Revised Bagtas Reviewer by Ve and Ocfe 2A ATENEO DE MANILA LAW SCHOOL OUTLINE ON PHILIPPINE CESAR L. VILLANUEVA Atty. CORPORATE LAW1 2ND SEMESTER, SY 2004-2005 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 en tity inSpanish law exactly corresponding to the notion "corporation" in English and American law; the Philippine Commission enacted the Corporation Law (Act No. 1459), to introdu ce theAmerican corporation into the Philippines as the standard commercial entit y and to hasten theday when the sociedad annima of the Spanish law would be obsol ete. The statute is a sort ofcodification of American Corporate Law. Harden v. B enguet Consolidated Mining, 58 Phil. 141 (1933). 2. The Corporation Law The first corporate statute, the Corporation Law, or Act No. 1459, became effect ive on 1April 1906. It had various piece-meal amendments during its 74-year hist ory. It rapidly 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 adop tedvarious corporate doctrines enunciated by the Supreme Court under the old Cor poration Law. It clarified the obligations of corporate directors and officers, expressed in s tatutory languageestablished principles and doctrines, and provided for a chapte r on close corporations. 4. Proper Treatment of Philippine Corporate Law Philippine Corporate Law comes from the common law system of the United States. Therefore, although we have a Corporation Code that provides for statutory princ iples, Corporate Law is essentially, and continues to be, the product of commercial dev elopments. Much of this development can be expected to happen in the world of commerce, and someexpressed jurisprudential rules that try to apply and adopt corporate princ iples into the changing concepts and mechanism of the commercial world. 1Unless otherwise indicated, all references to sections pertain to The Corporati on Code of the Philippines. 2The whole body of statutory and jurisprudential rules pertaining to corporation s is referred to as "CorporateLaw" to differentiate it from the old statute know n as "The Corporation Law," or Act No. 1459.

grant is conferred. A corporation will be formed only when 5 individual persons , as incorporators, agree to form a corporat II. CONCEPTS See opening paragraphs of VILLANUEVA, Corporate Contract Law, 38 ATENEO 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 opera tion of law, having the rights of succession and the powers attributes and properties, expres sly authorized by law or incident to its existence. Art. 44(3) The following are juridical persons Corporations, partnerships and as sociations forprivate interest or purpose to which the law grants a juridical pe rsonality, separate anddistinct 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 lawscreating 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 th e provisionsof this Code concerning partnerships. 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 oftheir organization. Art. 1775 Association and societies, whose articles are kept secret among the me mbers, andwherein any pone of the members may contract in his own name with thir d persons, shallhave no juridical personality, and shall be governed by the prov isions relating to co-ownership corporation is an artificial being created by operation of law. It has a persona lity separateand distinct from the persons composing it, as well as from any oth er legal entity to which itmay be related. PNB v. Andrada Electric & Eng ring Co., 381 SCRA 244 (2002). an artificial being - a person created by law or by state; legal fiction

created by law its existence is dependent upon the onsent or grant of the stateEXC EPT corporation by estoppel and de facto corporation -the definition of a corporation is merely a guide and does not really provide f or thebasis of a corporation Q. Why is it important to know that the corporation is a juridical person? A. To be able to know that the corporation is able to contract with others.

Revised Bagtas Reviewer by Ve and Ocfe 2A Q. Why does the definition of a corporation involve a statement creature of the law ? A. To reiterate the fact that the corporation can only do acts given to it by th e law. It is of 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 tang ibles ( ex. in a grocery, the goods being sold) (b) BUSINESS ENTERPRISE OR ECONOMIC UNIT the commercial venture; this includes not o nly thetangible assets but also the intangibles like goodwill created by the bus iness 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 in its own way as there are consequences for each. The dist inctions becomeimportant and come into play when it comes to dealing with corpor ation law What are you selling orbuying (and their worth) will depend upon the p articular level you choose. EXAMPLE: If you merelywant to purchase the assets an d not the business, a simple deed of sale would suffice and you willnot be liabl e for contingent liabilities. It will be different if you buy the business as an economic concept. SEC Regulations or 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 contractualrelationship on four (4) levels: Between the corporation and its agents or representatives to act in the real world, such as its directors and its officers, which is governed also by theLaw on Agency Between the corporation and its shareholders or members Between and among the shareholders in a common venture B) EXTRA-CORPORATE LEVEL, which views the relationship between the corporation a ndthird-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 anAGGRUPATION OF PERSONS DOING BUSINESS or AN UNDERLYING ECONOMIC UNIT.

-The corp. is emerging as an enterprise bounded by economics rather than an arti ficialpersonality bounded by forms of words in a charter, minute books & books o f accounts. The proposition that a corp. has an existence separate and distinct from its

Tayag vs Benguet Consolidated, Inc. (26 SCRA 242) membership has its limitations. (Separate existence is for a particular purpose. ) There can be no corp. existence w/o persons to compose it & there can be no association w/o associates. (a) Theory of Concession (aTayag v. Benguet Consolidated, 26 SCRA 242 [1968]). corporation creature of the state limited no other privilege may be exercised beyond grant

To organize a corporation that could claim a juridical personality of its own an d transact business as such, is not a matter of absolute right but a privilege whi ch may beenjoyed only under such terms as the State may deem necessary to impose . cf. Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 (1962) It is a basic postulate that before a corporation may acquire juridical personali ty, theState must give its consent either in the form of a special law or a gene ral enabling act, and the procedure and conditions provided under the law for the acquisition of s uchjuridical personality must be complied with. Although the statutory grant to an associationof the powers to purchase, sell, lease and encumber property can o nly be construed thegrant of a juridical personality to such an association . . . nevertheless, the failure to comply with the statutory procedure and conditions does not warrant a finding th at suchassociation acquired a separate juridical personality, even when it adopt s 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 Corpor ationCode, then even a simple family corporation cannot claim an exemption nor c an it haverules and practices other than those established by law. Torres v. Cou rt 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 , 002shares of stock of appellant Benguet Consolidated, Inc. -Renato Tayag, as ancilliary administrator in the Philippines, requested County Trustto surrender to ancilliary administrator the stock certificates to satisfy the legitimateclaims of local creditors. However, County Trust refused. The lower court then presided by Judge Santos ruled that : 1. stock certificates are considered lost for all purposes of admin. & liquidationo f the Philippine estate of Perkins 2. said certificates are cancelled

3. directs said corp. To issue new certificates in lieu thereof, the same to bedeli vered by aid corp. to either Tayag or the Probate division of this court. -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 Coun tyTrust. They also assert that there was a failure to observe certain requiremen ts ofits by-laws before new stock certificates could be issued. ISSUE: Whether or not Benguet properly pursued the appeal? HELD: The Court held that the appeal cannot prosper. Judgment affirmed. Benguet bound by order. -the challenged order represents a response & express a policy arsing out of a specific problem, addressed to the attainent of specific ends by the use of spec ificremedies, w/ full & ample support from legal doctrines of weight and signifi cance.

