

Stockholder American 1 2 1.00

3

Stockholder Chinese 15 30 1.00

4

Stockholder Chinese 30,000 60,000 45,000.00

5 Corp.

Stockholder American 100,000 200,000 100,000.00

6 Corp.

131,266 262,532 147,412.00

========= ========== ==========

NINTH: ____________________ has been elected by the subscribers as

treasurer of the corporation to act as such until his/her successor is duly elected and
qualified in accordance with the by-laws; and that as such Treasurer, he/she has been
authorized to receive for and in the name and for the benefit of the corporation, all
subscriptions paid by the subscribers.

Page 34 of 40
 TENTH: We, in behalf of the corporation, hereby undertake to change its
corporate name immediately upon receipt of notice or directive from the Commission
that corporation, partnership, or person has acquired a prior right to the use of that
name or that the name has been declared as misleading, deceptive, or confusingly
similar to a registered name or contrary to public morals, good custom, or public
policy.

ELEVENTH: (Corporations which will engage in any business or activity

reserved for Filipino citizens shall provide the following): No transfer of stock or
interest which shall reduce the ownership of Filipino citizens to less than the required
percentage of the capital stock as provided by existing laws shall be allowed or
permitted to be recorded in the proper books of the corporation and this restriction
shall be indicated in all stock certificates issued by the corporation.

IN WITNESS WHEREOF, we have set our hands this ___ day of __________, 2017
at ____________.

__________________________ __________________________

__________________________ __________________________

________________________________

_________________________
WITNESSES:

_____________________________ ___________________________

Section 6. Classification of shares. The shares of stock of stock corporations

may be divided into classes or series of shares, or both, any of which classes
or series of shares may have such rights, privileges or restrictions as may be
stated in the articles of incorporation: Provided, That no share may be deprived
of voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code: Provided, further,
That there shall always be a class or series of shares which have complete
voting rights. Any or all of the shares or series of shares may have a par value
or have no par value as may be provided for in the articles of incorporation:
Provided, however, That banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not be permitted to issue no-
par value shares of stock.

Page 35 of 40
Preferred shares of stock issued by any corporation may be given preference in
the distribution of the assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code:
Provided, That preferred shares of stock may be issued only with a stated par
value. The board of directors, where authorized in the articles of incorporation,
may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and Exchange Commission.

A preferred share of stock, on one hand, is one which entitles the

holder thereof to certain preferences over the holders of common
stock. The preferences are designed to induce persons to
subscribe for shares of a corporation. Preferred shares take a
multiplicity of forms. The most common forms may be classified
into two: (1) preferred shares as to assets; and (2) preferred shares
as to dividends. The former is a share which gives the holder
thereof preference in the distribution of the assets of the
corporation in case of liquidation; the latter is a share the holder of
which is entitled to receive dividends on said share to the extent
agreed upon before any dividends at all are paid to the holders of
common stock. There is no guaranty, however, that the share will
receive any dividends. Under the old Corporation Law in force at
the time the contract between the petitioner and the private
respondents was entered into, it was provided that "no corporation
shall make or declare any dividend except from the surplus profits
arising from its business, or distribute its capital stock or property
other than actual profits among its members or stockholders until
after the payment of its debts and the termination of its existence
by limitation or lawful dissolution." Similarly, the present
Corporation Code provides that the board of directors of a stock
corporation may declare dividends only out of unrestricted retained
earnings. The Code, in Section 43, adopting the change made in
accounting terminology, substituted the phrase "unrestricted
retained earnings," which may be a more precise term, in place of
"surplus profits arising from its business" in the former law. Thus,
the declaration of dividends is dependent upon the availability of
surplus profit or unrestricted retained earnings, as the case may
be. Preferences granted to preferred stockholders, moreover, do
not give them a lien upon the property of the corporation nor make
them creditors of the corporation, the right of the former being
always subordinate to the latter. Dividends are thus payable only
when there are profits earned by the corporation and as a general
rule, even if there are existing profits, the board of directors has
the discretion to determine whether or not dividends are to be

Page 36 of 40
 declared. Shareholders, both common and preferred, are
considered risk takers who invest capital in the business and who
can look only to what is left after corporate debts and liabilities are
fully paid.
(Republic Planters Bank v. Agana, Sr., G.R. No. 51765, [March
|||

3, 1997], 336 PHIL 1-14)

Shares of capital stock issued without par value shall be deemed fully paid and
non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares without
par value may not be issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall be treated as capital
and shall not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the

certificate of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled
to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or

substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other

corporations;

7. Investment of corporate funds in another corporation or business in

accordance with this Code; and

8. Dissolution of the corporation.

Page 37 of 40
Except as provided in the immediately preceding paragraph, the vote necessary
to approve a particular corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights. (5a)

