corporation code of the philippines

Revised Bagtas Reviewer by Ve and Ocfe 2A ATENEO DE MANILA LAW SCHOOL OUTLINE ON PHILIPPINE

Atty. CESAR L. VILLANUEVA

CORPORATE 2ND SEMESTER, SY 2004-2005

LAW1

I. HISTORICAL BACKGROUND 1. Philippine Corporate Law:2 Sort of Codification of American Corporate Law

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

 The first corporate statute, the Corporation Law, or Act No. 1459, became effective on 1 April April 1906. 1906. It had variou various s piece piece-me -meal al ame amendm ndment ents s during during its 74-yea 74-yearr histor history. y. It rapidl rapidly y became antiquated and not adapted to the changing times. 3. The Corporation Code

 The Corporation Code (Batas Pambansa Blg . 68) took effect on 1 May 1980. It adopted various corporate doctrines enunciated by the Supreme Court under the old Corporation Law. It clarified the obligations of corporate directors and officers, expressed in statutory language established principles and doctrines, and provided for a chapter on close corporations. 4. Proper Treatment of Philippine Corporate Law

Phili Philippi ppine ne Corpor Corporate ate Law comes comes from from the common common law system system of the United United States States..   There Therefor fore, e, althou although gh we have have a Corpor Corporati ation on Code Code that that provid provides es for statut statutory ory princi principle ples, s, Corporate Law is essentially, and continues to be, the product of commercial developments. Much of this development can be expected to happen in the world of commerce, and some expressed expressed jurispruden jurisprudential tial rules that try to apply and adopt corporate corporate principles principles into the changing concepts and mechanism of the commercial world.

1Unless otherwise indicated, all references to sections pertain to The Corporation Code of the Philippines. 2The whole body of statutory and jurisprudential rules pertaining to corporations is referred to as "Corporate Law" to differentiate it from the old statute known as "The Corporation Law," or Act No. 1459.

rant is conferred. A corporation will be formed only when 5 individual persons , as incorporators, agree to form a corpora

II. CONCEPTS

See opening paragraphs of  VILLANUEVA, Corporate Contract Law, 38 A TENEO L.J. 1 (No. 2, June 1994) 1. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code)

Sec. 2 Corporation defined – A corporation is an artificial being created by operation of law, havi having ng the the righ rights ts of succ succes essi sion on and and the the powe powers rs attr attrib ibut utes es and and prop proper erti ties es,, expr expres essl sly y authorized by law or incident to its existence. Art. 44(3) The following are juridical persons – Corporations, partnerships and associations for privat private e intere interest st or purpos purpose e to which which the law grants grants a juridi juridical cal person personali ality, ty, separ separate ate and distinct from that of each shareholder, partner or member. Art. 45 Juridical persons mentioned in Nos.1 and 2 of the preceding article are governed by laws creating or recognizing them. Private corporations are regulated by laws of general application on the subject. Partnerships and associations for private interest or purpose are governed by the provisions of this Code concerning partnerships. Art. Art. 46 Juri Juridi dica call pers person ons s ma may y acqu acquir ire e and and poss posses ess s prop proper erty ty of all all kind kinds, s, as we well ll as incu incurr obligations and bring civil or criminal actions, in conformity with the laws and regulations of  their organization. Art. 1775 Association and societies, whose articles are kept secret among the members, and wherein any pone of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to co-ownership corporation is an artificial being created by operation of law. It has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may be related. PNB v. Andrada Electric & Eng’ring Co. , 381 SCRA 244 (2002). -

“an artificial being” being” - a person created by law or by state; state; legal fiction

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“created by law” – its existence is dependent upon the onsent or grant of the state EXCEPT corporation by estoppel and de facto corporation

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the definition of a corporation is merely a guide and does not really provide for the basis of a corporation

Q. Why is it important important to know that the corporation corporation is a juridical person? person? A. To be able to know know that the corporation is able to contract with with others.

Revised Bagtas Reviewer by Ve and Ocfe 2A

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

2. Tri-Level Existence of the Corporation (a)

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

(b) BUSINESS ENTERPRISE OR ECONOMIC UNIT – the commercial venture; this includes not only the tangible assets but also the intangibles like goodwill created by the business C)

JURIDICAL ENTITY  – juridical existence as a person; the primary franchise granted by the state

Q. Why is the distinction between the three levels important? A. Each is important important in its own way as there are consequen consequences ces for each. The distinctions distinctions become become important and come into play when it comes to dealing with corporation law What are you selling or buying (and their their worth) will depend depend upon the particular particular level you you choose. EXAMPLE: If you merely want to purchase the assets and not the business, a simple deed of sale would suffice and you will not be liable for contingent contingent liabilitie liabilities. s. It will be different different if you buy the business business as an economic economic concept. SEC Regulations or Bulk Bulk sales Law may be applied.

3. Relationships Involved in a Corporate Setting A)

JURIDICAL ENTITY  LEVEL, which views the State-corporation relationship -

the state cannot destroy a corporation without observing due process of law

(b) INTRA-CORPORATE LEVEL , which considers that the corporate setting is at once a contractual relationship on four (4) levels: •

•

•

B)

Between the corporation and its agents or repres represent entati atives ves to act in the real world, world, such as its directors and its officers, which is governed also by the Law on Agency Betwee Betw een n the the members

corp corpor orat atio ion n

and and

its its

shar shareh ehol olde ders rs or

Betwe Between en and among the shareh sharehold olders ers in a common common venture

EXTRA-CORPORATE LEVEL, which views the relationship between the corporation and third-parties or “outsiders”, essentially governed by Contract Law and Labor Law. -

most imporatant level, highest form of law in this level is contract law.

4. Theories on the Formation of Corporation: -

the SC has looked upon the corp. not merely as an artificial being but more as an AGGRUPATION OF PERSONS DOING BUSINESS or AN UNDERLYING ECONOMIC UNIT.

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 The corp. is emerging as an enterprise bounded by economics rather than an artificial pers person onal alit ity y boun bounde ded d by form forms s of wo word rds s in a char charte ter, r, minu minute te book books s & book books s of  accounts.

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  The The prop propos osit itio ion n that that a corp corp.. has has an exis existe tenc nce e sepa separa rate te and and dist distin inct ct from from its its

Tayag vs Benguet Consolidated, Inc. (26 SCRA 242)

membershi membership p has its limitatio limitations. ns. (Separate (Separate existence existence is for a particular particular purpose.) purpose.)   The There re can can be no corp corp.. exis existe tenc nce e w/o w/o pers person ons s to comp compos ose e it & ther there e can can be no association w/o associates. (a) Theory of Concession ( Tayag v. Benguet Consolidated, 26 SCRA 242 [1968]). -

corporation – creature of the state

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limited – no other privilege may be exercised beyond grant

  To organi organize ze a corpor corporati ation on that that could could claim claim a juridi juridical cal personal personality ity of its own and transact business as such, is not a matter of absolute right but a privilege which may be cf. Ang Pue enjoyed only under such terms as the State may deem necessary to impose. cf. Ang & Co. v. Sec. of Commerce and Industry , 5 SCRA 645 (1962) “It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act,” and the procedure and conditions provided under the law for the acquisition of such  juridical personality must be complied with. Although the statutory grant to an association of the powers to purchase, sell, lease and encumber property can only be construed the grant of a juridical personality to such an association . . . nevertheless, the failure to comply with the statutory procedure and conditions does not warrant a finding that such associ associati ation on acquir acquired ed a separa separate te juridi juridical cal person personali ality, ty, even even when when it adopts adopts sets sets of  constitution and by-laws. International Express Travel & Tour Services, Inc. v. Court of   Appeals, 343 SCRA 674 (2000). Since all corporations, big or small, must abide by the provisions of the Corporation Code, then even a simple family corporation cannot claim an exemption nor can it have rules and practices other than those established by law. Torres v. Court of Appeals , 278 SCRA 793 (1997).

FACTS: -

Idonah Slade Perkins died in 1960 with County Trust & Co. of New York as her domiciliary administrator & left, among others, 2 stock certificates covering 33, 002 shares of stock of appellant Benguet Consolidated, Inc.

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Renato Tayag, as ancilliary administrator in the Philippines, requested County Trust to surrender to ancilliary administrator the stock certificates to satisfy the legitimate claims of local creditors. However, County County Trust refused.

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 The lower court then presided by Judge Santos ruled that : 1. stock certif certificate icates s are considere considered d lost for all purposes purposes of admin. admin. & liquida liquidation tion of the Philippine estate of Perkins 2. said said certi certific ficate ates s are are cance cancell lled ed 3. direct directs s said corp. corp. To issue issue new certif certifica icates tes in lieu lieu thereof, thereof, the same same to be delivered by aid corp. to either Tayag or the Probate division of this court.

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An appeal was taken not by County Trust, as domiciliary admin., but by Benguet on the ground that the certificates of stock are existing and in possession of County   Trust. They also assert that there was a failure to observe certain requirements requirements of  its by-laws before new stock certificates could be issued.

ISSUE: Whether or not Benguet properly pursued the appeal? HELD: order.

The Court Court held that that the appeal appeal cannot cannot prosper. prosper. Judgment Judgment affirmed affirmed.. -

Benguet Benguet bound bound by

the challeng challenged ed order order repres represent ents s a respon response se & expre express ss a policy policy arsing arsing out of a specific specific problem, problem, addressed addressed to the attainent attainent of specific specific ends by the use of specific specific remedies, w/ full & ample support from legal doctrines of weight and significance.

ormally adopts the concession theory; corp w/o imprimatur outside state grant. n set of by laws etc., the corp would still have to obey the order of the state by Ve and Ocfe 2A Bagtas Reviewer irtue irtue of a primary franchise given by the state. And Revised it is within within the power of the state to grant it it or not. But5once grante plication of EET – corp-as reality of the group as a social & legal entity independent of state recognition & concession. A disagreement ensued between the ancilliary and the domiciliary admin to who ws entitled the certificate of stocks -

 The CFI ordered County Trust to produce and deposit the stocks with the court w/c wasn’t complied with Thus the order of the the CFI.

Bengu Benguet et didn’t didn’t disput dispute e Tayag’ Tayag’s s author authority ity to gain gain contro controll & posses possessio sion n of all the themultiply decedent w/n the Phil. e corp. life of its own tells assets it to goofand it profitably. The corp. like every Juan and Maria given given life by God acts on it -

Corporatio Corporation n is an artificial artificial being being created by operation operation of law. It owes it life to the state its birth being purely dependent on its will.

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Flether: “A corp. is not in fact fact and in reality a person, but the law treats it as though it were a person by process of fiction, or by regarding it as an artificial person distinct and separate from its individual stockholders.

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 There is thus a rejection rejection of Gierke’s genossenchaft genossenchaft theory. A corp as known to Phil.  Jurisprudence is a creature w/o any existence until it has received the imprimatur of  the state acting acting according according to law. It is logically logically inconceivabl inconceivable e therefore therefore that it will have rights and privileges privileges of a higher higher priority than that of its creator. More than that it cannot legitimately refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary, whenever called upon to do so.

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Corporate by-laws must yield to judicial order

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As a matter of fact, a corp. once it comes into being comes more often w/n the ken of the judiciary than the other two coordinate branches. It institutes the appropriate appropriate court action to enforce its right. right. Correlatively, it is not immune from judicial control control in those instances, where a duty under the law as ascertained in an appropriate legal proceeding is cast upon it.

c) Theo Theory ry of Enterp Enterpri rise se Entit Entity y (BERLE, Theory of Enterprise Entity , 47 C OL. L. R EV. 343 [1947]) -

 juridical personality

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contractual relation between 5 or more individuals

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recognize existence of an aggregation of individuals (enterprise entity)

A corpor corporati ation on is but an associ associati ation on of indivi individua duals, ls, allow allowed ed to transa transact ct under under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such a body. PSE v. Court of Appeals, 281 SCRA 232 (1997). Corpor Corporati ations ons are compos composed ed of natura naturall person persons s and the legal legal fictio fiction n of a separa separate te corporate personality is not a shield for the commission of injustice and inequity, such as to avoid the execution of the property of a sister company. Tan Boon Bee & Co., Inc. v.  Jarencio, 163 SCRA 205 (1988).

5. Four Corporate Attributes Based on Section 2: A)

A

CORPORATION IS AN ARTIFICIAL BEING

(“ Ability to Contract and Transact ”) ”)

- a person created by law or by state; a legal fiction B)

CREATED -

C)

D)

(“Creature of the Law ”)

its existence is dependent upon the consent or grant of the state EXCEPT corporation by estoppel and de facto corporation

WITH -

BY  OPERATION OF LAW

RIGHT OF SUCCESSION

(“Strong Juridical Personality  ”) Personality ”)

the the corp corpor orat atio ion n exis existt desp despit ite e the the deat death h of its its me memb mber ers s as a corp corpor orat atio ion n has has a personality separate and and distinct from that of its its individual stockholders. stockholders. The separate personality remains even if there has been a change in the members and stockholders of the corporation.

HAS

THE POWERS , ATTRIBUTES AND PROPERTIES EXPRESSLY  AUTHORIZED BY  LAW OR INCIDENT TO ITS

EXISTENCE

(“Creature of Limited Powers ”)

6. Advantages and and Disadvantages of Corporate Form: (a) Four Basic Advantageous Characteristics of Corporate Organization: (i) STRONG LEGAL PERSONALITY 

“A corporation is an entity separate and distinct from its stockholders. While not in fact and in reality a person, the law treats the corporation as though it were a person by process of fiction or by regarding it as an artificial person distinct and separate from its individual stockholders.” Remo, Jr. v. IAC , 172 SCRA 405 (1989).  The transfer of the corporate assets to the stockholder is not in the nature of a partition but is a conveyance from one party to another. Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila , 6 SCRA 373 (1962). STOCKHOLDERS OF F. GUANZON & SONS Inc. v REGISTER OF DEEDS Facts: In 1960, five stockholders of F. Guanzon & Sons, Inc. executed a certificate of liquidation of the assets of the corporation which provided that due to the resolution of the stockholders dissolving the corpor corporati ation, on, they they have have distri distribut buted ed amo among ng themse themselve lves s in proport proportion ion to their their shareh sharehold olding ings, s, as liquidating dividends, the assets of said corporation including real properties located in Manila. The certificate of liquidation was denied registration by the Register of Deeds and one of the grounds is that the judgment judgment of the corporation corporation in approving dissolution dissolution and directing directing opposition opposition of assets assets of  the corporation need to be presented aside from the following: (1) the number of parcels which were not certif certified ied in the acknow acknowled ledgem gement ent (2) P430.5 P430.50 0 regist registrat ration ion fee fees s have have to be paid paid (3) P90.45 P90.45 docustamps need to be attached. Stockholders contend that it was not conveyance but a mere distribution of corporate assets after the corporation ceased to exist upon dissolution. Issue: Issue: WON the certif certifica icate te merely merely involv involves es a distri distribu butio tion n of the corpor corporate ate assets assets or should should be considered a transfer or conveyance. Held:  The Supreme Court agrees with the Register of Deeds and the Land Registration Commission. A corporation is a juridical person distinct from the members composing it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property, they do not represent property of the corporation. The corporation has property of its own which consist mainly of real estates. A share of stock only typifies an aliquot part of the corporation’s property or the right to share in the proceeds to that extent when distributed according to law and equity. But its holder is not the owner of any part of the capital nor

Revised Bagtas Reviewer by Ve and Ocfe 2A 7 is he entitled to the possession of any definite portion of its property or assets. The stockholder is not a co-owner or tenant in common of the corporate property. Thus, the act of liquidation made by the stockhold stockholders ers of the corporation’s corporation’s assets cannot be considered considered as a partition partition of the community community prop proper erty ty but but rath rather er a tran transf sfer eren ence ce or conv convey eyan ance ce of the the titl title e of its its asse assets ts to the the indi indivi vidu dual al stockholders in proportion to their stockholdings. Therefore, said transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders. (ii) CENTRALIZED MANAGEMENT

As can be gleaned from Sec. 23 of Corporation Code “It is the board of directors or trustees which exercises almost all the corporate powers in a corporation.” Firme v. Bukal Enterprises and Dev. Corp. , 414 SCRA 190 (2003).  The exercise of the corporate powers of the corporation rest in the Board of  Directors save in those instances where the Corporation Code requires stockholders’ approval for certain specific acts. Great Asian Sales Center Corp. v. Court of Appeals , 381 SCRA 557 (2002). (iii) LIMITED LIABILITY  TO INVESTORS

AND

OFFICERS

One of the advantag advantages es of the corporat corporation ion is the limitati limitation on of an invest investor’ or’s s liability to the amount of investment, which flows from the legal theory that a corporate entity is separate and distinct from its stockholders. San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals , 296 SCRA 631 (1998). It is hornbook law that corporate personality is a shield against personal liability of its officers—a corporate officer and his spouse cannot be made personally liable under a trust receipt where he entered into and signed the contract clearly in his official capacity. Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001). Obligations incurred by the corporation acting through its directors, officers and employees, are its sole liabilities. Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001). (iv) FREE TRANSFERABILITY  RANSFERABILITY OF OF UNITS

OF

OWNERSHIP

FOR

INVESTORS

Authority granted to corporations to regulate the transfer of its stock does not empower the corporation to restrict the right of a stockholder to transfer his shares, but but me mere rely ly auth authori orize zes s the the adop adopti tion on of regu regula lati tion ons s as to the the form formal alit itie ies s and and Thomson v. Court of Appeals procedure to be followed in effecting transfer. , 298 SCRA 280 (1998).

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

Advantages and Disadvantages of Corporate Form: Four Basic Characteristics Organization:

of

Advantageous Corporate

(i) Strong Legal Personality - entity attributable powers; - continuity of existence; existence;

Disadvantages:

(i) Abuse management -

of

co corporate

there is seve severa ranc nce e of  control and

having having the right right of  succession, t he death of an individual stoc stockh khol olde derr does does not affect corporate existence

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not a natural occurr occurrenc ence, e, exists exists mainly because the law provides provides for it. This is what dist distin ingu guis ishe hes s the the sepa separa rate te juri juridi dica call personality of a (ii) Abuse Abuse of limited limited liabi liability lity corpor corporati ation on from from a feature partne partnersh rship. ip. The this his featu eature re legal personality personality of  had been a corp is strong a b u s e d and because the law may hurt provides for the innocent right of succession, creditors. surviv surviving ing even even w/o those who incorporated it while in a (ii) Cost of maintenance partnership the the formation formation sepa separa rate te juri juridi dica call and personality is incorporation exting extinguis uished hed upon upon of a corp. the death of a entails a lot of  partner difficulties

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no delectus personarum

(ii) Limited Limited Liability Liability of Investors Investors ( provided provided for by jurisprudence only) -

-

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ownership. Control will be veste ested d with ith the BoD, thus investors have ave no say say over over the the use use of their investment and little voic oice in the the conduct of   the business

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the liability of an investor is limi limite ted d thei theirr inve invest stme ment nts s and investors cannot be held accoun accountab table le for more more than than what they invested. CLV: CLV: Howeve Howeverr there there are a lot of ways to circumvent the law and make the shareholders liable for more than than his actual actual invest investmen mentt (ex. A creditor requiring the chairm chairmn n or presid president ent of the company company as a joint debtor of  the loan) A trade-off to the abdication made by the investor of his right to manage the property he had invested in the

and costs, particularly the requirements made ma de by the the law so as to qualify for incorporation.

(iv) Double taxation Divi Divide dend nds s rece receiv ived ed by individu individuals als from domestic domestic corporations are subject to final final 10% tax for income income earned on or after 1   January January 1998 (Sec. 24(B) (2), 1997 NIRC) Inter-corporate dividends between dome domest stic ic corp corpor orat atio ions ns,, howeve however, r, are not subjec subjectt to any any inco income me tax tax (Sec. (Sec. 27(D)(4), 1997 NIRC)

Revised Bagtas Reviewer by Ve and Ocfe 2A compan company. y. Under Under proper property ty In additi addition, on, there there is relaw, a person exercises full impo impos siti ition of the the 10% ownership over his property “improperl “improperly y accumulat accumulated ed but when he invests it in a earnin earnings gs tax” tax” for holdin holding g corpo rporation, on, the owner companies (Sec. 29, 1997 abdi abdica cate ted d the the six six “jus “jus” ” of  NIRC) ownership

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(iii) Free Transferability of shares -

A legal relationship is created which is more stable for for ther there e are are law aws s whic which h gove govern rn,, and and the the corp corp.. and and the stockholders stockholders are bound by the law.

(iv) Centralized Management -

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

Q. Is a corp. in our jurisdiction given given the feature of limited liability? liability? A. No. The feature of limited liability liability is given to the the stockholder and not to the corporation.

Q. Is limited liability a normal run of things? A. No. It is only there because in this this case, it comes comes with the separate separate juridical personality. personality.

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

7. COMPARED WITH OTHER BUSINESS MEDIA

Distribution of Risk, Profit and Control  a) Sole Sole Propri Proprietor etorshi ships ps

Sole Proprietorship

Corporation

Free Free from from many many requir requireme ements nts and regulations in its operation

Heavily regulated; a lot of  requirements imposed for registration and incorporation

Owner Owner has full full control control of his his busines business s

Control Control of busine business ss is done done by the

nd fiat. Just because the BoD are to be elected elected by the stockholders does does not mean that the former derives its powers fro BoD Owne Ownerr stan stands ds to lose lose mo more re than than what he puts into the venture

Investors have limited liabilty

(b) Partnerships and Other Associations

(Arts. 1768 and 1775, Civil Code)

Art. 1768 The partnershi partnership p has a juridical juridical capacity capacity separate and distinct from that of each of  the partners partners,, even even in case case of failur failure e to comply comply with requir requireme ements nts of Art. Art. 1772 1772 first first paragraph. Art. 1775 Association and societies, whose articles are kept secret among the members, and wherein any pone of the members may contract in his own name with third persons, shall have no juridical juridical personality personality,, and shall be governed by the provisions provisions relating to coownership

Corporation

Partnership

Separate legal personality

Separate legal personality

Investors limited liability

Contractual limited liability ( when a limited partnership is created)

Free transfer of shares

Transfer with consent of partner

Centralized management

Every partner is agent

Q. How How does does the cont contra ract ctua uall ma mana nage geme ment nt of a corp corp.. comp compar are e with with the the ma mana nage geme ment nt of a partnership? A. Every partner, in the the absence of a stipulation stipulation in the articles of partnership, partnership, binds the part partne ners rshi hip p as ever every y part partne nerr is an agen agentt of the the othe others rs (del (delec ectu tus s pers person onaru arum) m).. In a corporation, only the BoD and not the stockholders can bind the corporation.

Q. What are the 2 types of partnerships? A. Regular and and Joint venture

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

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

Pioneer insurance insurance & Surety corp. vs. CA ( 175 SCRA 668)

Revised Bagtas Reviewer by Ve and Ocfe 2A 11 P100M, it would be foolish foolish to put all my eggs in one basket (if the the basket falls, all eggs break). break). So, I merely put P10M in one corporation and then borrow the P90M while the rest of my money I pt somewhere else. else. If the corporation fails, fails, I do not lose lose all my P100M, I lose only my my P10M. But if the corp. succeeds and I get to pay my creditor, I retain the P10M plus the profits acquired from the P90M paid up loan. This is the concept concept of LEVERAGING, using other people’s people’s money to make a profit for yourself. This is why borrowing is an integral integral part of corporate life and it is up to the creditors to make a diligent appraisal of the credit standing of the corp.

Q. What is the main distinction between between a corporation and a partnership? partnership? A. A corp. is an intermingling intermingling of corporation law and and contract law. On the other hand, a partnership is purely purely a contra contractu ctual al relati relations onship hip and so every every time time a partne partnerr dies, dies, the contra contract ct is actual actually ly extinguished.

Q. What is Corporation Law all about? A. It is all about jurisprudence jurisprudence actually built around the 4 attributes of a corporation

Q. Can a defective attempt to form a corporation result result at least in a partnership?

 A. Pioneer Insurance v. Court of Appeals Appeals, 175 SCRA 668 (1989); (1989); Lim Tong Lim v. Philippine Fishing Gear Industries, Inc. , 317 SCRA 728 (1999).

Facts: -

In 1965, Jacob S. Lim was engaged in the airline business as owner of Southern Airlines, a single proprietorship.

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On May 17, 1965, he bought bought from Japan Domestic Airlines Airlines for the sale sale of 2 aircrafts and one set f necessary necessary spare parts for the total total price of $109,00. $109,00. Both arrived arrived in Manila

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On May, 22 1965, Pioneer Insurance Corp, as surety executed and issued its surety bond in behalf of Lim, principal, for the balance price for the aircrafts and spare parts.

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Border Border Machin Machinery ery and Heavy Heavy Equipm Equipment ent (BORMA (BORMAHE HECO) CO),, the Cervan Cervantes teses es and Constanc Constancia ia Maglana Maglana contribut contributed ed some funds in the purchase of the above aircrafts aircrafts and spare spare parts. parts. The funds funds were suppos supposed ed to be their their contri contribut bution ions s to anew corpor corporati ation on propos proposed ed by Lim to expand expand his airline airline busines business. s. They They execu executed ted indemnity agreements in favor of Pioneer, one signed by Maglana and the other  jointly  jointly signed SAL, BORMAHECO BORMAHECO and Cervantes: Cervantes: where where they principally principally agree and bind themselves jointly and severally to indemnify pioneer.

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On June June 10, 10, 1965 1965 Lim Lim for for SAL SAL exec execut uted ed in favo favorr of Pion Pionee eerr a deed deed of chat chatte tell mortgage mortgage as security security for the suretyship suretyship in favor of Pioneer. Pioneer. The deed was was duly registered with the Manila RoD and with the Civil Aeronautics Administration.

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Lim defaulted on his subsequent installments prompting JDA to request payment from the surety. surety. Pioneer paid about P298,000

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Pioneer filed for an extra-judicial foreclosure of the mortgage but the Cervanteses

and Maglana filed a third party complaint claiming that they are co-owners of the aircraft. Pioneer later filed a petition for judicial judicial foreclosure and an application application for a writ writ of prelim prelimina inary ry attach attachmen mentt agains againstt Lim, Lim, the Cervan Cervantes teses, es, BORMAH BORMAHECO ECO and Maglana. -

In their answer, the the Cervanteses, BORMAHECO and Maglana Maglana alleged they were not privy to the contracts signed by Lim.

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 The RTC ruled in favor of Pioneer, holding Lim liable but dismissing the case as to the other defendants. defendants. On appeal, the CA affirmed. affirmed.

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

HELD:

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

PRINCIPLES: Persons who attempt, attempt, but fail, to form a corporation corporation and who carry on business business under the corporate corporate name occupy occupy the position of PARTNERS PARTNERS INTER SE. Thus, Thus, where persons persons associate associate them themse selv lves es toge togeth ther er unde underr arti articl cles es to purc purcha hase se prop proper erty ty to carr carry y on a busi busine ness ss,, and and thei theirr organization is so defective as to come short of creating a corp. w/n the statute, they become in legal effect partners inter se, and their rights as members of the company to the property acquired by the company will be recognized. However, such a relationship does not exist, for ordinary persons cannot be made to assume the relation of partners, as between themselves, themselves, when their purpose is that no partnership shall exist and should be implied implied only when necessary necessary to do justice between between the parties: thus, one who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become become a partne partnerr with with other other subsc subscrib ribers ers who engage engage in busin business ess under under the name of the pretended corp., so as to be liable as such in an action for settlement of the alleged partnership and contribution. -

the record records s show show that that Lim receiv received ed the amount amount of P151,0 P151,000 00 repres represent enting ing the participation of BORMAHECO and Maglana

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it was clear that Lim never intended to form a corp with them but they were duped into giving their money

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no de facto corp. was created

Q. In cases cases where where there there is a defect defective ive attemp attemptt to form a corp. corp. which which is the prevai prevailin ling g rule, rule, a partnership inter se is created or a corporation by estoppel? A. It depends wholly on the extent of the participation participation of the party on who a claim is being being mind. In the case at bar, there was no intent on the other parties to enter into a partnership but a corporation. As to the Cervanteses & BORMAHECO, they cannot be considered to have entered even into a partnership inter se, since there was no intention to do so and to be held liable as such. But if it were the Cervanteses or BORMAHECO, who entered into the contracts using the corporate name and actively participated in the activities of the corporation, then they are to be held liable as partners. Q. Why are we taking taking up Pioneer? Pioneer? Why were they not liable? A. Because Because Pioneer Pioneer shows us that that for a person person to be liable as a partner, he should should have actively actively participated in the conduct of the business, the SC held in this case that to be able to be held liable the person should possess powers of management.

Revised Bagtas Reviewer by Ve and Ocfe 2A

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

LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES

Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. entered into a contract with Phil. Fishing Gear Industries Inc. for the purchase of fishing nets and floats. They claimed that they were a fishing venture with Lim Tong Lim who was however not a signatory to the contract. They failed to pay and so PFGI filed a collection case with a prayed for a writ of preliminary attachment.  The case was filed against Chua, Yao and Lim because it was found that Ocean Quest was a nonexistent corporation as shown by the certification from SEC. Chua admitted liability and Yao waived his right to crosscross-ex exami amine ne and presen presentt eviden evidence ce becaus because e he failed failed to appear appear while while Lim filed a counterclaim and a cross-claim. Court granted the writ of attachment and ordered the Auction Sale of the F/B Lourdes which was previously attached. Trial court ruled that PFGI was entitled to the Writ and Chua, Yao and Lim were jointly liable as general partners. Held: 1.) 1.) Lim Lim wa was s cont contes esti ting ng that that the the CA rule ruled d that that ther there e wa was s a part partne ners rshi hip p in the the Co Comp mpro romi mise se Agreement and alleges that he had no direct participation in the negotiations and was merely leasing F/B Lourdes to Chua and Yao à Facts found by the TC and CA showed that there was a partnership formed by the three of them. They initially purchased two boats through a loan from Lim’s brother and as security, was placed in the name of Lim Tong Lim. The repairs and supplies were shouldered shouldered by Chua and Yao. A civil case was filed by Chua and Yao against Lim for nullity of commercial documents, reformation of contracts and declaration of ownership of  fishing boats…which was settled amicably. In the Compromise Agreement, it was revealed that they intended to pay the loan from Jesus Lim by selling the boats and to divide among them the excess or loss. Therefore it was clear that a partnership existed which was not solely based on the agreement. It was merely an embodiment of the relationship among parties. 2.) Lim alleges alleges that he was merely a LESSOR by showing showing the Contract of Lease and registratio registration n papers of the boats, including F/B Lourdes where the nets were found à As found by the lower courts, the boats were registered to Lim only as security for the loan that was granted to the partnership by the brother of Lim, which was not an uncommon practice. Aside from the fact that it was absurd for Lim to sell the boats to pay the debt he did not incur, if needed he was merely leasing the boats to Chua and Yao. 3.) Lim contests contests his liability liability by saying saying that only those who dealt in the name of the ostensible ostensible corporation should be held liable. His name was not in any of the contracts and never dealt with PFGI à Sec. 21 – All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurr incurred ed or arisin arising g as a result result thereo thereof; f; Provid Provided ed howeve howeverr that that when when any such such ostens ostensibl ible e corporation corporation is sued, on any transaction transaction entered by it as a corporation corporation or ant tort committed committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. Even if the ostensible corporate entity is proven to be non-existent, a party may be estopped from denying its corporate existence because an unincorporated association has no personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as provided by law. It cannot create agents or confer authority on another to act on its behalf. Thus, those who act or purport to act as its representatives do so without authority and at their own risk. Clearly, Lim benefited from the use of the nets found inside F/B Lourdes which was proved to be an asset of the partnership. He in fact questioned the atta attach chme ment nt beca becaus use e it has has effe effect ctiv ivel ely y inte interf rfer ered ed with with the the use use of the the vess vessel el.. Thou Though gh technically, he did not directly act on behalf of the corporation, however, by reaping the benefits of the contract entered into by persons he previously had an existing relationship

with, he is deemed part of said association and is covered by the doctrine of corporation by estoppel. CLV: Pioneer case à actors who knew of corporation’s non-existence are liable as general partners while actors who did not know are liable as limited partners, passive investors are not liable; Lim teaches us that even passive investors should be held liable provided they benefited from such transactions.

(c) Joint Ventures

associati ation on of person persons s or compan companies ies jointl jointly y undert undertaki aking ng some some  Joint  Joint venture venture is an associ commer commercia ciall enterp enterpris rise; e; genera generally lly all contri contribut bute e assets assets and share share risks. risks. It requir requires es a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement to share both in profit and losses. Kilosbayan, Inc. v. Guingona, Jr. , 232 SCRA 110 (1994).

Q. What is the difference difference between a joint venture and and a partnership? A. A joint venture venture is by law a partnership partnership because because it follows the same definiti definition on as having two or more persons binding themselves together under a common fund with the intention of dividing the profits between themselves. Therefore, every joint venture is a partnership. partnership. The distinction distinction between the the two two is that that a join jointt vent ventur ure e is for for a limi limite ted d purp purpos ose e only only whil while e a part partne ners rshi hip p invo involv lves es an arrangement or an on-going concern.

Q. Is it possible possible for a joint venture venture not to be a partnership? partnership? A. Yes. When the joint joint venture forms a corporation, it then becomes becomes a joint joint venture corporation.

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

(d) Cooperatives

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

A cooperative is a duly registered association of persons, with a common bond of  intere interest, st, who have have volun voluntar tarily ily joined joined togeth together er to achiev achieve e a law lawful ful common common social social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles. Cooperatives are established to provide a strong social and economic organization to ensure ensure that that the tenant tenant-fa -farme rmers rs will will enjoy enjoy on a lastin lasting g basis basis the benefi benefits ts of agrari agrarian an reforms. Corpuz v. Grospe, 333 SCRA 425 (2000).

Cooperative

Corporation

Separate Juridical Personality Governed by principles of   SH vote vote their their perce percenta ntage ge share share of  democratic control where the the stocks subscribed by them member members s have have equal equal voting voting rights rights on a one-member-one vote principle BoD manage the affairs of the coop. But it is the GA of full membership that that exer exerci cise ses s all all the the righ rights ts and and performs all of the obligations of the

BoD is the repository of all powers EXCEPT for acts where the Corp. Code requires concurrence or

coop.

Revised Bagtas Reviewer by Ve and Ocfe 2A ratification by the SH

Under Under the superv supervisi ision on of the coop. coop. Development Authority

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Under the Supervision of the SEC

Organized for the purpose of  Stock Corp. for profit; Non-Stock providing goods and services to its Corp eleemosynary (charitable, members and thus to enable them philantrophic) purpose to atta attain in incr increa ease sed d inco income me and and saving, etc.

e) Busi Busine ness ss Trus Trusts ts (Article 1442, Civil Code)

Art. 1442

Q. What is the difference difference between a business trust trust and a corporation? A. The relationship in a business business trust is essentially essentially a trust relationship. The business trust does not have a personality personality which which is apart from the trustor trustor or the trustee/be trustee/benefi neficiary ciary.. The concept concept of a separate juridical personality is absent from a business trust.

(f) Sociedades Anónimas

A sociedad anónima was consid considere ered d a commer commercia ciall partne partnersh rship ip “where “where upon upon the execution of the public instrument in which its articles of agreement appear, and the contribut contribution ion of funds funds and personal personal property, becomes a juridical juridical person—an person—an artificial artificial being, invisible, intangible, and existing only in contemplation of law—with power to hold, buy, buy, and and sell ell prop proper erty ty,, and and to sue sue and and be sued sued—a —a corp corpor orat atio ion— n—no nott a gene genera rall copartnership nor a limited copartnership . . . The inscribing of its articles of agreement in the commercial register was not necessary to make it a juridical person—a corporation. Such Such inscri inscripti ption on only only operat operated ed to show show that that it partoo partook k of the form of a commer commercia ciall corporation.” Mead v. McCullough , 21 Phil. 95 (1911).  The sociedades anónimas were introduced in Philippine jurisdiction on 1 December 1888 with the extension to Philippine territorial application of Articles 151 to 159 of the Spanish Code of Commerce. Those articles contained the features of limited liability and centralized management granted to a juridical entity. But they were more similar to the Engli English sh joint joint stock stock compan companies ies than than the modern modern commer commercia ciall corpor corporati ations ons.. Benguet  Consolidated Mining Co. v. Pineda , 98 Phil. 711 (1956).

sociedades anónimas and Our Corporation Corporation Law recogniz recognizes es the differenc difference e between between sociedades corporations and will not apply legal provisions pertaining to the latter to the former. Phil. Product Co. v. Primateria Societe Anonyme , 15 SCRA 301 (1965). (g) Cuentas En Participacion

A cuentas en participacion participacion as a sort of an accidental partnership constituted in such a manner that its existence was only known to those who had an interest in the same, there being being no mutual mutual agreem agreement ent betwee between n the partne partners, rs, and withou withoutt a corpor corporate ate name name indicating to the public in some way that there were other people besides the one who ostensibly managed and conducted the business, governed under Article 239 of the Code of Commerce.   Tho Those se who who cont contra ract ct with with the the pers person on unde underr whos whose e name name the the busi busine ness ss of such such partnershi partnership p of  cuentas en participacion is conducted, shall have only a right of action against such person and not against the other persons interested, and the latter, on the other hand, shall have no right of action against third person who contracted with the

manager unless such manager formally transfers his right to them. Bourns v. Carman , 7 Phil. 117 (1906).

III. NATURE AND ATTRIBUTES OF A CORPORATION CORPORATION 1. Nature of Power to Create a Corporation

(Sec. 16, Article XII, 1987 Constitution)

  The Congress shall not except by general law, provide for the formation, organization or regulation regulation of private private corporation corporations, s, Governmen Government-own t-owned ed or controlled controlled corporations corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability. P.D. 1717, which created New Agrix, Inc. violates the Constitution which prohibits the format formation ion of a privat private e corpor corporati ation on by specia speciall legisl legislati ative ve act which which is neithe neitherr owned owned nor controlled by the government, since NDC was merely required to extend a loan to the new corporation, and the new stocks of the corporation were to be issued to the old investors and stoc stockh khol olde ders rs of the the inso insolv lven entt Agri Agrix x upon upon proo prooff of thei theirr clai claims ms agai agains nstt the the abol abolis ishe hed d

Revised Bagtas Reviewer by Ve and Ocfe 2A corporation. NDC v. Philippine Veterans Bank, 192 SCRA 257 (1990).

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Congress cannot enact a law creating a private corporation with a special charter, and it follows that Congress can create corporations with special charters only if such corporations are government-owned or controlled. Feliciano v. Commission on Audit , 419 SCRA 363 (2004). Q: What What dist distin ingu guis ishe hes s a publ public ic corp corpor orat atio ion n from from a priv privat ate e corp corpor orat atio ion n ow owne ned d by the the government? A: It is not ownership which distinguishes distinguishes a public corporation from a private corporation. It is the civil service eligibility of its employees and if  the financial records are subject to the examination of the Commission on Audit. A public corpor corporati ation on is create created d by its charter charter wherea whereas s a privat private e corpor corporati ation on is create created d under under the Corporation Code. 2. CORPORATION

AS A

PERSON:

(a) Entitled to Due Process  The due process clause is universal in its application to all persons without regard to any differences of race, color, or nationality. Private corporations, likewise, are “persons” within the scope of the guaranty insofar as their property is concerned. Smith Bell & Co. v. Natividad , 40 Phil. 136, 144 (1920). (b) Equal Protection Clause (Smith Bell & Co. v. Natividad , 40 Phil. 136 [1920]). (c) Unreasonable Searches and Seizure A corpor corporati ation on is protec protected ted by the consti constitut tution ional al guaran guarantee tee agains againstt unrea unreason sonabl able e searches and seizures, but its officers have no cause of action to assail the legality of the seizures, regardless of the amount of shares of stock or of the interest of each of them in said said corpor corporati ation, on, and whatev whatever er the office offices s they they hold hold therei therein n may be, becaus because e the corporation has a personality distinct and separate from those of said officers. Stonehill v. Diokno , 20 SCRA 383 (1967).

A corporation is but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate for such body. Its property cannot be taken without compensation; can only be proceeded against by due process of law; and is protected against unlawful discrimination. Bache & Co. (Phil.), Inc. v. Ruiz , 37 SCRA 823, 837 (1971), quoting from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652. Q: Why Why is a corp corpora orati tion on enti entitl tled ed to the the righ rights ts of due due proc proces ess s and and equa equall prot protec ecti tion on? ? CLV: A corporation enjoys constitutional rights. In that manner, it enjoys the same protection the law grants to an individual. A corporation is entitled to due process and equal protection by virtue of the juridical personality given by the State through the primary franchise of the corporation. The constitution did not distinguish whether the term “person” in Sec. 1 Art. III of  the Constitution refers to an individual or a juridical entity, which therefore extends to private corporations within the scope of the guaranty. Q: Why is the corpor corporati ation on entitl entitled ed to the protec protectio tion n agains againstt unreas unreasona onable ble sea search rches es and seizures? A: The corporation being entitled to due process and equal protection is the consequence of the State’s grant of a primary franchise to a corporation. It emanates from the Theory of Concession, whereby the government recognizes not only the separate juridical personality of the corporation but also grants unto it all the rights and protections that a natural individual would possess which includes the right to due process and equal protection. However, a corporation is also entitled to protection against unreasonable searches and seizures. This right however does not emanate from the grant of the State by way of  primary franchise but is sourced through the Theory of Enterprise Entity which recognizes that regard regardles less s of Sectio Section n 2 of the Corporat Corporation ion Code, Code, a corpor corporati ation on is still still for all intent intents s and purposes an association of individuals under an assumed name and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities for such body. (1) Its properties cannot be taken without just compensation (2) it can only be proceeded against by due process of law (3) it is protected against unlawful discrimination.