Form wn s pplic on & concession. virtue of a primary franchise given by the state. And it is within the power of the state to grant it or not. But once grante Revised Bag tas Reviewer by Ve and Ocfe 2A -A disagreement ensued between the ancilliary and the domiciliary admin to who w sentitled the certificate of stocks -The CFI ordered County Trust to produce and deposit the stocks with the court w /cwasn t complied with Thus the order of the CFI. 5 5 -Benguet didn t dispute Tayag s authority to gain control & possession of all thehe corp. life of its own tells it to go and multiply profitably. The corp. like eve ry Juan and Maria given life by God acts on it assets of the decedent w/n the Phil. -Corporation is an artificial being created by operation of law. It owes it life to the state its birth being purely dependent on its will. -Flether: A corp. is not in fact and in reality a person, but the law treats it a s thoughit were a person by process of fiction, or by regarding it as an artific ial persondistinct and separate from its individual stockholders. -There is thus a rejection of Gierke s genossenchaft theory. A corp as known to Ph il. Jurisprudence is a creature w/o any existence until it has received the imprimat ur ofthe state acting according to law. It is logically inconceivable therefore that it willhave rights and privileges of a higher priority than that of its cre ator. More than that it cannot legitimately refuse to yield obedience to acts of its state organs, ce rtainlynot excluding the judiciary, whenever called upon to do so. -Corporate by-laws must yield to judicial order -As a matter of fact, a corp. once it comes into being comes more often w/n the kenof the judiciary than the other two coordinate branches. It institutes the ap propriate court action to enforce its right. Correlatively, it is not immune from judicial controlin those instances, where a duty under the law as ascertained in an appr opriate legalproceeding is cast upon it. c) Theory of Enterprise Entity (BERLE, Theory of Enterprise Entity, 47 COL. L. R EV. 343 [1947]) -juridical personality -contractual relation between 5 or more individuals -recognize existence of an aggregation of individuals (enterprise entity) A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing its elf as acollective body, it waives no constitutional immunities and perquisites appropriate to sucha body. PSE v. Court of Appeals, 281 SCRA 232 (1997). Corporations are composed of natural persons and the legal fiction of a separate

corporate personality is not a shield for the commission of injustice and inequi ty, such asto 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 BY OPERATION OF LAW ( Creature of the Law ) -its existence is dependent upon the consent or grant of the state EXCEPT corpor ationby estoppel and de facto corporation C) WITH RIGHT OF SUCCESSION ( Strong Juridical Personality ) -the corporation exist despite the death of its members as a corporation has a personality separate and distinct from that of its individual stockholders. The separatepersonality remains even if there has been a change in the members and s tockholdersof the corporation. D) HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCI DENT TO ITS EXISTENCE ( Creature of Limited Powers ) 6. Advantages 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 wer e aperson by process of fiction or by regarding it as an artificial person disti nct andseparate 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. aStockholders of F. Gua nzon 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 theassets of the corporation which provided that due to the resol ution of the stockholders dissolving thecorporation, they have distributed among themselves in proportion to their shareholdings, as liquidating dividends, the assets of said corporation including real properties located in Manila. Thecertificate of liquidation was denied registration by the Register of Deeds and one of the grounds isthat the judgment of the corporation in approving dissolution and directing opposition of assets ofthe corporation ne ed to be presented aside from the following: (1) the number of parcels which wer enot certified in the acknowledgement (2) P430.50 registration fees have to be p aid (3) P90.45docustamps need to be attached. Stockholders contend that it was n ot conveyance but a meredistribution of corporate assets after the corporation c eased to exist upon dissolution. Issue: WON the certificate merely involves a distribution of the corporate asset s or should be considered a transfer or conveyance. Held:

The Supreme Court agrees with the Register of Deeds and the Land Registration Co mmission. A corporation is a juridical person distinct from the members composing it. Proper ties registered in thename of the corporation are owned by it as an entity separ ate and distinct from its members. Whileshares of stock constitute personal prop erty, they do not represent property of the corporation. Thecorporation has prop erty of its own which consist mainly of real estates. A share of stock only typi fiesan aliquot part of the corporation s property or the right to share in the pro ceeds to that extent whendistributed 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 is he entitled to the possession of any definite portion of its property or asse ts. The stockholder is not a co-owner or tenant in common of the corporate property. Thus, the act of liqui dation made by the stockholders of the corporation s assets cannot be considered as a partition of th e community property but rather a transference or conveyance of the title of its assets to t he individual stockholders in proportion to their stockholdings. Therefore, said transfer cann ot 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 directorsor 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 ofDire ctors save in those instances where the Corporation Code requires stockholders app roval for certain specific acts. Great Asian Sales Center Corp. v. Court of Appe als, 381 SCRA 557 (2002). (iii) LIMITED LIABILITY TO INVESTORS AND OFFICERS One of the advantages of the corporation is the limitation of an investor sliabili ty to the amount of investment, which flows from the legal theory that acorporat e 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 liabi lityof its officers a corporate officer and his spouse cannot be made personally l iableunder a trust receipt where he entered into and signed the contract clearly in hisofficial capacity. Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001). Obligations incurred by the corporation acting through its directors, officers a ndemployees, are its sole liabilities. Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001). (iv) FREE TRANSFERABILITY 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 s hares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer. Thomson v. Court of Appeals, 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 Advantageous Characteristics of Corporate Organization: (i) Strong Legal Personality -entity attributable powers; -continuity of existence; Disadvantages: (i) Abuse of corporate management -there is severance of control and

. having the right of succession, the death of an individual stockholder does not affect corporateexistence . not a natural occurrence, exists mainly because thelaw provides for it. This is what distinguishes the separate juridical personality of a corporation from a partnership. The legal personality of a corp is strong because the law provides for the right of succession, surviving even w/o those who incorporated it while in a partnership the separate juridical personality is extinguished upon the death of a partner . no delectus personarum (ii) Limited Liability of Investors ( providedfor by jurisprudence only) -the liability of an investor islimited their investments and investors cannot be held accountable for more than what they invested. -CLV: However there are a lot of ways to circumvent thelaw and make the shareholders liable for more than his actual investment (ex. A creditor requiring thechairmn or president of thecompany as a joint debto r ofthe loan) -A trade-off to the abdication made by the investor of hisright to manage the propertyhe had invested in the ownership. Control will be vested with the BoD, thus investors

have no say over the use of their investment and little voice in the conduct of the business (ii) Abuse of limited liability feature -this feature had been abused and may hurt innocent creditors. (ii) Cost of maintenance -the formation and incorporationof a corp. entails a lot of difficulties and costs, particularlythe requirementsmade by the law so as to qualify for incorporation. (iv) Double taxation Dividends received by individuals from domestic corporations are subject tofinal 10% tax for income earned on or after 1 January 1998 (Sec. 24(B) (2), 1997 NIRC) Inter-corporate dividends between domestic corporations, however, are not subject to any income tax (Sec. 27(D)(4), 1997 NIRC)

Revised Bagtas Reviewer by Ve and Ocfe 2A company. Under propertylaw, a person exercises fullownership over his propertybu t when he invests it in a corporation, the owner abdicated the six jus of ownership (iii) Free Transferability of shares -A legal relationship is created which is more stable for there are laws which govern, and the corp. and the 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 flowsfrom the legal theory that a corp. entity is separate anddistinct from its stockholders In addition, there is reimposition of the 10% improperly accumulated earnings tax for holdingcompanies (Sec. 29, 1997NIRC) Q. Is a corp. in our jurisdiction given the feature of limited liability? A. No. The feature of limited liability is given to 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 case, it comes with the separate juridical personality. Q. If limited liability as shown in a corporation setting good for the investors, d oes it mean thatdelectus personarum is a bad thing? A. No. It is good in one way, since persons are bound by the contracts they enter i nto. 7. COMPARED WITH OTHER BUSINESS MEDIA 4 Distribution of Risk, Profit and Control 3 a) Sole Proprietorships Sole Proprietorship Corporation Free from many requirements and Heavily regulated; a lot of regulations in its operation requirements imposed for registration and incorporation Owner has full control of his business Control of business is done by the

and fiat. Just because the BoD an that the former derives its BoD Owner stands to lose more than BoD Owner stands to lose more than what he puts into the venture

are to be elected by the stockholders does not me powers fro Investors have limited liabilty Investors have limited liabilty