The right to vote is inherent in and incidental to the ownership of corporate stocks. 33
It is settled that unissued stocks may not be voted or considered in determining
whether a quorum is present in a stockholders' meeting, or whether a requisite
proportion of the stock of the corporation is voted to adopt a certain measure or act.
Only stock actually issued and outstanding may be voted. 34 Under Section 6 of the
Corporation Code, each share of stock is entitled to vote, unless otherwise provided
in the articles of incorporation or declared delinquent 35 under Section 67 of the Code.
(Tan v. Sycip, G.R. No. 153468, [August 17, 2006], 530 PHIL 609-627)

Taken in conjunction with Section 137, the last paragraph of Section 6 shows
that the intention of the lawmakers was to base the quorum mentioned in
Section 52 on. the number of outstanding voting stocks. (Tan v. Sycip, G.R. No.
153468, [August 17, 2006], 530 PHIL 609-627)

Section 7. Founders shares. Founders shares classified as such in the

articles of incorporation may be given certain rights and privileges not enjoyed
by the owners of other stocks, provided that where the exclusive right to vote
and be voted for in the election of directors is granted, it must be for a limited
period not to exceed five (5) years subject to the approval of the Securities and
Exchange Commission. The five-year period shall commence from the date of
the aforesaid approval by the Securities and Exchange Commission. (n)

Section 8. Redeemable shares. Redeemable shares may be issued by the

corporation when expressly so provided in the articles of incorporation. They
may be purchased or taken up by the corporation upon the expiration of a fixed
period, regardless of the existence of unrestricted retained earnings in the
books of the corporation, and upon such other terms and conditions as may be
stated in the articles of incorporation, which terms and conditions must also be
stated in the certificate of stock representing said shares. (n)

Redeemable shares, on the other hand, are shares usually preferred, which by
their terms are redeemable at a fixed date, or at the option of either issuing
corporation, or the stockholder, or both at a certain redemption price. A
redemption by the corporation of its stock is, in a sense, a repurchase of it for
cancellation. The present Code allows redemption of shares even if there are
no unrestricted retained earnings on the books of the corporation. This is a new
provision which in effect qualifies the general rule that the corporation cannot
purchase its own shares except out of current retained earnings. However,
while redeemable shares may be redeemed regardless of the existence of

Page 38 of 40
unrestricted retained earnings, this is subject to the condition that the
corporation has, after such redemption, assets in its books to cover debts and
liabilities inclusive of capital stock. Redemption, therefore, may not be made
where the corporation is insolvent or if such redemption will cause insolvency
or inability of the corporation to meet its debts as they mature.
(Republic Planters Bank v. Agana, Sr., G.R. No. 51765, [March 3, 1997], 336
|||

PHIL 1-14)

Section 9. Treasury shares. Treasury shares are shares of stock which have
been issued and fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation or through some other lawful
means. Such shares may again be disposed of for a reasonable price fixed by
the board of directors. (n)

Although authorities may differ on the exact legal and accounting status of so-
called "treasury shares," they are more or less in agreement
that treasury shares are stocks issued and fully paid for and re-acquired by the
corporation either by purchase, donation, forfeiture or other
means. Treasury shares are therefore issued shares, but being in the treasury
they do not have the status of outstanding shares. Consequently, although a
treasury share, not having been retired by the corporation re-acquiring it, may
be re-issued or sold again, such share, as long as it is held by the corporation
as a treasury share, participates neither in dividends, because dividends cannot
be declared by the corporation to itself, nor in the meetings of the corporation
as voting stock, for otherwise equal distribution of voting powers among
stockholders will be effectively lost and the directors will be able to perpetuate
their control of the corporation, though it still represents a paid-for interest in the
property of the corporation. (Commissioner of Internal Revenue v. Manning,
|

G.R. No. L-28398, [August 6, 1975], 160 PHIL 726-741)

Sec. 13. . .

The Securities and Exchange Commission shall not accept the articles of
incorporation of any stock corporation unless accompanied by a sworn
statement of the Treasurer elected by the subscribers showing that at least
twenty-five (25%) percent of the authorized capital stock of the corporation has
been subscribed, and at least twenty-five (25%) of the total subscription has
been fully paid to him in actual cash and/or in property the fair valuation of which
is equal to at least twenty-five (25%) percent of the said subscription, such paid-
up capital being not less than five thousand (P5,000.00) pesos.

I, ____________________, being duly sworn, depose and say:

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That I have been elected by the subscribers of the corporation as
Treasurer thereof, to act as such until my successor has been duly
elected and qualified in accordance with the by-laws of the corporation,
and that as such Treasurer, I hereby certify under oath that at least 25%
of the authorized capital stock of the corporation has been subscribed
and at least 25% of the total subscription has been paid, and received by
me, in cash or property, in the amount of not less than P5,000.00, in
accordance with the Corporation Code.
____________________
(Signature of Treasurer)

SUBSCRIBED AND SWORN to before me, a Notary Public, for and in

the City/Municipality of___________________Province of
_____________________, this _______ day of ___________, 19
_____; by __________________ with Res. Cert. No. ___________
issued at _______________________ on ____________, 19 ______

NOTARY PUBLIC
My commission expires on _________, 19 _____

Doc. No. _________;

Page No. _________;
Book No. ________;
Series of 19____ .

x---------------------------------------------------------------x

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