In the same line of reasoning, although a corporation is a legal fiction, a search and seizure involves physical intrusion into the premises of the corporation, and therefore also intrudes into the personal and business privacy of the stockholders or members who compose it. It can be seen that the right of the individual against unreasonable searches and seizures is extended to corporations upon whom they are members. (d) But Not Entitled to Privilege Against Self incrimination

“It is elementary that the right against self-incrimination has no application to juridical persons.” Bataan Shipyard & Engineering v. PCGG , 150 SCRA 181 (1987). While an individu individual al may lawfully lawfully refuse to answer answer incrimina incriminating ting questions questions unless unless protec protected ted by an immuni immunity ty statut statute, e, it does does not follow follow that a corpor corporati ation, on, vested vested with with special privileges and franchises, may refuse to show its hand when charged with an abuse of such privilege. Hale v. Henkel , 201 U.S. 43 (1906); Wilson v. United States, 221 U.S. 361 (1911); United States v. White, 322 U.S. 694 (1944). Q: Why Why is a corp corpor orat atio ion n enti entitl tled ed to equa equall prot protec ecti tion on but but not not the the righ rightt agai agains nstt self self-incrimination? A: Any individual is entitled to equal protection whether they be juridical or natural. The corporation being in the same class should be treated equally. However, the right to self-incrimation is not extended to corporation because: 1. The right right is meant meant to prevent prevent individua individuals ls from having having to lie under under oath in order order to protect protect his interest. It is to protect the individual from having to commit perjury just to keep himself from going to jail. However, if a corporation lies under oath, who would you bring to jail when in fact, a corporation is just a legal fiction. 2. The corpora corporatio tion n is subject subject to the reporto reportoria riall requir requireme ements nts of the law. The corporat corporation ion being a mere creature of the State is subject to the whims of its Creator. The corporation powers are limited by law. CLV: Beats me! Perhaps such right is attributable to the moral dimension of an individual, and since the corporation is of an amoral personality, such right may not be attributable to it. 3. Practice of Profession

Corporations cannot engage in the practice of a profession since they lack the moral and technical competence required by the PRC. A corporation engaged in the selling of eyeglasses and which hires optometrists is not engaged in the practice of optometry. Samahan ng Optometrists v. Acebedo International Corp., 270 SCRA 298 (1997); Alfafara v. Acebedo Optical Company, 381 SCRA 293 (2002). 4. Liability for Torts

A corporation is civilly liable in the same manner as natural persons for torts, because the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial person. That a principal or master is liable for every tort which he expressly directs or authorizes, is just as true of a corporation as a natural person. PNB v. Court of Appeals , 83 SCRA 237 (1978). PNB v COURT OF APPEALS Facts: Rita Gueco Tapnio had an export sugar quota of 1,000 piculs piculs for the agricultural agricultural year 19561957. Since, she did not need it, she agreed to allow Mr. Jacobo Tuazon to use the said quota for consideration of 2,500. Her sugar cannot be exported without sugar quota allotments. Sometimes, however a planter harvests less sugar than her quota so her excess quota is used by her mother who pays for it. This is her arrangement with Mr. Tuazon. At the time of the agreement, she was indebted to PNB of San Fernando, Pampanga. Her indebtedness was known as a crop loan and was secured by her sugar crop, and since her quota was mortgaged to PNB, her arrangement with Mr. Tuazon had to be approved by the bank. Upon presentment of the lease arrangement, the PNB branch manager revised it by increasing the lease amount

Revised Bagtas Reviewer by Ve and Ocfe 2A 19 to P2.80 per picul for a total of P2,800. Such increase was agreed to by both Rita and Jacobo. However, when it was presented to the Board of Directors for approval, they further increased the amount to P3.00 per picul. Jacobo asked for the reconsideration but he was denied the same. The matter stood as it was until Jacobo informed Rita and PNB that he had lost interest in pursuing the deal. In the meantime, the debt of Rita with the PNB matured. Since she had a surety agreement with the Philippine American General Insurance Co. Inc. (Philamgen), the latter paid her outstanding debt. Philamgen in turn demanded from Rita the amount which they paid the bank. Instead of paying the bank, Rita claimed that she told Philamgen that she did not consid consider er herse herself lf indebt indebted ed to the bank since since she had an agreem agreement ent with Jacobo Jacobo  Tuazon. When such was discontinued, she failed to realized the income with which she could have have paid paid her creditor creditors. s. Phila Philamge mgen n filed filed a compla complaint int for the collecti collection on of sum of money money against Rita. Rita implicated PNB as a third party defendant claiming that her failure to pay was due to the fault or negligence of PNB. Issue: WON PNB is liable for the damage caused to Rita. Held: 

  The There re is no ques questi tion on that that Rita Rita’s ’s fail failur ure e to util utiliz ize e her her suga sugarr quot quota a wa was s due due to the the disapproval of the lease by the Board of Directors of the petitioner, thus PNB should be held liable.



 The Board justified the increase to P 3.00 per picul by saying that it was the prevalent rate at that time. However, there was no proof that any other person was willing to lease the sugar quota allotment of Rita for a price higher than P2.80 per picul. Just because there are isolated transactions where the lease price was P3.00 per picul does not mean that there are always ready takers.



While PNB had the ultimate authority of approving or disapproving the proposed lease since since the quota was mortgage mortgaged d to the bank, the latter latter certainly certainly cannot cannot escape escape its responsibility of observing precaution and vigilance which the circumstances of the case  justly demanded in approving or disapproving the lease of said sugar quota.



According to Art. 19 of the Civil Code, “[e]very person must in the exercise of his rights and the performance of his duties, act with justice, give everyone his due and observe honesty and good faith.” This the petitioner failed to do. As a consequence, Art. 21 states, [a]ny person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage.



On the liability of the corporation, the court ruled that, “[a] corporation is civilly liable in the same manner manner as natural persons for torts, torts, because because generally generally speaking, speaking, the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or master be a natural person or artificial person. All of  the authorities agree that a principal or master is liable for every tort which he expressly directs or authorizes, and this is just as true of a corporation as of a natural person. A corporation, is liable therefore, whenever a tortuous act is committed by an officer or agent under express direction or authority from the stockholders or members acting as a body, or generally, from the directors as the governing body.

NOTE: CLV tells us that it is clear from the ruling of the Court in this case that not every tortuous act committed by an officer can be ascribed to the corporation as its liability, for it is reasonable to presume that in the granting of authority by the corporation to its agent, such a grant did not include a direction to commit tortuous acts against third parties. Only when the corporation has expressly directed the commission of such tortuous act, would the damages resulting therefrom be ascribable to the corporation. And such a direction by the corporation, is manifested either by its board adopting a resolution to such effect, as in this case, or having taken advantage of such a tortuous act the corporation, through its board, expressly or impliedly ratifies such an act or is estopped from impugning such an act. Our jurisprude jurisprudence nce is wanting as to the definite definite scope scope of “corporate “corporate tort.” Essentia Essentially, lly, “tort” consists in the violation of a right given or the omission of a duty imposed by law; a breach of a legal duty. The failure of the corporate employer to comply with the law-imposed duty under the Labor Code to grant separation pay to employees in case of cessation of 

operations constitutes tort and its stockholder who was actively engaged in the management or operation of the business should be held personally liable. Sergio F. Naguiat v. NLRC , 269 SCRA 564 (1997). Q: When is a corporation liable for tort? A: A corporation is liable for tort when: (a) the act is committed by an officer or agent (2) under express direction of authority from the stockholders or members acting as a body or through the Board of Directors. Q: How can authority given to the agent of the corporation be determined? A: Either Either by: (a) such direct direction ion by the corporat corporation ion is manife manifeste sted, d, by its board adopti adopting ng a resolution to such effect (b) by having takien advantage of such a tortious act, the corporation through its board, has expressly or impliedly ratified such an act or estopped from impugning the same. Q: What is a derivative suit? A: Since, the act of the board is essentially that of the corporation and therefore corporate assets cannot cannot escape escape enforc enforceme ement nt of the award of damage damage to the tort victim victim.. As a remedy remedy,, the stockholders may institute a derivative suit against the responsible board members and officers for the damages suffered by the corporation as a result of the tort suit. 5. Corporate Criminal Liability ( West Coast Life Ins. Co. v. Hurd , 27 Phil. 401 (1914); People v. Tan Boon Kong , 54 Phil. 607 [1930]; Sia v. Court of Appeals , 121 SCRA 655 [1983]; Articles 102 and 103, Revised Penal Code).

WEST COAST LIFE INS. CO. v HURD Facts:  The petitioner (West Coast) is a life-insurance corporation, organized under the laws of California, doing doing business business regularly regularly and legally in the Philippines Philippines.. An information information was filed against against the plaintiff corporation as well as John Northcott and Manue Grey charging the said corporation and said individual individuals s with the crime crime of libel. libel. The controvers controversy y started started when Northcott, Northcott, as general manager for the Philippines of said company and John Grey who was an agent and employee of  the company, conspired to release certain circulars containing foul statements against Insular Life Company claiming that the Insular Life was then and there in a dangerous financial condition on the point of going into insolvency, to the detriment of the policy holders of the said company, and of those with whom said company have and had business transactions. The plaintiffs then filed a motion to quash summons sent by the Judge, on the ground that the court had no jurisdiction over said company, there being no authority in court for the issuance of the processes. Moreover, plaintiffs alleged that under the laws of the Philippines, the court has no power or authority to proceed against a corporation, criminally, to bring it into court for the purpose of making it amenable to criminal laws. Issue: WON corporations can be held criminally liable. Held: No. While the courts have inherent powers which usually go with courts of general jurisdiction, it was held that under circumstances of their creation, they have only such authority in criminal matters as is expressly conferred upon them by statute or which is necessary to imply from such authority in order to carry out fully and adequately the express authority conferred. The SC did not feel that Courts have authority to created new procedure and new processes of criminal law. Although, there are various penal laws in the Philippines which the corporation may violate, still the SC does not believe that the courts are authorized to go to the extent of creating special procedure and processes for the purpose of carrying out the penal statutes, when the legislative itself has neglected to do so. This is true since the courts are creatures of the statute and have only powers conferred upon them by statute. Philippines courts have no common law jurisdiction

Revised Bagtas Reviewer by Ve and Ocfe 2A

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or powers. PEOPLE v TAN BOON KONG Facts: During 1924, in Iloilo, Tan Boon Kong as manager of the Visayan General Supply Co. engaged in the purchase and sale of sugar, bayon, copra, and other native products and as such must pay intern internal al revenu revenue e taxes taxes upon upon is sales. sales. However However,, he only only declar declared ed 2.3 millio million n in sales sales but in actuality the sales amounted to 2.5 million, therefore failing to declare for the purpose of taxation about 200,000, not having paid the government 2,000 in taxes. Upon filing by the defendant of a demurrer, the lower court judge sustained said motion on the ground that the offense charged must be regarded as committed by the corporation and not its officials. Issue: WON the defendant as manager may be held criminally liable. Held: Ruling reversed. Case remanded.  The court held that the judge erred in sustaining the motion because it is contrary to a great weight of authority. The court pointed out that, a corporation can act only through its officers and agents agents where where the busines business s itself itself involves involves a violat violation ion law law,, the correct correct rule rule is that that all who participate in it are criminally liable. In the present case, Tan Boon Kong allegedly made a false return for purposes of taxation of the total amount of sales for year 1924. As such, the filing of  false returns constitutes a violation of law. Him being the author of the illegal act must be held liable. SIA v PEOPLE Facts:   The The fact facts s reve reveal al that that in 1963 1963,, the the accu accuse sed d Jose Jose Sia Sia wa was s the the gene genera rall ma mana nage gerr of Meta Metall Manufa Manufactu cturin ring g Com Compan pany y of the Philip Philippin pines es engage engaged d in the manufa manufactu cturin ring g of steel steel office office equipment. When the company was in need of raw materials to be imported from abroad, Sia applied for a letter of credit to import steel sheets from Tokyo, Japan, the application being direct directed ed to Contin Continent ental al Bank Bank and was opened opened in the amount amount of $18,30 $18,300. 0. Accor Accordin ding g to the Continental Bank, the delivery of the steel sheets was only permitted upon the execution of the trust receipt. While according to Sia, the steel sheets were already delivered and were even conver converted ted to equipm equipment ent before before the trust receip receiptt was signed signed by him. him. Howeve However, r, there there is no question that when the bill of exchange became due, neither the accused nor his company made payments, despite demands of the bank. On appeal, Sia contends that he should not be held liable. Issue: WON petitioner Sia may be liable for the crime charged, having acted only for and in behalf  of his company. Held: NO. The Court disputed the reliance of the lower court and the CA on the general principle that for a crime committed by a corporation, the responsible officers thereof would personally bear the criminal liability, as enunciated enunciated in Tan Boon Kong. The latter provides that: “[t]he corporation was directly required by law to do an act in a given manner and the same law makes the person who fails to perform the act in the prescribed manner expressly liable criminally. The performance of  an act is an obligation directly imposed by the law on the corporation. Since it is a responsible officer or officers of the corporations who actually perform the act for the corporation, they must of necessity be the ones to assume the criminal liability; otherwise this liability as created by the law would be illusory, and the deterrent effect of the law, negated.   The The Co Cour urtt conc conclu lude ded d that that the the cite cited d case case does does not not fall fall squa square rely ly with with the the circ circum umst stan ance ces s surrounding Sia since the act alleged to be a crime is not in the performance of an act directly ordained by law to be performed by the corporation. The act is imposed by the agreement of the parties in pursuit of the business. The intention of the parties is therefore a factor determinant of  whether a crime or a civil obligation alone is committed. The absence of a provision of the law

even in the RPC making Sia criminally liable as the president of his company created a doubt that must be ruled in his favor according to the maxim, that all doubts must be resolved in favor of the accused. CONTRASTING THE THREE CASES

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In the case of West, the court in effect enunciated that for a person to proceed criminally against a corporation, it was necessary that express provisions of law be enacted, specifically providing that a corporation may be proceeded against criminally and brought to court.

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But since a corporation is a legal fiction that cannot be handcuffed and brought to court, the case of Tan Boon Kong provided that since a corporation acts through its officers and agents, any violation of law by any of the actors of the corporation in the conduct of its business involves a violation of law, the correct rule is that all who participate in it are liable. In making actors liable, the court here said attaching criminal liability to the fiction cannot be done since: (1) a corporation is only an artificial person (2) there is a lack of intent imputable to a being since it lacks its own mind.

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  To apply apply the doctri doctrine ne of separa separate te juridi juridical cal person personali ality ty would would allow allow crimin criminals als to use the corporation as a shield or cloak to hide their criminal activities behind such.

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However, the liability of officers were delineated in case of Sia where the court held that the respon responsib sible le office officerr is person personall ally y liable liable is person personall ally y liable liable for crimes crimes commit committed ted by the corporation only in a situation where the corporation was directly required by law to do an act in a given manner, and the same law makes the person who fails to perform the act in the prescribed manner expressly liable criminally.

NOTE: While the law only defines individuals as offenders of criminal acts or as criminal actors, the law is currently undergoing changes such that juridical persons are also defined as offenders of criminal acts, as with the case of the Anti-Money Laundering Act. 

Art. 102 of the RPC: Subsidiary civil liability of innkeepers, tavern-keepers and proprietors of  establish establishments ments – In default default of the persons persons criminall criminally y liable, liable, innkeepers innkeepers,, tavern-ke tavern-keepers epers and any any othe otherr pers person on or corp corpor orat atio ions ns shal shalll be civi civill lly y liab liable le for for crim crimes es comm commit itte ted d in thei theirr establishments, in all cases where a violation of municipal ordinances or some general or special police regulation shall have been committed by them or their employees. Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery or theft theft within within their their houses houses from from guests guests lodgi lodging ng therei therein, n, or for the paymen paymentt of the value therefore, provided that such guests shall have notified in advance the innkeeper himself, or the the pers person on repr repres esen enti ting ng him, him, of the the depo deposi sitt of such such good goods s with within in the the inn; inn; and and shal shalll furthermore have followed the directions which such innkeeper or his representative may have given them with respect to the care of and vigilance over such goods. No liability shall attach in case of robbery with violence against or intimidation of persons unless committed by the innkeeper’s employees.

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Art. Art. 103 of the RPC: Subsid Subsidiar iary y civil civil liabil liability ity of other other person persons s – The subsid subsidiar iary y liabil liability ity established in the next preceding article shall also apply to employers, teachers, persons and corporations engaged in any kind of industry for felonies committed by their servants, pupils, workmen, apprentices, or employees in the discharge of duties. No criminal suit can lie against an accused who is a corporation. Times, Inc. v. Reyes , 39 SCRA 303 (1971). When a criminal statute forbids the corporation itself from doing an act, the prohibition extends to the board of directors, and to each director separately and individually. People v. Concepcion, 44 Phil. 129 (1922). While it is true that a criminal case can only be filed against the officers and not against the corporation itself, it does not follow that the corporation cannot be a real-party-in-interest for the purpose of bringing a civil action for malicious prosecution for the damages incurred by the corporation for the criminal proceedings brought against its officer. Cometa v. Court of   Appeals , 301 SCRA 459 (1999).

Revised Bagtas Reviewer by Ve and Ocfe 2A 23 Q: Why can the corporation be held liable for tortuous acts done by its agent but not for criminal acts done outside its authority? A: Crime is not within the corporate contemplation while negligence is. Negligence could be part of every transaction. It is an integral part of corporate transactions. For as long as people comprise the corporation, it is within the contemplation of every corporate act. 6. Recovery of Moral and Other Damages

A corporation, being an artificial person, cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis for moral damages under Art. 2217 of the Civil Code. However, a corporation may have a good reputation which, if besmirched, may be a ground for the award of moral damages . Mambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968);   APT v. Court of   Appeals, 300 SCRA 579 (1998). A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, emotions nor senses; therefore, it cannot experience physical suffering and mental mental anguish. anguish. Mental suffering suffering can be experienced experienced only by one having having a nervous nervous system system and it flows from real ills, sorrows, and griefs of life—all of which cannot be suffered by an artificial person. Prime White Cement Corp. v. IAC , 220 SCRA 103 (1993); LBC Express, Inc. v. Court of Appeals, 236 SCRA 602 (1994); Acme Shoe, Rubber & Plastic Corp. v. Court of   Appeals , 260 SCRA 714 (1996); Solid Homes, Inc. v. Court of Appeals , 275 SCRA 267 (1997); NPC v. Philipp Brothers Oceanic, Inc. , 369 SCRA 629 (2001).  The statement in People v. Manero and Mambulao Lumber Co. v. PNB , that a corporation may recover moral damages if it “has a good reputation that is debased, resulting in social humiliation” is an obiter dictum. Recovery of a corporation would be under Articles 19, 20 and 21 of the Civil Civil Code, Code, but which which requi requires res a clear clear proof proof of malice malice or bad bad faith. faith.  ABS-CBN Broadcasting Corp. v. Court of Appeals , 301 SCRA 589 (1999). 7. CORPORATE NATIONALITY: UNDER W HOSE HOSE L AWS INCORPORATED (Sec. 123) 

Section 123: Definition and rights of foreign corporations – For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of  the Philippines and whose laws allow Filipino citizens and corporations to do business in the Philip Philippin pines es after after it shall shall have have obtain obtained ed a licens license e to transa transact ct busine business ss in this this countr country y in accordance with this Code and a certificate of authority from the appropriate government agency.

 There are three tests to determine the nationality of the corporation, namely: 1.) Place of incorporatio incorporation n – that a corporation corporation is of the nationality nationality of the country under whose whose laws it has been organized and registered, embodied in Sec. 123 of the Corporation Code. 2.) Control test – nationality nationality determined by the nationality nationality of the majority stockholders, stockholders, wherein control is vested. 

Situation #1: 51% Filipino 49% Japanese à Under Under the control test, test, the nationality nationality cannot be determined because for a group of stockholders to exercise control over a corporation it is required by the Corporation Code that they at least control 60% of the corporation. à Why 60%? Because under the Corporation Code for a group of persons to incorporate a corporation, at least 5 persons are required by law. A majority of the 5 is 3 and converting it into percent, one gets 60%. We can say that in fact 51% is majority but in a group of 5 people 51% is 2 & 1/5, there really is no 1/5 of a person.

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Situation #2: 60% Filipino 40% Japanese

à

Under the control test, this is considered a

Filipino corporation. 3.) Principal place of business – applied applied to determine determine whether a State has jurisdiction over the existence and legal character of a corporation, its capacity or powers, internal organizations, capital structure, rights and liabilities of directors. Q: Do all three tests apply in the Philippines? A: Yes. The first test is considered the primary test, the second one is used to determine whether a corporation can engage in nationalized activities in the country, and the third one is used to determine the jurisdiction of the State to enforce for instance taxation laws. Q: What is the importance of determining the nationality of the corporation? A: It is necessary so as to determine whether or not a corporation can enter into various transactions or engage in different industries. And also, the legal fiction supporting a corporation is valid only within Philippine territory. Q: It was said that the place of incorporation is the primary test to determine the nationality of  the corporation, why then are there other tests used? A: There are certain aspects of the Philippine economy that require that the controlling test in corporations engaging in said type of business be that of Filipinos. The nationalized economic sectors are primarily focused at making Filipino interests benefit directly from the bounties of this country. The place of incorporation test need not have been expressly provided by the Constitution since it is an integral part of our law specifically the power of Congress to grant primary franchise to corporations. The place of incorporation test is deemed the primary test. It is a true test of nationality. Being a creature of law of the place where it was incorporated, the corporation cannot escape said law. By providing for the control test, the Constitution is providing for a secondary test to determine which corporations are entitled to entry in nationalized sectors. Q: What is the implication of having a primary test and a secondary test? A: Simply put, if a corporation does not pass the first test, which the place of incorporation test, automatically it is deemed to be a foreign corporation. However, having passed the first test, the nationality of the corporation may have been established but this does not mean that the corporation is entitled to enter every single economic sector of the Philippines. The control test determines now whether the corporation fulfills the equity requirements of the Constitution. In doing this, the other tests are made such as: war-time test, investment test and grandfather rule. EXCEPTIONS: T EST  EST  OF CONTROLLING OWNERSHIP also applies in: (a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Constitution; Roman Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the Register of  Deeds of Davao , 102 Phil. 596 [1957]). 

Sec. 140 Stock ownership in certain corporations – Pursuant to the duties specified by Article XIV of the Constitution, the National Economic Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corporation of by business or industry to frustrate the provisions thereof  or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their prevention or correction. Maxi Maximu mum m limi limits ts ma may y be set set by the the Ba Bata tasa sang ng Pamb Pamban ansa sa for for stoc stockh khol oldi ding ngs s in corpor corporati ations ons declar declared ed by it to be vested vested with a public public interest interest pursuant pursuant to the provisions of this section, belonging to the individuals or groups of individuals related to each other by consanguinity or affinity or by close business interests, interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restrain or trade, to implement national economic policies declared in laws, rules and regula regulatio tions ns design designed ed to promot promote e the genera generall we welfa lfare re and foster foster econom economic ic development.

Revised Bagtas Reviewer by Ve and Ocfe 2A 25 In recommending to the Batasang Pambansa corporations, business or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the National Economic and Development Authority shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity, the export potential, as well as the other factors which are germane to the realization and promotion of business and industry. 

Sec. 2 Art. XII All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of potential energy, fisheries, fisheries, forests or timber, wildlife, wildlife, flora and fauna and other natural resources are owned by the State. With the exception of agricultural lands, all other national resources shall under the full control and supervision of the State. The State may directly undertake such activities or it may enter into coproduction, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty percentum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law. In cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the development of water power, beneficial use may be the measure and limit of the grant.  The State shall protect the nation’s marine wealth in its archipelagic waters, territorial sea, and exclusive economic zone, and reserve its use and enjoyment exclusively exclusively to Filipino citizens.  The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens, as well as cooperative fish farming, with priority to subsistence fishermen and fishworkers in rivers, lakes, bays and lagoons  The President may enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development and utilization of minerals, petroleum and other mineral oils according to the general terms and conditions provided by law, based on real contributions to the economic growth and general welfare of the country. In such agreements, the State shall promote the development and use of local scientific and technical resources.  The President shall notify the Congress of every contract entered into in accordance with this provision within thirty days from its execution.

ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO v THE LRC Facts: Mateo Rodis, a Filipino citizen and resident of Davao, executed a deed of sale of a parcel of  land land locate located d in the same city in favor favor of the Roman Catholic Catholic Adminis Administrat trator or of Davao, Davao, a “corporation sole” organized and existing in accordance with Philippine laws. The incumbent administra administrator tor is Msgr. Clovis Clovis Thibault, Thibault, a Canadian Canadian citizen. citizen. When the deed was presented presented to the Register of Deeds for registration, it required them to submit an affidavit stating that the ownership ownership of the corporation corporation is 60% Filipino Filipino citizens citizens as required required under the Constitution. Constitution. Roman Catholic stated that it was a corporation sole (meaning only one incorporator) and that the totality of the Catholic population in Davao would become the owner of the property. consulta in the Regi Re gist ster er of De Deed eds s doub doubte ted d this this and and subm submit itte ted d the the case case for for en consulta the Land Land Registration Commission. LRC ruled that the requirement of the Constitution must be followed and since the 60% cannot be complied with, the registration should be denied. Hence, this appeal. Issue: Issue: WON the Roman Catholic Catholic Apostolic Apostolic Church, Church, being a corporation corporation sole, can lawfully lawfully acquire lands in the Philippines. Held: YES. 

Corporation sole – a special form of corporation usually associated with the clergy designed to facilitate the exercise of the functions of ownership of the church which

was registered as property owner. It is created not only to administer the temporalities of the church or religious society where the corporator belongs, but also to hold and transmit the same to his successor in said officer. 

 The incumbent administrator is not the actual owner of the land but the constituents or those that make up the church, thus it is their nationality that has to be taken into consideration. The corporation sole only holds the property in trust for the benefit of  the Roman Catholic faithful.

Dissenting opinion by Justice JBL Reyes à In requiring corporations or association to have 60% of their capital owned by Filipino citizens, the constitution manifestly disregarded the corporate corporate fiction fiction i.e. the juridical juridical personality personality of such corporation corporation or associatio associations. ns. It went behi behind nd the the corp corpor orat ate e enti entity ty and and look looked ed at the the natu natura rall pers person ons s that that comp compos osed ed it, it, and and demanded that a clear majority in interest (60%) should be Filipino. Since under the rules governing governing corporation corporation sole, sole, the members of the religious religious associatio association n cannot cannot overrule overrule or override the decisions of the sole corporator, then it would be wrong to conclude that the control of the corporation sole would be in the members of the religious association. NOTE: NOTE: The Rom Roman an Cathol Catholic ic Church Church is a corpor corporati ation on by prescr prescript iption ion,, with with acknow acknowled ledged ged  juridical personality inasmuch as it is an institution which antedated almost a thousand years any other personality in Europe, and which existed when Grecian eloquence still flourished in Antioch and when idiots were still worshipped in the temple of Mecca. Since it is a corporation by prescription, it has no nationality, and hence, the nationality test does not apply. (But refer to below.) Q: Why is this case relevant to us? A: It is relevant because while it tells us that a corporation sole is not subject to the nationality test, it must be further qualified to mean that this is the case only insofar as the control test is concerned. Nationality is irrelevant insofar as this test is concerned. However, it becomes relevant when the place of incorporation comes into play since the case never sought to touch the place of incorporation test.

 The registration of the donation of land to an unincorporated religious organization, whose whose trustees trustees are foreigners, foreigners, would violate violate constitut constitutional ional prohibition prohibition and the refusal refusal would not be in violation of the freedom of religion clause. The fact that the religious association “has no capital stock does not suffice to escape the constitutional inhibition, since it is admitted that its members are of foreign nationality. . . and the spirit of the Constitution demands that in the absence of capital stock, the controlling membership should be composed of Filipino citizens .” Register of Deeds of Rizal v. Ung Sui Si Temple , 97 Phil. 58 (1955). (b) Public Utilities (Sec. 11, Art. XII, Constitution; 

People v. Quasha , 93 Phil. 333)

Sec. 11 Art. XII No franchise, certificate or any other form of authorization for the operation of public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty  per centum of  whose capital is owned by such citizens, nor shall such franchise, certificate or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines. Philippines.

NOTE: Stock ownership must at least be 60% Filipino but management must be 100% Filipino for such corporation to operate in industries concerning public utilities.

Revised Bagtas Reviewer by Ve and Ocfe 2A

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

Q: Why are we studying Quasha? A: This case makes a distinction with the grant by the government of primary and secondary franchise. As far as doctrinal pronouncements are concerned, any and all type of corporations may be incorporated, so long as the requirements for incorporation are fulfilled and that its purpose is lawful and not contrary to law or public policy. The violation of equity requirements with regard to entry into nationalized sectors as provided by the Constitution come only into play when the secondary franchise is granted. In granting the secondary franchise considerations of equity are now made. CLV: Note that while Quasha makes such doctrinal pronouncements, in practice, this is not the case. SEC will refuse to register the Articles of Incorporation if it is not 60% owned by Filipinos. In fact, Quasha lied in order to have the articles registered.

 The primary franchise, that is, the right to exist as such, is vested in the individuals who compose the corporation and not in the corporation itself and cannot be conveyed in the absence of a legislative authority so to do. The special or secondary franchises are vested in the corporation and may ordinarily be conveyed or mortgaged under a general powe powerr gran grante ted d to a corp corpor orat atio ion n to disp dispos ose e of its its prop proper erty ty,, exce except pt such such spec specia iall or secondary franchises as are charged with a public use.  J.R.S. Business Corp. v. Imperial Insurance , 11 SCRA 634 (1964).  The Constitution requires a franchise for the operation of a public utility; however, it does not require a franchise before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the public. There is a clear distinction between “operation” of a public utility and the ownership of the facilities and equipment used to serve the public. Tatad v.Garcia, Jr. , 243 SCRA 436 (1995).  TATAD v GARCIA Facts In 1989, DOTC planned to construct a light railway transit along EDSA. Initially, Eli Levin Enterprise Inc. was supposed to construct the LRT III on a Build-Operate-Transfer (BOT) basis. Subseq Subsequen uently tly,, RA 6957 6957 was enacte enacted d which which provid provides es for two scheme schemes s for the financ financing ing,, construction and operation of government projects through private initiative and investment: BuildBuild-Ope Operat rate-T e-Tran ransfe sferr (BOT) (BOT) or BuildBuild-Tra Transf nsfer er (BT). (BT). DOTC DOTC issued issued a Depart Departmen mentt Orders Orders creating the Pre-qualification Bids and Awards Committee. EDSA LRT Consortium composed of  10 foreign and domestic corporations, was one of the five groups who responded to the invitation. And being the sole complying bidder, it was awarded the contract. DOTC and EDSA LRT Corp., Ltd. in substitution of the EDSA LRT Consortium entered into an “Agreement to Buil Build, d, Leas Lease e and and Tran Transf sfer er an LRT LRT syst system em for for EDSA EDSA” ” unde underr the the term terms s of the the BOT BOT Law. Law. Agree Agreemen mentt was subseq subsequen uently tly revise revised d and anothe anotherr “Suppl “Suppleme ementa ntall Agreem Agreement ent” ” was also also contracted. According to the agreements, the EDSA LRT III (MRT) will use light rail vehicles from abroad (Czech and Slovak Federal Republics) and will have a maximum carrying capacity of 450,000 passengers a day. It will have its own power facility and will have 13 passenger stations. The private respondent will finance the entire project required for a complete operational LRT system. Upon full or partial completion and viability, private respondent shall deliver the use and possession of the completed portion to DOTC which shall operate the same. DOTC shall pay pay resp respon onde dent nt mo mont nthl hly y rent rental als, s, whic which h is to be dete determ rmin ined ed by an inde indepe pend nden entt and and internationally accredited inspection firm. As agreed upon, private respondent’s capital shall be recove recovered red from the rentals rentals to be paid paid by DOTC, which which in turn, shall come from the earnings of the MRT. After 25 years and after the DOTC shall have completed payment of the rentals, ownership of the project shall be transferred to the latter. Petitioners argue that the Agreements, insofar as it grants EDSA LRT Corp. Ltd., a foreign corporation the ownership of MRT, a public utility, violate the Constitution. They claim that since the MRT is a public utility, its ownership and operation is limited by the Constitution to Filipino citizens and domestic corporation, not foreign corporations, like private respondent. DOTC Secretary Secretary and private respondent respondent on the other hand, hand, contend contend that the nationality nationality requir requireme ement nt for publi public c utilit utilities ies mandat mandated ed by the Consti Constitut tution ion does does not apply apply to privat private e respondent. Also, these Agreements were already approved by President Ramos. Issue: WON the Agreements violated the Constitution (re: ownership/operation of a public utility by a foreign corporation). Held: No. It is to be noted that what the private respondents own are the rail tracks, rolling stocks like the coaches, rail stations, terminals and power plant, which do not fall under “public utility”. While a franchise is needed to operate these facilities to serve the public, they do not by themselves constitute a public utility. What constitutes a public utility is not their ownership but their use to the public. While the Constitution requires a franchise for the operation of 

Revised Bagtas Reviewer by Ve and Ocfe 2A 29 public utility, it does not however require a franchise before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the public. There must be a clear distinction between the “operation” of a public utility and the ownership of the facilitie facilities s and equipments equipments used to serve the public. public. The right to operate a public public utility utility may exist exist independ independentl ently y and separatel separately y from the ownership ownership of the facilities facilities without without operating operating them as a public utility, or conversely, one may operate a public utility without owning the facilities used to serve the public. In the case, while private respondent is the owner of the facilities necessary to operate the MRT, it admits that it is not enfranchised to operate a public utility. In view of the incapacity, private respondent EDSA Corp. and DOTC agreed that on completion date, private respondent will deliver possession of the LRT system by way of lease of 25 years, during which period DOTC shall operate the same as common carrier and private respondent shall provide the technical maintenance and repair services to DOTC. In sum, private respondent will not run the light rail vehicles and collect fees from the riding public. It will have no dealings with the public and the public will have no right to demand any services from it. A mere owner and lessor of the facilities used by a public utility is not a public utility. Even the mere formation of a public utility corporation does not ipso facto characterize the corporation as one operating a public utility. The moment for determining the requisite Filipino nationality is when the entity applies for a franchise certificate or any other form of authorization for that purpose. Q: How does the case of Quasha differ from the case of Tatad? A: Quasha tells us that we have to look at the secondary franchise, i.e. to whom such is given while Tatad tells us that it does not matter to whom the franchise is given but what matters is who actually operates the utility. The latter case tells us that restrictions are not on the assets of the corporations but on the enterprise itself, thus control determines nationality and not the beneficiaries. CLV: The Constitution restricts the juridical person as it controls the enterprise. Note, that assets are different from the juridical person and from the business enterprise itself. (c) Mass Media 

(Sec. 11(1), Art. XVI, 1987 Constitution)

Sec. 11(1) Art. XVI   The ownership and management of mass media shall be limited to citizens of the Philip Philippin pines, es, or to corpor corporati ations ons,, cooper cooperati atives ves or associ associati ations ons,, wholl wholly-o y-own wned ed and managed by such citizens.  The Congress shall regulate or prohibit monopolies in commercial mass media when the the publ public ic inte intere rest st so requ requir ires es.. No comb combin inat atio ion n in rest restra rain intt of trad trade e or unfa unfair ir competition shall be allowed.

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Mass media includes includes the gathering gathering,, transmiss transmission ion of news, news, informatio information, n, messages messages,, signals and forms of written, oral and all visual communication and shall embrace the print medium, radio, television, films, movies, advertising in all its phases and their business business managerial managerial.. It does not include include commercial commercial telecomm telecommunica unications tions because because such is a public utility.

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 The Constitutional requirements are much stricter for it requires that socks are 100% Filipino owned and managed.

Sources: P.D. 36, amended by P.D.s 191 and 197; DOJ Opinion No. 120, s. of 1982; Sec. 2, P.D. 576; SEC Opinion, 24 March 1983; DOJ Opinion 163, s. 1973; SEC Opinion, 15  July 1991, XXV SEC Q UARTERLY BULLETIN, (No. 4—December, 1991), at p. 31.

Cable Industry : “Cable TV operations shall be governed by E.O. No. 205, s. 1987. If  CATV operators offer public telecommunications services, they shall be treated just like a public telecommunications telecommunications entity.” (NTC Memo Circular No. 8-9-95) Cable TV as “a form of mass media which must, therefore, be owned and managed by Filipino citizens, or corporations, cooperatives or associations, wholly-owned and managed by Filipino citizens pursuant to the mandate of the Constitution.” (DOJ Opinion No. 95, s.

1999, citing  Allied Broadcasting, Inc. v. Federal Communications Commission, 435 F. 2d 70). 

  The National National Tele Telecomm communica unications tions Commissio Commission n which which regulates regulates and supervise supervises s the cable television industry in the Philippines under Sec. 2 of EO 436 series of 1997 has provided provided under the NTC Memorandum Memorandum Circular Circular No. 8-9-95 under under item 920(a) thereof  provides that “[c]able TV operations shall be governed by E.L. No. 205 series of 1987. If CATV operators offer public telecommunications services, they shall be treated just like public telecommunications industry.”

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Under DOJ opinion No. 95 series of 1999, the Secretary of Justice taking its cue from   Allie Allied d Broa Broadca dcasti sting ng Inc. Inc. v. Federa Federall Commu Communic nicati ation ons s Comm Commiss issio ion n 435 F.2d 70 considered CATV as “a form of mass media, which must therefore be owned and managed by Filipinos, or corporations, cooperatives or associations, wholly-owned and managed by Filipino citizens pursuant to the mandate of the Constitution.”

(d) Advertising Business 

(Sec. 11(2), Art. XVI, 1987 Constitution)

Sec. 11(2) Art. XVI  The advertising industry is impressed with public interest and shall be regulated by law for the protection of consumers and promotion of the general welfare. Only Filipino citizens or corporations or associations at least seventy percentum of the capital of which is owned by such citizens shall be allowed to engage in the advertising industry.  The participation of foreign investors in the governing body of entities in such industry shall be limited to their proportionate share in the capital thereof, and all the executive and managing officers of such entities must be citizens of the Philippines.

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Only Filipino citizens or corporations or associations at least seventy percent of the capital shal shalll be allo allowe wed d to enga engage ge in the the adve advert rtis isin ing g indu indust stry ry.. It also also prov provid ides es that that the the part partic icip ipat atio ion n of fore foreig ign n inve invest stor ors s in the the gove govern rnin ing g body body shal shalll be limi limite ted d to thei theirr proportionate share in the capital thereof, and all the executive and managing officers of  such entities must be citizens of the Philippines. Philippines.

(e) War-Time War-Time Test (Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc. , 89 Phil. 54 [1951]; Davis Winship v. Philippine Trust Co. , 90 Phil. 744 [1952]; Haw Pia v. China Banking Corp ., 80 Phil. 604 [1948]). 

Compania de Seguros v. Christern, Huenefeld & Co., Inc. , the Court held that in In Filipinas Compania times of war, the nationality of a private corporation is determined by the character or citizenship of its controlling stockholders The court considered the juridical entity as an enemy enemy based based on the fact that that the “majority “majority of the stockhol stockholder ders s of the responde respondent nt corporation were German subjects.” It ruled that the control test was applicable only in war-time. It refused the sole application of the place of incorporation test during the wartime to determine the nationality of an enemy corporation.

(f) Investment Investment Test as to “Phili “Philippi ppine ne Nation Nationals als” ” (Sec. (Sec. 3(a) 3(a) & (b), (b), R.A. R.A. 7042, 7042, Foreig Foreign n Investments Act of 1991) 

Under Sec. 3a of the FIA of 1991, the term “Philippine national” as it refers to a corporate entity shall mean a corporation organized under the laws of the Philippines of which at least 60% percent of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines. NOTE: In this aspect, FIA is more liberal than the Constitution which did not specify as to what type of share the 60% Filipino-ownership requirement pertained to. FIA, in this aspect, only referred to voting shares.

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However, it provides that were a corporation and its non-Filipino stockholders own stocks in a SEC-registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of both corporations must be owned and held by citizens of the Philippines and at least 60% of the members of the Board of Directors of both corporations must be citizens of the Philippines, in order that a corporation shall be considered a Philippine national. The law therefore limits the test to voting shares, but however makes it more stringent when it

Revised Bagtas Reviewer by Ve and Ocfe 2A 31 comes to actual control by making a double 60% rule requirement as to both holding and held company, as well as their Board of Directors. Q: Why should not we infer that the 60% Filipino ownership requirement requirement of the Constitution as pertaining to voting shares? A: Elementary rule of Statutory Construction that when the law does not distinguish, neither should we. Moreover, the right to vote is not the only right granted to stockholders, as the right to file suits against the Board of Directors is granted to them. Q: Given these facts: ABC Company is comprised of 60% Filipino and 20% Foreign investors with respect to voting stocks and 40% Foreign investors with respect to non-voting stocks, under the FIA, is it a Philippine national? A: Yes, since FIA limits its scope to voting stocks. Q: Given these facts: ABC Company with 20 voting stocks is comprised of 80% Filipino (16) and 20% Foreign (4), is it a Philippine national? Can it therefore own land under the Constitution? A: Yes, under FIA, it is a Philippine national but it cannot own land. As to the aspects that FIA runs contrary to the Constitution, which is the supreme law of the land, the former shall not apply. (g) Grandfather Rule (Opinion of DOJ No. 18, s. 1989, 19 January 1989; SEC Opinion, 6 Nove Novemb mber er 1989 1989,, XXIV XXIV SEC SEC Q UARTERLY BULLETIN (No. (No. 1- Marc March h 1990 1990); ); SEC SEC Opin Opinio ion, n, 14 December 1989, XXIV SEC Q UARTERLY BULLETIN (No. 2 -June 1990) 

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned owned by Filip Filipino ino citize citizens ns shall shall be consid considere ered d as of Phili Philippi ppine ne nation nationali ality, ty, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Example: partnership between ABC and X companies. ABC owns 60% with 40% forei foreign gn and 60% Filip Filipino ino-ow -owned ned shares shares while while X compan companie ie own 40% with with 100% 100% Filip Filipino ino-ow -owned ned share shares. s. Under Under the SEC DOJ Rule, Rule, such such partne partnersh rship ip is Filipi Filipinono-own owned. ed. Moreover, under this rule once the 60% requirement is reached, there is no more need for tierring.

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It must be stressed however that the aforequoted SEC rule applies only for purposes of  reso resolv lvin ing g issu issues es on inve invest stme ment nts. s. The The SEC SEC wa was s quic quick k to add: add: “[h] “[h]ow owev ever er,, whil while e a corporation with 60% Filipino and 40% foreign equity ownership is considered a Philippine national for purposes of investment, it is not qualified to invest in or enter into a joint venture agreement with corporations or partnerships, the capital or ownership of which under under the constitution constitution of other special special laws are limited to Filipino Filipino citizens citizens only. A joint venture arrangement would mean that such corporation has become a partner and is deemed then to be acting or involving itself in the operations of a nationalized activity by the acts of the local partners by virtue of the principle of mutual agency applicable to partnerships.