(b) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code) Art. 1768 The partnership has a juridical capacity separate and distinct from th at of each ofthe partners, even in case of failure to comply with requirements o f Art. 1772 first paragraph. Art. 1775 Association and societies, whose articles are kept secret among the me mbers, andwherein any pone of the members may contract in his own name with thir d persons, shallhave no juridical personality, and shall be governed by the prov isions relating to co ownership Corporation Separate legal personality Investors limited liability Free transfer of shares Centralized management Partnership Separate legal personality Contractual limited liability ( when a limited partnership is created) Transfer with consent of partner Every partner is agent Q. How does the contractual management of a corp. compare with the management of a partnership? A. Every partner, in the absence of a stipulation in the articles of partnership , binds thepartnership as every partner is an agent of the others (delectus pers onarum). 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 Joint venture Q. Can a corporation be a partner in a regular partnership? A. No. Because a partner must be a natural person. It is against public policy f or corporation to be a partner in a regular partnership. Q. If limited liability is something that can be contracted in a partnership, wh y did the legislature putsuch limited liability as an attribute of a corporation ? If the feature of limited liability cots moneythen why not take it out? Why no t eave it up to the investors who can decide if they want limitedliability or no t? A. Even though limited liability will cost a lot of money, borrowing makes a lot more sense. If I have

Pioneer insurance & Surety corp. vs. CA ( 175 SCRA 668) Revised Bagtas Reviewer by Ve and Ocfe 2A P100M, it would be foolish to put all my eggs in one basket (if the basket falls , all eggs break). So, Imerely put P10M in one corporation and then borrow the P 90M while the rest of my money I ptsomewhere else. If the corporation fails, I d o not lose all my P100M, I lose only my P10M. But if the corp. succeeds and I get to pay my creditor, I retain the P10M plus the profits acquired from theP90M paid up loan. This is the concept of LEVERAGING, using oth er people s money to make a profit for yourself. This is why borrowing is an integral part of corporate life and it is up to the creditors tomake a diligent appraisal of the credit standing of th e corp. Q. What is the main distinction between a corporation and a partnership? A. A corp. is an intermingling of corporation law and contract law. On the other hand, a partnership is purely a contractual relationship and so every time a partner dies, the contr act is actually extinguished. Q. What is Corporation Law all about? A. It is all about jurisprudence actually built around the 4 attributes of a cor poration Q. Can a defective attempt to form a corporation result at least in a partnershi p? A. Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989); Lim Tong Lim v. P hilippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999). Facts: -In 1965, Jacob S. Lim was engaged in the airline business as owner of SouthernA irlines, a single proprietorship. -On May 17, 1965, he bought from Japan Domestic Airlines for the sale of 2 aircr aftsand one set f necessary spare parts for the total price of $109,00. Both arr ived in Manila -On May, 22 1965, Pioneer Insurance Corp, as surety executed and issued its sure tybond in behalf of Lim, principal, for the balance price for the aircrafts and spare parts. -Border Machinery and Heavy Equipment (BORMAHECO), the Cervanteses and Constancia Maglana contributed some funds in the purchase of the above aircrafts and spare parts. The funds were supposed to be their contributions to anew corporation proposed by Lim to expand his airline business. They executed indemnity agreements in favor of Pioneer, one signed by Maglana and the otherjoi ntly signed SAL, BORMAHECO and Cervantes: where they principally agree andbind t hemselves jointly and severally to indemnify pioneer. -On June 10, 1965 Lim for SAL executed in favor of Pioneer a deed of chattel mortgage as security for the suretyship in favor of Pioneer. The deed was dulyre gistered with the Manila RoD and with the Civil Aeronautics Administration. -Lim defaulted on his subsequent installments prompting JDA to request paymentfr om the surety. Pioneer paid about P298,000 -Pioneer filed for an extra-judicial foreclosure of the mortgage but the Cervant eses

and Maglana filed a third party complaint claiming that they are co-owners of th eaircraft. Pioneer later filed a petition for judicial foreclosure and an applic ation for a writ of preliminary attachment against Lim, the Cervanteses, BORMAHECO and Maglana. -In their answer, the Cervanteses, BORMAHECO and Maglana alleged they were notpr ivy to the contracts signed by Lim. -The RTC ruled in favor of Pioneer, holding Lim liable but dismissing the case a s to theother defendants. On appeal, the CA affirmed. ISSUE: whether or not the Cervanteses, BORMAHECO and Maglana are entitled to rei mbursement ofamounts given by Lim? HELD: Lim s assertions: The failure of respondents to incorporate, a de facto partnershi pamong them was created, and that as a consequence of such relationship all must share inthe losses and/or gains of the venture in proportion to their contribut ion. PRINCIPLES: Persons who attempt, but fail, to form a corporation and who carry o n business underthe corporate name occupy the position of PARTNERS INTER SE. Thu s, where persons associate themselves together under articles to purchase property to carry on a business, and their organization is so defective as to come short of creating a corp. w/n the statut e, they become in legaleffect partners inter se, and their rights as members of the company to the property acquired by thecompany will be recognized. However, such a relationship does not exist, for ordinary persons cannot be made to assumethe relation of partners, as between themselves, when their purpose is that no partnership shall existand should be implied only when necessary to do justice between the parties: thus, one who takes no part except to subscribe for stock in a proposed corporation which is never l egally formed doesnot become a partner with other subscribers who engage in busi ness under the name of the pretended corp., so as to be liable as such in an action for settlement of the a lleged partnership andcontribution. -the records show that Lim received the amount of P151,000 representing the participation of BORMAHECO and Maglana -it was clear that Lim never intended to form a corp with them but they were dup edinto giving their money -no de facto corp. was created Q. In cases where there is a defective attempt to form a corp. which is the prev ailing rule, a partnership inter se is created or a corporation by estoppel? A. It depends wholly on the extent of the participation of the party on who a cl aim is being mind. In the case at bar, there was no intent on the other parties to enter into a partne rship but a corporation. As to the Cervanteses & BORMAHECO, they cannot be considered to have entered eve n into apartnership inter se, since there was no intention to do so and to be he ld liable as such.

But if it were the Cervanteses or BORMAHECO, who entered into the contracts usin g thecorporate name and actively participated in the activities of the corporati on, then they are to be heldliable as partners. Q. Why are we taking up Pioneer? Why were they not liable? A. Because Pioneer shows us that for a person to be liable as a partner, he shou ld have activelyparticipated in the conduct of the business, the SC held in this case that to be able to be held liablethe person should possess powers of manag ement.

Revised Bagtas Reviewer by Ve and Ocfe 2A Q. What is the difference between Pioneer and Lim Tong Lim? A. In the case of Pioneer, the SC stopped when it declared that to be liable, yo u have to possesspowers of management. In Lim tong Lim, it continues its pronoun cement, by saying that if you havebeneficial ownership over the business, then y ou 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 i nto a contract withPhil. Fishing Gear Industries Inc. for the purchase of fishin g nets and floats. They claimed that theywere a fishing venture with Lim Tong Li m who was however not a signatory to the contract. Theyfailed 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 Que st was a nonexistent corporation as shown by the certification from SEC. Chua admitted liability and Yao waivedhis right to cross-examine and present evidence because he failed to a ppear while Lim filed acounterclaim and a cross-claim. Court granted the writ of attachment and ordered the Auction Saleof the F/B Lourdes which was previously attached. Trial court ruled that PFGI was entitled to the Writand Chua, Yao and Lim were jointly liable as general partners. Held: 1.) Lim was contesting that the CA ruled that there was a partnership in the Com promiseAgreement and alleges that he had no direct participation in the negotiat ions and was merely leasing F/B Lourdes to Chua and Yao Facts found by the TC and CA showed that the re wasa partnership formed by the three of them. They initially purchased two bo ats through a loanfrom Lim s brother and as security, was placed in the name of Li m Tong Lim. The repairs andsupplies were shouldered by Chua and Yao. A civil cas e was filed by Chua and Yao against Limfor nullity of commercial documents, refo rmation of contracts and declaration of ownership offishing boats which was settle d amicably. In the Compromise Agreement, it was revealedthat they intended to pa y the loan from Jesus Lim by selling the boats and to divide amongthem the exces s or loss. Therefore it was clear that a partnership existed which was not solel ybased on the agreement. It was merely an embodiment of the relationship among p arties. 2.) Lim alleges that he was merely a LESSOR by showing the Contract of Lease and registration papers of the boats, including F/B Lourdes where the nets were found As found by thelower courts, the boats were registered to Lim only as security for the loan that was grantedto the partnership by the brother of Lim, which was not an unco mmon practice. Aside fromthe fact that it was absurd for Lim to sell the boats t o pay the debt he did not incur, if neededhe was merely leasing the boats to Chu a and Yao. 3.) Lim contests his liability by saying that only those who dealt in the name o f the ostensiblecorporation should be held liable. His name was not in any of th e contracts and never dealt with PFGI Sec. 21 All persons who assume to act as a corporation knowing it to b e withoutauthority to do so shall be liable as general partners for all debts, l iabilities and damagesincurred or arising as a result thereof; Provided however that when any such ostensiblecorporation is sued, on any transaction entered by it as a corporation or ant tort committedby it as such, it shall not be allowed to use as a defense its lack of corporate personality. Evenif the ostensible cor porate entity is proven to be non-existent, a party may be estopped fromdenying

its corporate existence because an unincorporated association has no personality and would be incompetent to act and appropriate for itself the power and attribu tes of acorporation as provided by law. It cannot create agents or confer author ity on another to acton its behalf. Thus, those who act or purport to act as its representatives do so withoutauthority and at their own risk. Clearly, Lim bene fited from the use of the nets found insideF/B Lourdes which was proved to be an asset of the partnership. He in fact questioned theattachment because it has ef fectively interfered with the use of the vessel. Thoughtechnically, he did not d irectly act on behalf of the corporation, however, by reaping thebenefits 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 co rporation byestoppel. CLV: Pioneer case actors who knew of corporation s non-existence are liable as gen eral partnerswhile actors who did not know are liable as limited partners, passi ve investors are not liable; Limteaches us that even passive investors should be held liable provided they benefited from suchtransactions. (c) Joint Ventures Joint venture is an association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks. It requi res a community of interest in the performance of the subject matter, a right to direc t andgovern the policy in connection therewith, and duty, which may be altered b y agreementto share both in profit and losses. Kilosbayan, Inc. v. Guingona, Jr. , 232 SCRA 110 (1994). Q. What is the difference between a joint venture and a partnership? A. A joint venture is by law a partnership because it follows the same definitio n as having two ormore persons binding themselves together under a common fund w ith the intention of dividing theprofits between themselves. Therefore, every jo int venture is a partnership. The distinction between the two is that a joint venture is for a limited purpose only while a partnershi p involves an arrangement or an on-going concern. Q. Is it possible for a joint venture not to be a partnership? A. Yes. When the joint venture forms a corporation, it then becomes a joint vent ure corporation. Q. Does the requirement of registration needed in a partnership also required in a joint venture? A. No. Only in a partnership is registration required (Art. 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 interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepti ng a fairshare of the risks and benefits of the undertaking in accordance with u niversally acceptedcooperative principles. Cooperatives are established to provide a strong social and economic organizatio n to ensure that the tenant-farmers will enjoy on a lasting basis the benefits of agr arian reforms. Corpuz v. Grospe, 333 SCRA 425 (2000). Cooperative Separate Juridical Personality Governed by principles of democratic control where the members have equal voting rightson a one-member-one vote principle BoD manage the affairs of the coop. But it is the GA of full membershipthat exercises all the rights and performs all of the obligations of the Corporation

SH vote their percentage share of the stocks subscribed by them BoD is the repository of all powers EXCEPT for acts where the Corp. Code requires concurrence or

Revised Bagtas Reviewer by Ve and Ocfe 2A coop. Under the supervision of the coop. Development Authority Organized for the purpose of providing goods and services to itsmembers and thus to enable them to attain increased income and saving, etc. ratification by the SH Under the Supervision of the SEC Stock Corp. for profit; Non-Stock Corp eleemosynary (charitable, philantrophic) purpose e) Business Trusts (Article 1442, Civil Code) Art. 1442 Q. What is the difference between a business trust and a corporation? A. The relationship in a business trust is essentially a trust relationship. The business trust does not have a personality which is apart from the trustor or the trustee/beneficiary. T he concept of a separate juridical personality is absent from a business trust. (f) Sociedades Annimas A sociedad annima was considered a commercial partnership where upon the execution of the public instrument in which its articles of agreement appear, an d thecontribution of funds and personal property, becomes a juridical person an ar tificial being, invisible, intangible, and existing only in contemplation of law with power to hold, buy, and sell property, and to sue and be sued a corporation not a generalcopartners hip nor a limited copartnership . . . The inscribing of its articles of agreemen t inthe commercial register was not necessary to make it a juridical person a corp oration. Such inscription only operated to show that it partook of the form of a commerci al corporation. Mead v. McCullough, 21 Phil. 95 (1911). The sociedades annimas were introduced in Philippine jurisdiction on 1 December18 88 with the extension to Philippine territorial application of Articles 151 to 1 59 of theSpanish Code of Commerce. Those articles contained the features of limi ted liability andcentralized management granted to a juridical entity. But they were more similar to theEnglish joint stock companies than the modern commercial corporations. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956). Our Corporation Law recognizes the difference between sociedades annimas and 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 as a sort of an accidental partnership constituted in such amanner that its existence was only known to those who had an interest in the same, therebeing no mutual agreement between the partners, and without a cor porate name indicating to the public in some way that there were other people besides the on e whoostensibly managed and conducted the business, governed under Article 239 o f the Codeof Commerce. Those who contract with the person under whose name the business of such partnership of cuentas en participacion is conducted, shall have only a right of actionagainst such person and not against the other persons interested, and the latter, on theother hand, shall have no right of action against third person wh o contracted with the

manager unless such manager formally transfers his right to them. Bourns v. Carm an,7 Phil. 117 (1906). III. NATURE AND ATTRIBUTES OF A CORPORATION 1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitut ion) The Congress shall not except by general law, provide for the formation, organiz ation orregulation of private corporations, Government-owned or controlled corpo rations may becreated or established by special charters in the interest of the common good and subject tothe test of economic viability. P.D. 1717, which created New Agrix, Inc. violates the Constitution which prohibi ts the formation of a private corporation by special legislative act which is neither o wned nor controlled by the government, since NDC was merely required to extend a loan to the newcorporation, and the new stocks of the corporation were to be issued to t he old investors andstockholders of the insolvent Agrix upon proof of their clai ms against the abolished

Revised Bagtas Reviewer by Ve and Ocfe 2A corporation. NDC v. Philippine Veterans Bank, 192 SCRA 257 (1990). Congress cannot enact a law creating a private corporation with a special charte r, 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 3 63 (2004). Q: What distinguishes a public corporation from a private corporation owned by t he government? A: It is not ownership which distinguishes a publiccorporation from a private corporation. It is the civil service eligibility of its employees and ifthe financial records are subject to the examination of the Commission on Audi t. A publiccorporation is created by its charter whereas a private corporation i s created under theCorporation Code. 2. CORPORATION AS A PERSON: (a) Entitled to Due Process The due process clause is universal in its application to all persons without re gard toany differences of race, color, or nationality. Private corporations, lik ewise, are persons within the scope of the guaranty insofar as their property is concerned. Smith B ell & 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 corporation is protected by the constitutional guarantee against unreasonable searches and seizures, but its officers have no cause of action to assail the le gality of theseizures, regardless of the amount of shares of stock or of the int erest of each of them insaid corporation, and whatever the offices they hold the rein may be, because 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 wit h adistinct legal entity. In organizing itself as a collective body it waives no constitutionalimmunities appropriate for such body. Its property cannot be take n without compensation; can only be proceeded against by due process of law; and is protected against un lawfuldiscrimination. 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 is a corporation entitled to the rights of due process and equal protecti on? CLV: A corporation enjoys constitutional rights. In that manner, it enjoys the s ame protectionthe law grants to an individual. A corporation is entitled to due process and equal protectionby virtue of the juridical personality given by the State through the primary franchise of thecorporation. The constitution did not distinguish whether the term person in Sec. 1 Art. III ofthe Constitution refers t o an individual or a juridical entity, which therefore extends to privatecorpora tions within the scope of the guaranty.