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 There seems to be a conflict as to the applicability of the SEC Rule and to that of the Foreign Investments Act but each in itself has advantages and disadvantages, since both requir require e string stringent ent requis requisite ites s for a corpor corporati ation on to avail avail of its privil privilege eges. s. But under under the present scenario, the FIA is believed to be the default rule having been enacted more recently that the SEC Rule.

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GRANDFATHER RULE – a method by which the percentage of Filipino equity in corporations engaged in nationalized or partly nationalized areas of activity provided for under the Constitution and other national laws is accurately computed, in cases where corporate shareholders are part of the ownership structure by considering the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder.

Q: When is the GFR applied? A: The GFR is applied in cases where the corporation has corporate stockholders with alien stockholdings, otherwise, otherwise, if the rule r ule is not applied, the presence of such corporate srockholders could diminish the effective control of Filipinos.

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SITUATION #1 – Silahis International Hotel, the capital stock of which is 69% owned by another corporation Hotel Properties Inc. and 31% owned by Filipinos. Hotel Properties in turn is 53% alien-owned and 47% 47 % Filipino-owned. The SEC through the GFR stated that Silahis International Hotel can engage in partly nationalized business because the Filipino equity in said corporation is 63.43% while the foreign equity in said corporation is 36.57%.

SILAHIS INTERNATIONAL HOTEL Hotel Properties Inc.

69%

1.) 53% Foreign 47% Filipino

Filipino stockholdings

31%

47/100 (Hotel Properties) x 69 = 32.43 + 31 (remaining Filipino stockholdings in Silahis)  TOTAL: 63.43%

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SITUATION #2 –Whether or not there may be an investment made by Pinoy Inc. in Mass Media Media which which requir requires es 100% 100% Filipi Filipino no owners ownership hip.. Pinoy Pinoy Inc. Inc. is 40% owned owned by Pedro, Pedro, a Filip Filipino ino,, while while 60% is owned by ABC, ABC, Inc. Inc. ABC on the other other hand, hand, is a corpor corporati ation on registered in the Philippines 60% of which is owned by Maria, a Filipino, while 40% is owned by George, a German.

Q: Can Pinoy, Inc. enter into the operation of a television station? A: In this situation, is the GFR is applied straight; Pinoy, Inc. would be disqualified since 24% of Pinoy is owned by George. But under the present investment regime of the Philippines, the FIA provides that corporations which are 60% owned by Filipino citizens shall be considered of  Philippine nationality. It is defined under said law that for the purposes of investment such a corporation of 60% Filipino and 40% foreign equity is allowed to invest in a corporation engaged in a nationalized sector. Q: Does this not contradict the very provisions of the Constitution? A: It does not because the main purpose of such provision of the law is to spur investments into the Philippine economy. What it specifically prohibits is for a corporation with a foreign equity to engage in nationalized industries. Note the difference in the use of terms, namely “to engage” as opposed to “to invest.” Engaging in nationalized industries involve direct participation in the exploitation or use of natural resources or entry into protected industries vested with public interest. This is what is prohibited from being entered into by nonnationals. Q: When should the GFR be applied? A: It should be applied when two requisites are met: (1) when there is involved a nationalized or partly nationalized sector of Philippine economy and (2) when there is tierring, meaning the corporation is partly-owned by another corporation.

Up to what level do you apply the grandfather rule? ( Palti Palting ng v. San Jose Jose Petroleum Inc. , 18 SCRA 924 [1966]) PALTING v. SAN JOSE PETROLEUM Facts: San Jose Petroleum filed with the SEC a sworn registration statement for the registration and licensing for sale in he Philippine voting trust certificate representing 2 million shares of its capital stock of a par value of $0.35/share at P1/share. It was alleged that the proceeds thereof will be used to finance the operations of San Jose Oil Co. which has 14 petroleum exploration concessions in various provinces. It was expressly conditioned that instead of  stock stock certif certifica icates tes,, regist registere ered d or bearer bearer-vo -votin ting g trust trust certif certifica icates tes from from voting voting truste trustees es (Americans) will be given. San Jose Petroleum amended the application from P2M to P5M at

Revised Bagtas Reviewer by Ve and Ocfe 2A

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reduced offering at P0.70/share. Palting, et.al filed with the SEC an opposition to said registration on the following grounds: (1) the tie-up between SJP, a Panamanian corporation and SJO, a domestic corporation violates the Constitution, the Corp. Law and the Petroleum Act of 1949 (2) the issuer is not licensed to transact business in the Philippines (3) the sale of shares is fraudulent (4) the issuer is based on unsound business principles (sic). SJP claimed that it was a “business enterprise” enjoying parity rights, with respect to mineral resour resources ces in the Philip Philippin pines, es, which which may be exerci exercised sed pursu pursuant ant to the Laurel Laurel-La -Langl ngley ey Agreement, through a medium, the SJO. It contends that giving SJO financial assistance did constitute transaction of business in the Philippines. SJO is a domestic corporation 90% of which is owned by SJP, a Panamanian Corp. the majority interest of which is owned by Oil Investments, Inc. another Panamanian Corp. The latter is in turn owned by Pantepec Oil Co. & PanCoastal Petroleum, both organized and existing under the laws of Venezuela. Under the Constitution, the exploitation of natural resources shall be limited to citizens of the Philippines or to corporations or associations at least 60% of the capital of which is owned by such citizens. However, this right was earlier extended to US citizens by virtue of the Parity Agreement. Said US citizens can either directly or indirectly own or control the business enterprise. Held: San Jose Petroleum is not entitled to Parity Rights: (1) It is not owned or controlled directly by US citizens because it is owned and controlled by Panamanian corporation; (2) Neither can it be said said that that it is indire indirectl ctly y owned owned and contro controlle lled d by US citize citizens ns becaus because e the contro controlli lling ng corp corpor orat atio ion n is in turn turn ow owne ned d by two two Ve Vene nezu zuel elan an corp corpor orat atio ions ns;; (3) (3) Alth Althou ough gh the the two two Venezuelan corporations claim to be owned by stockholders residing in the US, there is no showing that said stockholders were US citizens; (4) Even granting that these stockholders are US citize citizens, ns, it is still still necess necessary ary to establ establish ish that that their their differ different ent states states allow allow Filipi Filipino no corporations and citizens to engage in the exploitation of natural resources. However, there is no such proof to this; (5) The word indirectly should not be unduly stretched in application. Q: Why are we studying Palting? A: It is because Palting enunciated the doctrine that for a corporation to comply to the nationalization requirements of the Constitution, the equity requirements establishing the nationality of the controlling interest in the corporation should not be stretched to absurdity.  The application of the GFR to determine the nationality of the ultimate controller of a subject corporation cannot go beyond the level of what is reasonable. (h) Special Classifications (Sec. 140) 

Sec. 140 Stock ownership in certain corporations – Pursuant to the duties specified by Article XIV of the Constitution, the National Economic Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corporation of by business or industry to frustrate the provisions thereof  or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their prevention or correction. Maxi Maximu mum m limi limits ts ma may y be set set by the the Ba Bata tasa sang ng Pamb Pamban ansa sa for for stoc stockh khol oldi ding ngs s in corpor corporati ations ons declar declared ed by it to be vested vested with a public public interest interest pursuant pursuant to the provisions of this section, belonging to the individuals or groups of individuals related to each other by consanguinity or affinity or by close business interests, interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restrain or trade, to implement national economic policies declared in laws, rules and regula regulatio tions ns design designed ed to promot promote e the genera generall we welfa lfare re and foster foster econom economic ic development. In recommending to the Batasang Pambansa corporations, business or industries to be declared vested with a public interest and in formulating proposals for limitations on

stock ownership, the National Economic and Development Authority shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity, the export potential, as well as the other factors which are germane to the realization and promotion of business and industry.

IV. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION See relevant portions of  VILLANUEVA, Restatement of the Doctrine of Piercing The Veil of Corporate Fiction , 37 A TENEO L.J. 19 (No. 2, June 1993). IV. A. MAIN DOCTRINE: A CORPORATION HAS A PERSONALITY  SEPARATE STOCKHOLDERS OR MEMBERS

AND

DISTINCT

FROM ITS

1. Sources: Sec. 2; Article 44, Civil Code 

Sec. 2 Corporation defined – A corporation is an artificial being created by operation of  law, having the right of succession, and the powers, attributes, and properties expressly authorized by law or incident to its existence.

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Article 44 The following are juridical persons: (2) other corporations, institutions and entities for public interest or purpose, created by law, their personality begins as soon as they have been constituted according to law; (3) corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member.

2. Importance of Protecting Main Doctrine: 

  The The separa separate te juridi juridical cal person personali ality ty includ includes es the right right of succe successi ssion, on, limite limited d liabil liability ity,, centralized management, and generally free transferability of shares of stock. Therefore, an underm undermini ining ng of the separ separate ate juridi juridical cal person personali ality ty of the corpor corporati ation on such such as the application of the piercing doctrine, necessarily dilutes any or all of those attributes.

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FROM WHICH ATTRIBUTE OF THE CORPORATION DOES THE DOCTRINE OF PIERCING THE

Revised Bagtas Reviewer by Ve and Ocfe 2A VEIL OF CORPORATE FICTION FOCUS ON?

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1) Centra Centraliz lized ed manageme management nt – Centra Centraliz lized ed manageme management nt is not a natura naturall occurr occurrenc ence. e. It is a creation of statute under Sec. 23 of the Corporation Code Compared to partnerships, partnerships have mutual agency under delectus personarum. Mutual agency is more of a natural occurrence since here the partner is a co-owner of the assets of the partnership, maintaining his control over his property. In property law, there is what is called the seven  juses of ownership. In partnership however, a partner retains all this seven juses, albeit as a co-owner, co-owner, through mutual agency. agency. However, However, in a corporation corporation,, a stockhold stockholder er abdicates abdicates his his jus jus disp dispos ossi side dend ndi, i, jus jus abut abuten endi di,, etc. etc. as to the the prop proper erty ty he is plac placin ing g insi inside de a corporation retaining only to himself his jus fruendi, as to the dividends of his stocks. This is unnatu unnatural ral since since a person person is entitl entitled ed to full full use, use, enjoy enjoymen mentt or dispos disposses sessio sion n of his property. property. But since since under under the Corporation Corporation Code, Code, centraliz centralized ed managemen managementt is provided provided therefore therefore it is the means means by which a corporatio corporation n acts and conducts conducts it business business.. As such, the piercing doctrine is not directed at the attribute of centralized management, because in most instances, investors in a corporation hand the management of the business of the corporation to professionals. To do away with the central management would place the investors who had taken no active part in the conduct of the corporation to be liable as partners with mutual agency. 2) Free transfer transferabil ability ity of assets – Shares Shares of stock represent represent (1) right right to profits/divi profits/dividends dends (2) voting right (3) contingent right which recognizes a proprietary right of a mere aliquot share in the proceeds after dissolution and distribution of corporate assets. Therefore a stockholder is neither owner nor co-owner of assets of a corporation. The assets of a stockholder are distinct from the assets of a corporation. The stockholders have no control in the disposse dispossessi ssion on or acquis acquisiti ition on of assets assets (only (only as to their their voting voting capaci capacity ty in the manage managemen mentt of the corpor corporati ation) on).. The stockh stockhold olders ers howev however er have have the right right to freely freely dispose of his shares of stock to any and all person who may purchase it. There the corporation has no control. Applying the piercing doctrine as to the free transferability of  his assets cannot be done since jurisprudence points out that the piercing doctrine is a remedy of last resort. If a third party claimant has a claim as to the assets to be disposed of or acquired by a corporation can be afforded in other remedies whether it be intra or inter corporate. 3) Limited Limited Liability Liability and Separate Separate Legal Legal Personalit Personality y – Therefore it can be conclud concluded ed that the pierci piercing ng doctri doctrine ne is direct directed ed at the limite limited d liabil liability ity attrib attribute ute of the corpor corporati ation on (in consonance with the separate juridical personality attribute).The piercing doctrine in a way undermines the separate juridical personality of a corporation allowing a party to look behind the veil of corporate fiction to remedy a claim or fraud. In looking behind the veil, a plaint plaintiff iff seeks seeks to make make somebo somebody dy liable liable for a claim claim either either based based on tort, tort, breach breach of  contract, etc. Since a corporation can only act through its agents; it is the same agents that are to be held liable. Therefore the attribute of limited liability cannot be availed of in a piercing case since it is this attribute that is undermined so as a wrong can be remedied. CLV: In viewing the main doctrine of separate juridical personality as to the piercing doctrine, the main doctrine actually pertains to equity. Equity refers to the part of the rights or interest an indivi individua duall has in a corpor corporati ation. on. Equity Equity is compri comprised sed of two main parts parts which which is (1) enterprise and (2)assets. It is the enterprise or the conduct of the business which in effect undermines equity. Assets are those brought in by the stockholders during the formation of  the corporation or may have been acquired during its existence. They are inanimate objects that require human intervention to move or be used. Thus, it can be said that it is not the assets that undermine equity which bring about piercing. When an enterprise is conducted in fraud or in perpetuation of a wrong the equity of the corporation is undermined. Since, a corporation must act through its agents, so the corporation being the principal, commissions these agents to act under that special commission. If an agent acts beyond the commission of  the principal (as provided under its by-laws) it is the actor that should be held liable not the corpor corporati ation, on, since since the corpor corporati ation on for all of its juridi juridical cal exist existenc ence e is still still abstra abstract ct and a corporeal actor acts for it. Also a corporation cannot undermine equity, only the actors. So when when these these actors actors underm undermine ine equity equity,, they they lose lose limit limited ed liabil liability ity and may be held held liable liable..  Therefore, the basis of piercing is on the enterprise not on equity or its assets. Piercing regulates the enterprise of the corporation.

A corporation corporation,, upon coming into existenc existence, e, is invested by law with a personalit personality y separate separate and distinct from those persons composing it as well as from any other legal entity to which it may be relate related. d. This This separa separate te and distin distinct ct person personali ality ty is, is, howeve however, r, merely merely a fictio fiction n created by law for conveyance and to promote the ends of justice. LBP v. Court of Appeals, 364 SCRA 375 (2001). One of the advantages of a corporate form of business organization is the limitation of  an investor’s liability to the amount of the investment. This feature flows from the legal theory that a corporate entity is separate and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil may be used only for legitimate purposes. On equitable considerations, the veil can be disregarded when it is utilized as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another corporation. San Juan Structural v. Court of Appeals , 296 SCRA 631 (1998). SAN JUAN STRUCTURAL AND STEEL FABRICATORS v. CA Facts: San Juan entered into an agreement with Motorich for the transfer of a parcel of land. San  Juan paid a downpayment of 100,000, balance to be paid on or before March 2, 1989. San  Juan requested for the recomputation of the balance, Motorich’s broker Linda Aduca wrote the computation. San Juan and Motorich were supposed to meet in the office of San Juan but Motorich treasurer Mrs. Gruenberg did not appear. Despite repeated demands and in utter disreg disregard ard of its commit commitmen ments ts had refuse refused d toe execut execute e the Transfe Transferr of Rights Rights/De /Deed ed of  Assignme Assignment nt which is necessary necessary to transfer the certificate certificate of title (title (title was transferred transferred to spouses Gruenberg Gruenberg from ACL Corporation) Defendants, Defendants, president president and chairman of Motorich did not sign the agreement. Mrs. Gruenberg’s signature as treasurer is insufficient. San Juan knew of this infirmity that is why it did not pay on time. The RTC and CA held that Mrs. Gruenberg did not have the authority as she did not obtain the signatures of president and chairman, as such it was not ratified by the corporation. Issue: WON the doctrine of piercing the corporate veil may be applied. Held:   The Court finds no reason to pierce the corporate veil of Respondent Motorich. Petitioner utterly failed to establish that said corporation was formed, or that it is operated, for the purpose of shielding any alleged fraudulent or illegal activities of its officers or stockholders, or that the said veil was used to conceal fraud, illegality or inequity at the expense of third persons like petitioner. Veil can only be disregarded when it is utilized as a shield to commit fraud, illegality or inequity, defeat public convenience, confuse legitimate issues or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of  another corporation. In Dulay, the sale of real property was contracted by the President of a close corporation with the knowledge and acquiescence of its board of directors. In the present case, Motorich is not a close close corpor corporati ation on as previo previousl usly y discus discussed sed and the agreem agreement ent was entere entered d into into by the corpor corporate ate treasu treasurer rer withou withoutt the knowl knowledg edge e of the Boa Board rd of Direct Directors ors.. The Court Court is not unaware that there are exceptional cases where an action by a director who singly is the controlling stockholder, may be considered a binding corporate act and a board action is nothing more than a mere formality. The present case is not of them. Granting arguendo that the corporate veil of Motorich may be pierced, said parcel of land would then be treated as conjugal property of the spouses Gruenberg, because the same was acquired during the marriage. There being no indication that said spouses who appear to have been married before the effectivity of the Family Code have agreed to different property regime, their property relations would be governed by a conjugal partnership of gains. Neither spouse can alienate in favor of another his interest in the partnership or in any property belonging to it; neither spouse can ask for a partition of the properties before the partnership has been legally dissolved. 3. Applications:

Revised Bagtas Reviewer by Ve and Ocfe 2A (a) Majority Equity Ownership and Interlocking Directorship: Directorship :

37

Ownership of a majority of capital stock and the fact that majority of directors of a corporation are the directors of another corporation creates no employer-employee relationship with the latter's employees. DBP v. NLRC, 186 SCRA 841 (1990)

DBP v NLRC

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

Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate separate corporate corporate personalit personality. y. Sunio v. NLRC , 127 SCRA 390 (1984);  Asionics Philippines, Inc. v. NLRC, 290 SCRA 164 (1998); Francisco v. Mejia, 362 SCRA 738 (2001); Matutina Integrated Wood Products, Inc. v. CA , 263 SCRA 490 (1996); Manila Hotel Corp. v. NLRC , 343 SCRA 1 (2000). Mere substantial identity of incorporators of two corporations does not necessarily imply fraud, nor warrant the piercing of the veil of corporate fiction. In the absence of  clear and convincing evidence to show that the corporate personalities were used to perpetuate fraud, or circumvent the law, the corporations are to be rightly treated as distinct and separate from each other. Laguio v. NLRC, 262 SCRA 715 (1996). Having interlocking directors, corporate officers and shareholders is not enough   justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations. Velarde v. Lopez , 419 SCRA 422 (2004); Sesbreno v. Court of Appeals , 222 SCRA 466 (1993). (b) Being Corporate Officer: Being Being an officer officer or stockhold stockholder er of a corporation corporation does not by itself make one's property also of the corporation, and vice-versa , for they are separate entities, and that shareholders are in no legal sense the owners of corporate

property which is owned by the corporation as a distinct legal person. Emporium, Inc. v. CA , 194 SCRA 544 (1991).

Good Earth

 The mere fact that one is president of the corporation does not render the property he owns or possesses the property of the corporation, since that president, as an individual, and the corporation are separate entities. Cruz v. Dalisay , 152 SCRA 487 (1987); Booc v. Bantuas, 354 SCRA 279 (2001). It is hornbook law that corporate personality is a shield against personal liability of  its officers—a corporate officer and his spouse cannot be made personally liable under a trust receipt where he entered into and signed the contract clearly in his official capacity. Intestate Estate of Alexander T. Ty v. Court of Appeals, 356 SCRA 61 (2001); Consolidated Bank and Trust Corp. v. Court of Appeals , 356 SCRA 671 (2001). (c) Dealings Between Corporation and Stockholders:

 The fact that the majority stockholder had used his own money to pay part of the loan of the corporation cannot be used as the basis to pierce. “It is understandable that a shareholder would want to help his corporation and in the process, assure that his stakes in the said corporation are secured.” LBP v. Court of Appeals, 364 SCRA 375 (2001). Use of a controlling stockholder’s initials in the corporate name is not sufficient reason to pierce the corporate veil, since by that practice alone does it mean that the said corporation is merely a dummy of the individual stockholder. A corporation may assume any name provided it is lawful, and there is nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its shareholders. LBP v. Court of Appeals, 364 SCRA 375 (2001).  The mere fact that a stockholder sells his shares of stock in the corporation during the penden pendency cy of a collec collectio tion n case case agains againstt the corpor corporati ation, on, does does not make make such such stockholder personally liable for the corporate debt, since the disposing stockholder has has no pers person onal al obli obliga gati tion on to the the cred credit itor or,, and and it is the the inhe inhere rent nt righ rightt of the the stockholder to dispose of his shares of stock anytime he so desires. Remo, Jr. v. IAC , 172 SCRA 405 (1989); PNB v. Ritratto Group, Inc. , 362 SCRA 216 (2001).   Just Just becaus because e two foreig foreign n compan companies ies came came from from the same same countr country y and close closely ly worked worked togeth together er on certai certain n projec projects ts would would the conclu conclusio sion n arise arise that that one was the conduit of the other, thus piercing the veil of corporate fiction. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001). The The crea creati tion on by DBP DBP as the the mo moth ther er comp compan any y of the the thre three e mini mining ng corporations to manage and operate the assets acquired in the foreclosure sale sale lest lest they they dete deteri rior orat ate e from from nonnon-us use e and and lose lose thei their r valu value, e, does does not not indica indicate te fraud fraud or wrong wrongdoi doing ng and will will not consti constitut tute e applic applicati ation on of the piercing doctrine. DBP v. Court of Appeals, 363 SCRA 307 (2001). The facts that two corporations may be sister companies, and that they may be sharing sharing personnel personnel and resources, resources, without more, is insufficie insufficient nt to prove that their separate corporate personalities are being used to defeat Padilla v. public convenience, justify wrong, protect fraud, or defend crime. Padilla Court of Appeals , 370 SCRA 208 (2001). [CLV: In past decisions, such situation would generally warrant alter-ego piercing.] (d) On Privileges Enjoyed:  The tax exemption clause in the charter of a corporation cannot be extended to nor enjoyed by even its controlling stockholders. Manila Gas Corp. v. Collector of Internal Revenue , 62 Phil. 895 (1936). (e) Obligations and Debts: Corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's debt or credit that of the corporation. Traders Royal Bank v. Court of Appeals , 177 SCRA 789 (1989).

A corporation corporation has no legal standing standing to file a suit for recovery of certain parcels parcels of  land owned by its members in their individual capacity, even when the corporation is organized for the benefit of the members. Sulo ng Bayan v. Araneta, Inc ., 72 SCRA 347

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(1976). Stockholders have no personality to intervene in a collection case covering the loans of the corporation since the interest of shareholders in corporate property is purely inchoate. Saw v. CA , 195 SCRA 740 (1991); and vice-versa Francisco Motors Corp. v. Court of Appeals, 309 SCRA 72 (1999).  The majority stockholder stockholder cannot cannot be held personality personality liable for the attorney’s attorney’s fees charged by a lawyer for representing the corporation. Laperal Dev. Corp. v. Court of   Appeals , 223 SCRA 261 (1993). Even Even when when the the fore forecl clos osur ure e on the the corp corpor orat ate e asse assets ts wa was s wron wrongf gful ul done done,, stockholders have no standing to recover for themselves moral damages; otherwise, it would amount to the appropriation by, and the distribution to, such stockholders of  part part of the corpor corporati ation’ on’s s assets assets before before the dissol dissoluti ution on of the corpor corporati ation on and the liquidation of its debts and liabilities.  APT v. Court of Appeals, 300 SCRA 579 (1998).   The The obliga obligatio tions ns of a stockh stockhold older er in one corpor corporati ation on cannot cannot be offset offset from the obligation of the stockholder in a second corporation, since the corporation has a separate juridical personality. CKH Industrial and Dev. Corp v. Court of Appeals, 272 SCRA 333 (1997). B. PIERCING

THE

VEIL

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CORPORATE FICTION:

1. Source of Incantation: United States v. Milwaukee Refrigerator Transit Co. , 142 Fed. 247 (1905).

  The The notion notion of corpor corporate ate entity entity will will be pierce pierced d or disreg disregard arded ed and the indivi individua duals ls composing it will be treated as identical if the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. Gochan v. Young , 354 SCRA 207 (2001); DBP v. Court of Appeals , 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001). 2. Nature of Doctrine ( Traders Royal Bank v. Court of Appeals , 269 SCRA 15 [1997])

 TRADERS ROYAL BANK v COURT OF APPEALS Facts: Filriters Guaranty Assurance Corporation (Filriters) is the registered owner of Central Bank Certificate of Indebtedness (CBCI) with a face value of 500,000. Such was then transferred to Philippi Philippine ne Underwrit Underwriters ers Finance Finance Corporation Corporation (Philfin (Philfinance) ance) under under a Detached Detached Assignme Assignment. nt. Philfinan Philfinance ce entered entered into a repurchas repurchase e agreement agreement with Traders Traders Royal Bank over the CBCI wher whereb eby y TR TRB B buys buys the the CB CBCI CI and and Phil Philfi fina nanc nce e will will repu repurc rcha hase se it on Apri Aprill 27, 27, 1981 1981 for for 519,361.11 Upon the default of Philfinance TRB sought to register the CBCI in its name. CB refus refused ed to regist register er and transf transfer er the CBC CBCII due to the advers adverse e claim claim of Filrit Filriters ers.. (Filr (Filrite iters rs inte interj rjec ecte ted d the the defe defens nse e that that Alfr Alfred edo o Ba Bana nari ria a Seni Senior or VP of Filr Filrit iter ers s with withou outt any any boar board d resolution, knowledge or consent of the board of directors executed the detached assignment in favor of Philfinance. Subsequently, Alberto Fabella, Senior VP Comptroller and Pilar Jacobe Senior VP Treasury, of Filriters and of Philfinance executed similar forms transferring the CBCI to TRB. As such the transfers were null and void.)   TRB TRB then then we went nt to the RTC of Manila Manila and filed filed for mandamus mandamus to compel compel CB to regist register. er. Petitioner argued that the CBCI was a negotiable instrument and that it was a holder in due course course.. It also also conten contended ded that that Philfi Philfinan nance ce owned owned 90% of Filrit Filriter’ er’s s equity equity and the two corporations have identical officers, this demanding the application of the doctrine of piecing the veil of corporate fiction as to give validity to the transfer of the CBCI. Issue: WON the doctrine of piercing the veil of corporate fiction applicable in this case.

Held:   The CBCI is not a negotiable instrument because it lacks the words of negotiability. It is payable only to Filriters and the transfer by a non-owner i.e. Philfinance, to TRB should have put put the the latt latter er on guard guard as to the the titl title e of Phil Philfi fina nanc nce e to disp dispos ose e of the the CB CBCI CI.. Also Also the the assignme assignment nt of Filriters Filriters toPhilfinanc toPhilfinance e was fictitious fictitious as the same is without without considera consideration tion and was contrary to the rules of CB Circular 70 which provides that any assignment shall not be valid unless made by the registered owner in person or by a duly authorized representative in writing. Philfinance merely borrowed the CBCI from Filriters a sister corporation to guarantee financing corporations.  The doctrine of piecing the corporate veil is an equitable remedy which may only be awarded in cases cases when when the corpor corporate ate fictio fiction n is used used to defeat defeat public public conven convenien ience, ce, justif justify y wrong, wrong, protect fraud or defend crime or where a corporation is a mere alter ego or business conduit of a person. It requires the court to see through the protective shroud which exempts its stockhold stockholders ers from liabiliti liabilities es that ordinarily, ordinarily, they could be subject subject to or distingui distinguishes shes one corporation from a seemingly separate one, were it not for the existing corporate fiction. The court must be sure that the corporate fiction was misused.. It is the protection of innocent 3 rd parties dealing with corporate entity that the law seeks to protect by this doctrine. In this case, other than the allegation that Filriters is 90% owned by Philfinance and the identity of  one shall be maintained as to the other, there is nothing else which could lead the court under the circumstances to disregard their separate corporate personalities. There is no showing that TRB was defrauded at all when it acquired the subject certificate of indebtedness from Philfinance.  The fact that Philfinance owns a majority share in Filriters is not by itself a ground to disregard their their independ independent ent corporate entities. entities. In Liddel Liddel & Co. Inc. v. CIR mere ownership ownership by a single single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not itself a sufficient reason to disregard the fiction of separate corporate personalities.  TRB being a commercial bank which deals with corporate entities with circumstances showing that the agents are acting in excess of corporate authority may not hold the corporation liable. This is only fair as everyone must in the exercise of his rights and in the performance of  his duties, act with justice, give everyone his due and observe honesty and good faith. When the legal fiction of separate corporate personality is abused, such as when the same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate veil. Francisco v. Mejia, 362 SCRA 738 (2001). Piercing the veil of corporation fiction is warranted only in cases when the separate legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, such that in the case of two corporations, the law will regard the corporation as merged into one. Velarde v. Lopez , 419 SCRA 422 (2004).  The legal fiction of separate corporate existence is not at all times invincible and the same may be pierced when employed as a means to perpetrate a fraud, confuse legitimate issues, or used as a vehicle to promote unfair objectives or to shield an otherwise blatant violation of the prohibition against forum-shopping. While it is settled that the piercing of  the corporate veil has to be done with caution, this corporate fiction may be disregarded when necessary in the interest of justice. Rovels Enterprises, Inc. v. Ocampo , 391 SCRA 176 (2002).  The nature of the piercing doctrine is to disregard the separate juridical personality of a corporation and to hold the actors or the stockholders of the corporation liable for a wrong committed or a liability avoided. In our lessons in corporation law, we distinguish the cause of the piercing because it would explain of piercing is properly done. The Supreme Court does not go into an explanation or direct attribution as to cause of the piercing which at times cause confusion, so to clarify matters we classify the piercing case into three namely: (1) fraud (2) alter ego and (3) remedy. In the cases of fraud, the piercing is done because there is a wrong committed. Therefore, a person behind the wrong must be held liable which in a corporation are the directors, since the corporation acts through them. A piercing of the corporate veil in fraud cases is for the purpose of making the directors directly liable. In fraud cases, the SC looks into the circumstances of the case searching for

Revised Bagtas Reviewer by Ve and Ocfe 2A 41 elements of malice or evil motive. An absence of such an evil motive, the courts will not allow piercing. An example would be the case of TRB v. CA where the Court did not allow piercing because there was no injury caused. Also in the Umali case, the court did not allow piercing because the main intent was to annul a real estate mortgage under an allegation of fraud and not to hold the Directors liable. In both cases, piecing was not the proper remedy, even if fraud was actually alleged because the fraud committed was not attributed directly to the acts of the agents of the corporation. In alter ego cases, the allegation does not go into fraud or malicious intent but a disrespect for the corporate fiction. Here, the corporation is being used as a conduit or front for the activities of a person, whether natural or juridical, in order to avoid liability or gain advantage over another without really really employing employing fraud. Here, if piercing piercing is allowed allowed then the corporate existence existence of the conduit corporation is disregarded and the person or corporation behind the corporation shall be considered as one and the liability of one is the liability of the other. The main intent here is not to make the board of directors of the conduit corporation liable but to make the corporation behind the existence of the conduit liable. It is the objective of the Corporation Code to foster public convenience in sanctioning the creation of a corporation not as a means or private convenience where it is to be used by other corporations or individuals as a means to circumvent liability or cause a disruption of  normal business practice in dealing with corporations. Equity subdivision is the catch-all subdivision. If not fraud or alter ego, the court may grant piercing as an equitable remedy, but such is usually resorted to as a reason in consonance with fraud or alter ego cases. As such it is of purely judicial discretion.  The three cases may appear together in one application: FRAUD – to prevent wrong

PIERC IERCIN ING G DOCTR OCTRIN INE E convenience

ALTER LTER EGO EGO – disr disre espec spectt for for the the corp corpor orat ate e fict fictio ion n and and to def defeat eat publ public ic

EQUITY – to do justice  The application of the doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance for which such doctrine was applied. (a) Equitable Remedy: The doctrine of piercing the corporate veil is an equitable doctrine deve develo lope ped d to addr addres ess s situ situat atio ions ns wher where e the the sepa separa rate te corp corpor orat ate e pers person onal alit ity y of a corporation corporation is abused abused or used for wrongful wrongful purposes. purposes. PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001). (b) Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not available when other remedies are still available. Umali v. Court of Appeals , 189 SCRA 529 (1990).

UMALI v. COURT OF APPEALS Facts:  The Castillo family is the owner of a parcel of land which was given as security for a loan from the DBP. For failure to pay the amortization, foreclosure of the property was initiated. This was made known to Santiago Rivera, the nephew of plaintiff Mauricia Meer vda. De Castillo and president of  Slobec Slobec Realty Dev. Corp. Rivera proposed proposed to them the conversion conversion into a subdivis subdivision ion lot of the four parcels of land adjacent to the mortgaged property to raise the money. The Castillos agreed so a MOA was executed between Slobec represented by Rivera and the Castillos. Rivera obliged himself  to pay the Castillos P70T after the execution of the contract and P400T after the property had been converted into a subdivision. Rivera armed with the agreement approached Cervantes, president of  Bormaheco and bought a Caterpillar Tractor with P50T down payment and the balance of P180T payable in installments. Slobec through Rivera executed in favor of Bormaheco a chattel mortgage over the said equipment as security for the unpaid balance. As further security, Slobec obtained

through the Insurance Corporation of the Philippines a Surety Bond in favor of Counter-Guaranty with REM REM exec execut uted ed by Rive Rivera ra as pres presid iden entt of Slob Slobec ec and and the the Ca Cast stil illo los s as mo mort rtga gago gors rs and and ICP ICP as mortgagee. The Caterpillar Tractorwas delivered to Slobec. Meanwhile for violation of the terms and the conditions of the Counter-Guaranty Agreement, the properties of the Castillos was foreclosed by ICP. As the highest bidder, a Certificate of Sale was issued in its favor and TCTs over the parcels of land were issued by the Register of Deeds in favor of  ICP. The mortgagors had one year from the registration of the sale to redeem the property but they failed to do so. ICP consolidated its ownership over the parcels of land. Later on ICP sold to Philippine Machinery Parts Mfg. Co. the parcels of land and by virtue of said sale, PM transferred unto itself the title of the lots. PM parts through its President, Cervantes sent a letter to the Castillos to vacate the property. The Castillos refused to do so. Subsequently, Umali the administratix of the properties of  Castillos filed an action for annulment of titles. They countered that all the transaction starting from the Agreement of Counter-Guaranty with REM are void for being entered into in fraud. They seek to pierce the veil of corporate entity of Bormaheco, ICP and PM Parts alleging that these corporations employed fraud in causing the foreclosure and subsequent sale of their land. The lower court ruled in favor of Umali. This was reversed by the CA. Held:  The SC is not convinced that the contract entered into by the parties are fraudulent. Under the doctrine of piecing the veil of corporate entity, when valid ground exists , the following effects would be produced: (1) legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded (2) in such cases, the corporation will be considered as a mere association of person (3) the members or stockholders of  the corpor corporati ation on will will be consid considere ered d as the corpor corporati ation, on, making making them them liable liable direct directly. ly. It is only only applicable when corporate fiction is: (1) used to defeat public convenience, justify wrong, protect fraud, or defend crime (2) made as a shield to confuse legitimate issued (3) where a corporation is the mere alter ego or business conduit of a person (4) where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality., agency , conduit or adjunct of another corporation.  The SC is of the opinion that piecing the veil is not the proper remedy in order that the foreclosure proceedings may be declared a nullity under the circumstances in the case at bar. Petitioners are merely seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained without having to disregard the aforesaid corporate fiction attaching to the respondent corporations. Petitioners also fail to establish by clear and convincing evidence that private respondents were purposely formed and operated, with the sole intention of defrauding the latter. The facts showed that the surety of ICP is good only for 12 months therefore the surety had already expired. The failure of ICP to give notice renders ICP to have no right to foreclosure. In this case, piercing need not be resorted to. Q: Why is Umali seeking to pierce the corporate entity? A: Umali is seeking to have the veil pierced because it would have shown that the contracts entered into were fictitious and simulated, there being a fraudulent intent on the part of Bormaheco, ICP & PM parts to acquire the property of Umali through the foreclosure of the mortgage by ICP. However, the court belied such allegation because the mere fact that the business of two or more corporations are interrelated is not a justification for disregarding their separate personalities, absent a sufficient showing that the corporate entity was purposely purposely used as a shield to defraud creditors and third persons of their rights. Q: Why are we studying Umali? A: The allegations made by Umali were based on fraud and yet the main objective of the suit was to annul the foreclosure of the mortgage. The Court found no reason to pierce since the main objective was not in consonance with the remedy of piercing in a fraud case would do, which was to hold the Board of Directors liable. Piercing is not allowed unless the remedy sought is to make the officer or another corporation pecuniary liable for corporate debts. Q: What if it was based on alter ego? A: The probative factor show that no alter ego existed since there was no disrespect of the corporate fiction, the corporations each having its own way of conducting business. Even if it may be that they compliment one another in their business conduct, it does not form enough basis for their

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circumvention of any liability. (c) Purpose of Piercing: Piercing is not allowed unless the remedy sought is to make the officer or another corporation pecuniarily liable for corporate debts (?). Umali v. CA , 189 SCRA 529 (1990); Indophil Textile Mill Workers Union-PTGWO v. Calica , 205 SCRA 697 (1992).

INDOPHIL TEXTILE MILL WORKERS UNION v CALICA Facts: Indophil Union is a legitimate labor organization duly registered with the DOLE and the exclusive bargaining unit of all rank and file employees of Indophil Textile Mills. On April 1987, the Union and Indophil excecuted a CBA effective April 1, 1987 to March 31, 1990. On November 1987, Indophil Acrylic was formed and registered with the SEC. In 1998, Acrylic became international and hired worker workers s accord according ing to its criter criteria ia and standa standards rds.. Someti Sometime me in July July 1989, 1989, the worker workers s of Acryli Acrylic c unionize and a duly certified CBA was executed. In 1990, the Union claimed that the plant facilities built and set up by Acyrlic should be considered as an extension or expansion of Indophil pursuant to Sec. 1(c) of Art.1 of the CBA to wit: This agreement shall apply to all companies, facilities, and installations and to any extension and expansion thereat. The union sough that Acrylic be considered part of the bargaining unit.  Their contention is that the articles of incorporation of the two corporation establish that the two entities are engaged in the same kind of business, which is the manufacture and sale of yarns of  various counts and kinds and of other materials of kindred character or nature. Furthermore, they emphasize that the two corporations have practically the same incorporators, directors and officers. Also the two corporation have their facilities in the same compound. That many of Indophil’s own machineries such as dyeing machines, reeler, broiler, were transferred to and are now being used by the Acrylic plant. That services of a number of units, departments or sections of private respondents are provided by Acrylic and that the employees of Indophil are the same persons manning and servicing the units of Acrylic. Both parties submitted the issue to LA Calica. Calica ruled for Indophil and stated that Acrylic is not extension of Indophil an hence their CBA does not extend to the employees of Acrylic. Issu Issue: e: WON WON Acry Acryli lic c is a sepa separa rate te and and dist distin inct ct enti entity ty from from Indo Indoph phil il for for purp purpos oses es of unio union n representation. WON the operations in Acrylic are an extension or expansion of Indophil. Held: Acrylic is not an alter ego or an adjunct or a business conduit of Indophil because it has a separate legiti legitimat mate e busine business ss purpos purpose. e. Indoph Indophil il engage engages s in the manufa manufactu cture re of yarns yarns while while Acryli Acrylic c is to manufacture, buy, sell at wholesale basis, barter, import, export and otherwise deal in various kinds of yarns. yarns. Two corpor corporati ations ons cannot cannot be treate treated d as single single bargai bargainin ning g unit unit just just becaus because e they they have have related businesses. businesses.  The Union seeks to pierce the veil of Acrylic alleging that the corporation is a device to evade the application of the CBA. However the CA held that said doctrine is only used on the existence of valid grounds. In the case at bar, the fact that the business of Indophil and Acrylic are related that sometimes the employees of Indophil are the same persons manning and providing for auxiliary services to the units of Acrylic, and that the physical plants, offices, and facilities are situated in the same compound. It is the SC’s considered opinion that these facts are not sufficient to justify the piercing of the corporation veil of Acrylic. Furthermore, the legal entity is disregarded only if sought to hold the officers and stockholders liable. In the instant case, the Union does not seek relief from Indophil. LA CAMPANA COFFEE FACTORY v KAISAHAN NG MANGGAGAWA Facts:  Tan Tong since 1932 has been engaged in the buying and selling gawgaw under the trade name La Campana Gawgaw Packing. In 1950, Tan Tong and members of his family organized the family corporation. La Campana Coffee Factory with its principal office located in Gawgaw Packing. Prior to said information, Tan Tong entered into a CBA with the labor union of La Campana Gawgaw. Later on, his employees formed Kaisahan ng mga Manggagawa ng La Campana with an authorization from the DOLE to become an affiliate of the larger union.