Q: Why is the corporation entitled to the protection against unreasonable search es and seizures? A: The corporation being entitled to due process and equalprotection i s 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 on ly theseparate juridical personality of the corporation but also grants unto it all the rights andprotections that a natural individual would possess which incl udes the right to due processand equal protection. However, a corporation is also entitled to protection against unreasonable searc hesand seizures. This right however does not emanate from the grant of the State by way ofprimary franchise but is sourced through the Theory of Enterprise Enti ty which recognizes thatregardless of Section 2 of the Corporation Code, a corpo ration is still for all intents andpurposes an association of individuals under an assumed name and with a distinct legalpersonality. In organizing itself as a collective body, it waives no constitutional immunities forsuch body. (1) Its pr operties cannot be taken without just compensation (2) it can only beproceeded a gainst 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 sear ch andseizure involves physical intrusion into the premises of the corporation, and therefore alsointrudes into the personal and business privacy of the stockho lders or members who composeit. It can be seen that the right of the individual against unreasonable searches and seizures isextended 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 juridicalpersons. Bataan Shipyard & Engineering v. PCGG, 150 SCRA 181 (1987). While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested withspecial privileges and franchises, may refuse to show its hand when charged with anabuse of such privilege. Hale v. Henkel, 201 U.S. 43 (1906); Wilson v. Un ited States, 221 U.S. 361 (1911); United States v. White, 322 U.S. 694 (1944). Q: Why is a corporation entitled to equal protection but not the right against s elfincrimination? A: Any individual is entitled to equal protection whetherthey 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 is meant to prevent individuals from having to lie under oath in order to protecthis interest. It is to protect the individual from having to commit p erjury just to keephimself from going to jail. However, if a corporation lies un der oath, who would you bringto jail when in fact, a corporation is just a legal fiction. 2. The corporation is subject to the reportorial requirements of the law. The corpo rationbeing a mere creature of the State is subject to the whims of its Creator. The corporationpowers are limited by law. CLV: Beats me! Perhaps such right is attributable to the moral dimension of an i ndividual, andsince 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 m oral andtechnical 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 Interna tional Corp., 270 SCRA 298 (1997); Alfafara v. Acebedo Optical Company, 381 SCRA 293 (2 002). 4. Liability for Torts A corporation is civilly liable in the same manner as natural persons for torts, because therules governing the liability of a principal or master for a tort co mmitted by an agent orservant 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 princ ipal or master isliable for every tort which he expressly directs or authorizes, is just as true of a corporation as

a natural person. aPNB 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 for the agricultural year 19561957. Since, she did not need it, she agreed to allow Mr. Jacobo Tuazon to use the sai d quotafor consideration of 2,500. Her sugar cannot be exported without sugar qu ota allotments. Sometimes, however a planter harvests less sugar than her quota so her excess qu ota is usedby her mother who pays for it. This is her arrangement with Mr. Tuazo n. At the time of theagreement, she was indebted to PNB of San Fernando, Pampang a. Her indebtedness was known as a crop loan and was secured by her sugar crop, and since her quota was mortgagedto PNB, her arrangement with Mr. Tuazon had to be approved by the bank. Upon presentmentof the lease arrangement, the PNB branch manager revised it by increasing the lease amount

Revised Bagtas Reviewer by Ve and Ocfe 2A to P2.80 per picul for a total of P2,800. Such increase was agreed to by both Ri ta and Jacobo. However, when it was presented to the Board of Directors for approval, they furt her increasedthe amount to P3.00 per picul. Jacobo asked for the reconsideration but he was denied thesame. The matter stood as it was until Jacobo informed Rit a and PNB that he had lost interest in pursuing the deal. In the meantime, the debt of Rita with the PNB matured. Si nce she had asurety agreement with the Philippine American General Insurance Co. Inc. (Philamgen), thelatter paid her outstanding debt. Philamgen in turn demand ed from Rita the amount whichthey paid the bank. Instead of paying the bank, Rit a claimed that she told Philamgen that shedid not consider herself indebted to t he bank since she had an agreement with JacoboTuazon. When such was discontinued , she failed to realized the income with which she could have paid her creditors. Philamgen filed a complaint for the collection of sum o f moneyagainst Rita. Rita implicated PNB as a third party defendant claiming tha t her failure to paywas due to the fault or negligence of PNB. Issue: WON PNB is liable for the damage caused to Rita. Held: . There is no question that Rita s failure to utilize her sugar quota was due to the disapproval of the lease by the Board of Directors of the petitioner, thus PNB s hould beheld liable. . The Board justified the increase to P 3.00 per picul by saying that it was the p revalent rateat that time. However, there was no proof that any other person was willing to lease thesugar quota allotment of Rita for a price higher than P2.80 per picul. Just because thereare isolated transactions where the lease price wa s P3.00 per picul does not mean thatthere are always ready takers. . While PNB had the ultimate authority of approving or disapproving the proposed l easesince the quota was mortgaged to the bank, the latter certainly cannot escap e its responsibility of observing precaution and vigilance which the circumstances of the casejustly demanded in approving or disapproving the lease of said sugar quo ta. . According to Art. 19 of the Civil Code, [e]very person must in the exercise of hi s rightsand the performance of his duties, act with justice, give everyone his d ue and observehonesty and good faith. This the petitioner failed to do. As a cons equence, Art. 21 states, [a]ny person who willfully causes loss or injury to another in a manner that is contrary tomorals, 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 civ illy liable inthe same manner as natural persons for torts, because generally sp eaking, the rulesgoverning the liability of a principal or master for a tort com mitted by an agent or servantare the same whether the principal or master be a n atural person or artificial person. All ofthe authorities agree that a principal

or master is liable for every tort which he expresslydirects or authorizes, this is just as true of a corporation as of a natural person. Acorporation, liable therefore, whenever a tortuous act is committed by an officer oragent er express direction or authority from the stockholders or members acting as dy, or generally, from the directors as the governing body.

and is und abo

NOTE: CLV tells us that it is clear from the ruling of the Court in this case th at not everytortuous act committed by an officer can be ascribed to the corporat ion as its liability, for it isreasonable to presume that in the granting of aut hority by the corporation to its agent, such agrant did not include a direction to commit tortuous acts against third parties. Only when thecorporation has expr essly directed the commission of such tortuous act, would the damagesresulting t herefrom be ascribable to the corporation. And such a direction by the corporati on, is manifested either by its board adopting a resolution to such effect, as in th is case, orhaving taken advantage of such a tortuous act the corporation, throug h its board, expresslyor impliedly ratifies such an act or is estopped from impu gning such an act. Our jurisprudence is wanting as to the definite scope of corporate tort. Essential ly, tort consists in the violation of a right given or the omission of a duty imposed by law; abreach of a legal duty. The failure of the corporate employer to comply with the law-imposedduty under the Labor Code to grant separation pay to employ ees in case of cessation of

operations constitutes tort and its stockholder who was actively engaged in the managementor 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) underexpress direction of authority from the stockholders or membe rs acting as a body or through theBoard of Directors. Q: How can authority given to the agent of the corporation be determined? A: Either by: (a) such direction by the corporation is manifested, by its board adopting a resolution to such effect (b) by having takien advantage of such a tortious act, the corporationthrough its board, has expressly or impliedly ratified such an a ct 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 theref ore corporate assets cannot escape enforcement of the award of damage to the tort victim. As a remedy , the stockholders may institute a derivative suit against the responsible board membe rs and officersfor the damages suffered by the corporation as a result of the to rt suit. 5. Corporate Criminal Liability (aWest Coast Life Ins. Co. v. Hurd, 27 Phil. 401 (1914); aPeople v. Tan Boon Kong, 54 Phil. 607 [1930]; aSia v. Court of Appeals, 121 SCRA 655 [1 983]; 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 business regularly and legally in the Philippines. An information was file d against theplaintiff corporation as well as John Northcott and Manue Grey char ging the said corporation andsaid individuals with the crime of libel. The contr oversy started when Northcott, as generalmanager for the Philippines of said com pany and John Grey who was an agent and employee ofthe company, conspired to rel ease certain circulars containing foul statements against Insular LifeCompany cl aiming that the Insular Life was then and there in a dangerous financial conditi on onthe point of going into insolvency, to the detriment of the policy holders of the said company, andof those with whom said company have and had business tr ansactions. The plaintiffs then filed amotion to quash summons sent by the Judge , on the ground that the court had no jurisdictionover 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 powe r or authority toproceed against a corporation, criminally, to bring it into cou rt for the purpose of making itamenable 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 genera l jurisdiction, itwas held that under circumstances of their creation, they have only such authority in criminalmatters as is expressly conferred upon them by s tatute or which is necessary to imply from suchauthority in order to carry out f

ully and adequately the express authority conferred. The SC didnot feel that Cou rts 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, stillthe SC does not believe that the courts are authorized to go t o the extent of creating specialprocedure and processes for the purpose of carry ing out the penal statutes, when the legislativeitself has neglected to do so. T his is true since the courts are creatures of the statute and haveonly powers co nferred upon them by statute. Philippines courts have no common law jurisdiction

Revised Bagtas Reviewer by Ve and Ocfe 2A or powers. PEOPLE v TAN BOON KONG Facts: During 1924, in Iloilo, Tan Boon Kong as manager of the Visayan General Supply C o. engaged inthe purchase and sale of sugar, bayon, copra, and other native prod ucts and as such must payinternal revenue taxes upon is sales. However, he only declared 2.3 million in sales but in actuality the sales amounted to 2.5 million, therefore failing to declare for th e purpose of taxationabout 200,000, not having paid the government 2,000 in taxe s. Upon filing by the defendant of ademurrer, the lower court judge sustained sa id motion on the ground that the offense chargedmust 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 contr ary to a greatweight of authority. The court pointed out that, a corporation can act only through its officers and agents where the business itself involves a violation law, the correct rule is t hat all who participate in it are criminally liable. In the present case, Tan Boon Kong alle gedly made a falsereturn for purposes of taxation of the total amount of sales f or year 1924. As such, the filing offalse returns constitutes a violation of law . Him being the author of the illegal act must be heldliable. SIA v PEOPLE Facts: The facts reveal that in 1963, the accused Jose Sia was the general manager of M etal Manufacturing Company of the Philippines engaged in the manufacturing of steel o ffice equipment. When the company was in need of raw materials to be imported from abr oad, Siaapplied for a letter of credit to import steel sheets from Tokyo, Japan, the application beingdirected to Continental Bank and was opened in the amount of $18,300. According to the Continental Bank, the delivery of the steel sheets was only permitted upon the e xecution of thetrust receipt. While according to Sia, the steel sheets were alre ady delivered and were even converted to equipment before the trust receipt was signed by him. However, ther e is no question that when the bill of exchange became due, neither the accused nor his company madepayments, despite demands of the bank. On appeal, Sia contends that he should not be heldliable. Issue: WON petitioner Sia may be liable for the crime charged, having acted only for and in behalfof his company. Held: NO. The Court disputed the reliance of the lower court and the CA on the general principle that fora crime committed by a corporation, the responsible officers thereof would personally bear thecriminal liability, as enunciated in Tan Boon K ong. The latter provides that: [t]he corporation wasdirectly required by law to d

o an act in a given manner and the same law makes the person whofails to perform the act in the prescribed manner expressly liable criminally. The performance o fan act is an obligation directly imposed by the law on the corporation. Since i t is a responsibleofficer or officers of the corporations who actually perform t he act for the corporation, they mustof necessity be the ones to assume the crim inal liability; otherwise this liability as created by thelaw would be illusory, and the deterrent effect of the law, negated. The Court concluded that the cited case does not fall squarely with the circumst ances surrounding Sia since the act alleged to be a crime is not in the performance of an act directlyordained by law to be performed by the corporation. The act is i mposed by the agreement of theparties in pursuit of the business. The intention of the parties is therefore a factor determinant ofwhether a crime or a civil ob ligation 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 cre ated a doubt thatmust be ruled in his favor according to the maxim, that all dou bts must be resolved in favor of theaccused. CONTRASTING THE THREE CASES . In the case of West, the court in effect enunciated that for a person to proceed criminallyagainst a corporation, it was necessary that express provisions of la w be enacted, specificallyproviding that a corporation may be proceeded against criminally and brought to court. . But since a corporation is a legal fiction that cannot be handcuffed and brought to court, thecase of Tan Boon Kong provided that since a corporation acts throu gh its officers and agents, any violation of law by any of the actors of the corporation in the conduct of i ts businessinvolves a violation of law, the correct rule is that all who partici pate in it are liable. In makingactors liable, the court here said attaching cri minal liability to the fiction cannot be donesince: (1) a corporation is only an artificial person (2) there is a lack of intent imputable to abeing since it la cks its own mind. . To apply the doctrine of separate juridical personality would allow criminals to use the corporation as a shield or cloak to hide their criminal activities behind such. . However, the liability of officers were delineated in case of Sia where the cour t held that theresponsible officer is personally liable is personally liable for crimes committed by the corporation only in a situation where the corporation was directly required by l aw to do an actin a given manner, and the same law makes the person who fails to perform the act in theprescribed 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 def ined as offendersof criminal acts, as with the case of the Anti-Money Laundering Act. . Art. 102 of the RPC: Subsidiary civil liability of innkeepers, tavern-keepers an d proprietors ofestablishments In default of the persons criminally liable, innk eepers, tavern-keepers and any other person or corporations shall be civilly liable for crimes committed in their establishments, in all cases where a violation of municipal ordinances or some g eneral orspecial police regulation shall have been committed by them or their em ployees. Innkeepers are also subsidiarily liable for the restitution of goods taken by ro bbery or theft within their houses from guests lodging therein, or for the payment of the value therefore, provided that such guests shall have notified in advance the innkeepe r himself, orthe person representing him, of the deposit of such goods within th e inn; and shall

furthermore have followed the directions which such innkeeper or his representat ive mayhave given them with respect to the care of and vigilance over such goods . No liability shallattach in case of robbery with violence against or intimidat ion of persons unless committedby the innkeeper s employees. . Art. 103 of the RPC: Subsidiary civil liability of other persons The subsidiary liabilityestablished in the next preceding article shall also apply to employers , teachers, persons andcorporations 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 pr ohibitionextends 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 againstthe corporation itself, it does not follow that the corporation cann ot be a real-party-in-interestfor the purpose of bringing a civil action for mal icious prosecution for the damages incurredby the corporation for the criminal p roceedings brought against its officer. Cometa v. Court of Appeals, 301 SCRA 459 (1999).