Kaisahan with 66 members presented a demand for higher wages and more privileges to La Campana Starch and Coffee Factory. The demand was not granted and the DOLE certified the issue to the CIR. La Campana filed a motion to dismiss alleging that the action was directed against two different entities with distinct personalities. This was denied, hence this petition. Held: La Compana Gawgaw and La Campana Factory are operating under one single management or as one business though with two trade names. The coffee factory is a corporation and by legal fiction, an entity entity separat separate e and apart from from the persons persons composin composing g it namely namely,, Tan Tong and his family family.. However, However, the concept concept of separate separate corporate personality personality cannot be extended extended to a point beyond reason and policy when invoked in support of an end subversive of this policy and will be disregarded by the courts. A subsidiary company which is created merely as an agent for the latter may sometimes be regarded as identical with the parent corporation especially if the stockholders or officers of the two corporations are substantially the same or their systems of operation unified. The facts showed that they had one management, one payroll prepared by the same person, laborers were interchangeable, there is only one entity as shown by the signboard ad in trucks, packages and delivery forms and the same place of business.  The attempt to make the two factories appear as two separate businesses when in reality they are but one, is but a device to defeat the ends of the law and should not be permitted to prevail. WHY PIERCE? So that La Campana cannot evade the jurisdic jurisdiction tion of CIR since La Campana Campana Gawgaw has only 14 employees and only 5 are members of Kaisahan. CONTRASTING THE TWO CASES Q: Why did the court not also pierce Indophil Acrylic and declare that it is a mere alter ego of Indophil when in fact the same circumstances in La Campana exist? A: It may seem that the facts and circumstances are nearly the same between the two cases but the remedies are different. La Campana sought the protection of separate juridical personality so as it may not fall under the jurisdiction of the CIR, there being a clear intent to be excused from the coverage of Labor Laws which conferred the CIR’s jurisdiction over the issue at hand. Although there was no intent to defraud, the creation of La Campana Coffee Factory was meant to excuse itself from CIR jurisdiction. However, in Indophil the facts of the case show that there was no clear showing that Indophil meant to use Acrylic as a means of circumventing Labor Laws. Altough the CBA between Indophil and its union provides that any expansion of Indophil’s operations would also be covered by the CBA, Acrylic is an altogether different business. What showed that there was no intent by Indophil or Acrylic to circumvent labor laws is when Acrylic entered into a CBA with its own employees. There was clear independence of action between the relation of Indophil and Acrylic as to their respective employees, each constituting its own bargaining unit. Q: Could Indophil be considered as have superseded La Campana? A: CLV pointed out that were no mention of La Campana in the ruling in Indophil whether in support or in contravention of this doctrine. It can be seen that actually there are no points where Indophil had substantially changed the ruling in La Campana. La Campana, in fact is being cited in cases decided by the SC after Indophil, in the same way that Indophil continues to be cited. The criteria that when it is established that between two corporations which have one set of managers or board of directors; that there is a common stock ownership of both corporations; similarity of keeping corporate books and in conducting their businesses are mere probative factors that are to be considered when the corporate mask may be lifted and the corporate veil pierced. It does not mean that if these factors exist, piercing is automatically required. There is for one no hard and fast rule that can be laid down. So that in La Campana, the factors weighed heavily for piercing and in Indophil, against piercing.

Revised Bagtas Reviewer by Ve and Ocfe 2A 45 Piercing is not available when personal obligations of an individual are to be enforced against the corporation (?) Robledo v. NLRC, 238 SCRA 52 (1994). “The rationale behind piercing a corporation’s identity in a given case is to remove the barrie barrierr betwe between en the corpor corporati ation on from from the person persons s compri comprisin sing g it to thwart thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar, instead of holding certain individuals or person responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been turned upside down because of its erroneous invocation.” Francisco Motors Corp. v Court of Appeals , 309 SCRA 72 (1999). Piercing doctrine is meant to prevent fraud, and cannot be employed when the net result would be to perpetrate fraud or a wrong. Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal , 91 Phil. 786 (1952).   The The theory theory of corpor corporate ate entity entity was not mea meant nt to promot promote e unfair unfair object objective ives s or otherwise, nor to shield them. Villanueva v. Adre , 172 SCRA 876 (1989). (d) Basis Must Be Clear Evidence:  To disregard the separate separate juridical juridical personali personality ty of a corporation, it is elementary that the wrongdoing cannot be presumed and must be clearly and convincingly established. The organization of the corporation at the time when the relationship between the landowner and the developer were still cordial cannot be used as a basis to hold the corporation liable later on for the obligations of the landowner to the developer under the mere allegation that the corporation is being used to evade evade the perfor performan mance ce of obliga obligatio tion n by one of its major stockh stockhold olders ers.. Luxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999).

  The The me mere re assert assertion ion by a Filipi Filipino no litiga litigant nt agains againstt the existe existence nce of a “tande “tandem” m” between two Japanese corporations cannot be the basis for piercing, which can only be applied by showing wrongdoing by clear and convincing evidence. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001).  To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed. In this case, the Court finds that the Remington failed to discharge its burden of proving bad faith on the part of Marinduque Mining and its transferees in the mortgage and foreclosure of the subject properties to justify the piercing of the corporate veil. DBP v. Court of Appeals , 363 SCRA 307 (2001).  The party seeking for the piercing of the corporate veil has the burden of presenting clear and convincing evidence to justify the setting aside of the separate corporate personality rule. PNB v. Andrada Electric & Engineering Co. , 381 SCRA 244 (2002). Application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous application. PNB v. Andrada Electric & Engineering Co. , 381 SCRA 244 (2002). (e) Not Applicable to Theorizing: Piercing of the veil of corporate fiction is not allowed when when it is reso resort rted ed unde underr a theo theory ry of co-o co-own wner ersh ship ip to just justif ify y cont contin inue ued d use use and and possession by stockholders of corporate properties. Boyer-Roxas v. Court of Appeals , 211 SCRA 470 (1992). 

  The The pier pierci cing ng doct doctri rine ne is an equi equita tabl ble e reme remedy dy avai availa labl ble e only only to pers person ons s outs outsid ide e the the corporation. It cannot be availed of stockholders within the corporation forming part of the corporation. In comparison, CLV uses the Story of the Wall. This wall is the main doctrine, designed both to protect the stockholders by virtue of the attribute of limited liability and to hide from prying eyes the inner workings of the corporation. Stockholders are inside these

walls. Piercing the veil of corporate fiction is like a battering ram that creates a hole through this this wa wall ll to allo allow w thir third d pers person ons s to look look into into the the corp corpor orat atio ion n to see see if ther there e is a wron wrong g committed inside those walls. A stockholder being inside the fort are afforded other remedies, they have intra-corporate remedies to avail of.  The  The pierc piercing ing doctri doctrine ne cannot cannot be availe availed d of to dislod dislodge ge from from SEC’s SEC’s jurisd jurisdict iction ion a petiti petition on for suspen suspensio sion n of paymen payments ts filed filed under under P.D. P.D. 902-A 902-A,, on the ground ground that that the petitioning individuals should be treated as the real petitioners to the exclusion of the petiti petitioni oning ng corpor corporate ate debtor debtor.. “The “The doctri doctrine ne of pierc piercing ing the veil veil of corpor corporate ate fictio fiction n heavily relied upon by the petitioner is entirely misplaced, as said doctrine only applies when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.” Union Bank v. Court of Appeals, 290 SCRA 198 (1998). (f) Applicable to “Third-Parties”:

  That respondents are not stockholders of the sister corporations does not make them non-parties to this case, since it is alleged that the sister corporations are mere alter egos of the directors-pe directors-petitio titioners, ners, and that the sister sister corporation corporations s acquired acquired the proper propertie ties s sought sought to be reconv reconveye eyed d to FGSRC FGSRC in violat violation ion of direct directors ors-pe -petit tition ioners ers’’ fiduci fiduciary ary duty to FGSRC. FGSRC. The notion notion of corporat corporate e entity entity will will be pierce pierced d and the individuals composing it will be treated as identical if the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. Gochan v. Young, 354 SCRA 207 (2001). (g) Piercing is a power belonging to the court and cannot be assumed improvidently by a sheriff (?). Cruz v. Dalisay , 152 SCRA 482 (1987). 3. Consequences and Types of Piercing Cases : (Umali v. CA , 189 SCRA 529 [1990]) (a) Application of the doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance, or the particular obligation for which the doctrine was applied. Koppel (Phil.) Inc. v. Yatco, 77 Phil. 496 (1946); Tantoco v. Kaisahan ng Mga Manggagawa sa La Campana , 106 Phil. 198 (1959); Francisco v. Mejia , 362 SCRA 738 (2001). (b) Classification of Piercing Cases:

Rundown on Piercing Application:  This Court pierced the corporate veil to ward off a judgment credit, to avoid inclusion of corporate assets as part of the estate of the decedent, to escape liability arising for a debt, or to perpetuate fraud and/or confuse legiti legitimat mate e issues issues either either to promot promote e or to shiel shield d unfair unfair object objective ives s to cover cover up an otherwise blatant violation of the prohibition against forum shopping. Only is these and similar instances may the veil be pierced and disregarded. PNB v. Andrada Electric & Engineering Co. , 381 SCRA 244 (2002). (i) Fraud Piercing: When corporate entity used to commit fraud or do a wrong (ii) Alter-ego Piercing: When corporate entity merely a farce since the corporation is merely the alter ego, business conduit, or instrumentality of  a person or another entity (iii) Equity Cases: When piercing the corporate fiction is necessary to achieve justice or equity.

 The three cases may appear together in one application. See R.F. Sugay & Co., v. Reyes, 12 SCRA 700 (1964). 4. Fraud Cases:

When the legal fiction of the separate corporate personality is abused, such as when the same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate veil. Francisco v. Mejia, 362 SCRA 738 (2001). In acco accord rdan ance ce with with the the fore forego goin ing g rule rule,, this this Co Cour urtt has has disr disreg egar arde ded d the the sepa separa rate te

Revised Bagtas Reviewer by Ve and Ocfe 2A 47 personality of the corporation were the corporate entity was used to escape liability to third parties. In this case, however, we do not find any fraud on the part of the Marinduque Mining and its transferees to warrant the piercing of the corporate veil. DBP v. Court of   Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001).

Controlling Shareholder: Shareholder: Where a stockholder, who has absolute control a)  Acts by Controlling over the business business and affairs affairs of the corporation, corporation, entered into a contract contract with another another corporation through fraud and false representations, such stockholder shall be liable soidarily with co-defendant corporation even when the contract sued upon was entered into on behalf of the corporation. Namarco v. Associated Finance Co. , 19 SCRA 962 (1967). 

CLV: As a general rule, an agent acting within the scope of his authority cannot be held liable for acts done in behalf of the principal. However, when a wrong done by a corporation is through a person in its behalf, piercing makes both of them liable. In fact, an agents who commits a crime or fraud can be held liable despite the agency relation. Where the corporation is used as a means to appropriate a property by fraud which property property was later resold resold to the controlli controlling ng stockholde stockholders, rs, then piercing piercing should be allowed. Heirs of Ramon Durano, Sr. v. Uy , 344 SCRA 238 (2000). (b) Avoidance of Taxes:  The plea to pierce the veil of corporate fiction on the allegation that the corporations true purpose is to avoid payment by the incorporating spouses of  the estate taxes on the properties transferred to the corporations: “With regard to thei theirr clai claim m that that Elli Ellice ce and and Marg Margo o we were re me mean antt to be used used as me mere re tool tools s for for the the avoidance of estate taxes, suffice it to say that the legal right of a taxpayer to reduce the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted.” Gala v. Ellice Agro-Industrial Corp. , 418 SCRA 431 (2003). (c)  Avoidance of Contractual or Civil Liabilities: One cannot evade civil liability by Palacio v. Fely Transportation Co. , 5 SCRA incorporating properties or the business. 1011 (1962).

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Q: Why should a case be classified as a fraud case, an alter ego case, etc.? A: In fraud cases, it is necessary that the petitioners seek to enforce the claim against the stockholders or corporate officers. Since, in fraud cases only one act of fraud is necessary to hold them liable whereas in an alter ego case, a series of transaction has to proven before they may be held liable. When used to avoid a contractual commitment against non-competition. Transit, Inc. v. Ferrer , 25 SCRA 845 (1968).

Villa Rey 

(e) Avoiding Legal Restrictions:

 The corporate veil cannot be used to shield an otherwise blatant violation of the prohibition against forum-shopping. Shareholders, whether suing as the majority in direct actions or as the minority in a derivative suit, cannot be allowed to trifle with court court proces processes ses,, partic particula ularly rly where where the corpor corporati ation on itself itself has not been been remiss remiss in vigoro vigorousl usly y prosec prosecuti uting ng or defend defending ing corpor corporate ate causes causes and in using using and applyi applying ng remedies available to it. First Philippine International Bank v. Court of Appeals , 252 SCRA 259 (1996). (d)

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Parent-Subsidiary Relations; Affiliates : (Commissioner Commissioner of Internal Revenue v. Norton and Harrison , 11 SCRA 704, [1954]; Tomas Lao Construction v. NLRC , 278 SCRA 716 [1997]).

Q: Why is there an inordinate showing of the alter ego elements? A: In cases of parent-subsidiary parent-subsidiary relations, it is necessary that the factual circumstances be considered in order to distinguish between a case of fraud or alter ego. There may be an inordinate showing of alter ego elements but that does not necessarily make it an alter ego case. Therefore, alter ego in fraud cases must be distinguished from pure alter ego. In fraud cases, the alter ego concept pertains to employing the corporation even for a single transaction to do evil while in pure alter ego cases, the courts go into systematic findings of 

utter disregard and disrespect of the separate juridical personality of the corporation. (e) Guiding Principles in Fraud Cases :

Why is there inordinate showing of alter-ego elements? •

•

 There must have been fraud or an evil motive in the affected transaction, and the mere proof of control of the corporation by itself would not authorize piercing; and  The main action should seek for the enforcement of pecuniary claims pertaining to the corporation against corporate officers or stockholders.

5. Alter-Ego Cases: (a) Factual Basis: The question of whether a corporation is a mere alter ego is a purely one of fact, and the burden is on the party who alleges it. PNB v. Andrada Electric & Engineering Co. , 381 SCRA 244 (2002); MR Holdings,Ltd. V. Bajar , 380 SCRA 617 (2002); Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996). (b) Using Corporation as Conduit or Alter Ego:

Where the capital stock is owned by one person and it functions only for the benefit of such individual owner, the corporation and the individual should be deemed the same.  Arnold v. Willets and Patterson, Ltd. , 44 Phil. 634 (1923). When corporation is merely an adjunct, business conduit or alter ego of another corpor corporati ation, on, the fictio fiction n of separ separate ate and distin distinct ct corpor corporati ation on entiti entities es should should be disregarded. Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988). Where Where a debtor debtor regist registers ers his residenc residence e to a family family corpor corporati ation on in exchan exchange ge of  shares of stock and continues to live therein, then the separate juridical personality may be disregarded. PBCom v. CA, 195 SCRA 567 (1991). Neither has it been alleged or proven that Merryland is so organized and controlled and its affairs affairs are so conduc conducted ted as to make make it merely merely an instru instrumen mental tality ity,, agency agency condui conduitt or adjunc adjunctt of Cardal Cardale. e. Even Even assumi assuming ng that that the busine business sses es of Cardal Cardale e and Merryland are interrelated, this alone is not justification for disregarding their separate personalities, absent any showing that Merryland was purposely used as a shield to defraud creditors and third persons of their rights. Francisco v. Mejia , 362 SCRA 738 (2001). Use Use of nomi nomine nees es to ma man n the the corp corpor orat atio ion n for for the the bene benefi fitt of the the cont contro roll llin ing g . stockholder. Marvel Building v. David , 9 Phil. 376 (1951) (c) Mixing-up Operations; Disrespect to the Corporate Entity:

Employment of same workers; single place of business, etc., may indicate alter ego Campana Coffee Factory Factory v. Kaisahan Kaisahan ng Manggaga Manggagawa wa , 93 Phil. 160 situation. La Campana (1953); Shoemart v. NLRC, 225 SCRA 311 (1993). Where two business enterprises are owned, conducted, and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities and treat them as identical. Sibagat Timber Corp. v. Garcia , 216 SCRA 70 (1992). Where corporate fiction was used to perpetrate social injustice or as a vehicle to evade obligations or confuse the legitimate issues (as in this case where the actions of  management of the two corporations created confusion as to the proper employer of  claimants), it would be discarded and the two corporations would be merged as one.  Azcor Manufacturing, Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999). Mixing Mixing of person personal al accoun accounts ts with with corpor corporate ate bank bank deposi depositt accoun accounts. ts. Ramirez 

Revised Bagtas Reviewer by Ve and Ocfe 2A Telephone Corp. v. Bank of America , 29 SCRA 191 (1969).

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(d)  Avoidance of taxes: Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160 (1961); Liddell & Co. v. Collector of Internal Revenue , 2 SCRA 632 (1961).

 YUTIVO & SONS INC. v CTA Facts:   Yutivo is a domestic corporation engaged in the importation and sale of hardware supplies and equipment. It bought a number of cars and trucks from General Motors Overseas Corporation. GM paid sales tax on original sales on the basis of its selling price to Yutivo. Yutivo paid no further tax on its sales to the public. Southern Motors was then organized to engage in the business of selling cars, trucks, and spare parts with capital stock of 10,000 shares, 2,500 of which were subscribed in equal proportion by the children of Yutivo’s incorporators. Under this set-up, Yutivo would purchase the cars and tucks from GM then sell the same to SM which in turn sold them to the general public. Then GM withdrew its operations from the Philippines. Yutivo took over the importation of trucks and cars. It likewise continued to have the previous arrangement of selling exclusively to SM which in turn paid no such sales tax on its sales to the general public. The CIR made an assessment upon Yutivo and demanded a sum representing deficiency sales tax plus surcharges claiming that the taxable sales were the retail sales should be between SM to the general public and not the sale at wholesale made by Yutivo to SM since the two were one and the same corporation, SM being a mere subsidiary of   Yutivo. CTA affirmed such a ruling and further stated that there was no legitimate purpose in the organization of SM – apparently organized to evade the payment of taxes – and that it was owned and controlled by Yutivo and is a mere branch, adjunct, conduit, instrumentality or alter ego of   Yutivo. Issue: WON SM is a mere alter ego of Yutivo meant to defraud government of lawful tax revenues? Held: SM was not organized for the purpose of defrauding the government of lawful tax revenues because: (1) The intention to minimize taxes as in tax evasion when used in the context of fraud, must be proven to exist by clear and convincing evidence amounting to more than the mere preponderance of evidence. The evidence of the collector falls short of such standard. (2) SM was organized at a time when there was not yet tax to evade, when GM was still the importer and was the one paying the sales tax. (3) The transactions between Yutivo and SM were and have always been in the open, embodied in private and public documents, constantly subject to inspection by tax authorities. (4) A taxpayer has the legal right to decrease the amount of what otherwise would be his taxes altogether avoid them by means which the law permits. (5) However, SM was actually owned and controlled by Yutivo to make it a mere subsidiary or branch of the latter. SM was organized by the leading stockholders of Yutivo. Yutivo was at all times in control if the majority stock of SM. The principal officers of both corporations are identical. Thus, the business, financial and management policies of both corporations could be directed towards common ends. The funds of SM are directly remitted to Yutivo and subject to withdrawal only of Yutivo, SM’s resources resources being under Yutivo’s Yutivo’s control. The accountin accounting g system system maintained maintained by Yutivo Yutivo shows that it maintained a high degree of control over SM accounts. All transactions between Yutivo and SM are recorded and effected by mere debit or credit entries against the reciprocal account maintained in their respective books of accounts and indicate the dependency dependency of SM as a branch of Yutivo. (6) Thus, SM being a mere instrumentality of Yutivo, the CTA correctly disregarded the technical defense of separate corporate entity in order to arrive at the true liability of Yutivo. Q: Can tax avoidance not be considered as a crime thus perpetuated in fraud rather than an alter ego case? A: The Court had in this case ruled as to the legitimacy of a corporation to act as to seek means to decrease its tax liability. The difference between Yutivo and  Tan Boon Kong is that in the latter, the court found evidence that Tan Boon Kong acted beyond the scope of his authority. In the former, evidence was seen to be insufficient as to establish a willful desire to evade taxes.

(e) Thinly-capitalized corporations: McConnel v. CA , 1 SCRA 722 (1961). 

  The The fact fact that that a corp corpor orat atio ion n has has no adeq adequa uate te capi capita tall enou enough gh basi basis s for for pier pierci cing ng.. Such Such pronouncement limits the advantage of creating a corporation. For example, in cases where leveraging is undertaken which is considered as a legitimate business practice. (f) Parent-subsidiary; Affiliated Companies: Koppel (Phil.), Inc. v. Yatco , 77 Phil. 97 (1946); PHIVIDEC v. Court of Appeals , 181 SCRA 669 (1990).

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 The person who invokes the doctrine must always be the injured party. Abse Absenc nce e of proo prooff that that cont contro roll over over a corp corpor orat atio ion n is bein being g used used by a mo moth ther er compan company y to commit commit fraud or wrong, wrong, there would would be no basis basis to disreg disregard ard their separate juridical personalities. Ramoso v. Court of Appeals, 347 SCRA 463 (2000); Guatson Int’l Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990). If used to perform legitimate functions, a subsidiary’s separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confin confined ed to those those arisin arising g in their their respec respectiv tive e busine businesse sses. s. Even Even when when the parent parent corporation agreed to the terms to support a standby credit agreement in favor of the subsidiary, does not mean that its personality has merged with that of the subsidiary. MR. Holdings, Ltd. V. Bajar , 380 SCRA 617 (2002). (g) Summary of Probative Factors: Concept Builders, Inc. v. NLRC , 257 SCRA 149 (1996); PNB v. Ritratto Group, Inc. , 362 SCRA 216 (2001); Velarde v. Lopez , 419 SCRA 422 (2004).

CONCEPT BUILDERS Inc. v NLRC Facts: Concept Builders is engaged in the construction business. Private respondents are employed by the company as laborers, carpenters and riggers. In November of 1981, private respondents were served individual notices of termination by the company. It stated that their contract had already expired.  The NLRC discovered that the project for which they were hired was not yet even finished. In addition to this, Concept had to hire subcontractors whose works are the same as private respondents. A writ of execution was issued which was partially satisfied through the garnishment of money from MWSS which is a debtor of Concept and the balance was to be collected from Concept directly. But the sheriff reported that when the writ was to be served the guard on duty refused it on the ground that Concept no longer owned the premises and was now occupied by Hydro Pipes, which had the same Board of Directors as Concept. Held:  The veil may be pierced when it its just the alter ego of a person of another corporation.  The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and circumstances of each case. No hard and fast rule can be laid down, but there are some probative factors of identity that will justify the application of the doctrine. Summary probative factors: (1) stock membership by one ore common ownership of both (2) identity of direct directors ors and office officers rs (manag (manageme ement) nt) (3) manner manner of keepi keeping ng corpor corporate ate books books and record records s (management) (4) methods of conducting business (management). While petitioners claimed that it ceased operations in 1986, it filed an Information Sheet with the SEC in 1987 stating that its office address is their old address. Both information sheets were filed by Virgilio Casino, the same corporate secretary. They had the same President, Board of Directors and substantially the same subscribers. (h) Guiding Principles in Alter-Ego Cases: •

•

Doctrine applies even in the absence of evil intent, because of  the the dire direct ct viol violat atio ion n of a cent centra rall corp corpor orat ate e law law prin princi cipl ple e of  separating ownership from management; Doctrine in such cased is based on estoppel: if stockholders do not respect the separate entity, others cannot also be expected

Revised Bagtas Reviewer by Ve and Ocfe 2A to be bound by the separate juridical entity; •

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Piercing in alter ego cases may prevail even when no monetary claims claims are sought sought to be enforc enforced ed agains againstt the stockh stockhold olders ers or officers of the corporation.

(i) Distinction Between Fraud Piercing and Alter-ego Piercing: Banking Corp. , 402 SCRA 339 (2003).

Lipat v. Pacific

6. Equity Cases: (a) When used to confuse legitimate issues. Telephone Engineering and Service Co., Inc. V. WCC, 104 SCRA 354 (1981). (b) When used to raise technicalities. Emilio Cano Ent. v. CIR , 13 SCRA 291 (1965). 7. Due Process Clause (a) Need to bring a new case against the officer. Padilla v. Court of Appeals , 370 SCRA 208 (2001); McConnel v. Court of Appeals , 1 SCRA 723 (1961).

A suit against individual shareholders in a corporation is not a suit against the corporation. Failure to implead the corporations as defendants and merely annexing a list of such corporations to the complaints is a violation of due process for it would in effect be disregarding their distinct and separate personality without a hearing. PCGG v. Sandiganbayan, 365 SCRA 538 (2001). Although both lower courts found sufficient basis for the conclusion that PKA and Phoenix Omega were one and the same, and the former is merely a conduit of the other the Supreme Court held void the application of a writ of execution on a judgment held held only only agains againstt PKA, PKA, since since the RTC obtain obtained ed no jurisd jurisdict iction ion over over the person person of  Phoenix Omega which was never summoned as formal party to the case. The general principle is that no person shall be affected by any proceedings to which he is a stranger, and strangers to a case are not bound by the judgment rendered by the court. Padilla v. Court of Appeals , 370 SCRA 208 (2001). (b) When corporate officers are sued in their official capacity when the corporation was not made a party, the corporation is not denied due process. Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965). (c) Provided that evidential basis has been adduced during trial to apply the piercing Jacinto nto v. Court Court of Appeal Appeals s, 198 Arcilla la v. Court Court of  doctrine.   Jaci 198 SCRA SCRA 211 211 (199 (1991) 1);;   Arcil  Appeals , 215 SCRA 120 (1992).

V.  x CLASSIFICATIONS CLASSIFICATIONS OF CORPORATIONS 1. In Relation to the the State: a) Public Corporation (Sec. 3, Act No. 1459). one formed or organized for the government or a portion of the state -

its purpose is for general good and welfare

b) Quasi-public Corporation. Marilao Water Consumers Associates v. IAC , 201 SCRA 437 (1991); marriage of both a public and a private corp. -

it is gran grante ted d the the same same powe powers rs as a priv privat ate e corp corp.. but but they they have have no incorporators, SH’s or members example: example: A water district, district, although although establishe established d as a corporation, corporation, it was establish established ed for the greater good and with no stockhold stockholders. ers. They are also placed under the jurisdiction of the LWUA not the SEC

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

- one formed for some private private purpose, benefit benefit or end. Government’s majority shares does not make an entity a public corporation. National Coal Co., v. Collector of Internal Revenue , 46 Phil. 583 (1924). A corpor corporati ation on is create created d by operat operation ion of law under under the Corporat Corporation ion Code Code while while a government corporation is normally created by special law referred to often as a charter. Bliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271 (1994).  The test to determine whether a corporation is government owned or controlled, or private in nature is simple. Is it created by its own charter for the exercise of a public functi function, on, or by incorp incorpora oratio tion n under under the genera generall corpor corporati ation on law law? ? Those Those with with specia speciall charters are government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are compulsory members of  the GSIS. Camparedondo v. NLRC , 312 SCRA 47 (1999) While public benefit and public welfare may be attributable to the operation of the Bases Conversion and Development Authority (BCDA), yet it is certain that the functions it perfor performs ms are basica basically lly propri proprieta etary ry in nature nature—th —the e promot promotion ion of econom economic ic and social social developm development ent of Central Central Luzon, Luzon, particula particularly, rly, and the country’s goal for enhancem enhancement. ent.  Therefore, the rule that prescription does not run against the State will not apply to BCDA, it being said that when title of the Republic has been divested, its grantees, although artifi artificia ciall bodies bodies of its own creati creation, on, are in the same same catego category ry as ordina ordinary ry person persons. s. Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001). Although Boy Scouts of the Philippines does not receive any monetary or financial subsidy from the Government, and its funds and assets are not considered government in nature and not subject to audit by the COA, the fact that it received a special charter from the government, that its governing board are appointed by the Government, and that its purpos purpose e are of public public charac character ter,, for they they pertai pertain n to the educat education ional, al, civic civic and social social development of the youth which constitute a very substantial and important part of the nation, it is not a public corporation in the same sense that municipal corporation or local governments are public corporation since its does not govern a portion of the state, but it

Revised Bagtas Reviewer by Ve and Ocfe 2A 53 also does not have proprietary functions in the same sense that the functions or activities of government-owned or controlled corporations, is may still be considered as such, or under under the 1987 Administr Administrative ative Code as an instrumen instrumentalit tality y of the Government, Government, and it employees are subject to the Civil Service Law. Boy Scouts of the Philippines v. NLRC , 196 SCRA 176 (1991). But being a GOCC makes it liable for laws and provisions applicable to the Government or its entities and subject to the control of the Government. Cervantes v. Auditor General, 91 Phil. 359 (1952). Beyond Beyond cavil, a GOCC has a personalit personality y of its own, distinct distinct and separate separate from that of  the govern governmen ment, t, and the interv intervent ention ion in a transa transacti ction on of the Offic Office e of the Presi Presiden dentt throug through h the Execu Executiv tive e Secret Secretary ary does does not change change the indepe independe ndent nt existe existence nce of a government entity as it deals with another government entity. PUP v. Court of Appeals , 368 SCRA 691 (2001).  The doctrine doctrine that employees employees of GOCCs, GOCCs, whether created by special special law or formed formed as subsidiaries under the general corporation law are governed by the Civil Service Law and not by the Labor Code, Code, has been been suppla supplante nted d by the 1987 Consti Constitut tution ion.. The present present doctrine in determining whether a GOCC is subject to the Civil Service Law is the manner  of its creation , such that government corporations created by special charter are subject the Civil Service Law, while those incorporated under the general corporation law are governed by the Labor Code. PNOC-Energy Development Corp. v. NLRC , 201 SCRA 487 (1991); Davao City Water District v. Civil Service Commission , 201 SCRA 593 (1991). Section 31 of Corporation Code ( Liability of Directors and Officers ) is applicable to corporations which have been organized organized by special charters since Sec. 4 of Corporation Code renders the provisions supplementarily applicable to all corporations, including those with special or individual charters, such as cooperatives organized under P.D. 269, so long Cooperative, as those provisions are not inconsistent with such charters. Benguet Electric Cooperative, Inc. v. NLRC , 209 SCRA 55 (1992). Water districts can validly exists as corporate entities under PD 198, and provided they are government-owned or controlled, and their board of directors and other personnel are Feliciano o v. governmen governmentt employees employees subject subject to civil civil service service laws and anti-graf anti-graftt laws. Felician Commission on Audit , 419 SCRA 363 (2004). 2. As to Place of Incorporation: (a) Domestic Corporation -

incorporated in the Philippines

(b) Foreign Corporation (Sec. 123)

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

incorporated in another country and that country grants the same rights to Filipinos in terms of doing business there; it shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this code & a certificate of authority from the appropriate government agency ( SEC license after obtaining BOI certificate )

3. As to Purpose of of Incorporation: Incorporation:

(a) Municipal Corporation – LGU’s can sue be sued without their consent ( as provided for by the LGC) -

in certain instances considered as an adjunct to the national government but has been recognized to have a personality separate and distinct from the national government. (b) Religious Corporation (Secs. 109 and 116) Section 109. Classes of religious corporations . - Religious corporations may be incorporated by one or more persons. Such corporations may be classified into corporations sole and religious societies. societies. -

Religious corporations shall be governed by this Chapter and by the general provisions on non-stock corporations insofar as they may be applicable. Section Section 116. Religious Religious societies societies. - Any religious religious society or religious religious order, or any diocese, synod, or district organization of any religious denominati denomination, on, sect or church, church, unless unless forbidden forbidden by the constitution, constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties and estate by filing with the Securities and Exchange Commission, articles of incorporation verified by the affidavit of the presiding presiding elder, secretary, secretary, or clerk or other member of such religious religious society or religious order, or diocese, synod, or district organization of  the religious denomination, sect or church, setting forth the following: 1. That the religious society or religious order, or diocese, synod, or dist distri rict ct orga organi niza zati tion on is a reli religi giou ous s orga organi niza zati tion on of a reli religi giou ous s denomination, sect or church; 2. That at least two-thirds (2/3) of its membership have given their writte written n consen consentt or have have voted voted to incorp incorpora orate, te, at a duly duly conven convened ed meeting of the body; 3. That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is not forb forbid idde den n by comp compet eten entt auth author orit ity y or by the the cons consti titu tuti tion on,, rule rules, s, regulations or discipline of the religious denomination, sect, or church of which it forms a part; 4. That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the administration of its affairs, properties and estate; 5. The place place where where the princip principal al offic office e of the corporat corporation ion is to be established and located, which place must be within the Philippines; and  The names, nationalities, and residences of the trustees elected by the religious society or religious order, or the diocese, synod, or district organization to serve for the first year or such other period as may be prescribed by the laws of the religious society or religious order, or of  the diocese, synod, or district organization, the board of trustees to be not less than five (5) nor more than fifteen (15). (160a) Since Since in matters purely ecclesiasti ecclesiastical cal the decisions decisions of the proper church tribunals tribunals are conc conclu lusi sive ve upon upon the the civi civill trib tribun unal als, s, then then a chur church ch me memb mber er who who is expe expell lled ed from from the the membership by the church authorities, or a priest or minister who is by them deprived of his sacred office, is without remedy in the civil courts. Long v. Basa , 366 SCRA 113 (2001).

Revised Bagtas Reviewer by Ve and Ocfe 2A (c) Educational Corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)

55

Sectio Section n 106. 106. Incorp Incorpora oratio tion n. - Educ Educat atio iona nall corp corpor orat atio ions ns shal shalll be governed by special laws and by the general provisions of this Code. (n) Section 107. Pre-requisites to incorporation . - Except upon favorable reco recomm mmen enda dati tion on of the the Mini Minist stry ry of Educ Educat atio ion n and and Cult Cultur ure, e, the the Securitie Securities s and Exchange Commission Commission shall not accept accept or approve approve the articles articles of incorporat incorporation ion and by-laws by-laws of any education educational al institut institution. ion. (168a) Section 108. Board of trustees . - Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5). Unless otherwise provided in the articles of incorporation on the bylaws, the board of trustees of incorporated schools, colleges, or other inst instit itut utio ions ns of learn learnin ing g shal shall, l, as soon soon as organ organiz ized ed,, so clas classi sify fy themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only only for the unexpi unexpired red period period.. Truste Trustees es ele electe cted d therea thereafte fterr to fill fill vacancies caused by expiration of term shall hold office for five (5) years. years. A majori majority ty of the trustees trustees shall constitu constitute te a quorum quorum for the transaction of business. The powers and authority of trustees shall be defined in the by-laws. For institut institutions ions organized as stock corporations, corporations, the number number and term erm of direc irecto tors rs shal shalll be gover overne ned d by the provi rovisi sion ons s on stoc stock k corporations. (169a) (d) Charitable, Scientific or Vocational Corporations (e) Business Corporation 4. As to Number of Members: (a) Aggregate Corporation (b) Corporation Sole (Secs. (Secs. 110 to 115; Roman Catholic Apostolic Administrator of Davao, Inc. v. LRC and the Register of Deeds of Davao City , 102 Phil. 596 [1957]).

Section 110. Corporation sole. - For the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religi religious ous denomi denominat nation ion,, sect sect or church church,, a corpor corporati ation on sole sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. (154a) Sect Sectio ion n 111. 111. Arti Articl cles es of inco incorp rpor orat atio ion. n. - In orde orderr to beco become me a corporation sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file with the Securities and Exchange Commission articles of incorporation setting forth the following: 1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding presiding elder of his religious religious denominat denomination, ion, sect or church church and that he desires to become a corporation sole; 2. That That the the rule rules, s, regu regula lati tion ons s and and disc discip ipli line ne of his his reli religi giou ous s denomination, sect or church are not inconsistent with his becoming a corporation sole and do not forbid it;

3. That That as such such chief chief archbi archbisho shop, p, bishop bishop,, priest priest,, minist minister, er, rabbi rabbi or pres presid idin ing g elde elder, r, he is char charge ged d with with the the admi admini nist stra rati tion on of the the temporalities and the management of the affairs, estate and properties of his religi religious ous denomi denominat nation ion,, sect sect or church church within within his territ territori orial al  jurisdiction, describing such territorial jurisdiction; 4. The manner in which any vacancy occurring in the office of chief  archbishop, bishop, priest, minister, rabbi of presiding elder is required to be filled filled,, accord according ing to the rules, rules, regula regulatio tions ns or discip disciplin line e of the religious denomination, sect or church to which he belongs; and 5. The place where the principal office of the corporation sole is to be established and located, which place must be within the Philippines.   The The articl articles es of incorp incorporat oration ion may includ include e any other other provis provision ion not contrary to law for the regulation of the affairs of the corporation. (n) Section 112. Submission of the articles of incorporation. - The articles of inco incorp rpor orat atio ion n must must be veri verifi fied ed,, befo before re fili filing ng,, by affi affida davi vitt or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission commission,, certifica certificate te of election election or letter letter of appointmen appointmentt of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public. From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit or affirmation, and accomp accompani anied ed by the docume documents nts mentio mentioned ned in the preced preceding ing paragraph, paragraph, such chief archbishop, archbishop, bishop, bishop, priest, priest, minister, minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate estate and properties properties of the religious denominatio denomination, n, sect or church church theretofore administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole bene benefi fitt of his his reli religi giou ous s deno denomi mina nati tion on,, sect sect or chur church ch,, incl includ udin ing g hosp hospit ital als, s, scho school ols, s, coll colleg eges es,, orph orphan an asyl asylum ums, s, pars parson onag ages es and and cemeteries thereof. (n) Section 113. Acquisition and alienation of property . - Any corporation corporation sole may purchase and hold real estate and personal property for its church church,, charit charitabl able, e, benevo benevolen lentt or educat education ional al purpos purposes, es, and may receive bequests or gifts for such purposes. Such corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the Court of First Instance of the province where the property is situated upon proof made to the satisfaction of the court that notice of the application for leave to sell or mortgage has been given by publication or otherwise in such manner and for such time as said court may have directed, and that it is to the interest of the corpor corporati ation on that that lea leave ve to sell sell or mortga mortgage ge should should be grante granted. d. The application for leave to sell or mortgage must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole, and may be opposed by any member of the religious denomination, sect or church represented by the the corp corpor orat atio ion n sole sole:: Prov Provid ided ed,, That That in case cases s wher where e the the rule rules, s, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real real esta estate te and and pers person onal al prop proper erty ty,, such such rule rules, s, regu regula lati tion ons s and and discipline shall control, and the intervention of the courts shall not be necessary. (159a)

Revised Bagtas Reviewer by Ve and Ocfe 2A Section 114. Filling of vacancies . - The successors in office of any chief  archbi archbisho shop, p, bishop bishop,, priest priest,, minist minister, er, rabbi rabbi or presid presiding ing elder elder in a corporation sole shall become the corporation sole on their accession to office and shall be permitted to transact business as such on the filing with the Securities and Exchange Commission of a copy of their commission commission,, certificat certificate e of election, election, or letters letters of appointmen appointment, t, duly certified by any notary public.

57

During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church church incorp incorporat orated ed as a corpor corporati ation on sole, sole, the person person or person persons s authorized and empowered by the rules, regulations or discipline of the religious denomination, sect or church represented by the corporation sole to administer the temporalities and manage the affairs, estate and properties of the corporation sole during the vacancy shall exercise all the powers and authority of the corporation sole during such vacancy. (158a) Section 115. Dissolution. - A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the Securities and Exchange Commission a verified declaration of dissolution.  The declaration of dissolution shall set forth: 1. The name of the corporation; 2. The reason for dissolution and winding up; 3. The authoriz authorizati ation on for the dissolu dissolutio tion n of the corporat corporation ion by the particular religious denomination, sect or church; 4. The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation. Upon approval of such declaration of dissolution by the Securities and Exchan Exchange ge Com Commis missio sion, n, the corpor corporati ation on shall shall cease cease to carry carry on its operations except for the purpose of winding up its affairs.

Villanueva , 114 SCRA 875 (1982) and Republic v. Iglesia ni  The doctrine in Republic v. Villanueva Cristo , 127 SCRA SCRA 687 (1984) (1984),, that that a corpor corporati ation on sole sole is disqua disqualif lified ied to acquir acquire/h e/hold old alienable lands of the public domain, because of the constitutional prohibition qualifying only individuals to acquire land and the provision under the Public Land Act which applied only to Filipino citizens or natural persons, has been expressly overturned in Director of  (1986) .3 Land v. IAC , 146 SCRA 509 (1986). 5. As to Legal Status: (a) De Jure Corporation (b) De Facto Corporation (Sec. 20)

Sectio Section n 20. De facto facto corpor corporati ations ons.. - The due incorpor incorporati ation on of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (c) Corporation by Estoppel (Sec. 21)

3Overturning affirmed in Republic v. Iglesia ni Cristo , 127 SCRA 687 (1984); Republic v. IAC , 168 SCRA 165 (1988).

Section 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. Q. Why is there piercing in a de facto corporation? A. Piercing is allowed because the intention of the law is to protect the contracts entered into by the corporation. 6. As to Existence of of Shares (Secs. 3 and 5):

Sec. 3 Classes of Corporation – Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations. Sec. 5 Corporations and incorporators, stockholders and members – Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Corporators in a non-stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. (a) Stock Corporation (b) Non-Stock Corporation

Revised Bagtas Reviewer by Ve and Ocfe 2A

59

VI. CORPORATE CONTRACT LAW

See relevant portion of  VILLANUEVA, Corporate Contract Law, 38 A TENEO L.J. 1 (No. 2,  June 1994) INTRODUCTION: Corporate Contract Law

à

contracts shaped by corporate law.



Form v. substance



In the levels of the legal relationship, corporate contract law is used to resolve issues between the different levels – between the juridical entity level, the contract relationship level and the business entity level.

à

substance prevails

Q: Why Why is ther there e a need need to dist distin ingu guis ish h corp corpora orate te cont contra ract ct law law from from cont contra ract ct law? law? A: There is a need to distinguish between the two because there are certain instances where where an applic applicati ation on of corpor corporate ate contra contract ct law princi principle ples s are in direct direct confli conflict ct with with contract law principles. An example would be in the situation where a corporation is being incorporated, the corporation code in certain instances recognize the binding effect of  contracts contracts entered into in the pre-incorpora pre-incorporation tion stage. But if contract law was strictly strictly applied such a contract would be void since it lacks one vital element which is consent of  the contracting parties. How does a corporation that does not exist yet give consent? This is where corporate contract law find its relevance. The conflict between the juridical entity level level is reconciled reconciled with the contractual contractual relations relationship hip level. level. (DOCTRINE: to validate validate the contract entered into by the supposed corporation) PROMOTER’S CONTRACT

à

C. BY ESTOPPEL

à

DE FACTO or DE JURE

à

DISSOLUTION

Q: In order to reach the level of corporation by estoppel, what is the essential ingredient ingredient of  such doctrine? A: When there is a representation that a corporation exists when in fact there is none and at least one party thought that there was a corporation. Q: Distinguish promoter’s contract principles from the corporation by estoppel doctrine? A: In both both the the corp corpor orat atio ion n does does not not exis exist. t. But But in prom promot oter er’s ’s cont contra ract cts s ther there e is no misrepresentation that the corporation does not yet exist. When the contracts are entered into by persons who in behalf of the corporation, acknowledging that the corporation does not yet exist exist and is still still in the process of incorporation, incorporation, you do not apply the doctrine doctrine of  corporation by estoppel. It is still what one may call as the promoter’s contract. (The moment there is no corporation and contracts are entered into under the representation that that the corporat corporation ion does exist exist then that is the only only time time you apply apply the doctrin doctrine e of  corporation by estoppel.) 1. Pre-Incorporation Contracts (a) Who Are Promoters?