Revised Bagtas Reviewer by Ve and Ocfe 2A Q: Why can the corporation be held liable for tortuous acts done by its agent bu t not forcriminal acts done outside its authority? A: Crime is not within the corporate contemplation while negligence is. Negligen ce could bepart of every transaction. It is an integral part of corporate transa ctions. For as long as peoplecomprise the corporation, it is within the contempl ation of every corporate act. 6. Recovery of Moral and Other Damages A corporation, being an artificial person, cannot experience physical sufferings , mentalanguish, fright, serious anxiety, wounded feelings, moral shock or socia l humiliation which arebasis 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 d amages. Mambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968); APT v. Cour t of Appeals, 300 SCRA 579 (1998). A corporation, being an artificial person and having existence only in legal con templation, has no feelings, emotions nor senses; therefore, it cannot experience physical s uffering andmental anguish. Mental suffering can be experienced only by one havi ng a nervous systemand it flows from real ills, sorrows, and griefs of life all of which cannot be suffered by anartificial person. Prime White Cement Corp. v. IA C, 220 SCRA 103 (1993); LBC Express, Inc. v. Court of Appeals, 236 SCRA 602 (1994); Acme Shoe, Rubber & Plastic Corp. v. Cour t of Appeals, 260 SCRA 714 (1996); Solid Homes, Inc. v. Court of Appeals, 275 SCRA 26 7 (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 corpora tionmay recover moral damages if it has a good reputation that is debased, result ing in socialhumiliation is an obiter dictum. Recovery of a corporation would be under Articles 19, 20 and 21 of the Civil Code, but which requires a clear proof of malice or bad faith. A BS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999). 7. CORPORATE NATIONALITY: UNDER WHOSE LAWS INCORPORATED (Sec. 123) . Section 123: Definition and rights of foreign corporations For the purposes of t his Code, aforeign corporation is one formed, organized or existing under any la ws other than those ofthe Philippines and whose laws allow Filipino citizens and corporations to do business in thePhilippines after it shall have obtained a li cense to transact business in this country inaccordance with this Code and a cer tificate of authority from the appropriate government agency. There are three tests to determine the nationality of the corporation, namely: 1.) Place of incorporation that a corporation is of the nationality of the count ry under whoselaws it has been organized and registered, embodied in Sec. 123 of the Corporation Code. 2.) Control test nationality determined by the nationality of the majority stock holders, whereincontrol is vested.

. Situation #1: 51% Filipino 49% Japanese Under the control test, the nationalityc annot be determined because for a group of stockholders to exercise control over acorporation it is required by the Corporation Code that they at least control 60% of the corporation. Why 60%? Because under the Corporation Code for a group of personst o incorporate a corporation, at least 5 persons are required by law. A majority of the 5is 3 and converting it into percent, one gets 60%. We can say that in fa ct 51% ismajority but in a group of 5 people 51% is 2 & 1/5, there really is no 1/5 of a person. . Situation #2: 60% Filipino 40% Japanese Under the control test, this is consider ed a

Filipino corporation. 3.) Principal place of business applied to determine whether a State has jurisdi ction over theexistence and legal character of a corporation, its capacity or po wers, 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 whethera corporation can engage in nationalized activities in the cou ntry, and the third one is used todetermine the jurisdiction of the State to enf orce 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 int o varioustransactions or engage in different industries. And also, the legal fic tion supporting a corporationis valid only within Philippine territory. Q: It was said that the place of incorporation is the primary test to determine the nationality ofthe corporation, why then are there other tests used? A: There are certain aspects of the Philippine economy that require that the con trolling test incorporations engaging in said type of business be that of Filipi nos. The nationalized economicsectors are primarily focused at making Filipino i nterests benefit directly from the bounties of thiscountry. The place of incorpo ration test need not have been expressly provided by theConstitution since it is an integral part of our law specifically the power of Congress to grantprimary franchise to corporations. The place of incorporation test is deemed the primary test. It isa true test of nationality. Being a creature of law of the place whe re it was incorporated, thecorporation cannot escape said law. By providing for the control test, the Constitution is providingfor 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 t he first test, thenationality of the corporation may have been established but t his does not mean that thecorporation is entitled to enter every single economic sector of the Philippines. The control testdetermines now whether the corporati on fulfills the equity requirements of the Constitution. Indoing this, the other tests are made such as: war-time test, investment test and grandfather rule. EXCEPTIONS: TEST OF CONTROLLING OWNERSHIP also applies in: (a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Const itution; aRoman Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the Regist er of Deeds of Davao, 102 Phil. 596 [1957]). . Sec. 140 Stock ownership in certain corporations Pursuant to the duties specifie d byArticle XIV of the Constitution, the National Economic Development Authority shall, from time to time, make a determination of whether the corporate vehicle has bee nused by any corporation of by business or industry to frustrate the provisions thereofor of applicable laws, and shall submit to the Batasang Pambansa, wheneve r deemednecessary, a report of its findings, including recommendations for their prevention orcorrection. Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public interest pursuant to the provisions of this section, belonging to the individuals or groups of individual

s relatedto each other by consanguinity or affinity or by close business interes ts, or whenever itis necessary to achieve national objectives, prevent illegal m onopolies or combinationsin restrain or trade, to implement national economic po licies declared in laws, rulesand regulations designed to promote the general we lfare and foster economic development.

Revised Bagtas Reviewer by Ve and Ocfe 2A 25 25 In recommending to the Batasang Pambansa corporations, business or industries to bedeclared vested with a public interest and in formulating proposals for limit ations onstock ownership, the National Economic and Development Authority shall consider thetype and nature of the industry, the size of the enterprise, the eco nomies of scale, thegeographic location, the extent of Filipino ownership, the l abor intensity of the activity, the export potential, as well as the other factors which are germane to the real izationand promotion of business and industry. . Sec. 2 Art. XII All lands of the public domain, waters, minerals, coal, petroleum and other mine raloils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and faunaand other natural resources are owned by the State. With the exc eption of agriculturallands, all other national resources shall under the full c ontrol and supervision of theState. The State may directly undertake such activi ties or it may enter into coproduction, joint venture, or production-sharing agreements with Filipino citizens, orcorpor ations or associations at least sixty percentum of whose capital is owned bysuch 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 conditio nsas may be provided by law. In cases of water rights for irrigation, water supp ly, fisheries, or industrial uses other than the development of water power, benefic ial usemay be the measure and limit of the grant. The State shall protect the nation s marine wealth in its archipelagic waters, ter ritorialsea, and exclusive economic zone, and reserve its use and enjoyment excl usively toFilipino citizens. The Congress may, by law, allow small-scale utilization of natural resources by Filipinocitizens, as well as cooperative fish farming, with priority to subsiste nce fishermen andfishworkers in rivers, lakes, bays and lagoons The President may enter into agreements with foreign-owned corporations involvin geither technical or financial assistance for large-scale exploration, developme nt andutilization of minerals, petroleum and other mineral oils according to the general termsand conditions provided by law, based on real contributions to the economic growthand general welfare of the country. In such agreements, the Stat e shall promote thedevelopment and use of local scientific and technical resourc es. The President shall notify the Congress of every contract entered into in accord ancewith 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 o f a parcel ofland located in the same city in favor of the Roman Catholic Admini strator of Davao, a corporation sole organized and existing in accordance with Phil ippine laws. The incumbentadministrator is Msgr. Clovis Thibault, a Canadian cit izen. When the deed was presented tothe Register of Deeds for registration, it r equired them to submit an affidavit stating that theownership of the corporation is 60% Filipino citizens as required under the Constitution. Roman Catholic stated that it was a corporation sole (meaning only one incorpora tor) and thatthe totality of the Catholic population in Davao would become the o

wner of the property. Register of Deeds doubted this and submitted the case for en consulta in the Lan d Registration Commission. LRC ruled that the requirement of the Constitution must be followedand since the 60% cannot be complied with, the registration should b e denied. Hence, thisappeal. Issue: WON the Roman Catholic Apostolic Church, being a corporation sole, can la wfullyacquire lands in the Philippines. Held: YES. . Corporation sole a special form of corporation usually associated with the clerg ydesigned 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 tempo ralitiesof the church or religious society where the corporator belongs, but als o to hold andtransmit the same to his successor in said officer. . The incumbent administrator is not the actual owner of the land but the constitu ents or those that make up the church, thus it is their nationality that has to be ta ken intoconsideration. The corporation sole only holds the property in trust for the benefit ofthe Roman Catholic faithful. Dissenting opinion by Justice JBL Reyes In requiring corporations or association to have60% of their capital owned by Filipino citizens, the constitution manife stly disregarded thecorporate fiction i.e. the juridical personality of such cor poration or associations. It went behind the corporate entity and looked at the natural persons that composed it, and demanded that a clear majority in interest (60%) should be Filipino. Since under the rulesgoverning corporation sole, the members of the religious association c annot overrule or override the decisions of the sole corporator, then it would be wrong to conclud e that thecontrol of the corporation sole would be in the members of the religio us association. NOTE: The Roman Catholic Church is a corporation by prescription, with acknowled gedjuridical personality inasmuch as it is an institution which antedated almost a thousand yearsany other personality in Europe, and which existed when Grecian eloquence still flourished inAntioch and when idiots were still worshipped in t he temple of Mecca. Since it is a corporationby prescription, it has no national ity, and hence, the nationality test does not apply. (But referto below.) Q: Why is this case relevant to us? A: It is relevant because while it tells us that a corporation sole is not subje ct to thenationality test, it must be further qualified to mean that this is the case only insofar as thecontrol test is concerned. Nationality is irrelevant in sofar as this test is concerned. However, itbecomes relevant when the place of i ncorporation comes into play since the case neversought to touch the place of in corporation test. The registration of the donation of land to an unincorporated religious organiza tion, whose trustees are foreigners, would violate constitutional prohibition and the refusalwould not be in violation of the freedom of religion clause. The fact tha t the religiousassociation has no capital stock does not suffice to escape the co nstitutional inhibition, since it is admitted that its members are of foreign nationality. . . and the sp irit of the Constitution demands that in the absence of capital stock, the controlling membe rship 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; aPeople v. Quasha, 93 Phi l. 333) . Sec. 11 Art. XII No franchise, certificate or any other form of authorization for the operation o f publicutility shall be granted except to citizens of the Philippines or to cor porations orassociations organized under the laws of the Philippines at least si

xty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate o rauthorization be exclusive in character or for a longer period than fifty years . Neithershall any such franchise or right be granted except under the condition that it shall besubject to amendment, alteration or repeal by the Congress when the common goodso requires. The State shall encourage equity participation in p ublic utilities by thegeneral public. The participation of foreign investors in the governing body of anypublic utility enterprise shall be limited to their pro portionate share in its capital, andall the executive and managing officers of s uch corporation or association must becitizens of the 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 utiliti es.

Revised Bagtas Reviewer by Ve and Ocfe 2A PEOPLE v QUASHA Facts: William Quasha, a member of the Philippine Bar was charged with falsification of public andcommercial documents in the CFI. He was entrusted with the preparatio n and registration ofthe articles of incorporation of Pacific Airways Corporatio n but he caused it to appear thatArsenio Baylon, a Filipino had subscribed to an d was the owner of 60% of subscribed capitalstock. Such was not case because the real owners of said portions were really Americancitizens. The purpose of such false statement was to circumvent the Constitutional mandatethat no corporation shall be authorized to operate as a public utility in the Philippines unless60% of its capital is owned by Filipinos. Held:

The falsification imputed to Quasha consists in not disclosing in the Articles o f Incorporationthat Baylon was a mere trustee of the Americans, thus giving the impression that Baylonsubscribed to 60% of the capital stock. But contrary to th e lower court s assumption, theConstitution does not prohibit the mere formation o f a public utility corporation without therequired proportion of Filipino capita l. What it does prohibit is the granting of a franchise orother form of authoriz ation for the operation of a public utility to a corporation already inexistence but without the requisite proportion of Filipino capital. From the language of thetext, the terms franchise , certificate , and other form of authorization are qualif ed by thephrase for the operation of public utility. As such, these terms cannot a nd do not refer to thecorporation s primary franchise, which vests a body of men w ith corporate existence, but to itssecondary franchise, or the privilege to oper ate as public utility after the corporation hasalready gone into being. Primary franchise refers to that franchise which invests a body of men with corp orateexistence, while the secondary franchise is the privilege to operate as a p ublic utility after thecorporation has already come into being. For the mere formation of the corporation, such revelation was not essential and the corporation law does not require it. Therefore, Quasha was under no obligation t o make it. Inthe absence of such obligation and of the alleged wrongful intent, Quasha cannot be legallyconvicted of the crime with which he is charged. A corpo ration formed with capital that isentirely alien may subsequently change the nat ionality of its capital through transfer of sharesto Filipino citizens. The conv erse may also happen. Thus for a corporation to be entitled tooperate a public u tility, it is not necessary that it be organized with 60% of its capital ownedby Filipinos from the start. Said condition, may at any time be attained through t he necessarytransfer of stocks. The moment for determining whether a corporation is entitled to operate aspublic utility is when it applies for a franchise, cer tificate or any other form of authorization forthat purpose and that can only be done after the corporation has already come into being notwhile being formed. Q: Why are we studying Quasha? A: This case makes a distinction with the grant by the government of primary and secondaryfranchise. As far as doctrinal pronouncements are concerned, any and a ll type of corporationsmay be incorporated, so long as the requirements for inco rporation are fulfilled and that itspurpose is lawful and not contrary to law or public policy. The violation of equity requirementswith regard to entry into na tionalized sectors as provided by the Constitution come only intoplay when the s econdary franchise is granted. In granting the secondary franchiseconsiderations of equity are now made.

CLV: Note that while Quasha makes such doctrinal pronouncements, in practice, th is is not thecase. 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 ind ividualswho compose the corporation and not in the corporation itself and cannot be conveyed inthe absence of a legislative authority so to do. The special or s econdary franchises arevested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such special o r 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; how ever, itdoes not require a franchise before one can own the facilities needed to operate a publicutility so long as it does not operate them to serve the public . There is a clear distinctionbetween operation of a public utility and the owners hip of the facilities and equipment used to serve the public. aTatad 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 LevinEnterprise Inc. was supposed to construct the LRT III on a Build-Oper ate-Transfer (BOT) basis. Subsequently, RA 6957 was enacted which provides for two schemes for the financi ng, construction and operation of government projects through private initiative and investment: Build-Operate-Transfer (BOT) or Build-Transfer (BT). DOTC issued a Department Or ders creating the Pre-qualification Bids and Awards Committee. EDSA LRT Consortium co mposed of10 foreign and domestic corporations, was one of the five groups who re sponded to theinvitation. And being the sole complying bidder, it was awarded th e contract. DOTC and EDSALRT Corp., Ltd. in substitution of the EDSA LRT Consort ium entered into an Agreement to Build, Lease and Transfer an LRT system for EDSA under the terms of the BOT Law. Agreement was subsequently revised and another Supplemental Agreement was 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 carryin g capacity of 450,000passengers a day. It will have its own power facility and w ill have 13 passenger stations. Theprivate respondent will finance the entire pr oject required for a complete operational LRTsystem. Upon full or partial comple tion and viability, private respondent shall deliver the useand possession of th e completed portion to DOTC which shall operate the same. DOTC shall pay respondent monthly r