“Promoter” is a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. (Sec. 3.10, Securities Regulation Code [R.A. 8799]) CLV: The definition of promoter is important to determine the liability for promoter’s contract. Before you can make a promoter liable, you must be able to determine who is the promoter. He must be the one who takes initiative on the founding and organization of the business venture which eventually ends up as the corporation being organized. Q: At the promoter’s stage there is no juridical personality until the SEC issues the certificate of  incorporation. Until the certificate is issued, issued, the stage of the de facto corporation has not yet been reached. Prior to the de facto corporation stage what then is the status of the contract entered into by a promoter for and in behalf of the person or agent who had undertaken the transaction? A: Unenforceable. It is not binding upon the corporation because it has not given consent to the authority of the person or agent who had undertaken the transaction.

Q: How can ratification be done? A: Ratification can be done in two ways: (1) express ratification – a mere board resolution making the corporation liable by accepting the contract and (2) implied ratification – by accepting of benefits (b) Nature of Pre-incorporation Agreements (Secs. 60 and 61; Bayla v. Silang Traffic Co., Inc. , 73 Phil. 557 [1942]). 

Sec. 60 Subscription contract – Any contract for the acquisition of unissued stocks in an existing corporation or a corporation still to be formed shall be deemed as subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract.



Sec. 61 Pre-incorporation subscription – A subscription f or shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six months from the date of  subscr subscript iption ion unless unless all the other other subsc subscrib ribers ers consen consentt to the revoca revocatio tion, n, or unless unless the incorporation of said corporation fails to materialize within said period or within a longer peri period od as ma may y be stip stipul ulat ated ed in the the cont contra ract ct of subs subscr crip ipti tion on:: Prov Provid ided ed,, that that no prepreinco incorp rpor orat atio ion n subs subscr crip ipti tion on ma may y be revo revoke ked d afte afterr the the subm submis issi sion on of the the arti articl cles es of  incorporation to the SEC.

CLV: Sec. 61 of the Corp. Code governs a pre-incorporation subscription agreement. Sec. 61 says that a pre-incorporation subscription agreement is irrevocable. The only manner by which you can revoke it is if ALL of the other subscribing stockholders consent to the revocation. Sec. 61 is a clear demonstration of the fact that a promoter’s contract can be valid and even irrevocable. In the case of a pre-incorporation subscription agreement agreement that contract is valid because there are in fact two parties. The party subscribed and all of the other parties who have subscribed to the other incorporators and all of them bind themselves together to form the corporation. That is why it is irrevocable unless the other party which is all of the other subscribers, agree. (c) Theories on Liabilities for Promoter's Contracts ( Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko , 65 Phil. 223 [1937]; Rizal Light & Ice Co., Inc. v. Public Service Comm. , 25 SCRA 285 [1968]; Caram, Jr. v. CA , 151 SCRA 372 [1987]).

CAGAYAN FISHING DEVELOPMENT CO. INC. v. TEODORO SANDIKO

Facts: Manuel Tabora , as owner of four parcels of land in Cagayan mortgaged the said properties to secure his loan – 1 st mortgage to PNB: P8000; 2 nd mortgage to PNB: P7000; and 3 rd mortgage to Bauzon: P2900 which was registered and annotated on the titles of the property. In 1930 Tabora sold said parcels to Cagayan Fishing Development Co., said to be under process of incorporation, subject to the mortgages and with the condition that title will not be transferred until the corporation has paid Tabora’s indebtedness. Cagayan Fishing filed its Articles of Incorporation with the Bureau of  Commerce. The Board of Directors adopted a resolution authorizing its President Ventura to sell the four four parcel parcels s of land land to Sandik Sandiko o with with the conditio condition n that that he would would should shoulder er the mortgage mortgage debts. debts. Sandiko issued promissory notes to that effect. When Sandiko failed to comply with the obligation, the corporation filed a recovery suit. The lower court held that the contract is void since it was entered into with a corporation that has no corporate existence at the time the properties were transferred to it. Issue: WON Sandiko can be held liable for the mortgage debt? Held: The SC affirmed the decision of the TC. The fact of the matter is Sandiko cannot be held liable for the mortgage debt since there was no valid sale of the property, since at the time when Cagayan supposedly acquired the property, it still had no juridical personality to acquire property. There was no transfer of lots from Tabora to Cagayan since Cagayan was only incorporated five months after the sale. 1.) A corporation should have full and complete organization and existence as an entity before it can enter into any kind of contract or transact any business. A corporation until organized has no being, franchises or faculties nor do those engaged in bringing it into being have no power to bind it by contract, unless so authorized by the charter.

Revised Bagtas Reviewer by Ve and Ocfe 2A 61 2.) The contract entered into was not between Tabora and the corporation instead it was between  Tabora, as owner and Tabora, wife, plus others, as promoters of a corporation, since the corporation was still non-existent. These promoters could not have acted as agents for a projected corporation since that which had no legal existence could have no agent. Although a corporation has no life until organized, it does not mean that under no circumstances may the act of promoters of a corporation be ratified by the corporation if and when subsequently organized. But said doctrine of ratification is not applicable here. 3.) Cagayan could not have and did not acquire the four parcels of land. It follows that it did not possess any reluctant right to dispose of them by sale to Sandiko. It was not even a de facto corporation at the time of transfer so that it does not have the personality to enter into contracts. 4.) Some peculiar circumstances: (a) Tabora formed a corporation by himself, wife and others but subscribed to P45,000 of P48,700 (capital stock subscribed); (b) the lands remained in Tabora’s name despite the sale to the corporation and Sandiko regarded Tabora as the owner; (c) Ventura signed the contract in behalf of Tabora; (d) P/N issued by Sandiko was payable to the corporation to avoid being attached by Tabora’s creditors. Q: Why are we studying Cagayan? A: This case espouses the element of contract law which is the lack of the element of consent; there being one party, the corporation, lacking a juridical personality; the contract was thus declared void. Cagayan and Rizal provides us the doctrine that promoter’s contract must be adopted and ratified by the corporation. If the act of the promoter’s is ratified then that act is binding on the corporation. CLV: The court here dismissed the action against Sandiko on the basis that at the time the properties were sold to the corporation, it had no legal existence, therefore, it could not purchase anything. Having bought nothing when it sold the said properties to Sandiko, it had in fact nothing to sell – therefore there was no valid assumption of loans and neither were there promissory notes supported by valid consideration. Q: What if Sandiko was aware at the time that the contract was entered that the corporation did not exist? What if the corporation invokes the doctrine of the corporation by estoppel so that Sandiko could not raise the defense that at the time the fraud was committed, the corporation has no juridical personality? A: Remember that the doctrine of corporation by estoppel is only applicable if at least one of the parties knew that a corporation existed when in fact it did not. In this case, the doctrine cannot apply because nobody was in the belief that it existed at the time when fraud was being committed. Even Tabora himself  knew from the start that at the time of the transfer, the corporation did not exist.

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

Fact Facts: s: Riza Rizall Ligh Lightt and and Ice Ice Co Co.. Inc. Inc. is a dome domest stic ic corp corpor orat ation ion gran grante ted d by the the Publ Public ic Serv Servic ice e Commission, a certificate of public convenience for the installation, operation and management of an electric light, heat, and power service in Morong, Rizal. PSC required Rizal light to show cause why it should not be penalized for violation of the conditions of its CPC and for failure to comply with directions to raise its service voltage, etc. Rizal failed to comply so the PSC ordered the cancellation and revocation of Rizal’s CPC and forfeiture of its franchise. The order of revocation was set aside when it was known that the company representative failed to appear due to illness.  The municipality of Rizal formally asked the PSC to revoke Rizal’s CPC and forfeiture of its franchise. PSC found that Rizal failed to comply with its directive and violated the conditions of the CPC. PSC ordered the cancellation and revocation of Rizal’s CPC and the forfeiture of its franchise. Later, Morong Electric, having been granted a franchise by the Municipality of Morong, filed with the PSC an application for CPC. It later brought up the issue that Morong Electric had no legal personality because because its certifica certificate te of incorporati incorporation on was issued only on October October 17, 1962, while the applicatio application n was filed on September 10,1962. The motion to dismiss was denied on the ground that Morong Electric is a de facto corporation. Thus, the PSC granted Morong Electric a CPC. Thus, this petition. Held: Decision affirmed.

Under the law, before any CPC may be granted, three requisites must be present: (1) citizen of the Philippines or the US or a corporation, co-partnership, association or joint-stock co. constituted and organized under the laws of the Philippines, 60% at least of the stock or paid up capital of which belongs entirely to citizens of the Philippines or the US; (2) financially capable of undertaking the service; (3) prove that the operation of the public service proposed will promote public interest. Petitioner contend that until a corporation has come into being, by the issuance of a certificate of  incorporation by the SEC, it cannot enter into any contract as a corporation and that its application was null and void for being done prior to said issuance. Its contention that Morong Electric, at the moment of application and grant of franchise did not yet have a legal personality is correct. The legal existence of Morong Electric began upon issuance of the certificate of incorporation before said time, the incorporators cannot be considered as de facto corporation. But the fact fact that that Morong Morong Electri Electric c at the moment moment of the applica applicatio tion n and grant of franch franchise ise was grante granted d does does not render render the franch franchise ise invali invalid d becaus because e Morong Morong later later obtain obtained ed its certif certifica icate te of  incorporation and accepted the franchise in accordance with the terms and conditions thereof. While a franch franchise ise cannot cannot take take effec effectt until until the grante grantee e corpor corporati ation on is organi organized zed,, the franch franchise ise,, may, may, nevertheless be applied for before the company is fully organized.  The incorporation of Morong and its acceptance of the franchise as shown by its action in prosecuting the application filed with the PSC for the approval of said franchise, not only perfected a contract between the Municipality of Morong and Morong Electric. CLV: The theory used here by the SC to validate the contract is the continuing offer theory. A grant of  the franchise according to the SC, prior to the time that the corporation actually existed is like a conditional grant that will be effective upon the corporation’s becoming a legal entity. Prior to that, it is merely a continuing offer (on the part of the government). CARAM Jr. v CA Facts: Baretto and Garcia contracted the services services of plaintiff plaintiff Arellano to prepare a project study for the organization organization of Filipinas Filipinas Orient Airways. Airways. For failure failure to pay such services services,, Arellano Arellano sued the corporation, Baretto and Garcia and petitioner Fermin and Rosa Caram as stockholders. They were held solidarily liable with their co-defendants. Hence, this petition. Peitioner Canson claims that said decision finds no support because they were mere investors in the corporation later created. They should not be held solidarily liable with the corporation, who has a separate juridical personality. Held: Petition granted.  The services were acquired by virtue of the request of Baretto and Garcia so that a report can be represented to financiers. Petitioners are not really involved in the initial steps that finally led to the incorporat incorporation ion of Filipina Filipinas s Orient Orient Airways Airways which which were being directed directed by Baretto. Baretto. Petitione Petitioners rs were merely among the financiers whose interest was to be invited and who were persuaded to invest in the airline.  There was no showing that Filipinas was a fictitious corporation and did not have a separate juridical personality to justify making the petitioner, as principal stockholders, responsible for its obligations. As a bona fide corporation, Filipinas should alone be liable for its corporate acts as duly authorized by its officers and directors. Thus, petitioner could not have been personally liable for the compensation claimed by Arellano. CLV: The case tried to distinguish participation of a promoter from that of a promotee, in a venture that actually becomes a corporation late on. Not every person, who participates in a venture that will later become a corporation is a promoter. Q: How do you distinguish a participation of a promoter from that of a promotee who acts together to form a corporation? A: The promotees are merely passive investors. A plan is given to them and if they like it, they invest. Promoters are the active participants. They found and they organize the corporation. According to Caram only the promoters should be liable. The SC held that a mere promotee (those who merely subscribe to the shares of stock) should not be held liable for a promoter’s

Revised Bagtas Reviewer by Ve and Ocfe 2A 63 contract (just as an ordinary stockholder after a corporation has already been incorporated cannot be held liable for more that beyond his investment). CLV: Remember that once a corporation is formed, it usually follows that all promoter’s contracts get ratified because the corporation actually arises out of these contracts. The corporation usually has no choice. It rarely rejects the contracts for such would be commercial suicide. Once the corporation is formed, the promoter’s contract of the corporation (if the latter accepts) and not the promoter’s. This is why the promoter, once the corporation accepts, escapes liability. Remember Remember that a promoter in a promoter’s contract signs not in his own name but always for and in behalf of the corporation. Q: What are the three theories in pre-incorporation contracts?  Theory #1 – Therefore, since a promoter’s contract is really the promoter’s own, the only reason why the corporation, once it is organized becomes liable is when the corporation adopts it as its own. The promoter’s promoter’s real contract contract theory theory is one of the three theories theories by which which to validate validate a contract contract prior to incorporation.  Theory #2 – The 2nd theory as adopted by Jurisprudence is what is termed as a continuing offer. The continuing offer that exists as to the time of the issuance of the certificate of incorporation. And if it is accepted, then the offer means the acceptance, and there arises a contract.  Theory  Theory #3 – Once the promoter promoter enters enters into a contract contract for and in behalf behalf of a non-exist non-existent ent principal, principal, the promoter becomes personally liable like an agent who acts without authority from the principal.  The contract entered into then is valid unless the agent acted without authority. But it is possible for the contract to be adopted by the principal by accepting it. In all three instances, there is deemed to be a valid contract of a valid offer. That is the basis of the promoter’s contract – so that the people will be willing to risk without much fear, investing their money into a venture prior to the incorporation of a company or a corporation. Q: Promoter v. Agent A: The promoters are not the corporation itself, and although they may be regarded, for certain purposes as sustaining to the corporation a relationship similar to that of an agent, strictly speaking they cannot be regarded as such, there being at that time no existing principal. Q: Promoter v. Trustee A: A promoter is also sometimes likened to a trustee. But a trustee is supposed to be entirely disinterested, while while persons engaged in promotion expect to receive and seek to obtain a liberal award or profit for their initiative. 3. De Facto Corporation (Sec. 20) 

Sec. 20 De Facto Corporations – The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.

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Every corporation is deemed de jure until proven otherwise.

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De Jure Corporation – formed in accordance with law; perfectly incorporated; consequences: separate juridical personality and perfect liability.

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De Facto Corporation – formed also in accordance with law but falls short of the requirements provided by law. Such is awarded a separate juridical personality, it may thus enter into contracts, it may sue and be sued (note: third parties may sue the corporation, incorporators may sue but the corporation cannot sue). Note also that such has imperfect liability à only the actors will be held liable. In proceeding against such, compliance with due process must be had.

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 The doctrine of de facto corporation applies as to the first level relationship (as between the State and corporation corporations) s) and also to the third level of relations relationship hip (as between between third persons and corporations). If it primarily concerns the first level, why does it draw its vitality from the third level? Because without such, transactions shall have no effect but with such, despite the defects, the contracts are valid and enforceable. But because of its primary relation to the first level, third persons cannot question the legal personality of such de facto corporation.

Only the State through a quo warranto proceeding may do such. 

Not all corporations which lack elements are de facto corporations.

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Elements for Existence of De Facto Corporation:

1) Valid Valid law under under which which it is incorpo incorporated rated:: The Corporation Corporation Code Code 2) Attempt Attempt in good faith to incorporate incorporate – colorable colorable complian compliance: ce: The corporation corporation must must have filed its Articl Articles es of Incorp Incorpora oration tion and the SEC SEC duly duly issued issued a Ce Certi rtific ficate ate of Incorp Incorpora oratio tion. n. The minimum requirement for this requisite is the issuance of a certificate such that even if you honestly believed that you incorporated (and all the other requisites are present), it is still not a de facto corporation. 

 The above is need to prove reliance in good faith.

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If any of the above element is absent can the principle be invoked by third persons? No, but they may have a remedy remedy under under the principle principle of corporatio corporation n by estoppel. estoppel. Can such be used in all instances? No, when both parties knew that no corporation existed, such may not be invoked.

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Issuance of certificate of incorporation – minimum requirement under this number.

3) Assumption of corporate powers: powers: Minimum requirement: election of the Board of Directors. Q: Why must there be an election of the BoD? A: The basic principle is a de facto corporation is a mutual going about of the transaction in good faith. Since the corporation has a juridical personality, the only way by which it can be said that there was good faith in entering a transaction is that there must be a BoD by which a corporation can act. If there is no BoD there is no good faith on the part of the corporation because it knows that it can only act through the BoD not on the part of the parties dealing with the corporation because it knows that there must be BoD for the corporation to bind itself. This is also important because this is by which the corporation manifests itself. (Remember: (Remember: notion of a ghost – A ghost manifest itself through signs, in the same manner, a corporation manifests its existence through the existence of the BoD). (a) Elements:  Arnold Hall v. Piccio , 86 Phil. 634 (1950).

ARNOLD HALL v. PICCIO Facts: Petitioner Arnold Hall and Bradley Hall and respondent Fred Brown, Emma Brown, Hipolita Chapman and Ceferino Abella signed and acknowledged the Articles of Incorporation of the Far Eastern Lumber and Commercial Co., Inc. a general lumber business. 23,428 shares of stock were subscribed and fully paid for and certain properties were transferred to the corporation.  The Articles of Incorporation were filed with the SEC for the issuance of the corresponding certificates of incorporation. The corporation proceeded to do business. Pending the issuance of the certificates by SEC, the respondents Brown et. al. filed before the CFI of  Leyte a civil case entitled “Fred Brown v. Arnold Hall” alleging among others, that the Far Eastern Lumber and Commercial Co. was an unregistered partnership; that they wish to have it dissolved because of a bitter dissension among the members, mismanagement and fraud by the managers and heavy financial losses. Hall, et. al. filed a motion to dismiss alleging the lack of jurisdiction by the court. Judge Piccio ordered the dissolution of the company. Held: The SEC had not issued the corresponding certificate of incorporation. All of them know or ought to know that the personality of a corporation begins to exist only from the moment such certificate is issued, not before. Here, the complaining associate have not represented to the others that they were incorporated any more than the defendant had made similar representations. Since nobody was led to believe anything to his prejudice and damage, the principle of estoppel does not apply.  The section on de facto corporations does not apply in this case: (1) First, Far Eastern Lumber, even its stockholders, may not probably claim in “good faith” to be a corporation not having obtained the certificate of incorporation. Thus the immunity of collateral attack granted to corporations claiming in

Revised Bagtas Reviewer by Ve and Ocfe 2A 65 good faith to be a corporation does not apply here. (2) Second, this suit is not one in which the corporation is a party. This is a litigation between stockholders of the alleged corporation for the purpose of obtaining its dissolution. Even the existence existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without intervention intervention of the State. CLV: The de facto doctrine was formulated to safeguard the security of commercial transactions whenever they involve the corporation. Parties dealing with said corporation are secured by the fact that the transactions entered into with said corporations may be sued upon and they can recover.  That is why aside from the other two requisites there must be a set of officers (i.e. assumption of  corporate powers) or directors because of the principle that a corporation can only act through its officers. 

Effect as to both parties: (1) cannot deny its existence (2) liable as general partners.

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Not applicable to intra-corporate disputes, why? (1) it is a third level doctrine (2) public is not expected to know, while the above are expected to know.

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If the other party knows of the non-existence of the corporation

à

there is no estoppel.

3. Corporation by Estoppel (Sec. 21; Salvatierra v. Garlitos , 103 Phil. 757 [1958] ;  Albert v. University Publishing Co. , 13 SCRA 84 [1965];  Asia Banking Corp. v. Standard Products , 46 Phil. 145 [1924]; Madrigal Shipping Co., v. Ogilvie , 55 O.G. No. 35, p. 7331) 

Sec. 21 Corporation by estoppel – All persons who assume to act as a corporation knowing it to be without authority to do shall be liable as general partners for all debts, liabilities and damages incurr incurred ed or arisi arising ng as a result result thereof: thereof: Provid Provided, ed, howeve however, r, that that when when any such such ostens ostensibl ible e corporation is sued on any transaction entered by it as a corporation or any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.

SALVATIERRA v. GARLITOS

Facts: Salvatierra owned a parcel of land in Leyte. She entered into a contract of lease with Philippine Fibers Fibers Producers Producers Co., Inc. allegedly allegedly a corporation corporation duly organized organized and existing existing under the Philippi Philippine ne laws, as represented by its President Refuerzo. Refuerzo. The land will be leased for ten years and the lessor lessor would be entitled to 30% of the net income accruing from the harvest of any crop.  The alleged corporation did not comply with said obligation. Salvatierra filed with the CFI a complaint against against PFPC for accounting accounting,, rescissio rescission n and damages. damages. The corporation corporation defaulted defaulted and the court rendered judgment in favor of Salvatierra. The court issued a writ of execution and the three parcels of land under the name of Refuerzo were attached because no property of PFPC was found available. Refuerzo filed a motion claiming that the decision was null and void since there was no allegation of  his personal liability. The court granted the motion and released his land from attachment. Hence, this petition by Salvatierra. Held: Held: The failur failure e of Salvat Salvatier ierra ra to specif specify y Refuer Refuerzo’ zo’s s person personal al liabi liabilit lity y was due due to the fact fact that that Salvatierra was under the impression that PFPC, represented by Refuerzo was a duly registered corporation, but subsequently, inquiry with the SEC yielded otherwise. While as a general rule, a person who has contracted or dealt with an association in such a way as to recognize its existence as a corporate body is estopped from denying the same in an action arising out of such transaction or dealing. Yet, this doctrine is inapplicable where fraud takes a part in said transaction. Here Refuerzo gave no confirmation of denial as to PFPC’s juridical personality and Salvatierra was made to believe that the corporation was duly organized.  The grant of separate juridical personality to corporations refer merely to registered corporations and cannot be made applicable to the liability of members of an unincorporated association. Since an orga organi niza zati tion on whic which, h, befo before re the the law, law, is nonnon-ex exis iste tent nt and and has has no pers person onal alit ity y and and wo woul uld d be incompetent to act and appropriate for itself the power and attributes of a corporation, it cannot create agents or confer authority on another to ct in its behalf, thus, those who act or purport to act as its representatives or agents do so without authority and at their own risk. A person acting or purporting to act in behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other

acts performed as such agent. Here, Refuerzo as president of the unregistered corporation was the spirit behind the consummation of the lease contract, thus, his liability cannot be limited or restricted to that imposed upon corporate SH’s. In acting on behalf of a corporation, which he knew to be unregistered, he assumes the risk of  reaping the consequential damages or resultant rights, if any arising from the transaction.

ALBERT v. UNIVERSITY PUBLISHING CO.

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

(a) Nature of Doctrine

Founded on principles of equity and designed to prevent injustice and unfairness, the doctri doctrine ne applie applies s when when person persons s assume assume to form form a corpor corporati ation on and exerc exercise ise corpor corporate ate

Revised Bagtas Reviewer by Ve and Ocfe 2A 67 functions and enter into into business relations relations with third persons. Where no third person is involv involved ed in the confli conflict, ct, there there is no corpor corporati ation on by estopp estoppel. el. A failed failed consol consolida idatio tion n Lozano v. De Los therefore therefore cannot result result in a consolida consolidated ted corporation corporation by estoppel estoppel.. Lozano Santos , 274 SCRA 452 (1997) A part party y cann cannot ot chal challe leng nge e the the pers person onal alit ity y of the the plai plaint ntif ifff as a duly duly orga organi nize zed d corporation after having acknowledged same when entering into the contract with the plaintiff as such corporation for the transportation of its merchandise. Ohta Dev. Co. v. Steamship Pompey, 49 Phil. 117 (1926). 4 A person person who accepts employment employment in an unincorpo unincorporated rated charitable charitable associati association on is estopped from alleging its lack of juridical personality. Christian Children’s Fund v. NLRC, 174 SCRA 681 (1989). One who deals with an organization which is not duly incorporated is not estopped to deny its corporate existence when his purpose is not to avoid liability. Int’l Express Travel v. Court of Appeals, 343 SCRA 674 (2000). INTERNATIONAL EXPRESS TRAVEL v. CA Facts: Philippine Football Federation got tickets from petitioner travel agency for the SEA games and trips to China and Brisbane. Two partial payments were made. Petitioners wrote to Kahn (president of the federation federation)) demanding demanding the completio completion n of the payment. payment. Federation, Federation, through through Project Project Gintong Gintong Alay paid the amount of P 31,000. Then Kahn issued a personal check for P 50,000. After that, no further payments were made. Petitioner then sued Kahn in his personal capacity and as president of the federation for the unpaid balance for the purchased tickets as Kahn allegedly guaranteed the said obligation. Kahn maintained that he did not guarantee the payment but merely acted as an agent of the Federation which has a separate and distinct juridical personality. RTC: Kahn is personally liable because neither the travel agency nor Kahn adduce any evidence proving the corporate existence of the federation. Being the president, its corporate existence is within the knowledge of Kahn and could have easily denied specifically the assertions of petitioner that it is a mere sports association association.. Voluntary Voluntary unincorporated unincorporated association associations s have no power to enter enter into, or to ratify, a contract. The contract entered into by its officers or agents in behalf of the associ associati ation on is not bindin binding g or enforc enforceab eable le agains againstt it. Agents Agents and office officers rs person personall ally y liable liable.. CA: reversed. Held: RA 3135 and PD 604 recognized the juridical existence of national sports associations. The power to adopt a constitution, raise funds, acquire property, etc. indicate that the associations may acquire juridical personality. However, such does not automatically take place by the passage of the laws. Before a corporation may acquire juridical personality, the state must give its consent either in the form of a special law or a general enabling act. Nowhere can it be found in the 2 above mentioned laws any provision creating the Philippine Football Federation. Before an entity may be considered as a national sports association, such entity must be recognized by the accrediting organizations – Philippine Amateur Athletic Federation (RA 3135) and Dept. of   Youth and Sports Development (PD 604). Although a copy of the constitution of the federation was presented in court, thye same does not prove that it had been recognized. Therefore, the federation is not a nation national al sport sports s associ associati ation on within within the purvie purview w of the laws laws and that Kahn Kahn is person personall ally y responsible for the obligation. Under the law on estoppel including that under Sec. 21 of Corporation Code, those acting on behalf of an ostensible corporation and those benefited benefited by it, knowing knowing it to be without valid existence, are held liable liable as general general partners. partners. Lim Tong Lim v. Philippine Fishing Gear Industries, Inc. , 317 SCRA 728 (1999).

LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES 4The same principle applied in Compania Agricole de Ultramar v. Reyes , 4 Phil. 1 [1911] but that case pertained to a commercial partnership which required registration in the registry under the terms of the Code of  Commerce).

Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. entered into a contract with Phil. Fishing Gear Industries Inc. for the purchase of fishing nets and floats. They claimed that they were a fishing venture with Lim Tong Lim who was however not a signatory to the contract. They failed to pay and so PFGI filed a collection case with a prayed for a writ of preliminary attachment.  The case was filed against Chua, Yao and Lim because it was found that Ocean Quest was a nonexistent corporation as shown by the certification from SEC. Chua admitted liability and Yao waived his right to crosscross-ex exami amine ne and presen presentt eviden evidence ce becaus because e he failed failed to appear appear while while Lim filed a counterclaim and a cross-claim. Court granted the writ of attachment and ordered the Auction Sale of the F/B Lourdes which was previously attached. Trial court ruled that PFGI was entitled to the Writ and Chua, Yao and Lim were jointly liable as general partners. Held: 4.) 4.) Lim Lim wa was s cont contes esti ting ng that that the the CA rule ruled d that that ther there e wa was s a part partne ners rshi hip p in the the Co Comp mpro romi mise se Agreement and alleges that he had no direct participation in the negotiations and was merely leasing F/B Lourdes to Chua and Yao à Facts found by the TC and CA showed that there was a partnership formed by the three of them. They initially purchased two boats through a loan from Lim’s brother and as security, was placed in the name of Lim Tong Lim. The repairs and supplies were shouldered shouldered by Chua and Yao. A civil case was filed by Chua and Yao against Lim for nullity of commercial documents, reformation of contracts and declaration of ownership of  fishing boats…which was settled amicably. In the Compromise Agreement, it was revealed that they intended to pay the loan from Jesus Lim by selling the boats and to divide among them the excess or loss. Therefore it was clear that a partnership existed which was not solely based on the agreement. It was merely an embodiment of the relationship among parties. 5.) Lim alleges alleges that he was merely a LESSOR by showing showing the Contract of Lease and registratio registration n papers of the boats, including F/B Lourdes where the nets were found à As found by the lower courts, the boats were registered to Lim only as security for the loan that was granted to the partnership by the brother of Lim, which was not an uncommon practice. Aside from the fact that it was absurd for Lim to sell the boats to pay the debt he did not incur, if needed he was merely leasing the boats to Chua and Yao. 6.) Lim contests contests his liability liability by saying saying that only those who dealt in the name of the ostensible ostensible corporation should be held liable. His name was not in any of the contracts and never dealt with PFGI à Sec. 21 – All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurr incurred ed or arisin arising g as a result result thereo thereof; f; Provid Provided ed howeve howeverr that that when when any such such ostens ostensibl ible e corporation corporation is sued, on any transaction transaction entered by it as a corporation corporation or ant tort committed committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. Even if the ostensible corporate entity is proven to be non-existent, a party may be estopped from denying its corporate existence because an unincorporated association has no personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as provided by law. It cannot create agents or confer authority on another to act on its behalf. Thus, those who act or purport to act as its representatives do so without authority and at their own risk. Clearly, Lim benefited from the use of the nets found inside F/B Lourdes which was proved to be an asset of the partnership. He in fact questioned the atta attach chme ment nt beca becaus use e it has has effe effect ctiv ivel ely y inte interf rfer ered ed with with the the use use of the the vess vessel el.. Thou Though gh technically, he did not directly act on behalf of the corporation, however, by reaping the benefits of the contract entered into by persons he previously had an existing relationship with, he is deemed part of said association and is covered by the doctrine of corporation by estoppel. CLV: Pioneer case à actors who knew of corporation’s non-existence are liable as general partners while actors who did not know are liable as limited partners, passive investors are not liable; Lim teaches us that even passive investors should be held liable provided they benefited from such transactions.

(b) Two Levels: (i) With “Fraud;” and (ii) Without “Fraud”

Revised Bagtas Reviewer by Ve and Ocfe 2A 69 When the incorporators represent themselves to be officers of the corporation which was never never duly duly regist registere ered d with with the SEC, and engage engage in the name of the purport purported ed corporation in illegal recruitment, they are estopped from claiming that they are not liable as corporate officers under Sec. 25 of Corporation Code which provides that all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all the debts, liabilities and damages incurred or arising as a result thereof. People v. Garcia , 271 SCRA 621 (1997); People v. Pineda , G.R. No. 117010, 18 April 1997 (unpub). 4. TRUST FUND DOCTRINE

See VILLANUEVA, "The Trust Fund Doctrine Under Philippine Corporate Setting ," 31 A TENEO L.J. (No. 1, Feb. 1987).  The capital stock of the corporation especially its unpaid subscriptions is a trust fund for the benefit of the general creditors of the corporation. a) Commercial/Common Law Premise: Equity versus Debts (Art. 2236, Civil Code) 

Art. 2236 The debtor is liable with all his property, present and future, for the fulfillment of  his obligations, subject to the exceptions provided by law.

b) Nature of Doctrine: Ong Yong v. Tiu , 401 SCRA 1 (2003).

ONG YONG v. TIU Facts: Facts: In 1994, 1994, the construc constructio tion n of the Masagana Masagana Citima Citimall ll in Pasay Pasay City City by First First Landli Landlink nk Asia Asia Development Corporation (FLADC) owned by the Tiu family was threatened by the foreclosure by the PNB for their P 190 M debt. In order to stave off the threat the Tiu family together with the Ong family agreed to restructure FLADC and created a pre-subscription agreement and each were to maintain equal shareholdings. The Ong family invested a total sum of P 190 M to the corporation while the Tiu family included several real estate properties as added capital for the restructured corporation. The Ong and Tiu families now owned 1,000,000 shares each of FLADC. After all the debts were paid, the peace between Ong and Tiu did not last. Tiu claimed rescission based on substantial breach by Ong upon the pre-subscription agreement. Ong, on the other hand maintained that it was Tiu who committed the breach because one of the properties that they were supposed to include in the agreement was in fact already in the real estate owned by FLADC. The SEC approved the resciss rescission ion (both (both partie parties s we were re return return to status status quo, P 190 M to the Ong family family and all the remaining FLADC assets to the Tiu family, which included the now finished mall valued at more than P 1B) and the CA affirmed the decision with slight modifications. Held: 1.) Is rescission rescission the proper proper remedy for an intra-corp intra-corporate orate dispute dispute à No, the Corporation Corporation Code, SEC rules and even the Rules of Court provide for appropriate and adequate intra-corporate remedies, other than rescission, in situations like this. Rescission is certainly not one of them, specially if the party asking for it has no legal personality to do so (because it is a corporation,  Tiu family is not the corporation) and the requirements of the law therefore have not been met. A contrary doctrine will tread on extremely dangerous ground because it will allow just any stockholder, for just about any real or imagined offense, to demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without complying with the requirements of the Corp. Code. 2.) Granting Granting rescission rescission is a proper remedy, remedy, does it violate violate the TFD à Yes it will violate the TFD and the procedures for valid distribution of assets and property under the Corp. Code. The  TFD provides that subscription to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims. The doctrine is the underlying principle in the procedure for the distribution of capital assets, in the Corp. Code which allows the distribution of corporate capital only in three instances: (1) amendments of  the Articles of Incorporation to reduce the authorized capital stock (requires Board Resolution and and stoc stockh khol olde ders rs’s ’s me meet etin ing) g) (2) (2) purc purcha hase se of rede redeem emab able le shar shares es by the the corp corpora orati tion on,, regardless of the existence of unrestricted retained earnings and (3) dissolution and eventual liquidati liquidation on of the corporation. corporation. In the instant case, the rescission rescission of the pre-subscript pre-subscription ion

agreement will effectively result in the unauthorized distribution of the capital assets and property of the corporation, thereby violation the TFD and the Corp. Code, since the rescission of a subscription agreement is not one of the instances when distribution of capital assets and property of the corporation is allowed.

Under the trust fund doctrine, the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Comm. of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).  The “trust fund” doctrine considers the subscribed capital stock as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital stock may be turned over or released to the stockholder (except in the redemption of the redeemable shares) without violating this principle. Thus dividends must never impair the subscribed capital stock; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the consideration therefore. NTC v. Court of Appeals, 311 SCRA 508 (1999).  The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the capital stock, property and other assets of a corporation are regarded as equtiy in trust for the payment of corporate creditors. The reason reason is that that credit creditors ors of a corpor corporati ation on are prefer preferred red over the stockhol stockholder ders s in the distri distribu butio tion n of corpor corporate ate assets assets.. There There can be no distri distribut bution ion of assets assets amo among ng the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void. Boman Environmental Dev. Corp. v. CA, 167 SCRA 540 (1988). c) To Pur Purch chas ase e Own Own Shar Shares es (Secs. 8, 41, 43 and 122, last paragraph; Phil. Trust Co. v. Rivera , 44 Phil. 469 [1923]; Steinberg v. Velasco , 52 Phil. 953 [1929]) 

Sec. 8 Redeemable Shares – Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of  unrestricted retained earnings in the books of the corporation, and upon such terms and condition conditions s as may be stated stated in the articles articles of incorporat incorporation, ion, which terms and conditions conditions must also be stated in the certificate of stock representing said shares.

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Sec. Sec. 41 Pow Power er to acquir acquire e own shares shares – A stock stock corpor corporati ation on shall shall have have the power power to purch purchase ase or acquir acquire e its own shares shares for a legit legitima imate te corpor corporate ate purpos purpose e or purpos purposes, es, includ including ing but not limit limited ed to the follow following ing cases: cases: Provid Provided, ed, that that the corpor corporati ation on has unres unrestri tricte cted d retain retained ed earnin earnings gs in its books to cover cover the shares shares to be purcha purchased sed or acquired: (1) to eliminate fractional shares arising out of stock dividends; (2) to collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shared sold during said sale; and 3) to pay dissenting or withdrawing stockholders entitled to the payment for their shares under the provisions of this Code.

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Sec. 43 Power to declare dividends – The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stocks shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Prov Provid ided ed furt furthe her, r, That That no stoc stock k divi divide dend nd shal shalll be issu issued ed with withou outt the the appr approv oval al of  stockholders representing not less than two-thirds of the outstanding capital stock at a regular or special meeting duly called for that purpose. Stock corporations are prohibited from retaining surplus profits in excess of one hundred

Revised Bagtas Reviewer by Ve and Ocfe 2A 71 (100%) (100%) per cent cent of their their paid-i paid-in n capita capitall stock, stock, excep except: t: (1) when when justif justified ied by defini definite te corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without his/her consent and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. 

Sec. 122 Corporate Liquidation Liquidation – Every Every corporation corporation whose charter charter expires expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close it affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of  its property in trust for the benefit of its stockholders, members, creditors and others in intere interest, st, all intere interest st which which the corpor corporati ation on had in the proper property ty termin terminate ates, s, the legal legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon Upon the windin winding g up of corpor corporate ate affair affairs, s, any asset asset distri distribut butabl able e to any credit creditor or or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall shall distribut distribute e any of its assets or property property except upon lawful lawful dissolution dissolution and after payment of all its debts and liabilities.

(d) Rescission of Subscription Agreement Based on Breach

  The The violat violation ion of terms terms embodi embodied ed in a subsc subscrip riptio tion n agreem agreement ent,, with with are person personal al commitments, do not constitute legal ground to rescind the subscription agreement since such would violate the Trust Fund Doctrine and the procedures for the valid distribut distribution ion of assets assets and property under the Corporation Corporation Code. “In the instant case, the the resc rescis issi sion on of the the PrePre-Su Subs bscr crip ipti tion on Agre Agreem emen entt will will effe effect ctiv ivel ely y resu result lt in the the unauthorized distribution of the capital assets and property of the corporation, thereby violating violating the Trust Fund Doctrine and the Corporation Corporation Code, since the rescission rescission of a subscription agreement is not one of the instances when distribution of capital assets and property of the corporation is allowed.” Ong Yong v. Tiu , 401 SCRA 1 (2003). (e) Distribution of Corporate Assets

“The distribution distribution of corporate corporate assets and property cannot be made to depend depend on the whims and caprices of the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire of the court a quo ‘to prevent further squabbles and future litigations’ unless the indispensable conditions and procedures for the protection of  the corporate creditors are followed. Otherwise, the ‘corporate peace’ laudably hoped for by the court will remain nothing but a dream because this time, it will be the creditors’ turn turn to enga engage ge in ‘squ ‘squab abbl bles es and and liti litiga gati tion ons’ s’ shou should ld the the cour courtt order order an unla unlawf wful ul distribution in blatant disregard of the Tr ust Fund Doctrine.” Ong Yong v. Tiu , 401 SCRA 1 (2003). 

  The The trust trust fund fund doctri doctrine ne applie applies s in the followin following g cases: cases: (1) where the corporat corporation ion has distributed its capital among the stockholders without providing for the payment of creditors (2) where it had released subscribers to capital stock from their subscription receivables (3) where where it had transf transferr erred ed corpor corporate ate property property in fraud fraud of its creditor creditors s and (4) where where the corporation is insolvent.

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Statutory references: (1) Sec. 122 of the Corp. Code governing dissolution of corporations and

their liquidation when it provides that “except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.” (2) SEC Rules governing Redeemable and Treasury Shares expressly adopts the doctrine as follows, “the outstanding capital stock of a corporation, including unpaid subscriptions, shall constitute a trust fund for the benefit of its creditors which shall not be returned to the stockholders by repurchase of  shares or otherwise, except in the manner as provided for under the Corporation Code and this rules. 

Coverage of Trust Fund Doctrine – adopted the two precursors of the trust fund doctrine which is the a.) capital impairment rule and the b.) profit rule. A fixed capital must be preserved for protecting the claims of creditors so that dividend distributions to stockholders should be limited to profits earned or accumulated by the corporation. In a solvent corporation, the trust fund doctrine encompasses only the capital stock. 1.) Coverage of capital stocks – covers “capital stock;” the protection by the doctrine upon corporation not in a state of insolvency but only up to the extent of the “capital stock” of the corporation. 2.) Retained earnings – although part of the stockholder’s equity, do not constitute part of the “capital stock.” It is not covered by the doctrine. The corporation is at liberty to declare and pay out dividends from its assets. 3.) Outstanding capital stock – total shares of stock issued to subscribers or stockholders whether or not fully or partially paid (as long as there is a binding subscription agreement) except treasury shares (Sec. 137 ).

4.) Par value stock – capital stock represent represented ed by aggregate par value of all shares issued and subs subscr crib ibed ed.. If par par valu value e shar shares es are are sold sold at prem premiu ium, m, exce excess ss is not not trea treate ted d as lega legall capital/capital stock but can be declared as stock dividends. This stock dividends fall within the ambit of the Trust Fund doctrine. 5.) No par value stock – legal capital capital = total consideration consideration received for the shares of stock. Entire consideration for no par value stock treated as capital and not available for distribution as dividends. Funds received by a corporation – to cover subscription payment on increase in authorized capital stock prior to approval thereof of the SEC would not be covered by the TFD. As a TF, this money is still withdrawable by any of the subscribers at any time before issuance of the corresponding shares of stock, unless there is a pre-subscription to the contrary.

VII. ARTICLES OF INCORPORATION

See relevant portions of  VILLANUEVA, Corporate Contract Law, 38 A TENEO L.J. 1 (No. 2,  June 1994).  The article of incorporation is: 1.) A CONTRACT – an agreement that that gives rise rise to obligations: obligations: a.) Betwe Between en the corpor corporati ation on and the state (becaus (because e it is under under the AI by which which the state grants the primary franchise.) à state manifests its consent through the SEC while the corporation manifests its consent by the filing of the AI, through the incorporators and eventually through the Board of Directors. b.) Between Between the state state and stockhol stockholders ders c.) Betwe Between en the corporat corporation ion and stockhol stockholder ders s

à

the stockhold stockholders ers manifest manifest their their

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consent through their subscription of stocks and through voting à as against the corporation, the stockholders do not have individual standing but only standing as a group. d.) Among stockhold stockholders ers

à

in this situation they now have individual standing.

e.) Between Between the stockhol stockholders ders and the Board Board of Directors Directors f.) Between the the corporation and the public (since (since the AI is a public document.) 2.) A PUBLIC DOCUMENT – because it is registered with the SEC. Such works works with the doctrine doctrine of public notice that when the public deals with the corporation, the contents of AI binds them whether they in fact have seen the AI or not. When a person enters into a contract or any transaction with a corporation whether or not he has checked with the SEC the terms and conditions of the AI, he will be bound by it. He cannot claim ignorance of the charter of the corporation. 1. Nature of Charter:  The charter is in the nature of a contract between the corporation and the government. Government of P.I. v. Manila Railroad Co ., 52 Phil. 699 (1929).

GOVERNMENT OF P.I. v. MANILA RAILROAD CO. Facts: The GPI filed a petition for mandamus in the SC to compel the Manila Railroad and Jose Paez, its manager to provide and equip the telegraph poles of the company in Tarlac and La Union with crosspieces for 6 telegraph wires belonging to the government which, it alleged, are necessary for public service between certain municipalities. municipalities. Petitioner relies on Sec. 84 of Act No. 1459 which provides that the railroad company shall establish a telegraph line for the use of the railro railroad ad and that that such such posts posts may be used used for governm government ent wires wires and shall be suffic sufficien ientt for crosspieces to carry the number of wires which the government may consider necessary for public service. Petitioner contends that since 6 crosspieces are now necessary for public service, the company company should should provide provide sufficie sufficient nt crosspiec crosspieces. es. Responden Respondentt answers answers by saying saying that the Charter of Manila Railroad (Act No. 1510) repealed Sec. 84 of Act 1459 and contended that the Government is entitled to only 4 wires. Held: Held: Petit Petition ion denied. denied. Inasmuch Inasmuch as Act Act No. 1510 is the charte charterr of the Manila Manila Rai Railro lroad ad Co. constitu constitutes tes a contract contract between the corporation corporation and the government, government, it would would seem that the corporation corporation is governed governed by its contract contract and not by the provisions provisions of the general law. But from a reading of the charter it will be seen that there is no indication that the government intended to impose upon said company any other conditions or obligations not expressly found in the said contract or charter. Section 84 of the Corp. Law was intended to apply to all railways in the Philippines which did not have a special charter or contract. Act No. 1510 applies only to Manila Railroad and being a special charter, its adoption had the effect of superseding the provisions of  the corporation law which are applicable to railroads in general.  The charter of a corporation is a contract between three parties: (1) it is a contract between the state and the corporation to which the charter is granted (2) it is a contract between stockholders and the state (3) it is a contract between the corporation and its stockholders. A special charter constitutes a contract between the corporation and the government and as such are ar e both equally bound by its provisions. For the State to impose an obligation or a duty upon the respondent corporation corporation,, not expressly expressly provided provided in the charter would amount to a violation violation of said contract. contract.  The provisions of Act 1459 relate to the number of wires which the government may place upon poles of the company are different and more onerous than the provisions of the charter. NOTE: Articles of Incorporation cannot prevail over statutory provisions. Such cannot overcome the law. However in the case of GPI, its special charter overruled the Gen. Law on the ground that the former is both a contract and a law. Thus, its charter as a law creates an amendment to all other laws. In the same manner, if the former were a mere contract then the case would have been decided differently.

2. Procedure and Documentary Requirements

(Sec. 14 and 15)

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Sec. 14 Contents of the Articles of Incorporation – All corporations organized under this code shall file with the SEC articles of incorporation in any of the official languages duly signed and acknowled acknowledged ged by all of the incorporat incorporators, ors, containing containing substantially substantially the following following matters, except as otherwise prescribed by this Code or by special law. 1. The name name of of the the corpor corporati ation; on; 2. The specifi specific c purpose purpose or purposes purposes for which the the corporation corporation is being being incorporat incorporated. ed. Where Where a corporation has more than one stated purpose, the articles of incorporation shall state which which is the primary primary purpos purpose e and which which is/are is/are the second secondary ary purpos purpose e or purpos purposes: es: Provided, that a non-stock corporation may not include a purpose which would change or contradict its nature as such; 3. The place place where where the principa principall office office of the corpor corporati ation on is to be locate located, d, which which must be within the Philippines; Philippines; 4. The term for which which the corporation corporation is to to exist; exist; 5. The names, names, national nationalities ities and and residenc residences es of the incorp incorporator orators; s; 6. The number number of directo directors rs and trustee trustees s which which shall not be less less than five nor more more than fifteen; 7. The names, names, nationaliti nationalities es and residence residences s of persons who shall shall act as directors directors or trustees trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; 8. If it be a stock stock corporation corporation,, the amount amount of its authorized authorized capita capitall stock in lawful lawful money money of  the Philippines, the number of shares to which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; 9. If it be a non-st non-stock ock corporat corporation ion,, the amount amount of its capita capital, l, the names, names, nation nationali alitie ties s and residences of the contributors and the amount contributed by each; and 10. Such other matters matters as are not inconsistent inconsistent with law and which which the incorporat incorporators ors may deem necessary and convenient.

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  The SEC shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five percent (25%) of the authorized capital stock of the corporation has been subscribed and at least twenty-five percent (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twentyfive percent (25%) of said subscription, such paid-up capital being not less than P5,000. Sec. Sec. 15 Forms Forms of Articl Articles es of Incorp Incorpora oratio tion n – Unless Unless otherw otherwis ise e prescr prescribe ibed d by specia speciall law law,, articles articles of incorporat incorporation ion of all domestic domestic corporations corporations shall shall comply comply substanti substantially ally with the following form: …

NOTE: The form goes into the validity and enforceability of the Articles of Incorporation.

I ncorporators (Sec. 10); a)  As to Number and Residency of Incorporators 

Sec. 10 Number and Qualifications of Incorporators – Any number of natural person not less than five but not more than fifteen, all of legal age and a majority of whom are residents of  the Philippines, may form a private corporation for any lawful purpose or purposes. Each of  the incorporators incorporators of a stock corporation corporation must own or be a subcriber subcriber to at least least one share of  the capital stock of the corporation.

NOTE: Incorporators must be warm-blooded individuals for purposes of accountability. They must not be more than fifteen for pragmatic reasons, and they must be less than five because two and four create a deadlock, while three is not as efficient as five. (Institution of the Board of Directors is a clear embodiment of the corporation’s centralized management.) b) Corporate Name (Secs. 18, 14(1) and 42; Red Line Trans. v. Rural Transit , 60 Phil. 549 [1934]).

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Sec. 18 Corporate Name – No corporate name may be allowed by the SEC if the proposed name is identical or deceptively confusing or similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name.

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Sec. 42 Power to invest corporate funds in another corporation or business or for any other purpose – Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any other purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing 2/3 of the outstanding capital stock or at least 2/3 of  the members in case of non-stock corporations, at a stockholders’ or members meeting duly called for the purpose. Written notice of the proposed investment and the time and place of  the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addresse in the post office with postage prepaid, or served personally: Provided: That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corpor corporati ation on is reason reasonabl ably y necess necessary ary to accomp accomplis lish h its primar primary y purpos purpose e as stated stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. Parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by another corporation, whether a business or a nonprofit  misleadin ding g or likel likely y to injure injure the exercise exercise of its corporat corporate e functi functions ons,, organization , if mislea regardless of intent, may be prevented by the corporation having a prior right.  Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus v. Iglesia ng Dios Kay Dristo Jesus , 372 SCRA 171 (2001). Similarity in corporate names between two corporations would cause confusion to the public especially when the purposes stated in their charter are also the same type of  business. Universal Mills Corp. v. Universal Textile Mills Inc. , 78 SCRA 62 (1977). Section 18 of Corporation Code expressly prohibits the use of a corporate name which is “ identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary  to existing laws.”  The policy behind the foregoing prohibition is to avoid fraud upon the public that will occasion to deal with the entity concerned, the evasion of legal obligations and duties duties,, and the reduct reduction ion of diffic difficult ulties ies of admini administr strati ation on and super supervis vision ion over over corporations. Industrial Refractories Corp. v. Court of Appeals , 390 SCRA 252 (2002); Lyceum of the Philippines v. Court of Appeals, 219 SCRA 610, 615 (1993). A corporation corporation has no right to interven intervene e in a suit using a name, not even its acronym, other than its registered name, as the law requires and not another name which it had not Laureano Investment Investment and Dev. Corp. v. Court Court of Appeals Appeals , 272 SCRA 253 registered. Laureano (1997).  There would be no denial of due process when a corporation is sued and judgment is rendered against it under its unregistered trade name, holding that “[a] corporation may be sued under the name by which it makes itself known to its workers.” Pison-Arceo  Agricultural Dev. Corp. v. NLRC, 279 SCRA 312 (1997). A corporation may change its name by the amendment of its articles of incorporation, but the same is not effective until approved by the SEC. Philippine First Insurance Co. v. Hartigan , 34 SCRA 252 (1970). A change in the corporate name does not make a new corporation corporation,, and has no effect on the identity of the corporation, or on its property, rights, or liabilities. Republic Planters Bank v. Court of Appeals , 216 SCRA 738 (1992).

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 The name of a corporation is very important, the incorporators constituting as body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein. Such name is fatal in commercial transactions. The public may only know the corporation through its name.

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  The name of a corporation is (1) essential to its existence (2) it cannot change its name except in the manner provided by the statute (3) by that name alone is it authorized to transact business and (4) it is through its name that a corporation can sue and be sued and perform all other legal acts.

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SEC reserves the right to order a corporation to change name when it appears that there is an identical name.

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Guidelines on Corporate Names: 1.) Name must contain “Corp.” or “Inc.” 2.) 2.) Name Name must must not not tend tend to misl mislea ead d or conf confus use e the the publ public ic and and must must not not cont contai ain n such such descriptive words as “excellent” “fair” “good”, etc. 3.) Name must not be similar to a name already used by another partnership or corporation. 4.) If proposed name contains a word similar to a word already used as a part of the firm name of a registered corporation, proposed name must contain two other words different from the name of the company already registered. 5.) If name or surname used as part of corporate name, the incorporators must have a basis for such surname; it being one of the incorporators: Otherwise, consent of the person whose name is being used must be submitted. 6.) If it contains initials, it must contain an explanation of the meaning and relevance or reason thereof. 7.) The use of the words “State” “Maharlika” and “Baranggay” are prohibited and reserved for the government.  The following words when used must at least relate to the line of business namely: Financing and Invest Investmen ment. t. The follow following ing words words are prohib prohibite ited d from from being being used used namely namely:: Nation National, al, Engineer, Architect. c) Purp Purpos ose e Clau Clause se (Secs. 14(2) and 42; Uy Siuliong v. Director of Commerce and Industry , 40 Phil. 541 [1919])

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Sec. 42 Power to invest corporate funds in another corporation or business or for any other purpose – Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any other purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing 2/3 of the outstanding capital stock or at least 2/3 of  the members in case of non-stock corporations, at a stockholders’ or members meeting duly called for the purpose. Written notice of the proposed investment and the time and place of  the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addresse in the post office with postage prepaid, or served personally: Provided: That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corpor corporati ation on is reason reasonabl ably y necess necessary ary to accomp accomplis lish h its primar primary y purpos purpose e as stated stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. “The best proof of the purpose of a corporation is its articles of incorporation and bylaws. The articles of incorporation must state the primary and secondary purposes of  the corpor corporati ation, on, while while the by-law by-laws s outlin outline e the admini administr strati ative ve organi organizat zation ion of the corporation corporation,, which, which, in turn, is supposed supposed to insure insure or facilitate facilitate the accomplis accomplishmen hmentt of  said purpose.” Therefore, the Court brushed aside the contention that the corporations were were organi organized zed to illega illegally lly avoid the provis provision ions s on land land reform reform and to avoid avoid the payment of estate taxes, as being prohibited collateral attack. Gala v. Ellice AgroIndustrial Corp. , 418 SCRA 431 (2003).

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Significance: It confers as well as limits the powers which a corporation may exercise. Other reasons: (1) prospective investors shall know the kind of business the corporation deals with (2) management shall know the limits of its action (3) a third party can know whether his dealing with the corporation is within the corporate functions and powers (4) also, for the

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Revised Bagtas Reviewer by Ve and Ocfe 2A 77 administrative supervision and monitoring of the State, to determine which particular agency shall have jurisdiction over the operations of the corporation.  The purpose must be lawful, having only one primary purpose and many secondary purposes. d) Corp Corpor orat ate e Term Term (Sec. 11)

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Sec. 11 Corporate Term – A corporation shall exist for a period not exceeding fifty years (50) from the date of incorporation unless sooner dissolved or unless said period is extended. The corpor corporate ate term term as origin originall ally y stated stated in the articl articles es of incorp incorporat oration ion may be extend extended ed for periods not exceeding fifty years (50) in any single instance by an amendment of the articles of incorp incorpora oratio tion n in accord accordanc ance e with with this this Code; Code; Provid Provided, ed, that that no extens extension ion can be made made earlier than five years (5) prior to the original or subsequent expiry dates unless there are  justifiable reasons for an earlier extension as may be determined by the SEC.

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 The purpose of the limit emphasizes the contractual nature of the corporation – the extension must be approved by the State. No extensio extension n of term can be effected effected once dissolution dissolution stage has been reached, reached, as it constitutes new business. Alhambra Cigar v. SEC , 24 SCRA 269 (1968). e) Princ Principal ipal Plac Place e of Busin Business ess (Sec. 51)

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Sec. 51 Place and time of meetings of stockholders or members – Stockholders’ or members’ meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. Notice of meetings shall be in writing, and the time and place thereof stated therein. All proceedi proceedings ngs had and any busine business ss transa transacte cted d at any mee meetin ting g of the stockhol stockholder ders s or member members, s, if withi within n the powers powers or author authority ity of the corporati corporation on shall shall be valid valid even even if the meetin mee ting g be improp improperl erly y held held or called called,, provid provided ed all the stockh stockhold olders ers or member members s of the corporation are present or duly represented at the meeting.

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IMPORTANCE: For jurisdictional purposes. The corporation cannot be allowed to file an action in a place other than that place or in the place of residence of the defendant. Place of residence of the corporation is the place of its principal office. Clavecilla Radio System v. Antillon , 19 SCRA 379 (1967)   The The reside residence nce of its presiden presidentt is not the residenc residence e of the corporat corporation ion becaus because e a corp corpor orat atio ion n has has a pers person onal alit ity y sepa separat rate e and and dist distin inct ct from from that that of its its offi office cers rs and and stockholders. Sy v. Tyson Enterprises, Inc., 119 SCRA 367 (1982). f) Mini Minimu mum m Capi Capita tali liza zati tion on (Sec. 12)

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Sec. 12 Minimum capital stock required of stock corporation – Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherw otherwise ise speci specific ficall ally y provid provided ed for by specia speciall law law,, and subjec subjectt to the provis provision ions s of the following section.

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Sec. 13 Amount of capital stock to be subscribed and paid for the purposes of incorporation – At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of  incorporation must be subscribed at the time of incorporation and at least twenty-five percent (25%) of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of  a fixed date or dates, upon call for payment by the Board of Directors: Provided however, that in no case shall the paid-up capital be less than five thousand pesos (P5,000).

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Q: Doe Does s the Corp. Code Code expres expressly sly provide provide for a minimu minimum m requir requireme ement nt of the author authorize ized d capital stock? A: Under Sec. 12 there is no minimum minimum requirement requirement but the Code says that “in no case shall the paid up capita capitall be less than P5,00 P5,000 0 (Sec. (Sec. 13). 13). Thus Thus it turns out that that P5,000 P5,000 is the minimum.

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Q: Why is the maximum capitalization required to be indicated? A: (1) To protect the stockholders and also it limits the issuance of capital stock and the extent of the voting power or capacity of a stockholder (2) Because of accountability. Whether a corporation is going to do good or bad will depend upon the assets its holds. The only way by which the State can look at the accountability of a corporation in terms of assets it receives is to get a maximum so that if the corporation wants to go beyond that, it has to go back to the State. g) Subscriptio Subscription n and and Paid-up Paid-up Requiremen Requirements ts (Sec. 13)

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Sec. 13 Amount of capital stock to be subscribed and paid for the purposes of incorporation – At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of  incorporation must be subscribed at the time of incorporation and at least twenty-five percent (25%) of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of  a fixed date or dates, upon call for payment by the Board of Directors: Provided however, that in no case shall the paid-up capital be less than five thousand pesos (P5,000).

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Q: What is the 25%-25% rule? A: It means that of the authorized capital stock applied for, 25% thereof must be subscribed. Of the 25% subscribed thereof must be paid up. Example, a corporation is by 5 individuals and they ask for an authorized capital stock of P2M, how much must each subscribe to? P125,000. RATIONALE: The purpose of such a requisition is that the State may be assured of  the successful prosecution prosecution of the work and that creditors of the company may have to the extent, at least, of the required subscription, the means of obtaining satisfaction for their claims.

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Q: Must each subscribe equally? A: No.

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NOTES: 1.) Capital Stock – the amount fixed in the AI procured to be subscribed and paid up. It is settled that shares issued in excess of the authorized capital stock are void. 2.) Capital – the actual property or estate of the corporation whether in money or property. It may be higher or lower than the capital stock. 3.) Subscribed Capital Stock – the portion of the capital stock subscribed (procured to be paid) whether or not fully paid. 4.) Subscription – the mutual agreement of the corporation and the subscriber to take and pay for the stock of the corporation. 5.) Pre-in Pre-incor corpor porati ation on – the stage stage in which which each each incorp incorpora orator tor or stockh stockhold older er agrees agrees to contribute to a proposed corporation. 6.) Par value share – one in the certificate of stock of which appears an amount in pesos as the nominal value of shares; must be stated in the AI and par value share cannot be issued at less than such par value, which may only be changed by amendment. 7.) No par value share – stated in the AI that it would be issued by the corporation and its consideration cannot be less than the issued value, which cannot be less than five pesos (P5). Value may be fixed in any of the three ways: (1) by the articles of incorporation (2) by the boar board d of dire direct ctor ors s when when so auth author oriz ized ed by said said arti articl cles es or by the the by-l by-law aws s (3) (3) by the the stockholders representing at least a majority of the controlling stockholders. h) Steps and Docum Documents ents Require Required d in SEC

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In addition to the AI, documents required are: 1.) Treasu Treasurer rer’s ’s Affida Affidavit vit – accomp accompani anied ed by a swo sworn rn statem statement ent of the Treasure Treasurerr that that at least 25% of the capital stock authorized is subscribed and at least 25% of such have been fully paid in cash or property – fair valuation of which is equal at least to 25% of  the said subscription, such paid-up capital not being less than P5,000.

Revised Bagtas Reviewer by Ve and Ocfe 2A

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2.) Certificat Certificate e of deposit deposit 3.) Letter Letter of authority authority for the SEC authorizing authorizing it to examine examine the bank deposit, deposit, books of  accoun accountt and suppor supportin ting g record records s as to the exist existenc ence e and utiliz utilizati ation on of the paid-u paid-up p capital stock 4.) Written Written undertaking undertaking to change their partnersh partnership ip or corporate corporate name in case there is another person, firm, entity wit a prior right to use of the said income or one similar to it. 1. Ground Grounds s for for Disappr Disapprova ovall (Sec. 17) 

Sec. Sec. 17 Grou Ground nds s when when arti articl cles es of inco incorp rpor orat atio ion n or am amen endm dmen entt ma may y be reje reject cted ed or disapproved – The SEC may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, that the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or approval” 1.) That That the articl articles es of incorp incorpora oratio tion n or any ame amend ndmen mentt theret thereto o is not substa substanti ntiall ally y in accordance with the form prescribed herein; 2.) That the purpose or purposes purposes of the corporation corporation are patently unconstituti unconstitutional, onal, illegal, illegal, immoral or contrary to government rules and regulations; 3.) That the Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false. 4.) That the percentag percentage e of ownership ownership of the capital capital stock to be owned by the citizens citizens of the Philippines has not been complied with as required by existing laws or the Constitution. No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, institutions, building and loan associations, trust companies and other financial intermedi intermediaries aries,, insurance insurance companies companies,, public public utilities utilities,, education educational al instituti institutions ons and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. When the proposed articles show that the object is to organize a barrio into a separate corporation for the purpose of taking possession and having control of all municipal property within within the incorporated incorporated barrio and administe administerr it exclusiv exclusively ely for the benefit of the residents, residents,  Asuncion v. De Yriarte the object is unlawful and the articles can be denied registration. , 28 Phil. 67 (1914). It is well to note that, if a corporation’s purpose, as stated in the Articles of Incorporation, is lawful, then the SEC has no authority to inquire whether the corporation has purposes other than than thos those e stat stated ed,, and and ma mand ndam amus us will will lie lie to comp compel el it to issu issue e the the cert certif ific icat ate e of  incorporation.” Gala v. Ellice Agro-Industrial Corp. , 418 SCRA 431 (2003).

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SEC’s duty is not merely ministerial – It has been granted by PD 902-A the powers to examine and approve or disapprove the articles of incorporation and registration of a corporation.

4. Amendments to the Articles of Incorporation Incorporation (Sec. 16). 

Sec. 16 Amendment of Articles of Incorporation – Unless otherwise prescribed by this Code or by special law and for legitimate purposes, any provision or matter stated in the articles of  incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least 2/3 of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least 2/3 of the members if  it be a non-stock corporation.

 The original and amended articles together shall contain all provisions required by law to set out out in the the arti articl cles es of inco incorp rpora orati tion on.. Such Such arti articl cles es,, as am amen ende ded d shal shalll be indi indica cate ted d by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amen am endm dmen entt or am amen endm dmen ents ts have have been been duly duly appr approv oved ed by the the requ requir ired ed vote vote of the the stockholders or members shall be submitted to the SEC.  The amendments shall take effect upon their approval by the SEC or from the date of the filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation. 

NOTES: The matter to be amended, even if it does not concern the Board, must always be concurred with by the Board. More importantly, the impetus to amend must always come from the Board. The stockholders merely ratify such amendment. Such is the case because the Board constitutes the centralized management. The impetus of the Board comprises the obligatory force of the contracts entered into.

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2/3 votes are needed in AI while a majority is needed in amending by laws to make it easier to amend by-laws.

à

Such is the case

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

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

Gokongwei vs. SEC Revised Bagtas Reviewer by Ve and Ocfe 2A

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VIII. BY-LAWS

See relevant portions of  VILLANUEVA, "Corporate Contract Law, " 38 A TENEO L.J. 1 (No. 2,  June 1994). 1. Nature and Functions ( Gokongwei v. SEC , 89 SCRA 337 [1979]; [1979]; 717 [1991])

Peña v. CA , 193 SCRA

FACTS: In 1972, Universal Universal Robina Robina Corp acquired acquired 622,987 622,987 share in San Miguel Miguel Corp. In 1972 also, Consol Consolida idated ted Foods Corp. acquired acquired SMC shares shares amo amoun untin ting g to P543,9 P543,959. 59. John John Gokong Gokongwei wei,, the presidne tand controlling controlling stockholder of URC & CFC purchased 5,000 5,000 SMC shares. Gokongwei tried to get a seat in the SMC BoD but was rejected by the SH’s n the grounds that he was engaged engaged in a competitive business business and his securing a seat in the BoD would subject SMC to great disadvantages. On September 18, 1976 repondent SH’s amended the by-laws of SMC, Gokongwei contends that: 1. the the Bo BoD D acte acted d with withou outt auth author orit ity y & in usurpa usurpati tion on of the the powe powerr of the SH’s SH’s since since the computation of 2/3 vote was based on the authorized capital stock as of 1961 & not as of  1976 2. The authority authority granted granted in 1961 1961 was also extend extended ed in 1962 & 1963 1963 when said said authority authority was supposed to cease to exist 3. Prior Prior to said said ame amendm ndment ent,, petiti petitione onerr had all the qualifi qualificat cation ions s as Directo Directorr & that that as a substitute SH he has the right to vote & be voted as director & that in amending the bylaws, the corp. purposely provided for Gokongwei’s disqualification& deprived him of his vested right. 4. Gokongwei Gokongwei further further alleges alleges that that the corp. corp. has no inherent inherent power power to disqualif disqualify y a SH & that provis provision ion allow allowing ing the BoD to consid consider er such such factor factors s as busine business ss & family family relati relations ons is

unreasonable & oppressive, thus void. Gokong Gokongwei wei prays prays that that the amended amended by law laws s be declare declared d null null & void. void. He also wanted wanted to inspect and get get a copy of certain documents documents pertaining to the corp. The SEC allowed him to see the the minutes of the meeting only. So he filed an MR & a petition with the SC due to the alleged deliberate deliberate inability of the SCE to action on his petition.  The SEC had earlier ruled in denying the MR, allowing Gokongwei to run as director but he should not sit as such if elected until there is a decision on the validity of the by-laws.  The SMC answered by saying that he is engaged in a business antagonistic to SMC & that in allowing him to sit in the the BoD, he would have access access to SMC trade secrets and and plans. It says that the amended by laws were adopted to preserve & protect SMC from danger which was based in its right for self-preservation. ISSUE: Whether or not the amended amended by-laws of SMC SMC disqualifying a competitor competitor from nomination or election to the BoD of SMC are valid and reasonable? HELD: 1. Ever Every y corp corp.. has has the the inhe inhere rent nt righ rightt to adop adoptt by-l by-law aws s for for its its inte intern rnal al gove govern rnme ment nt & to regulate the conduct & prescribe the rights and duties of its members towards itself & among amo ng thems themselv elves es in refere reference nce to the managem management ent of its affairs affairs.. This This is expressl expressly y recognized by Sec. 21 of the Corp. Code & has been enunciated in Gov’t vs. El Hogar. 2. Any Any person person who buys stocks stocks in a corp. corp. does does so with with the knowled knowledge ge that its affair affairs s are dominated by a majority of the stockholders & that he impliedly contracts that the will of  the the ma majo jori rity ty shal shalll gove govern rn in all ma matt tter ers s with within in the limi limits ts of the Ao AoII & By-l By-law aws. s. A stockholder is said to have parted with his right to regulate the disposition of his property which he invested invested in the corporation. corporation. Thus, no contract between between the SHs and corp. was was infringed. 3. Pursu Pursuant ant to Sec. Sec. 18 of the Corp. Law, Law, any corp. corp. may may amend amend its AoI by a vote or written written assent of the Sh’s representing representing at least t 2/3 of the subscribed capital stock. stock. If it changes, diminishes or restricts the rights of SHs, the dissenting minority has only the right to object in writing & demand payment of their their share. Petitioner has no vested vested right to be elected director. 4. A directo directorr stands stands in a fiducia fiduciary ry relation relation to the corp. & its its SHs. SHs. He has has control control & guidan guidance ce of corp corpor orat ate e affa affair irs s & prop proper erty ty & henc hence, e, of the the prop proper erty ty inte intere rest sts s of SHs. SHs. Equi Equity ty recogn recognize izes s that that SHs are proper propertie ties s of corpor corporate ate intere interest st & are ultima ultimatel tely y the only only beneficiaries thereof. thereof. Thus, he cannot serve 2 adverse adverse masters without detriment detriment to one of them them He cann cannot ot util utiliz ize e his his insi inside de info inform rmat atio ion n & stra strate tegi gic c posi positi tion on to his his ow own n preferment. 5. An amendmen amendmentt to the by-laws by-laws which render renders s a SH ineligible ineligible to be a director, director, if he be be also a director in a competitor corp. has been sustained sustained valid. This is based on the principle principle that where the director is employed in the service of a rival corp he cannot serve both but must betray one or the other. Such an enactment merely advances advances the benefit of the corp & for its own good. Corporate Corporate officers officers are not permitted permitted to use their position position of trust trust & confidence to further their private interests. 6. DOCTRINE DOCTRINE OF CORPORATE CORPORATE OPORTUNIT OPORTUNITY Y – rests on the unfairn unfairness ess of an officer officer or director director taking advantage of an opportunity for his own personal profit where the interest of the corporation calls for protection. Here BoD members have access access to marketing strategies, strategies, pricing structure, budget for expansion, R&D sources of funding, availability of personnel, mergers & tie-ups, etc. The questioned amendment amendment of the y-laws was done to prevent the creation or an oppositor for an officer or director of SMC, also an officer of a competing corp. corp. from from taking taking advantag advantage e of the inform informati ation on which which he as direct director or to promot promote e his individual corporate interests to the detriment of SMC, it would be hard to avoid any possibility of Gokongwei’s taking advantage of his position as SMC director. 7. The The SC gran grants ts the the peti petiti tion on rega regard rdin ing g Go Goko kong ngwe wei’ i’s s peti petiti tion on to exam examin ine e the the book book and and records of SMC

Pe?a vs. CA Revised Bagtas Reviewer by Ve and Ocfe 2A 83 8. However, However, it sustaine sustained d the validity validity of the amendment amendment to the by-laws by-laws without without prejudice prejudice to the question of actual disqualification of Gokongwei to run if elected to sit as SMC director being decided, after proper hearing by the SMC BoD, whose decisions shall be appealable to the SEC & to the SC, unless disqualified, the prohibiton in the said by-laws will not apply to Gokongwei.

FACTS: PAMB PAMBUS USCO CO orig origin inal al ow owne ners rs of the the lots lots in ques questi tion on,, mo mort rtga gage ged d the the same same to DBP DBP in considera consideration tion of P935,000. P935,000. This mortgage mortgage was foreclosed foreclosed and said properties properties were awarded awarded to Rosita Peña as highest highest bidder in the foreclosure foreclosure sale. The Board of PAMBUSCO, through through three of its members resolved to assign assign its to one of its members, members, Atty. Joaquin Briones, to execute execute and sign a deed of assignment assignment for and in behalf of PAMBUSCO in favor of any interested party. Thus, Briones executed a deed of Assignment of PAMBUSCO’s redemption right over the subject lots in favor of  Marelino Marelino Enriquez. Enriquez. The latter then redeemed redeemed the said properties properties and a certificat certificate e of redemptio redemption n dated Aug. 15, 1975 was issued. issued. Enriquez executed executed a deed of absolute sale of the subject subject properties in favor of plaintiff-appellants, plaintiff-appellants, the spouses Rising T. Yap and Catalina Lugue. Peña wrote the sheriff notifying him that the redemption was not valid as it was made under a void deed of assignme assignment. nt. She then requested requested the recall recall of the said redemption redemption and a restraint restraint on any registration or transaction regarding the lots. lots. Defendant Peña through counsel counsel wrote the sheriff  asking for execution of a deed of final sale in her favor on the ground that the one year period of  redemption redemption has long elapsed elapsed without any valid redemption redemption having having been exercise exercised. d. Plaintiff Plaintiff Yap wrote defendant Peña asking for payment for back rentals in the amount of P42,750.00 for the use and occupancy of the land and and house. Later, the spouses Yap were were prompted to file the instant instant case on the ground that being registered owners, they have the right to enforce their right to possession against defendant who has been allegedly in unlawful possession thereof. It was contended that plaintiffs could not have acquired ownership over the subject properties under a deed of absolute sale executed in their favor by one Marcelino Enriquez who likewise could not have become the owner of the properties in question by redeeming the same under a void deed of assignment. The defense was that since since the deed of assignment executed executed by PAMBUSCO in favor of Enriquez was void ab initio for being an ultra vires act of its board of directors and for being without any valuable valuable consideration, it could not have had any legal effect. TC found for petitioner. petitioner. CA reversed. HELD: In order that the SEC can take cognizance cognizance of a case, case, the controvers controversy y must pertain pertain to any of  the following relationships: a. between between corp., corp., partnershi partnership p or assoc. assoc. and the the public public b. between between the the corp. corp. and and its SH, membe members, rs, office officers rs c. betwee between n corp. and the state state in so far as its franchi franchise, se, permit permit or license license to operate operate is concerned d. among the the stockhold stockholders, ers, partner partners s or associates associates themselves themselves.. Neither petitioner nor respondents Yap spouses are stockholders or officers of PAMBUSCO. Consequently, the issue of the validity of the series of transactions may be resolved only by the regular courts.  The by-laws of a corporation are its own private laws which substantially have the same effect as the laws laws of the corporation. They are in effect effect written into the charter. In this sense, sense, they become art of the fundamental law of the corporation which the corporation and its direct directors ors and office officers rs must comply comply with. with. Only Only three three out of five director directors s of PAMBU PAMBUSCO SCO convened on November 19, 1974 by by virtue of a prior notice of a special meeting. meeting. There was no quorum to validly transact business business since, under Section 4 of the amended amended by-laws herein above reproduced, at least 4 members must be present to constitute a quorum in a special meetin mee ting g of the BoD. BoD. The AoI or by-laws by-laws of the corp. corp. may fix a greate greaterr number number than the

majori majority ty than than the majority majority of the number number of board board member members s to consti constitut tute e the quorum quorum necessary for the valid valid transaction f business. business. Being a dormant corp. for several several years, it was highly irregular, if not anomalous, for a group of three individuals individuals representing representing themselves to be the the dire direct ctor ors s of resp respon onde dent nt PAMB PAMBUS USCO CO to pass pass a reso resolu luti tion on disp dispos osin ing g of the the only only remaining asset of the corporation in favor of a former corporate officer. officer. The latest list of SH of respondent PAMBUSCO on file with the SEC does not show that the said alleged directors were among the SHs of respondent respondent PAMBUSCO. Since the disposition disposition of said redemption right of PAMBUSCO by virtue of the questions ed resolution was not approved by the required number of SHs under the law, the said resolution, as well as the subsequent assignment executed assigning to respondent Enriquez the said right of redemption should be struck down as null and void. As the “rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it,” bylaws are indispensable to corporations. These may not be essential to corporate birth but cert certai ainl nly, y, thes these e are are requ requir ired ed by law law for for an orde orderl rly y gove govern rnan ance ce and and ma mana nage geme ment nt of  corporations. Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 (1997). Q. Distinguish by-laws from AoI A. The AoI is not not an internal internal document document that binds binds the parties parties to a corporate corporate settin setting. g. It is also a document document that binds the State. State. The BL is an intramural intramural document, document, its supposed supposed to bind the inner workings of a corp.

Q. Are the AoI AoI and BL public public documents? documents? A. Yes, both are public documents because they are not valid and binding binding without the approval approval of  the SEC

Q. Does the BL have have to be approved by the the SEC? A. Yes Yes,, prior prior to the approv approval al of the SEC, SEC, the by-law by-laws s are not binding binding since since the code code expres expressly sly requir requires es the approval approval of the SEC to be binding binding upon the SHs and member members. s. Absen Absentt the codal codal provision, it is binding because of a corp.’s inherent power to adopt its own by-laws.

Q. Do BL bind the public? A. As a general rule, BL provisions do not bind the public, except except if the third person has knowledge of the BL provision.

(a) Common Law Limitations on By-Laws (i) By-Laws Cannot Be Contrary to Law and Charter

A by-law by-law provisio provision n granti granting ng to a stockh stockhold older er perman permanent ent sea seatt in the Board of  Directors is contrary to the provision in Corporation Code requiring all members of the Board to be elected by the stockholders. Even when the members of the association may have formally adopted the provision, their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law. Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997). (ii) By-Law Provisions Cannot Be Unreasonable or Be Contrary to the Nature of  By-laws. Government of P.I. v. El Hogar Filipino , 50 Phil. 399 (1927).

Authority granted to a corporation to regulate the transfer of its stock does not empower the corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure Thomson v. Court Court of Appeals, Appeals, 298 SCRA 280 to be followed in effecting effecting transfer. transfer. Thomson

China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997). Revised Bagtas Reviewer by Ve and Ocfe 2A

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

China Banking Corp. v. Court of Appeals , 270 SCRA 503 (1997).

FACTS: Calapatia, a stockholder of PR Valley Golf and Country Club pledged his Stock Certificate to petitioner petitioner China Banking. Banking. Petitioner Petitioner wrote VGCCI VGCCI requesting requesting that the aforementio aforementioned ned pledge agreement be be recorded in its books. Later, Calapatia obtained a loan of P20,000 P20,000 from petitioner, payment of which was secured by the aforestated pledge agreement still existing between Calapatia Calapatia and petitioner. Due to Calapatia’s Calapatia’s failure to pay his his obligation, petitioner petitioner filed filed a petiti petition on for extra-ju extra-judic dicial ial foreclos foreclosure ure.. Petiti Petitione onerr inform informed ed VGC VGCCI CI of the aboveabovementioned foreclosure proceedings and requested that the pledged stock be transferred to its name. name. However, However, VGCCI VGCCI wrote petitione petitionerr expressing expressing its inability inability to accede to petitione petitioner’s r’s request due to Calapatia’s unsettled accounts with the club. Despite the foregoing, Notary Public de Vera held a public auction and petitioner emerged as the highest bidder, VGCCI sent Calapatia a notice demanding full payment of his overdue account in the amount of P18,783.24. VGCCI caused to be published published in the newspaper Daily Express Express a notice of  auction sale by VGCCI of its subject share of stock and thereafter filed a case with the RTC of Makati for the nullification. The RTC dismissed the the case for lack of jurisdiction jurisdiction over the subject matter on the theory that it involves an intra-corporate dispute. Petitioner filed a complaint complaint with the SEC. The Commission en banc believed believed that appellantappellantpetitioner had a prior right over the pledged share and because of pledgor’s failure to pay the principal debt upon maturity, appellant-petitioner could proceed with the foreclosure sale of the pledged share. share. The auction sale sale conducted by appellee-respondent appellee-respondent Club was declared null and void.  The CA rendered its decision nullifying and setting aside the orders of the SEC and its hearing officers on the ground of lack of jurisdiction jurisdiction over the subject. subject. The CA declared that the controversy controversy between CBC and VGCCI is not intra-corporate. HELD: VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art. VIII of its bylaws which provides that after a member shall have been posted as delinquent, the Board may order his/her/its share sold to satisfy satisfy the claims of the club. It is pursuant to this provision that VGCCI also sold the subject share at public public auction, of which it was the highest highest bidder. VGCCI caps its argument by asserting that its corporate by-laws by-laws could prevail. The SEC therefore took proper cognizance cognizance of  the instant case. Moreover, VGCCI completely completely disregarded petitioner’s petitioner’s right as pledgee. It even failed to give give petitioner notice notice of said auction sale. Such actuations of VGCCI thus thus belie its claim of good faith. In defending its actions, actions, VGCCI likewise maintains maintains that petitioner is bound by its by-laws. by-laws. It argues that the G.R. is that third persons are not bound by the by-laws of a corporation since they are not privy to thereto. The exception exception to this is when 3 rd persons have actual or constructive knowledge of the same. In the case at bar, petitioner had actual knowledge knowledge of the by-laws of private respondent respondent when petiti petitione onerr forec foreclos losed ed the pledge pledge made made by Cal Calapa apatia tia and when when petiti petitione onerr purcha purchased sed the share share foreclose foreclosed. d. Thus, Thus, the petitioner petitioner purchased purchased the said share subject subject to the right of the PR to sell the said shares for reasons of delinquency and the right of PR to have a first lien on said shares as these rights are provided for in the by-laws very clearly. In order to be bound, the 3 rd party must have acquired knowledge of the pertinent by-laws at the time the transaction or agreement between said 3 rd party and the shareholder was entered into, in this case, at the time the pledge agreement was executed. executed. Petitioner’s belated belated notice of said bylaws at the time of the foreclosure foreclosure will not suffice. suffice. By-laws By-laws signify signify the rules and regulation regulations s of 

private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it. The purpose of a by-law is to regulate the conduct conduct and define the duties of the members towards the corporation and among themselves. Note: Knowledge of the by-laws must be present at the time of the perfection of the contract. Such is not the case here, knowledge of the by-laws was had only during the proceedings, as such, it cannot bind China Bank. However, one may argue in the same way in Land Titles, where banks are required to go beyond the face of the title as they are institutions endowed with public interest; in this case China Bank should have inquired into such by-laws before entering into the transactions mentioned. “Neith “Neither er can we conced concede e that that such such contra contract ct would would be invali invalid d just just becaus because e signatory thereon was not the Chairman of the Board which allegedly violated corpor corporati ation’ on’s s by-law by-laws. s. Since Since by-la by-laws ws operat operate e merely merely as intern internal al rules rules amo among ng stoc stockh khol olde ders rs,, they they cann cannot ot affe affect ct or prej prejud udic ice e thir third d pers person ons s who who deal deal with with corporation, unless they have knowledge of the same.” PMI Colleges v. NLRC , SCRA 462 (1997).

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PMI COLLEGES v. NLRC FACTS: PMI is an educational institution offering courses on basic seaman training and other marinerelated courses hired private respondent as contractual instructor with an agreement agreement that the latter shall be paid at an hourly rte of P30 t P50. P50. PR then organized classes classes in marine engineering. engineering. PR and other instructors were compensated for services rendered during the first three periods of the abovementioned mentioned contract. contract. However, However, for reasons reasons unknown to PR, he stopped stopped receiving receiving payment payment for the succeeding rendition of services. Repeat Repeated ed demand demands s having having likewi likewise se failed failed,, PR was soon soon constr constrain ained ed to file file a compla complaint int seeking seeking payment payment for salaries salaries earned. earned. PMI contended contended that classes classes in the courses offered offered which complainant claimed claimed to have remained remained unpaid were not held held in the school premises of PMI. Only PR knew whether classes classes were indeed conducted. conducted. Later in the proceedings, proceedings, petitioner manifested that Mr. Tomas Cloma Jr., a member of the petitioners BoD wrote a letter to the Chairman of the Board clarif clarifyin ying g the case case of PR and statin stating g therei therein n that that under under PMI’s PMI’s by-law by-laws, s, only only the Chairman Chairman is authorized to sign any employment employment contract. A decision was rendered rendered by the Labor Arbiter finding finding for PR. PR. The NLRC affirmed. affirmed. HELD:   The The contra contract ct would would be invali invalid d just just becaus because e the signat signatory ory was not the chairm chairman an which which allegedly violated PMI by-laws but since by-laws operate merely as internal rules among the stock holders, they cannot affect or prejudice 3 rd persons who deal with the corporation in good faith unless they have knowledge knowledge of the same. No proof appears on record that PR ever knew anything about about the provisions of said by-laws. Petitioner itself merely asserts asserts the same without even bothering to attach a copy or excerpt thereof to show that there there is such a provision. That this allegation has never never been denied by PR does not necessarily signify admission. admission. 2. Adoption Procedure (Sec. 46)

Section 46. Adoption of by-laws. - Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuan issuance ce of its certif certifica icate te of incorp incorpora oratio tion n by the Securi Securitie ties s and Exchange Commission, adopt a code of by-laws for its government not inco incons nsis iste tent nt with with this this Co Code de.. For For the the adop adopti tion on of by-l by-law aws s by the the corporation corporation the affirmativ affirmative e vote of the stockholders stockholders represent representing ing at leas leastt a ma majo jori rity ty of the the outs outsta tand ndin ing g capi capita tall stoc stock, k, or of at leas leastt a majority of the members in case of non-stock corporations, shall be nece necess ssar ary. y. The The by-l by-law aws s shal shalll be sign signed ed by the the stoc stockh khol olde ders rs or members voting for them and shall be kept in the principal office of the

Revised Bagtas Reviewer by Ve and Ocfe 2A corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of  the the dire direct ctors ors or trus truste tees es coun counte ters rsig igne ned d by the the secr secret etar ary y of the the corp corpor orat atio ion, n, shal shalll be file filed d with with the the Secu Securi riti ties es and and Exch Exchan ange ge Comm Co mmis issi sion on whic which h shal shalll be atta attach ched ed to the the orig origin inal al artic article les s of  incorporation.

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Notwithst Notwithstandin anding g the provision provisions s of the preceding preceding paragraph, paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such bylaws laws shal shalll be appr approv oved ed and and sign signed ed by all all the the inco incorp rpora orato tors rs and and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any  bank, banking institution, building and loan association, trust company, insurance company, public utility, educational instituti institution on or other special special corporati corporations ons governed governed by special special laws, laws, unless unless accompanie accompanied d by a certific certificate ate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. (20a)

dissolution simply because the incorporators failed to file the  There can be no automatic dissolution requir required ed by-law by-laws s under under Sec. Sec. 46 of Corpor Corporati ation on Code. Code. There There is no outrig outright ht “demis “demise” e” of  corporate existence. Proper notice and hearing are cardinal components of due process in any democratic institution, agency or society. In other words, the incorporators must be given the chance chance to explai explain n their their neglec neglectt or omiss omission ion and remedy remedy the same.” same.” Loyola Loyola Grand Grand Villas Villas Homeowners v. CA, 276 SCRA 681 (1997). 3. Contents (Sec. 47)

Section Section 47. Contents of by-laws by-laws . - Subject to the provisions of the Cons Co nsti titu tuti tion, on, this this Co Code de,, othe otherr spec specia iall laws laws,, and and the the arti articl cles es of  incorporation, a private corporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or trustees, officers and employees; 6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers other than directors or trustees; 8. The penalties for violation of the by-laws; 9. In the case of stock stock corpor corporati ations ons,, the manner manner of issuin issuing g stock stock certificates; and 10. 10. Such Such othe otherr ma matt tter ers s as ma may y be nece necess ssar ary y for for the the prop proper er or convenient transaction of its corporate business and affairs. (21a)

4. Amen Amendm dmen ents ts (Sec. 48) -

Power to amend may be delegated to the BoD Sectio Section n 48. Amendm Amendment ents s to by-law by-laws s . - The The boar board d of dire direct ctor ors s or truste trustees, es, by a majori majority ty vote vote thereo thereof, f, and the owners owners of at lea least st a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockh stockhold olders ers owning owning or repres represent enting ing a majori majority ty of the outsta outstand nding ing capital capital stock or a majority majority of the members in non-stock non-stock corporations, corporations, shall so vote at a regular or special meeting. When Whenev ever er any any am amen endm dmen entt or new new by-l by-law aws s are are adop adopte ted, d, such such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, corporation, and a copy thereof, thereof, duly certified certified under oath oath by the corporat corporate e secret secretary ary and a majori majority ty of the director directors s or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles of incorporation and original by-laws.

  The amended or new by-laws shall only be effective upon the issuance by the Secu Securi riti ties es and and Exch Exchan ange ge Co Comm mmis issi sion on of a cert certif ific icat atio ion n that that the the same same are are not not inconsistent with this Code. (22a and 23a) “Admittedly, the right to amend the by-laws lies solely in the discretion of the employer, this being in the exercise of management prerogative or business judgment. However this right, extensive as it may be, cannot impair the obligation of existing contracts or rights. . . If we were to rule otherwise, it would enable an employer to remove any employee from his employment by the simple expediency of amending its by-laws and providing that his/her position shall cease to exist upon the occurrence Salafranca nca v. Philaml Philamlife ife (Pamplon (Pamplona) a) Village Village Homeown Homeowners, ers, 300 SCRA 469 of a specif specified ied event. event.” ” Salafra (1998).

IX. CORPORATE POWERS, POWERS, AUTHORITY AND ACTIVITIES ACTIVITIES 1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45; Land Bank of the Philippines v. COA , 190 SCRA 154 [1990]) 

Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of  their organization.

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Sec. 36 Corporate powers and capacity – Every corporation incorporated under this Code has the power and capacity: 1. To sue sue and be sued sued in its its corpora corporate te name; name;

Revised Bagtas Reviewer by Ve and Ocfe 2A 89 2. Of success succession ion by its corpora corporate te name for the period period of time stated stated in the article articles s of  incorporation and the certificate of incorporation; 3. To adopt adopt and and use use a corpor corporate ate sea seal; l; 4. To amend its articles articles of incorpora incorporations tions in accordan accordance ce with the provision provisions s of this Code; 5. To adopt by-laws by-laws,, not contrary contrary to law, morals morals or public public policy, policy, and and to amend or repeal repeal the same in accordance with this Code; 6. In case of stock stock corporations, corporations, to issue issue or sell stocks stocks to subscribe subscribers rs and to sell treasury treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; 7. To purchase, purchase, receive, receive, take or grant, grant, hold, convey, convey, sell, lease, lease, pledge, pledge, mortgage mortgage and otherwise deal with such real and personal property, including securities and bonds of  other corporations, as the transactions of the lawful business of the corporation may reasonably and necessary require, subject to the limitations prescribed by law and the Constitution; 8. To enter into into merger merger or consolidati consolidation on with other other corporation corporations s as provided provided in this Code; Code; 9. To make make reason reasonabl able e donati donations ons,, includ including ing those those for the public public we welfa lfare re or hospit hospital al or charitable, cultural, scientific, civic or similar purposes: Provided, That no corporation, domestic or foreign shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10. To establ establish ish pensio pension, n, retire retiremen ment, t, and other other plans plans for the benefi benefitt of its direct directors ors,, trustees, officers and employees; and 11. To exerci exercise se such other other powers powers as may be essen essentia tiall or necess necessary ary to carry carry out its purpose or purposes as stated in the articles of incorporation. 

Sec. 45 Ultra vires acts of corporations – No corporation under this Code shall possess or exerc exercise ise any corpor corporate ate powers powers except except those those confer conferred red by this this Code Code or by its articles articles of  incorporation and except such as necessary or incidental to the exercise of the powers so conferred. A corporation has only such powers as are expressly granted to it by law and by its articles of incorporation, those which may be incidental to such conferred powers, those reasonably necessary to accomplish its purposes and those which may be incident to its existence. Pilipinas Loan Company v. SEC, 356 SCRA 193 (2001). a) Classificat Classification ion of Corporate Corporate Powers: Powers: Express; Implied; and Incidental 

EXPRESS

IMPLIED

INCIDENTAL

  Th These ese pow owe ers giv given to a  Those powers that exist as a  Those powers that: corporation either: necessary consequence of: a.) attach to a a.) By clear or express a.) the exercise of   corp corpor ora ation tion at the provision of the law. express powers of the moment of its corporation or creation Some of the other  b.) the pursuit of its b.) b.) with withou outt rega regard rd to its its powers expressly purpos pur pose e as provid pro vided ed expr ex pres ess s pow po w ers er s or granted under Sec. 36 for for in the the arti articl cle e of  part partiicula cularr prim primar ary y are consid considere ered d to be incorporation purposes and inherent inherent or incidenta incidentall powers which even if  c.) c.) is said said to be inher inheren entt the  not given by express in it as a legal entity management grant are or a legal of a nevertheless deemed organization. corporation corporation,, in to be within the the absence of  capacity of t he Powe Powers rs that that go into into  express foreign foreign entities entities (such (such the the very very natu nature re and and restrictions, as the power to adopt extent of a has

by-laws)

discretionary authority to enter into contracts or transactions which which may be deemed reasonably nece necess ssar ary y or inci incide dent ntal al to its business purpose.

b.) By the charter or articles of incorporation. 

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Express grant of   auth author oriity from from the the board of directors needed to validly bind the corporation.  Thus the SC held that absent any board resolution authorizing an officer or any perso erson n to exer exerc cise ise express powers given to a corporation such as filing a suit on its behalf, such an action is invalid.

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The power of a corp orporat oratio ion n to sue and and be sued ued in any any cour courtt is lodg lodged ed with with the board of directors that exercise its corporate powers.

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By-laws are not source of powers.

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Art. rt. 46 of Code provides powers corporation   jurid juridica icall possesses.

corporation corporation’s ’s juridical juridical entity cannot be presumed to be incidental or inherent powers. powers. This juridical juridical entity entity is StateState-gra grant nt and cannot be altered or am amen ende ded d with withou outt State State author authority ity (egs. (egs. righ rightt of succ succes essi sion on,, right to merger)

a

the the Civi Civill expressly for t he of a as a person personali ality ty

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Sec. 36 of t he Corporation Code expressly enumerates the ten powers which a corpo rporation may exercise.

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Sec. 45 of t he Corporation Code recognizes other powe powers rs prov provid ided ed in the Article of   Incorporation.

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General Gene rally ly exer exerci cise sed d by the Board of   Directors with except exception ion to certai certain n instances where sharehold shareholders’ ers’ assent assent are needed.

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Sub-par Sub-paragr agraph aph 11 of  Sec. 36 provide that a corp corpor orat atio ion n has has the the power and capacity to “exercise such powers as may be essential or necessary to carry out its purpos purpose e or purpos purposes es as stated in its articles of   incorporation.

Sec. 2 of the Corp. Code provides the corporation as having “the powers, attributes and properties expressly authorized by law or incident to its existence.” existence.”

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Generally, purel rely members of the Board of Direct Directors ors exerc exercise ise this.

Generally, purely members of the Board of Directors exercise this.

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Ultra Vires doctrine is connected with ancillary doctrines as of (1) apparent authority and of  (2) estoppel.

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One has to look at the corporation as a person before the law because of the (1) issue of  consent and (2) liability – who commits itself to obligation. The state only gives a corporation limited powers and not general powers as an individual has because of the consent and liability. (b) Where Corporate Power Lodged

A corporation has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents. . . In turn, physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors. Shipside Inc. v. Court of Appeals , 352 SCRA 334 (2001). Unless otherwise provided by the Corporation Code, corporate powers are exercised by the Boa Board rd of Direct Directors ors,, which which they they may delega delegate te to either either an execu executiv tive e commit committee tee,, officers officers or contracted contracted managers. managers. The delegatio delegation, n, except except for the executive executive committee, committee, must be for specific purposes, which makes the officers the agents of the corporation, and accordingly the general rules of agency as to the binding effects of their acts would apply. For such officers to be deemed fully clothed by the corporation to exercise a power of the Board, the latter must specially authorize them to do so.  ABS-CBN Broadcasting Corp. v. Court of Appeals , 301 SCRA 572 (1999). 

PRIMARY RULE: The Board of Directors/Trustees is the repository of all corporate powers (sec. 23)

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 The source of power of the board of directors is therefore primary and not delegated power from the stockholders or members of the corporation. However, there are specified instances in the Corporation Code where the particular exercise of power of the corporation by the board, board, in order order to be bindin binding g and effec effectiv tive, e, requir requires es the consen consentt and ratifi ratificat cation ion of the stockholders or members, on one hand, and the State, on the other hand.

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IN CONSONANCE WITH CONTRACT LAW PRINCIPLES – in conformity with the principles of  contract law, that a party cannot relieve himself from the contractual terms and conditions, much less amend or alter them, without the consent or approval of the other party or parties.

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EXCEPTION TO THE GENERAL RULE, in cases where the stockholders consent is required, majority rules. The consent or dissent of the stockholders is recognized by their majority vote or their qualified two-thirds as the case may be which would bind even those who abstained or dissented. For those who dissented, there is a way out for them by way of exercising their appraisal right (depending on the issue).

2. ULTRA V IRES IRES DOCTRINE

See relevant portions of  VILLANUEVA, Corporate Contract Law, 38 A TENEO L.J. 1 (No. 2,  June 1994). (a) Concept and Types (Sec. 45) 

Sec. 45 Ultra vires acts of corporations – No corporation under this Code shall possess or exerc exercise ise any corpor corporate ate powers powers except except those those confer conferred red by this this Code Code or by its articles articles of  incorporation and except such as necessary or incidental to the exercise of the powers so conferred.

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Sec. 45 of the Corporation Code is the statutory embodiment of the Ultra Vires Doctrine that provides that the corporation cannot exercise powers beyond what had been granted to it by statut statute e or by its articles articles of incorp incorpora oratio tion n except except such such as necess necessary ary or incide incidenta ntall to the exer exerci cise se of powe powers rs so conf confer erre red. d. It wa was s me mean antt to cont control rol and and regu regula late te the the acti action ons s of  corporations.

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BASIS OF ULTRA VIRES DOCTRINE (Two Corporate Principles) 1. A corporation is a creature of the law and has only such powers and privileges as are granted by the State – the ultra vires doctrine is a product of the theory of concession as provided in Sec. 2. 2. The doctrine upholds the fiduciary duty of directors and officers to the stockholders or members – such duty dictates that the corporation engage only in transactions to which the stockholders and members bind themselves by way of the provisions of the purposes clause.  This is also necessarily include an obligation not to enter into transactions which violate the law.

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 TEST TO DETERMINE ULTRA VIRES – Whether the act in question is in direct and immediate furt furthe hera ranc nce e of the the corp corpora orati tion on’s ’s busi busine ness ss,, fair fairly ly inci incide dent nt to the the expr expres ess s powe powers rs and and reasonably necessary to their exercise. The strict terms “direct and immediate” refers to the busi busine ness ss of the the corp corpor orat atio ion n whil while e the the libe liberal ral term terms s “fai “fairl rly y inci incide dent nt” ” and and “rea “reaso sona nabl bly y necessary” with reference to the powers of the corporation. With regard to the business of the corporation as the reference point, much latitude is given to the corporation to enter into various contracts as long as they have logical relation to the pursuit of such business. On the other hand, when the purpose clause used limiting words that Court will hold such corporation to such limited business.

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POLICIES SUPERVENING IN ULTRA VIRES ISSUES – Acts not per se illegal, liberal interpretation. 1.) PUBLIC CONVENIENCE – if corporation contracts are strictly construed, the public would be inconvenienced by having to verify and enter into contractual safeguards when entering into contra contracts cts with with corpor corporati ations ons.. As such such liber liberal al constr construct uction ion is afford afforded ed to such such corpor corporate ate contracts. 2.) CONTRAVENTIONOF CONTRACTUAL EXPECTATIONS – setting aside the corporate contract on the ground of ultra vires would contravene the expectations of both parties who entered into the contract expecting to be bound. 3.) PRINCIPLE OF BUSINESS JUDGMENT – the court will not sit in judgment to substitute their business judgment for that of the directors; and that as much as possible, directors in the exercise of their business judgment, should be given leeway to adopt corporate policies and to engage in transactions as they deem best for the corporation. 4.) NATURE NATURE OF BUSINE BUSINESS SS OF OPERAT OPERATION IONS S – it is imposs impossibl ible e to antici anticipat pate e all possible possible contingencies at the time the Articles are drawn thus there would be a need to amend or revise the Articles to keep abreast with the various aspects of the business.

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ULTRA VIRES ACTS DISTINGUISHED FROM ACTS WHICH ARE ILLEGAL PER SE 

Illegal acts of a corporation are those acts which are contrary to law, morals, or public order or contravenes some rule of public policy or public duty are void. Such acts or contracts cannot be the basis of any court action nor acquire validity by performance, ratification or estoppel.

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Ultra vires acts are those which are not illegal and void ab initio but are within the scope of the articles of incorporation are merely voidable and may become binding and enforceable when ratified by stockholders. Said ratification cures the infirmity of  the corporate act and makes it valid and enforceable. 

 TYPES OF ULTRA VIRES CASES

1.) acts or contracts which are per se illegal as being contrary to law

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2.) acts done beyond the powers of the corporation as provided for in the law or its articles of  incorporation; and à VOID or VOIDABLE? 3.) acts or contracts contracts entered into in behalf of the corporation corporation by persons who have no corporate corporate authority à UNENFORCEABLE 

Ultra vires acts of the second type are void as between the corporation and the State or in the first level of corporate existence while it is merely voidable in the third level because of public

Revised Bagtas Reviewer by Ve and Ocfe 2A 93 policy. The public who deals in good faith with the corporation has the right to expect that the obligation entered into shall be complied with.

First Type Ultra Vires: An ultra vires act is one committed outside the object for which a corporation is crated as defined by the law of its organization and therefore beyond the power conferred upon it by law. The term “ ultra vires “ is “distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratifi ratificat cation ion,, or estopp estoppel, el, while while the latter latter is void void and cannot cannot be valida validated ted.” .”  Atrium Management Corp. v. Court of Appeals , 353 SCRA 23 (2001). ATRIUM MANAGEMENT CORP. v. COURT OF APPEALS Facts: Hi-Cement through the corporate signatories (De Leon – treasurer, Delas Alas – chairman) issued checks in favor of E.T. Henry & Co. Inc. as a collateral for a loan) E.T. Henry endorsed the four checks to Atrium for valuable consideration. Upon presentment for payment, the bank dishonored all four checks because the payment was stopped. Atrium filed with the RTC an action for collection of  the proceeds of four postdated checks amounting to P2M. The TC ordered that De Leon, ET Henry and Hi-Cement pay Atrium jointly and severally the value of the four checks plus interest. The CA on the other hand absolved Hi-Cement from liability. Issue: WON De Leon was not authorized to issue the checks WON the issuance of the checks were ULTRA VIRES ACTS Held: De Leon was authorized and such issuance is not an ultra vires act. Ratio: De Leon as treasurer of the corporation is authorized to sign checks for the corporation. As a rule, the act of issuing checks is within the ambit of a valid corporate act. And securing a loan to finance the activities of the corporation is not an ultra vires act. While an ultra vires act is one committed outside the object or which a corporation is created as defined by law of its organization and therefore beyond the power conferred upon it by law, the act pertained to in the case is not an illegal act. De Leon on the other hand was negligent in confirming that such checks were issued to ET Henry Henry as paymen paymentt for their company company’s ’s debt with with the former. former. That is why she was held held to be personally liable to Atrium. Presidentt enters enters into speculati speculative ve contracts contracts,, Second Second Type Type Ultra Ultra Vires: Vires: When the Presiden without prior board approval, and without subsequent submission of those contracts to the Board for approval or ratification, nor were the transactions included in the reports of the corporation, such contracts do not bind the corporation. It must be pointed out that the Board of Directors, not the President, exercises corporate powers. Safic Alcan & Cie v. Imperial Vegetable Oil Co., Inc. , 355 SCRA 559 (2001). (b) Ratification of Ultra Vires Acts: ( Pirovano v. De la Rama Steamship Co., Inc. , 96 Phil. 335 [1954]; Carlos v. Mindoro Sugar Co. , 57 Phil. 343 [1932]; Republic v. Acoje Mining Co., 3 SCRA 361 [1963]; Crisologo Jose v. Court of Appeals , 177 SCRA 594 [1989]; Harden v. Benguet Consolidated Mining Co. , 58 Phil. 140 [1933]).

PIROVANO DE LA RAMA STEAMSHIP CO. INC. Facts: The story began with Enrico Perovano becoming President of the Dela Rama Corporation. Under Under his management, management, the corporatio corporation n grew into a multi-mi multi-million llion company company until until his death. Don Este Esteba ban n dela dela Ra Rama ma who who ow owne ned d and and cont contro roll lled ed the the stoc stock k of the the corp corpor orat atio ion, n, dist distri ribu bute ted d his his share shareho hold ldin ings gs am amon ong g his his five five daug daught hter ers s incl includ udin ing g Este Estefa fani nia. a. The The comp compan any y has has a bond bonded ed indebtedness amounting to P7,500 in 1940 but had assets/capitals of P15 M as of 1941 which were mortgaged as security for the debt to the National Development Corp. This bonded indebtedness was converted to non-voting preferred shares of the company under the condition that they would bear a fixed cumulative divisor of 6% per annum and this was carried out in 1949. N DC now had the right to be represented by four out of nine members in the Board of Directors. It was in 1946 that the Board of Directors adopted the questioned resolution where the corporation ser aside P400,000 to the four

minor children with the sum convertible into shares of stock. Lourdes de la Rama later learned that since the company shares of stock was actually 3.6 times their par value, the company would in effect be giving them an amount totaling to P1,440,000 and that stocks if were given to the children, the voting strength strength of the De la Rama daughters would be adversely adversely affected. This This caused Lourdes to ask for the cancellation and waiver of her pre-emptive rights. Don Esteban then advised the corp corpor orat ate e secr secret etar ary y that that the the reso resolu luti tion on be null nullif ifie ied d due due to the the misu misund nder erst stan andi ding ng as to its its implications. In 1947, the Board adopted a resolution changing the form of donation from 4,000 shares to merely a renunciation in favor of the children of the corporate right, titles and interests as beneficiary to the proceeds of the life insurance policy subject to the condition that proceeds be retained by the company as a loan with 5% interest ($321,500). Estefania as guardian of the children, accepted the donation in their behalf. Said donation was formally ratified in 1949 after Estefania bought a house in New York for $75,000. In 1950 Osmena Jr. husband of Lourdes de la Rama addressed an inquiry to the SEC asking asking for an opinio opinion n regard regarding ing the donati donation. on. SEC SEC opined opined that the donation donation was void void because the corporation could not dispose of its assets by gifts. Therefore, it acted beyond the scope of its powers. Thus, the stockholders revoked the donation on this ground. With With these these revoca revocatio tion, n, plaint plaintiff iff as repres represent ented ed by Estef Estefani ania a their their mother mother,, seek seek t enforc enforce e this this resolutions adopted by the Board of Directors and Stockholders of De la Rama Steamship Co. giving to said children the proceeds of the insurance policies of the deceased with the company as the beneficiary. The company contends that the resolution and the contract executed pursuant thereto are ultra vires and if valid, the obligation to pay the amount given is not yet due and demandable. Plaintiffs won in the lower court, hence this petition. Issue: WON the said Board of Director’s resolution was an ultra vires act? Held:  The grant or donation in question is remunerative in nature and was given in consideration of the services rendered by the heirs’ father to the corporation. The donation has already been perfected such such that that the the corp corpora orati tion on coul could d no lone lonerr resc rescin ind d it. it. It wa was s em embo bodi died ed in a Bo Boar ard d Re Reso solu luti tion on.. Representatives of the corporation and even its creditors as the NDC have given their concurrence.   The The resolu resolutio tion n was actual actually ly carrie carried d out when when the corpor corporati ation on and Estefa Estefania nia entere entered d into into an agreement that the proceeds will be entered as a loan. Estefania accepted the donation and such was recorded by the corporation. The Board of Directors approved Estefania’s purchase of the house in New York. Company stockholders formally ratified the donation.  The donation was a corporate act carried out by the corporation not only with the sanction of the Board of Directors but also of its stockholders. The donation has reached a stage of perfection which is valid and binding upon the corporation and cannot be rescinded unless there exists legal grounds for doing so. The SEC opinion nor the subsequent Board Resolution are not sufficient reasons to nullify the donation.  The donation is also not an ultra vires act. The corporation was given broad and unlimited powers to carry out the purpose for which it was organized which includes the power to (1) invest and deal with corporate money not immediately required in such manner as from time to time may be determined (2) aid in any other manner to any person, association or corporation of which any obligation is held by this corporation. The donation undoubtedly comes within the scope of this broad power. An ultra vires act is (1) an act contrary to law, morals, or public order or contravene some rules of  public policy or duty. It cannot acquire validity by performance, ratification, estoppel. It is essentially void (2) those within the scope of the Articles of Incorporation and not always illegal. It is merely voidable and may become binding and enforceable when ratified by stockholders. Since it is not contended that the donation is illegal or contrary to any of the expressed provisions of  the Articles of Incorporation nor prejudicial to the creditors of the corporation, said donation even if  ultra vires is not void and if voidable, its infirmity has been cured by ratification and subsequent atcs of the corporation. The corporation is now estopped or prevented from contesting the validity of the donation. To allow the corporation to undo what it has done would be most unfair and contravene the well-settled doctrine that the defense of ultra vires cannot be se up or availed of in any completed transaction. NOTE: The ratification of the stockholders of the donation made is the key in this case. Because such

Revised Bagtas Reviewer by Ve and Ocfe 2A ratification is meant to protect the contractual relationship or interest of stockholders.

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CRISOLOGO-JOSE v. COURT OF APPEALS

Facts: Facts: Atty. Atty. Benares Benares was the President President of Movers Movers Enterpris Enterprise e while while Ricardo Ricardo Santos Santos Jr. was the VicePresident. On April 1980 Atty. Benares in accommodation of his clients, the spouses Jaime and Clarita Ong issued a check drawn against Traders Royal Bank in the amount of 45,000 payable to Crisologo Jose. Since the check was under the account of the corporation, the president and the treasurer should sign the check. But since the treasurer was not available, Benares asked Santos to be the altern alternate ate signa signator tory. y. The check check was issue issued d to Crisol Crisologo ogo-Jo -Jose se in consid considera eratio tion n of the wai waiver ver of  Crisologo over a certain property which the GAIA agreed to sell to the clients of Benares (spouses Ong) with the understanding that upon approval of the compromise agreement with the spouses Ong, Ong, the check check will will be encash encashed ed accord according ingly. ly. Howeve However, r, the compro compromis mise e agreem agreement ent was not approved within the expected period. So Benares replaced the check with another one with the same amount also payable to Jose. When petitioner deposited the check, it was dishonored for insufficiency of fund. Petitioner filed criminal complaint for violation of BP 22. Meanwhile, during the preliminary investigation, Santos tendered cashiers check in payment of the dishonored check but petitioner refused to accept it. Santos then encashed the check and deposited the money to the Clerk of Court. Incidentally, Benares purchased the cashier’s check and gave it to the plaintiff to be applied as payment of the dishonored check. RTC held that it was not persuaded to believe that consignation is applicable here. So the complaint was dismissed. CA reversed and set aside such decision. Petitioner contends that the accommodation party in this case is Mover Enterprises and not private respondent who merely signed the check in a representative capacity. Issue: Assuming that Mover Enterprises is the accommodation party, WON it may be held liable on the accommodation instrument. Held: No. Corporation is not liable. The provisions of the NIL which holds an accommodation party liable on the instrument to a holder for value, although such holder at the time of taking the instrument knew him to be only an accommodation party, it does not apply to corporations which are accommodation parties This is because issue or endorsement of negotiable paper by a corporation without consideration and for the accommodation is an ultra vires act. By way of a corporation, an officer or agent may do so ONLY IF specifically authorized to do so. But where the facts show that the accommodation involved was for their personal account, undertaking or purpose and the creditor was aware thereof. NOTE: That while the public is not required to know that one is authorized or not to bind the corpor corporati ation on for a certai certain n obliga obligatio tion n and that that while while the contract contract may be enforc enforced ed even even witho without ut authority because the public dealing in good faith has the right to expect that the obligation entered into shall be complied with, such doctrine does not apply when the dealing public in the first place is in bad faith, as in this case; that is why the corporation was not bound to such accommodation agreement. HARDEN v. BENGUET CONSOLIDATED MINING

Facts: Benguet Consolidated Mining and Balatoc Mining Co. are entities organized for the purpose of engaging in the mining of gold in the Philippines and their respective properties lie only a few miles apart. The original stockholders of Balatoc were unable to supply the means for profitable operation thus, its board ordered a suspension of all work. A general meeting of  the stockholders approved to establish a committee to find investors. The committee in turn approached Bean, President and General manager of Benguet to secure the necessary capital for the development of the Balatoc properties. The management of both companies executed a contract where Benguet was to proceed with the development and construction of a milling plant for the mine and to erect a power plact. In return, Benguet would receive from Balatoc shares of par value of P600,000 in payment of the first 600,000 to be advanced to it.

By 1929, Benguet had spent P1,417,952,15 in pursuance of the contract. Balatoc stockholders have been receiving large dividends. Harden and two other stockholders filed a suit against Benguet, Balatoc and the officers to annul the certificate covering P600,000 shares of Balatoc issued to Benguet and to recover a large sum of money alleged to have been unlawfully collected by Benguet and to annul the contract. The trial court dismissed the complaint, hence this petition. Issue: WON it is lawful for Benguet to hold any interest in another mining corporation? Held: No. Section 75 of the Philippine Bill of 1902 prohibits corporation engaged in mining from being interested in any other corporation engaged in mining. This was amended by Act No. 3518 which now now prov provid ided ed that that a corp corpor orat atio ion n is proh prohib ibit ited ed to hold hold mo more re than than 15% 15% of the the OCS OCS of anot anothe herr corporation. The Corp. Law did not contain any clause directly penalizing the acts of a corporation or member in an interest contrary to Sec. 13 of Act 1459. The penalties imposed by the Corp. Law are of such nature that they can be enforced only by a criminal prosecution or by an action of quo warranto which can only be maintained by the Atty. General. Benguet Co. has committed no civil wrong against the plaintiff stockholders and if a public wrong is committed, the directors of Balatoc and plaintiff Harden himself were the active inducers of the commission of that wrong. The contracts have been performed on both sides and there is no possibility of undoing what has been done. Plaintiffs then invoke Art. 1305 which declares that an innocent party to an illegal contract may recover anything that he may have given while he is not bound to fulfill any promise he may have made. Supposing this is applicable, the general remedy provided by Art. 1305 cannot be invoked where a special remedy is supplied in special law. In as much as the corporation law prohibits the acquisition by one mining corporation of any interest in another and that these were enacted in the exercise of general police power of the government, it results that where a corporation does so, the stockholders cannot maintain an action to annul the contract by which such interest was acquired. The remedy must be sought in a criminal proceeding or quo warranto action instituted by the government. Until thus assailed in a direct proceeding, the contract by which the interest was acquired will be treated as valid as between the parties. NOTE: We are studying Harden because of the pronouncement that even where corporate contracts are illegal illegal per se, se, when when only only public public or govern governmen mentt policy policy is at stake stake and no privat private e wrong wrong is committed, the courts will leave the parties as they are in accordance with their original contractual expectations. (The only contracts that the courts will touch are contracts which are void for being illegal per se.)

(i) Theory of Estoppel or Ratification

 The principle of estoppel precludes a corporation and its Board of Directors from denying the validity of the transaction entered into by its officer with a third party who in good faith, relied on the authority of the former as manager to act on behalf of the corporation. aLipat v. Pacific Banking Corp., 402 SCRA 339 (2003). In order to ratify the unauthorized act of an agent and make it binding on the corporation, it must be shown that the governing body or officer authorized to ratify had had full full and and comp comple lete te know knowle ledg dge e of all all the the ma mate teri rial al fact facts s conn connec ecte ted d with with the the transaction to which it relates. Ratification can never be made on the part of the corpor corporati ation on by the same person person who wrongf wrongfull ully y assum assume e the power to make make the contract, but the ratification must be by the officer or governing body having authority to make such contract. Vicente v. Geraldez , 52 SCRA 210 (1973).  The admission by counsel on behalf of the corporation of the latter’s culpability for personal loans obtained by its corporate officers cannot be given legal effect when the admission was “without any enabling act or attendant ratification of corporate act,” act,” as would would author authorize ize or even even ratify ratify such admiss admission ion.. In the absence absence of such such ratificatio ratification n or authority authority,, such admission admission does not bind the corporation corporation.. Aguenza v. Metropolitan Bank and Trust Co., 271 SCRA 1 (1997).

Doctrin Doctrine e of Laches Laches or “Stale “Stale Deman Demands” ds”::   The The princi principle ple of laches laches or “stale “stale demands” provides that the failure or neglect, for an unreasonable and unexplained length of time, to do that which by exercising due diligence could or should have been

Revised Bagtas Reviewer by Ve and Ocfe 2A 97 done earlier, or the negligence or omission to assert a right within a reasonable time, warrants a presumption that the party entitled to assert it either has abandoned it or declined to assert it. Rovels Enterprises, Inc. v. Ocampo , 391 SCRA 176 (2002). 

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PRINCIPLE OF ESTOPPEL à It being merely voidable, an ultra vires act can be enforced or valida validated ted if there there are equita equitable ble grounds grounds for taking taking such such action action.. Here Here it is fair fair that that the resolution be upheld at least on the ground of estoppel. Ratifi Ratificat cation ion (a) the act must be consu consumma mmated ted and not execu executor tory y (b) credito creditors rs are not prejudiced or all of them have given their consent (c) rights of the public or the State are not involved (d) all the stockholders must give their consent. (ii) Theory of Apparent Authority  (Art. 1883, Civil Code; Prime White Cement Corp. v. IAC, 220 SCRA 103, 113-114 [1993]; Francisco v. GSIS , 7 SCRA SCRA 577 [1963]; Yao Ka Sin Trading v. CA , 209 SCRA 763 [1992]).

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Outwar Outward d appear appearanc ance, e, the agent’ agent’s s appare apparent nt repres represent entati ation on yields yields to the princi principal pal’s ’s true true representation and the contract is considered as entered into between the principal and the third person.

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Due what seems to be and what happens otherwise.

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Q: Upon whom is placed the burden of discovering that the agent has no authority? A: In view of the authority of apparent authority, the third person dealing with the corporation is not given the burden of discovering whether the agent has authority or not. It is also therefore reasonable in a case where an officer of a corporation has made a contract in its name, that the corporation should be required, if it denies the authority of the officer, to state such defense in its answer, since it allows the plaintiff plaintiff to be appraised of the fact that the agent’s authority is contested; and he is given an opportunity to adduce evidence showing either that the authority existed or that the contract was ratified and approved.

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NOTE: The theory of apparent authority is classified into two types by which such may be manife manifeste sted d or proved proved,, which which are by positi position on and by circu circumst mstanc ance. e. The burden burden of proof  proof  mentioned above applies to the second classification.

PRIME WHITE CEMENT CORP. v INTERMEDIATE IN TERMEDIATE APPELLATE COURT

Facts: A director (Te) entered into an agreement of Dealership agreement with PWCC, signed by its chairman and president of the corporation to supply 20,000 bags of white cement per month for five years at a fixed price of P9.70 per bag. Subsequently, the Board refused to abide by the contract unless new conditions are accepted providing for a new price formula. The dealing director sued for specific performance on the contract. Held: The Court held that under both the Corporation Law then and the present Corporation Code, the doctrine is that all corporate powers shall be exercised by the Board of Directors, except as those provided by law. Although it cannot completely abdicate its powers and responsibility to act for the   juridical entity, the Board may expressly delegate specific powers to its president or any of its officers. In the absence of such express delegation, a contract entered into by its President on behalf  of the corporation may still bind the corporation if the Board should ratify the same expressly or impliedly. Implied ratification takes various forms (1) silence or acquiescence (2) by acts showing approval or adoption of the contract or (3) by acceptance and retention of the benefits flowing therefrom. Even in the absence of express or implied authority by ratification, the President as a general rule may bind the corporation by a contract in the ordinary course of business, provided the same is reasonable under the circumstances. These rules are basic but general and flexible. Applies where the President is dealing with third persons but different where a director is dealing with his own corporation.  The court herein held that the director holds a position of trust and as such he owes a duty of loyalty to his corporat corporation ion and his contract contracts s with with the corporat corporation ion must must alw always ays be at reason reasonabl able e terms, terms,

otherwise the contract is void or voidable at the instance of the corporation. The court here found the terms of the Dealership Agreement were unreasonable for the corporation and that the unfairness in the contract was a basis which renders a contract entered into the President without authority from the Board, void or voidable, although it may have been in the ordinary course of business. NOTE: The President as the highest office of the corporation, by practice and jurisprudence embodies apparent authority. On the other hand, the general manager on its own may or may not embody such authority depending on the circumstances that go with it. The corporate secretary and lawyer enjoy no such presumption because their positions do entail much commercial significance.

FRANCISCO v. GSIS

Facts: Trinidad Francisco mortgaged to GSIS a parcel of land with 21 bungalows (Vic-Mari Compound) for a P400,000 loan of which P336,100 was released payable within 10 years with 7% interest per annum compounded monthly. In 1959 GSIS extrajudicially foreclosed the mortgage on the ground of  default of payment in the amount of P32,000 ( total payment amounted to P130,000) where GSIS was also the buyer. Atty. Francisco, the father of Trinidad proposed to the General Manager of GSIS to pay P30,000 of the P52,000 and asked that the foreclosure be set aside and for GSIS to take over the administration of the mortgaged property and to collect installments due on the unpaid purchase price for more than 31 house and lot payees to be applied to the arrearage and the loan. The GSIS approved this and Atty. Francisco was notifed by telegram. GSIS accepted a check for P30,000 and remittances totaling to P44,121.29 for which the corresponding OR’s were issued. GSIS then sent 3 letters signed by the GM asking a proposal for the payment of the debt since the 1yr. Period for redemption had expired. Atty. Atty. Franci Francisco sco protes protested ted and brough broughtt to the attent attention ion of GSIS GSIS the conclu concluded ded contra contract ct and its acceptanc acceptance e by telegram. telegram. GSIS replied replied asking payment for various various expenses expenses and that the telegram telegram should be disregarded for its failure toe express the content of a board resolution due to error of its minor employees in the sending of the telegram. The approval was apparently conditioned on Atty. Francisco’s agreement to pay all expenses incurred in foreclosure. GSIS held that the remittances were insufficient so that GSIS consolidated title to the compound in its name. Hence, this suit for specific performance and damages. The lower court ruled in favor of Francisco. Held: The SC finds no reason for altering the conclusion that the offer of compromise made by Francisco had been validly accepted and was binding on the defendant GSIS. The terms of the offer were clear and the acceptance of the proposal was signed by the GM Andal. The telegram hinted on no anomaly and was within Andal’s apparent authority. Corporation transactions would speedily come to a standstill where every person dealing with a corporation held duty-bound to disbelieve every act of its responsible officers, no matter how regular they should appear on their face. If a corporation knowingly permits one of its officers or any other agent within the scope of an apparent and thus holds him out to the public as possessing power to do those acts, the corporation will as against any one who has in good faith dealt with the corporation through such agent be estopped from denying such authority. Hence, even if it were the Board Secretary who sent the telegr telegram, am, the corpor corporati ation on could could not evade evade the bindin binding g effect effect produc produced ed by the telegr telegram. am. The corpor corporati ation on had suffic sufficien ientt notice notice of the allege allegedly dly unauth unauthori orized zed telegr telegram am when when it pocket pocketed ed the P30,000 but kept silent about it. Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of his employment and in relation to matters within the scope of his authority is notice to the corporation, whether he communicates such knowledge or not.  The silence taken together with the unconditional acceptance of 3 other substantial remittances of  the original agreement constitute a binding ratification of the original agreement. Ratification may be effected expressly or tacitly. There is tacit ratification if with knowledge of the reason which renders it voidable and such reason having ceased, to a person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right. As between two innocent parties, the one who made it possible for the wrong to be done should be

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the one t bear the resulting loss.  YAO KA SIN TRADING v. COURT OF APPEALS

Facts: Maglana, the president and chairman of PWCC sent a letter to Yao Ka Sin Trading represented by its manager Yao. It quoted the following P24.30/94 lbs. Bag net FOB CEBU; P24.30/94 lbs. Bag FOB Asturias; 45,000 bags (15,000/month). On June 30, 1973 Mr. Yao accepted the letter offer and issued a check check for P243,0 P243,000, 00, PWCC Boa Board rd of Direct Directors ors disapp disapprov roved ed the same. On July July 5, 1973 1973 PWCC PWCC informed YKS of the disapproval. However with respect to the 10,000 bags of cement. YKS accepted without protest. On August 4, 1973 PWCC wrote a letter to YKS stating that it is withdrawing or taking delivery of not less than 10,000 bags of cement. On September 10, 1973 YKS insisted on the delivery of the 45,000 bags of cement. On December 7, 1973 PWCC only delivered 9,775 bags. YKS filed an action for specific performance with the CFI. It was discovered that PWCC by-laws give the Chairman and the President the power to execute execute and sign for and in behalf of the corporation all contracts or agreements which the corporation enters into subject to the qualification that all his actuations shall be given to the Board of Directors of the corporation. PWCC contends that Mr. Maglana was not authorized to make any offer and sign a contract in behalf of the corporation and only the Board has the power to do so. The lower court ruled in favor of YKS but the CA reversed. Hence, this peition. Issue: Issue: WON the contract originally originally entered into by PWCC through through Presiden Presidentt Maglana, Maglana, binds the corporation despite the rejection of the Board of Directors. Held:  The by-laws do not confer upon the President, the authority to enter into contracts independently of  the Board of Directors. The fact that contracts are signed through the President was only meant to expedite its execution but still presupposes a prior act of the corporation, through the Board of  Directors. No greater authority can be implied from such express, but limited, delegated authority. It may be presumed that the President has authority to make contracts if he is given general control and supervision over affairs of the corporation. But here, there is a general manager charged with direct management of the business which Mr. Maglana was not involved in.  The doctrine on apparent authority provide that if a private corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts for it, the corporation will be estopped to deny that such apparent authority is real, as to innocent 3 rd persons dealing in good faith with such officers or agents. This apparent authority may result from: (1) the general manager by which the corporation holds out an officer or agents as having power to act (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether with or without the scope of power. However, YKS failed to prove that PWCC indeed clothed Mr. Maglana with apparent power. PWCC also showed that no contract can be signed by the President without the Board of Directors’ approval (and clearance from the NIDC representative and legal counsel). The first contract is at most unenforceable.  The first contract was disapproved and rejected by the Board of Directors which at the same time considered the P243,000 received by Maglana as payment for 10,000 bags of cement, treated as an entirely entirely different different contract. contract. YKS had in fact agreed to this by acceptin accepting g the delivery receipt receipt without without protest. NOTE: NOTE: Under Under the doctri doctrine ne of appare apparent nt author authority ity and under under the sub-cl sub-class assifi ificat cation ion of appare apparent nt authority authority by circumstan circumstance, ce, the first contract is unenforcea unenforceable ble because because PWCC effectively effectively proved through through clear and convinci convincing ng evidence evidence that their their Presiden Presidentt cannot cannot bind the corporatio corporation n without without authorization from the Board of Directors, so not the burden shifted upon YKS for him to provide for such circumstances which have led him to believe that the President has such apparent authority to bind the corporation; however such was not effectively discharged by YKS, that is why the first contract is unenforceable. Also, it is most important to note, that the contract for 10,000 bags of  cement is enforceable because such is a contract of sale entered into by the President in the regular course of business of the corporation. However, the 45,000 bags contract is unenforceable because it is a contract of dealership which is in the extraordinary course of the business of the corporation., hence, not within the purview of the apparent authority of the President.

NOTE: By-laws can bind third parties only when they have knowledge of such, otherwise, such may not bind third parties. In the same manner, knowledge of a third person of such by-laws may bind the corporation.

If a corporation knowingly permits one of its officers to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority. Soler v. Court of Appeals , 358 SCRA 57 (2001).   The authority of a corporate officer dealing with third persons may be actual or apparent . . . the principal is liable for the obligations contracted by the agent. The agent’ agent’ apparent apparent represent representation ation yields to the principal's principal's true representatio representation n and the contract is considered as entered into between the principal and the third person. First  Philipine International Bank v. Court of Appeals , 252 SCRA 259 (1996). Persons Persons who deal with corporate corporate agents agents within within circumstan circumstances ces showing showing that the agents are acting in excess of corporate authority, may not hold the corporation liable. Traders Royal Bank v. Court of Appeals , 269 SCRA 601 (1997). Apparent authority may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act, or, in other words the the appa appare rent nt auth author orit ity y to act act in gene general ral with with whic which h is clot clothe hes s them them;; or (2) (2) the the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereo thereof, f, within within or beyond beyond the scope of his ordina ordinary ry powers powers.. Inter-Asia Investment  Industries v. Court of Appeals, 403 SCRA 452 (2003). When a banking corporation, when an officers arranges a credit line agreement and forwards the same to the legal department at its head officer, and the bank did no disaffirm the contract, then it is bound by it. Premier Dev. Bank v. Court of Appeals , G.R. No. 159352, 14 April 2004. A corporation cannot disown its President’s act of applying to the bank for credit accommodation, simply on the ground that it never authorized the President by the lack of any formal board resolution. resolution. The following following placed placed the corporation corporation and its Board of  Directors Directors in estoppel estoppel in pais Firstly, ly, the by-law by-laws s provid provides es for the powers powers of the pais: First President President,, which which includes includes,, executin executing g contracts contracts and agreement agreements, s, borrowing borrowing money, money, signin signing, g, indors indorsing ing and deliv deliveri ering ng checks checks;; second secondly, ly, there there we were re alread already y previo previous us transactio transaction n of discount discounting ing the checks checks involving involving the same personalitie personalities s wherein wherein any enabling resolution from the Board was dispensed with and yet the bank was able to collect from the corporation. Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637 (1991). NYCO SALES CORPORATION v BA FINANCE CORPORATION Facts: Rufino Yao was the President and General Manager of Nyco Sales Corporation which was engaged in the business of selling construction materials. Nyco Sales through Yao was approached by Santiago and Renato Fernandez on behalf of Sanshell Corporation requesting for credit accommodation since Nyco had discounting privileges with BA Finance. The Fernandezes wen to Yao for the purpose of  discou discounti nting ng their their post-d post-date ated d BPI BPI check check worth worth P60,00 P60,000 0 made made payabl payable e to Nyco. Nyco. The discou discounti nting ng process agreed upon was that Nyco through Yao endorsed the check to BA Finance then BA Finance would issue a check payable to Nyco for which Nyco would then endorse it to Sanshell. With the exchange of checks, the parties agreed to a Deed of Assignment executed by Nyco in favor of BA Finance the subject of which was the check. The Deed contained a Continuing Suretyship Agreement at the back whereby the Fernandezes unconditionally guaranteed to BA Finance full and prompt paymen paymentt and discha discharge rge of any and all indebt indebtedn edness ess of Nyco. Nyco. BPI BPI check check was dishonor dishonored ed which which therefore led BA Finance to report it to the Fernadezes. They then issued another check, this time from Security Bank which was also dishonored. Despite repeated demands, Nyco and Fernandezes failed to settle their obligation which prompted BA Finance to file an action in court. TC ruled against Nyco and the Fernandezes Fernandezes to pay jointly jointly and severally severally.. Nyco’s Nyco’s cross-clai cross-claim m against against the Fernadezes Fernadezes

Revised Bagtas Reviewer by Ve and Ocfe 2A 10 1 was denied they were not declared in default in connection with the cross-claim and that no evidence was presented (it was also mentioned that Nyco should have impleaded Sanshell by way of  a third party complaint and not a cross-claim). CA affirmed the TC with modifications. modifications. Issue: WON Nyco can be held liable for its President unauthorized acts. Held: Nyco as an assignor-vendor warranted that both the credit itself (its existence and legality) and the person of the debtor (his solvency) according to Article 1628of the NCC. Therefore, any breach of the warranties, the assignor should be held answerable. It is of no question that the assignor is liable for the invalidity of whatever he assigned. The deed of assignment executed by Nyco in favor of BA Finance with Sanshell as debtor. BA Finance is actually enforcing the assignment. The check is merely an incidental matter and so Nyco is not being held liable for both the BPI and the Security Bank check but rather the deed of assignment. The issue on no notice of dishonor was given is belied not only by the formal demand letter but also the findings of the TC that Yao and the Fernandezes had frequent contacts before, during and after dishonor. There is no novation because there was no express agreement that BA Finance;s acceptance with Security Bank check will discharge Nyco from liability. Neither is there incompatibility because both checks were given precisely to terminate a single obligation. Nyco disowned the President’s acts claiming that it had not authorized Yao to apply to BA Finance for credit accommodation saying that it did not issue a board resolution giving such authority. However, the by-laws clearly provide for the power of its President, which include executing contracts and agreem agreement ents, s, borrow borrowing ing money, money, signin signing, g, indors indorsing ing and delive deliverin ring g check checks, s, all in behalf behalf of the corporation. Also, there was already a prior transaction of discounting checks involving the same parties wherein any enabling resolution from Nyco was dispensed with and yet BA was still able to collect from Nyco and Sanshell was able to discharge of its liabilities. Therefore, that places Nyco under estoppel in pais which arises when one, by his acts, representations or admissions, or by his silence when he ought to speak out, intentionally or through culpable negligence, induce another to believ believe e certai certain n facts facts to exist exist and such such other other rightf rightfull ully y relies relies on such such belie belief, f, so that that he will will be prejudiced if the former is permitted to deny the existence of such fact.. Per its Secretary’s Certificate, the foundation had given its President ostensible and apparent apparent authority authority to inter deal with with the respon responden dentt Bank, Bank, and theref therefore ore the inter alia deal foundation is estopped from questioning the President’s authority to obtain the subject loans from the respondent respondent Bank. Lapulapu Foundation, Inc., v. Court of Appeals , G.R. No. 126006, 29 January 2004. 3. Express Powers a) Enumerated Powers (Secs. 36) 

Sec. 36 Corporate powers and capacity – Every corporation incorporated under this Code has the power and capacity: 1.) To sue and and be sued in in its corporate corporate name; name; 2.) Of succession succession by its corporate corporate name name for the period of time stated stated in the articles of  incorporation and the certificate of incorporation; 3.) To adopt adopt and use a corporate corporate seal; seal; 4.) To amend its articles of incorporatio incorporations ns in accordanc accordance e with the provisions provisions of this Code; 5.) To adopt by-laws by-laws,, not contrar contrary y to law, morals morals or public public policy, policy, and to ame amend nd or repeal the same in accordance with this Code; 6.) In case of stock stock corporati corporations ons,, to issue or sell sell stocks stocks to subscr subscribe ibers rs and to sell sell treasu treasury ry stocks stocks in accord accordanc ance e with with the provis provision ions s of this this Code; Code; and to admit admit members to the corporation if it be a non-stock corporation; 7.) To purchase, receive, receive, take or grant, hold, convey, convey, sell, lease, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transactions of the lawful business of the corporation

may reasonably and necessary require, subject to the limitations prescribed by law and the Constitution; 8.) To enter into merger merger or consolida consolidation tion with other other corporations corporations as provided in this Code; 9.) To make reasonable donations, including including those for the the public welfare welfare or hospital or char charit itab able le,, cult cultur ural al,, scie scient ntif ific ic,, civi civic c or simi simila larr purp purpos oses es:: Prov Provid ided ed,, That That no corporation, domestic or foreign shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10.)To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11.)To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. b) Extend or Shorten Corporate Term (Secs. 37 and 81 [1])

Sec. 37 Power to extend or shorten corporate term – A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by majority vote of  the board of director or trustees and ratified at a meeting by the stockholders representing at least 2/3 of the outstanding capital stock or by at least 2/3 of the members in case of nonstock corporation. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid or served personally. Provided, that in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. Sec. 81[1] Instances of appraisal right – Any stockholder of a corporation shall have the right to dissent and demand payment of all the fair value of his shares in the following instances: In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholders or rights of any stockholder class of shares, or of authorizing preferences in any respect superior to those outstanding shares of any class, or of extending or shortening the term of the corporate existence. 

Such power only concerns the Juridical Entity Level – such extending or shortening of the term of the corporation tampers with the powers given the corporation by the State.

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Q: Why should such extension or shortening require the ratificatory vote of stockholders when this does not concern the business enterprise level but the juridical entity level? A: Such in effect is an amendment of the articles of incorporation, and any amendment to such would always require the consent of the State and of the corporation’s stockholders.  They also have a say in this because the extension extension or shortening of the corporate term affects these stockholder’s investments.

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Q: Why do stockholders not have appraisal right with respect to the shortening of the corporate term whereas they do in the extension of the corporate term? A: Actually, there is a seeming conflict between Sec. 37 which makes no mention of  stockholder’s appraisal right with respect to the shortening of the corporate term while Sec. 81(1) refers to such. CLV tells us that stockholders should be afforded an appraisal right even in the case of the shortening of the corporate term because it is not enough to talk of free transferability of interests when you dissent to the decrease because such concerns ones expectations with respect to the business enterprise. c) Increase or Decrease Capital Stock (Sec. 38)

Sec. Sec. 38 Pow Power er to increa increase se or decrea decrease se capita capitall stock; stock; incur, incur, create create or increa increase se bonded bonded indebtedness – No corporation shall increase or decrease its capital stock or incur, create or increa increase se any bonded bonded indebt indebtedn edness ess unless unless approv approved ed by a majori majority ty vote vote of the board of  directors and, at a stockholder’s meeting duly called for the purpose, 2/3 of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating, or increasing ant bonded indebtedness. Written notice of the proposed increase or

Revised Bagtas Reviewer by Ve and Ocfe 2A 10 3 diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholders meeting at which the proposed increa increase se or diminu diminutio tion n of the capital capital stock stock or the incurr incurring ing or increa increasin sing g of any bonded bonded indebtedness is to be considered, must be addressed to each stockholder at his place of  residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of directors of the corporation and countersigned by the chairman and the secretary of the stockholders’ meeting, setting forth: (1) That the requirements of this section section have been complied complied with; (2) The amount of the increase increase or diminution diminution of the capital stock; stock; (3) If an increase of the capital capital stock, the amount amount of capital capital stock or number of shares of  no-par stock thereof actually subscribed the names, nationalities, residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each., and the amount paid by each on his subscription in cash or property, or the amou am ount nt of capi capita tall stoc stock k or numb number er of shar shares es of no-p no-par ar stoc stock k allo allott tted ed to each each stockholder if such increase is for the purpose of making effective stock dividend thereof authorized; (4) Any bonded indebtedness indebtedness to be incurred, incurred, created or increased; increased; (5) The actual indebtedness indebtedness of the corporation corporation on the day of meeting; meeting; (6) The amount of stock represented represented at the meeting; and (7) The vote authorizing authorizing the increase increase or diminuti diminution on of the capital capital stock, or the incurring, incurring, creating, or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the the Commission of its certificate of filing, the capital stock stock shall stand increased or decreased and the incurring, creating or increasing any bonded indebtedness authorized, as the certificate of filing may declare Provided, That the Securities and Exchange Commis Com missio sion n shall shall not accept accept for filing filing any certif certifica icate te of increa increase se of capita capitall stock stock unless unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least 25% of such increased capital stock has been subscribed and that at least 25% of the amount subscribed has been paid paid eithe eitherr in actual actual cash cash to the corporat corporation ion or that that there there has been transf transferr erred ed to the corporation property the valuation of which is equal to 25% of the subscription: Provided further, that no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness or increase the same with the approval by a majority vote of the board of trustees and of at least 2/3 of the members in a meeting duly called for that purpose. Bonds Bond s issu issued ed by a corp corpor orat ation ion shal shalll be regi regist ster ered ed with with the the Secu Securi riti ties es and and Exch Exchan ange ge Commission, which shall have the authority to determine the sufficiency of the terms thereof. 

  The The policy policy behind behind the non-gran non-grantin ting g of apprai appraisal sal right right with with respec respectt to the increa increase se and decrease of the capital of the corporation is the fact that every stockholder should come into the corpor corporati ation on setti setting ng awa aware re that that the expedi expedienc encies ies of corpor corporate ate life life may requir require e that that event eventual ually ly the corpor corporati ation on may need need to increa increase se capita capitaliz lizati ation on to fund fund its operat operation ions s or expansions, and needs to look primarily into its equity investors to fund the same.

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In the increase, a stockholder may always sell his stock if he dissents to the increase of the capital stock. Moreover, such appraisal right may defeat the purpose of the corporation in increasing the funds; by increasing the funds for survival, if you grant the appraisal right in

effect you pay out capital when you seek to keep more money inside. 

In the decrease of capital stock, why appraise when in effect you will be returning capital to your stockholders. Despite the board resolution approving the increase in capital stock and the receipt of  payment on the future issues of the shares from the increased capital stock, such funds do not constitute part of the capital stock of the corporation until approval of the increase by Central Textile Textile Mills, Mills, Inc. v. Nationa Nationall Wages Wages and Producti Productivity vity Commis Commission sion , 260 SEC. Central SCRA368 (1996). A reduction of capital to justify the mass layoff of employees, especially of union members, amounts to nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital through the years, and would constitute unfair labor practice. Madrigal & Co. v. Zamora , 151 SCRA 355 (1987).

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Why do you need the consent of the stockholders when you increase or decrease capital stock? When you increase the capital stock, stockholders have to put in more money to maintain their proportionate interest in the corporation, as such the increase dilutes the value of the stock they have prior to such increase. Moreover, such increase affects their rights as in their voting capacity, their sharing in the dividends, their participation in the management, the extent of their participation in the dissolution of the corporation, etc. The consent of the stockholders is needed because such change once again affects their contractual expectation when they first entered into the corporation.

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But in decreasing capital stock, why do you again need the consent of the stockholders whereas in effect they will be receiving part of their investment? Such once again affects their contractual expectation when they first entered into the corporation. d) Incur, Create or Increase Bonded Indebtedness (Sec. 38)

Sec. Sec. 38 Pow Power er to increa increase se or decrea decrease se capita capitall stock; stock; incur, incur, create create or increa increase se bonded bonded indebtedness – No corporation shall increase or decrease its capital stock or incur, create or increa increase se any bonded bonded indebt indebtedn edness ess unless unless approv approved ed by a majori majority ty vote vote of the board of  directors and, at a stockholder’s meeting duly called for the purpose, 2/3 of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating, or increasing ant bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholders meeting at which the proposed increa increase se or diminu diminutio tion n of the capital capital stock stock or the incurr incurring ing or increa increasin sing g of any bonded bonded indebtedness is to be considered, must be addressed to each stockholder at his place of  residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of directors of the corporation and countersigned by the chairman and the secretary of the stockholders’ meeting, setting forth: 1. That the requi requiremen rements ts of this this section section have have been compli complied ed with; with; 2. The amount amount of the the increase increase or diminuti diminution on of the capital capital stock; stock; 3. If an increase increase of the capital capital stock, stock, the amount amount of capital capital stock or number number of shares shares of  no-par stock thereof actually subscribed the names, nationalities, residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each., and the amount paid by each on his subscription in cash or property, or the amou am ount nt of capi capita tall stoc stock k or numb number er of shar shares es of no-p no-par ar stoc stock k allo allott tted ed to each each stockholder if such increase is for the purpose of making effective stock dividend thereof authorized; 4. Any bonded bonded indebte indebtednes dness s to be incurred incurred,, created created or increased increased;; 5. The actual actual indebte indebtednes dness s of the corporat corporation ion on the day day of meeting meeting;; 6. The amount amount of stock represent represented ed at the the meeting meeting;; and

Revised Bagtas Reviewer by Ve and Ocfe 2A 10 5 7. The The vote vote auth authori orizi zing ng the the incr increa ease se or dimi diminu nuti tion on of the the capi capita tall stoc stock, k, or the the incurring, creating, or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing any bonded indebtedness authorized, as the certificate of filing may declare Provided, That the Securities and Exchange Commis Com missio sion n shall shall not accept accept for filing filing any certif certifica icate te of increa increase se of capita capitall stock stock unless unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least 25% of such increased capital stock has been subscribed and that at least 25% of the amount subscribed has been paid paid eithe eitherr in actual actual cash cash to the corporat corporation ion or that that there there has been transf transferr erred ed to the corporation property the valuation of which is equal to 25% of the subscription: Provided further, that no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness or increase the same with the approval by a majority vote of the board of trustees and of at least 2/3 of the members in a meeting duly called for that purpose. Bonds Bond s issu issued ed by a corp corpor orat ation ion shal shalll be regi regist ster ered ed with with the the Secu Securi riti ties es and and Exch Exchan ange ge Commission, which shall have the authority to determine the sufficiency of the terms thereof. 

Bond – security representing denominated units of indebtedness issued by a corporation to raise money or capital obliging the issuer to pay the maturity value at the end of a specified period which should be not less than 360 days. That is why not all indebtedness of the corporation require the ratification of the stockholders, only bonded indebtedness require the ratification of the stockholders.

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A bond in contrast to a promissory note represents a unit of a large indebtedness, whereas a promissory promissory note represents represents a single indebted indebtedness ness and may stand on its own. Mostly Mostly all properties of the corporation i.e. the business enterprise comprise of the security of such bonded indebtedness. indebtedness.

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 The SEC also require that a company has a minimum net worth of P25 M at the time of the filing of the application and must have been in operation for three years. (e) Sell or Dispose of Assets (Sec. 40) Sale by Board of Trustees of the only corporate property without compliance with Sec. 40 of Corporation Code requiring ratification of members representing at least two-thirds of the membership, would make the sale null and void. Islamic Directorate v. Court of   Appeals , 272 SCRA 454 (1997); Peña v. CA, 193 SCRA 717 (1991).

Sec. 40 Sale or other disposition of assets – Subject to the provisions of existing law on illegal combination and monopolies, a corporation may by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money money or other other proper property ty or consid considera eratio tion n as its board of direct directors ors or truste trustees es deem deem expedient, when authorized by the vote of stockholders representing at least 2/3 of the outstanding capital stock, or in the case of non-stock corporation, by the vote of at least 2/3 of the members, in a stockholders’ or members’ meeting duly called for that purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each each stockh stockhold older er or member members s at his place place of reside residenc nce e as shown shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid paid, or served personally: Provided, that any dissenting stockholder may exercise his appraisal right under the conditions provided for in the Code.

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was organized. After such authorization or approval by the stockholders or members, the board of directors or truste trustees, es, may never neverthe theles less, s, in its discre discretio tion, n, abando abandon n such such sale, sale, lea lease se,, exchan exchange, ge, mortgage, pledge or other disposition of property and assets subject to the rights of third partie parties s under under any contra contracti cting ng relati relating ng theret thereto o witho without ut furthe furtherr action action or approv approval al by the stockholders or members. Nothin Nothing g in this this secti section on is intend intended ed to restri restrict ct the power of any corpor corporati ation, on, withou withoutt the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regu regula larr cour course se of busi busine ness ss of said said corp corpora orati tion on or if the the proc procee eeds ds of the the sale sale or othe otherr disposition of such property and assets be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. 

NOTE: When the transaction is in the normal course of business, it only needs the majority of  the quorum of the Board of Director to approve such transaction. However, when such is in the extraordinary course of the business as in the disposition of all or substantially all of the assets of the corporation, such needs the vote of the absolute majority of the Board of  Directors plus the ratification of 2/3 vote of stockholders representing at least 2/3 of the outstanding capital stock of the corporation in case it is a stock corporation, or in the case of  a non-stock corporation, 2/3 of the members.

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  This This case case is one of the exceptio exceptions ns to the rule where where the stockhol stockholder ders s have have propri proprieta etary ry interests in the business enterprise. This is also an exception to the rule that generally the Board of Directors have the power to bind the, and transact for the corporation.

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If trans transact action ions s are enter entered ed into into relati relating ng to this this secti section on witho without ut the ratifi ratificat cation ion of the stockholders, such transaction is void for it is illegal per se as it runs contrary to Sec. 40 of the Corporation Code.

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Example: San Miguel decides to sell its Pale Pilsen formula, but retains all of its P 4B worth of  investment, will such transaction need the ratification of the stockholders and the absolute majori majority ty vote vote of the Board? Board? Yes Yes,, since since it concer concerns ns substa substanti ntiall ally y all all of the assets assets of the corporation as such formula pertains to the capacity of the corporation to earn. The absence of such such ratifi ratificat cation ion violat violates es the social social compac compactt as betwe between en the stockh stockhold olders ers and the corporation corporation.. Such sale violates violates the contractua contractuall expectati expectation on of these these stockholde stockholders, rs, and as such, their ratification must be availed of before it may be entered into. The same is also the case, if San Miguel decides to share the P 4B and retain the Pale Pilsen formula. (f) Invest Corporate Funds for Non-Primary Purpose Endeavor  (Sec. 42; v. Ma-ao Sugar Central Co ., 27 SCRA 247 [1969])

De la Rama

Sec. 42 Power to invest corporate funds in another corporation or business or for any other business purpose – Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least 2/3 of the outstanding capital stock, or at least by 2/3 of the members in the case of non-stock corporations, at a stockholders’ or members’ meeting duly called for that purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place place of reside residence nce as shown shown on the books books of the corpora corporatio tion n and deposite deposited d to the addressee in the post office with postage prepaid or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided however,   That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary.

Revised Bagtas Reviewer by Ve and Ocfe 2A

10 7

DE LA RAMA v. MA-AO SUGAR CENTRAL CO. Facts: De la Rama et.al. contend that Ma-ao Sugar Central through its President, subscribed P300,000 worth of capital stock of the Philippine Fiber Processing Co. Inc. They allege that the time of the first two payments were made there was no board resolution authorizing the investment and that it was only before the third payment that the President was so authorized by the Board of Directors. De la Rama also also conten contends ds that that even even assumi assuming, ng, arguen arguendo, do, that that the said said Boa Board rd Res Resolu olutio tions ns are valid, valid, the transaction is still wanting in legality, no resolution having been approved by the affirmative vote of  the stockholders holding shares in the corporation, entitling them to at least 2/3 of the voting power. Issue: WON the investment of corporate funds of Ma-ao were in violation of corporation law. Held: Investment of corporate funds in another corporation if done in pursuance of the corporate purpose, does not need the approval of the stockholders, but where the purchase of the shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval approval of the stockholders stockholders is necessary necessary.. The investment investment made in Philippine Philippine Fiber was upheld by the SC. Philippine Fiber was engaged in the manufacture of bags or investments in another corpor corporati ation on engage engaged d in the manufact manufacture ure of bags. bags. Since Since the sugar centra centrall is engage engaged d in the manufacture of sugars, sugar bags necessarily would come under the purview of its needs under the regular course of business 

Any corporation whatever its primary purpose has a choice of placing such fund either in a savings or time deposit account or in money market placements, or treasury bills, or even in shares of stocks of other corporations which are traded in the stock exchange. The exercise of  such business judgment on the part of the board in consistency with the primary purpose, since since it is expect expected ed even even from from the stockhol stockholder ders s to belie believe, ve, that that it is within within the ordinary ordinary business discretion of the Board to place the corporation’s investible fund in the form of  investment that would yield the best possible return to the corporation and would not require the ratification of the stockholders or members each time.

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Hotel Corporation invest 2M in 10M Bagoong Company à in this case while it contemplates a situation where the Board exercises ordinary business discretion, such investment would run contra contrary ry to the relati relations onship hip of the Board to the stockh stockhold olders ers whereb whereby y they they engage engaged d to manage the hotel corporation alone, and whereby they vowed to devote all their time and all their their effort effort in such such corpor corporati ation. on. By invest investing ing in 20% of anothe anotherr corpor corporati ation, on, said said Boa Board rd obtain obtained ed a very very big role in the manageme management nt of such such corpor corporati ation, on, hence hence such such would would run contrary to its obligation to the stockholders to take care of the business enterprise of the hotel corporation and not any other corporation’s business enterprise. As such, it would need a ratificatory vote of 2/3 of the stockholders.

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Hotel Company invest 2M in 100B San Miguel Corporation à in this case, the ratificatory vote is not needed since such is really within the ordinary business discretion of the Board. And by investing only in a relatively minimal share in the assets of another company, it does not really engage in the business enterprise of another corporation, hence, they still afford priority to the business enterprise of the hotel corporation.

Declare Dividends Dividends (Sec. 43; Nielson & Co. v. Lepanto Consolidated Mining Co. , 26 (g) Declare SCRA 540 [1968]) Sec. 43 Power to declare dividends – The board of directors of a stock corporation, may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividend due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his paid subscription is fully paid: Provided further, that no stock dividend shall be issued without the approval of stockholders representing not less than 2/3 of the outstanding capital stock at a regular or special meeting duly called for that purpose.

Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor whether local or foreign, from declaring dividends without its/his consent, consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtain obtaining ing in the corpor corporati ation, on, such such when when there there is need need for specia speciall reserv reserve e for probab probable le contingencies. NIELSON & CO. v. LEPANTO CONSOLIDATED MINING CO. Facts: In 1937, Lepanto entered into a management contract with Nielson. In this agreement, Nielson was to manage and operate the Mankayan mining claim of Lepanto in consideration for (a) P2,500 a month and (b) 10% of dividends declared and paid. In 1941, Lepanto declared dividends amounting to P175,000 10%of which Nielson was entitled to P17,500. Lepanto however never paid Nielson a cent. During the liberation in 1945, Lepanto unilaterally terminated the management contract with Nielson. In 1958, Nielson instituted an action for its 10% share in the dividends declared by Lepanto in 1941. The suit reached the SC and it decided against Lepanto in 1941. The suit between Nielson and Lepanto was suspended in 1942 when the US Army bombarded the Mankayan mining claims, thus preventing Nielson from complying with its obligation (i.e. operating and managing the claim).  The tribunal further said that the contract remained suspended even after the war was over in 1945 until 1948 when the mines were fully operational; and that the management contract still had five years years to go from from 1948. 1948. Thus, the SC stated stated that Nielson Nielson was entitle entitled d to 10% of the dividen dividend d declarations in 1949 and 1950 worth P3M. Lepanto sought reconsideration of SC’s decision in 1966. It raised two main points at issue namely: (1) What is the nature of the management contract? Is it one of agency and hence terminable at the principal’s will or is it a contract of lease of services which may be terminated only upon agreed causes? (2) Is Nielson entitled to 10% of the stock dividend even though Lepanto is not a stockholder? Held:  The management contract is a contract for lease of service. (1) The theory of agency was raised only on reconsideration which is a belated move by Lepanto (2) Agency is premised on representation while lease of service is based on employment. While an agent can execute juridical acts in behalf of  his principal ; an employee under a lease of service can only perform non-juridical acts or only material acts. (3) Since the acts of Nielson (exploration, purchase, etc.) are subject to general control and approval of the Board of Directors of Lepanto and cannot create, modify, extinguish business relations between Lepanto and Nielson, these acts can only be considered as material acts done for an employer for compensation. The contract, is therefore, a contract of lease of services. Being such a contract, it cannot be revocable at the will of the employer. The contract specifically provided that Lepanto can cancel the contract only: a.) upon the 90-day written notice and b.) for Nielson’s failure to operate and develop the mining claims for any cause except those causes due to the acts of God. (4) Since the war and the bombardm bombardment ent consti constitut tute e acts acts of God, God, they they cannot cannot be consid considere ered d as grounds to terminate the contract. In fact, the contract is deemed suspended from 1942 to 1948 when neither of the parties could comply with their obligations under it. Under its terms, the contract is suspended in cases of fortuitous events. And such terms must be interpreted to mean that a period equal to the period of suspension must be added to the original term of the contract by way of  extension. Thus, from 1948 the contract still had five more years. And by virtue of this extension, Nielson is entitled to 10% of the dividends declared in 1949 and 1950. Stock dividend is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can loosely be termed as the “trust fund” of the corporation. NTC v. CA, 311 SCRA 508 (1999). h) Enter (Sec.. 44; 44; Enter into into Manage Managemen mentt Contra Contracts cts (Sec Niel Nielso son n & Co., Co., Inc. Inc. v. Lepa Lepant nto o Consolidated Consolidated Mining, 26 SCRA 540 [1968]; Ricafort v. Moya , 195 SCRA 247 [1991]). Why  the difference in rule between entity and individual? Sec. Sec. 44 Pow Power er to enter enter into into manage managemen mentt contra contracts cts – No corpor corporati ation on shall shall conclu conclude de a manage managemen mentt contra contract ct with with anothe anotherr corpor corporati ation on unless unless such such contra contract ct shall shall have have been been approved by the board of directors and by stockholders owning at least the majority of the

Revised Bagtas Reviewer by Ve and Ocfe 2A 10 9 outstanding capital stock, or by at least a majority of the members in the case of a nonstock corporation of both managing and the managed corporation at a meeting duly called for that purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and managed corporations own or control more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least 2/3 of the total outstanding outstanding capital stock entitled to vote, or by at least least 2/3 of  the members members in the case of a non-st non-stock ock corporat corporation ion.. No manage managemen mentt contra contract ct shall shall be entered into for a longer period than five years for any one term.   The The provis provision ions s of the next next preced preceding ing paragr paragraph aph shall shall apply apply to any contra contract ct whereb whereby y a corporation undertakes to mange or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise otherwise:: Provided Provided however, That such service contracts contracts or operating operating agreements agreements which which relate to exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. 4. Implied Powers

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

 The act of issuing checks is within the ambit of a valid corporate act, for it as for securing ultra vires vires act.  Atrium a loa loan n to financ finance e the activiti activities es of the corporat corporation ion,, hence, hence, not an ultra Management Management Corp. v. CA , 353 SCRA 23 (2001). 6. Other Powers

a) Sell Sell Land Land and and Other Other Prope Propertie rties s When the corporation’s primary purpose is to market, distribute, export and import mercha merchandi ndise, se, the sale sale of land land is not withi within n the actual actual or appare apparent nt author authority ity of the corporation corporation acting through its officers, officers, much less when acting through the treasurer. treasurer. Likewise Articles 1874 and 1878 of Civil Code requires that when land is sold through an agent, the agent’s authority must be in writing, otherwise the sale is void. San Juan Structura Structurall v. CA, 296 SCRA 631 (1998) Realty y & Dev., Dev., Inc. Inc. v. Diese Dieselm lman an Freigh Freight  t  (1998);;  AF Realt Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp. , 414 SCRA 190 (2003).

b) Borr Borrow ow Fun Funds ds

 The power to borrow money is one of those cases where even a special power of  attorney is required under Art. 1878 of Civil Code. There is invariably a need of an enabling act of the corporation to be approved by its Board of Directors. The argument that the obtaining of loan was in accordance with the ordinary course of business usages usages and practices of the corporation corporation is devoid of merit because because the prevailing prevailing practice in the corporation was to explicitly authorize an officer to contract loans in behalf of the corporation. China Banking Corp. v. Court of Appeals , 270 SCRA 503 (1997).

a. Powe Powerr to to Su Sue Under Sec. 36 of Corporation Code, in relation to Sec. 23, where a corporation is an injured party, its power to sue is lodged with its Board of Directors. A minority stockholder who is a member of the Board has no such power or authority to sue on the corporation’s behalf. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001); Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002). Where Where the corpor corporati ation on is real real partyparty-inin-int intere erest, st, neithe neitherr admini administr strato atorr or a projec projectt manager could sign the certificate against forum-shopping without being duly authorized by resolution of the Board of Directors ( Esteban, Jr. v. Vda. De Onorio, 360 SCRA 230 [2001]), nor the General Manager who has no authority to institute a suit on behalf of the corporation even when the purpose is to protect corporate assets. ( Central Cooperative Exchange Inc. v. Enciso , 162 SCRA 706 [1988]). When the power to sue is delegated by the by-laws to a particular officer, such officer may appoint counsel to represent the corporation in a pre-trial hearing without need of a formal board resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993). For counse counsell to sign sign the certif certifica icatio tion n for the corpor corporati ation, on, he must must specif specifica ically lly be Leasing Corp. Corp. v. CA, 416 author authorize ized d by the Boa Board rd of Direct Directors ors.. BPI Leasing 416 SCRA SCRA 4 (200 (2003) 3);; Mariveles Shipyard Shipyard Corp. v. CA , 415 SCRA 573 (2003).

(d) Provide Gratuity Pay for Employees Providing gratuity pay for employees is an express power of a corporation under the Corporation Code, and cannot be considered to be ultra vires to avoid any liability arising from the issuance of resolution granting such gratuity pay. Lopez Realty v. Fontecha, 247 SCRA 183, 192 (1995).

(e) Donate (f) Enter Partnership Enter  Partnership or Joint Venture. Tuason & Co. v. Bolanos , 95 Phil. 106 (1954); SEC Opinion, dated 29 February 1980.  TUASON & CO. v. BOLANOS Facts:  JM Tuason & Co. Inc. represented by its managing partner Gregorio Araneta Inc. filed a complaint in the CFI for recovery of possession of registered land situated in Tatalon, QC against Quirino Bolanos. Defend Defendant ant in his answer answer claims claims through through prescr prescript iption ion and that that the registra registratio tion n of said said land land was obtained through fraud. The CFI ruled in favor of the plaintiff and declared that defendant had no right to the land. Hence, this appeal. Issue: WON the case should have been dismissed on the ground that it was not brought by the real party in interest? Held: No, the rules of court require that an action be brought in the name of but not necessarily by the real party in interest. In fact,the practice really is for the attorney-at-law to bring the action and file the complaint in plaintiff’s name which was done her. And while it is true that the complaint also states that the plaintiff is represented herein by its managing partner G. Araneta Inc. another corporation, there is nothing against one corporation being represented by another person, natural or juridical in a suit in court.

Revised Bagtas Reviewer by Ve and Ocfe 2A

11 1  The contention that G. Araneta Inc. cannot act as managing partner on the theory that it is illegal for two corporat corporation ions s to enetr enetr into into a partne partnersh rship ip is withou withoutt merit merit for the true true rule rule is that that though though a corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture with another where the nature of the venture is inline with the business authorized by is charter.  There is nothing in the record to show that the venture which plaintiff is represented by G. Araneta is not inline with the corporate business of either corporation. 

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

QUICK REFERENCE ON THE POWERS OF THE CORPORATION

POWER

STATUTORY REQUIREMENT

Pow ower er to short horte en or extend extend corporate corporate term (Sec. 37)

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Power to increase capita capitall stock stock and also also the power to decrease capital stock (Sec. 38)

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PROCEDURE

Approved by a majority vote of the Board Boa rd of Direct Directors ors (majority of the quorum) Ratified by at least 2/3 2/3 of the the OCS OCS or 2/3 of members in a non-stock corporation.

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Writ Writte ten n noti notice ce to each stockholder

Extension à Yes, such such consti constitut tutes es a novation of the contract. Shortening à No, but not because such is inherent, because such is not inherent as it constitutes an alteration of the powers granted it by the State.

Approved by a majority vote of the Board Boa rd of Direct Directors ors (majority of   quorum) Ratified by at least 2/3 of the OCS

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Writ Writte ten n noti notice ce to each stockholders Special documentary requirements Prior rior appr approv oval al of  the SEC; SEC shall not accept for filing unless with a sworn statement by trea treasu sure rerr that that 252525 rul rule com complie plied d with SEC approval triggers effectivity Written notice Prior rior appr approv oval al of  the SEC Supporting documents

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Power Pow er to incur, incur, create create or increase indebtedness (Sec. 38)

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WITH OR WITHOUT APPRAISAL RIGHT

Approved by a  majority vote of the  Board Boa rd of Direct Directors ors (majority of    quorum)

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Increase à None, dilutes the worth of  the the stoc stock, k, defe defeat ats s the purpose purpose of the increase. Decrease à None, because in effect there is a return of part of  investments of the stockholders

None – drains the corporation corporation of financial financial resour resources ces contra contrary ry to the purpos purpose e for which which the power is exercised.

required: Ratified by at least 1) trust indenture 2/3 of the OCS with with a trus truste tee e SEC INTERIM bank GUIDELINES à 2) unde underw rwri riti ting ng Corporation must have: agreement Minimum net worth  Bond nds s regi regist ster ered ed of P25 M at the  Bo with the SEC time of the filing of  the application Have been in  operation for at least 3 years Must fulfill financial  ratio ratio mandat mandated ed by SEC in interim guidelines Power Power to sell, sell, dispose, dispose, 1) Of all or (1) Must lease, lease, encumber encumber (Sec. (Sec. substa substanti ntiall ally y all of  comply with the 40) its property Bulk Sales Law Majority vote of   Listing the  ALL à Quantitative Board Boa rd of Direct Directors ors corporate corporate creditors creditors  Test (majority of   and the amount quorum) and nature of their SUBSTANTIALLY ALL à claims Qualitative Test  Ratified or (pur (purpos pose e for for whic which h it approved by 2/3 of   Failure renders was incorporated) the the OCS OCS or 2/3 of  transaction void the members (2) (2) If no rati ratifi fica cato tory ry Relates to the vote of stockholders, it  is an utra vires act of  primary purpose. 2) Exception to Sec. the third kind 40 – if the sale is nece ecessar ssary y in the the usua usuall and and regu regula larr course course of busine business ss or if proc roceeds eeds of  the the sale ale or othe otherr disposit disposition ion of such property and assets be appropriated for the the cond conduc uctt of its its remaining businesses Majority vote of   Board Boa rd of Direct Directors ors (business judgment rule Does Do es not not rela relate te to  primary or secondary purpose Power to purchase own  Must be for a legitimate purpose – example: shares (Sec. 41) (1) eliminate eliminate fraction fractional al shares arising arising out of stock dividends Buy back of shares (i) (2) collect or compromise an decr decrea ease se the the cost cost of  inde indebt bted edne ness ss to the the corp corpor orat atio ion n doing business (ii) arising out of unpaid subscription in a perp perpet etua uate te cont contro roll of  deli delinq nque uenc ncy y sale sale,, and and to purc purcha hase se the enterprise. delinquent shares during said sale and (3) to pay diss issenti entin ng or with ithdraw drawin ing g 

 Yes, such a sale does not necessarily leas to a dissolution of the corporation and return of the residual value of  the corporation. Such is afforded as a matter of  equity and fairness.

None

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Power to invest corpo orpora rate te funds unds in another corporation or busi busine ness ss or for for any any othe otherr purp purpos ose e (Sec (Sec.. 42)

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Revised Bagtas Reviewer by Ve and Ocfe 2A 11 3 stock tockho hollders ders exer exerc cising sing thei theirr appraisal right   Taken Taken from URE only except redeemable redeemable shares Yes,, beca becaus use e minu minus s Approved by a  Writ Writte ten n noti notice ce of    Yes majo ma jori rity ty vote vote of  the rati ratifi fica cato tory ry vote vote the proposed the the Board of   inve invest stme ment nt and and the contract or Directors (majority the time and place transaction falls under of quorum) of me meet etin ing g shal shalll the realm of ultra Ratified by at least be addr addres esse sed d to vires vires transa transacti ctions ons of  2/3 of the OCS each each stockh stockhold older er or member at his the third type.

As a general rule, section 42 applies if the invest investmen mentt is for secondary or other than the primary purpose.  Except if the investment is reasonably necessary to accomplish its prim primar ary y purp purpos ose e as state tated d in the the Articles of   Incorporation, approv roval of the stockholders is not necess necessary ary as it is included in the Business Judgment of Board of   Directors Cash dividends  (1) Absolute majority of   Board of   Directors à in accordance with the Business  Judgment Rule (2) Only declared out of the URE which shall be payable in cash, in property or in stock (3) However, cash dividends due on delinquent shares shall shall be first first applie applied d to the unpaid balance while while stock dividend dividends s shall be withheld until fully paid  Stock dividends à approval of 2/3 of 

place of residence as shown in the books of the corp corpor orat atio ion n and and depo deposi site ted d to the the addr addres esse see e in the the Post ost Offi Offic ce with ith postage prepaid or served personally.

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Power to declare dividends (Sec. 43)

Sec. Sec. 43 proh prohib ibit its s  Yes. stock stock corpor corporati ation on from retaining surp surplu lus s prof profit its s in excess of 100% of  their paid-up capital stock, EXCEPT: (1) When justified by definite corporate expansion projects or program ams s as approv roved by the Board of  Directors (2) When corporation corporation is proh prohib ibit ited ed unde underr any any loan loan agre agreem emen entt from declaring divide dividend nds s withou withoutt its consent and such 

the OCS at a regu regula larr or spec specia iall meetin mee ting g calle called d for that purpose.

Power to enter into management contracts (Sec. 44)

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con consent ent has not yet yet been secured or (3) When it can be clearly shown that such retention retention is necessar necessary y under special circumstances obtaining in the corp corpor orat atio ion n such such as when there is need for special reserve rve for profitable contingencies. Approved by absolute majority of the Board of Directors Approved by stockholders owning majority of  the OCS

HOWEVER where: (1) Stockholders representing the same interest of both managing and the managed corporation own or control more than 1/3 of the total OCS entitled to vote of the managing corporation OR (2) (2) Wher Where e a ma majo jori rity ty of the the me memb mber ers s of the the Board of Directors of the managing corporation also constitute a majority of the members of the Board of Directors of the managed corporation.  Then it must be approved by the stockholders of  the managed corporation owning at least 2/3 of  the OCS EXCEPT if the corporation is organized primarily as management company. 

Not for a period longer than five years for any one term.