corp law outline 2001 -

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OUTLINE ON PHILIPPINE CORPORATE LAW 1

Atty. CESAR L. VILLANUEVA

I. HISTORICAL BACKGROUND1. The Philippine Corporate Law: 2 Sort of Codification of American Corporate Law

When the Philippines came under American sovereignty, attention was drawn to the fact that there wasno entity in Spanish law exactly corresponding to the notion "corporation" in English and American law; thePhilippine Commission enacted the Corporation Law (Act No. 1459), to introduce the American corporation intothe Philippines as the standard commercial entity and to hasten the day when the sociedad annima of theSpanish law would be obsolete. The statute is a sort of codification of American Corporate Law. xHarden v.Benguet Consolidated Mining Co. , 58 Phil. 141 (1933).

2. The Corporation Law

The first corporate statute, the Corporation Law, or Act No. 1459, became effective on 1 April 1906. Ithad various piece-meal amendments during its 74 year history. It rapidly became antiquated and not adaptedto the changing times.

3. The Corporation CodeThe present Corporation Code, or Batas Pambansa Blg . 68, became effective on 1 May 1980. It adopted

various corporate doctrines enunciated by the Supreme Court under the old Corporation Law. It clarified theobligations of corporate directors and officers, expressed in statutory language established principles anddoctrines, and provided for a chapter on close corporations.

4. Proper Treatment of Philippine Corporate Law

Philippine Corporate Law comes from the common law system of the United States. Therefore, althoughwe have a Corporation Code that provides for statutory principles, Corporate Law is essentially, and continuesto be, the product of commercial developments. Much of this development can be expected to happen in theworld of commerce, and some expressed jurisprudential rules that try to apply and adopt corporate principlesinto the changing concepts and mechanism of the commercial world.

II. CONCEPTSSee 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).

2. Tri-Level Existence of Corporation

(a) Aggregation of Assets and Resources(b) Business Enterprise or Economic Unit(c) Juridical Entity

3. Relationships Involved in Corporate Setting

(a) Juridical Entity Level , which views the State-corporations relationship

(b) Contractual Relationship 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, suchas its directors and its officers, which is governed also by the Law on Agency;

- Between the corporation and its shareholders or members;

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.

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- Between and among the shareholders in a common venture; and

- Between the corporation and third-parties or "outsiders", which is essentially governedby Contract Law.

4. Theories on Formation of Corporation:

(a) Theory of Concession (Tayag v. Benguet Consolidated Inc. , 26 SCRA 242 [1968])

To organize a corporation that could claim a juridical personality of its own and transact business assuch, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as theState may deem necessary to impose (x- cf. Ang Pue & Co. v. Sec. of Commerce and Industry , 5 SCRA645 [1962]).

Before a corporation may acquire juridical personality, the State must give its consent either in theform of a special law or a general enabling act, and the procedure and conditions provided under the lawfor the acquisition of such juridical personality must be complied with. The failure to comply with thestatutory procedure and conditions does not warrant a finding that such association achieved theacquisition of a separate juridical personality, even when it adopts sets of constitution and by-laws.xInternational 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 evena simple family corporation cannot claim an exemption nor can it have rules and practices other than thoseestablished by law. x Torres v. Court of Appeals , 278 SCRA 793 (1997).

(b) Theory of Enterprise Entity (BERLE , Theory of Enterprise Entity , 47 C OL. L. R EV. 343 [1947])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 inequity, such as the use of separatepersonality to avoid the execution of the property of a sister company. x Tan Boon Bee & Co., Inc. v.Jarencio , 163 SCRA 205 (1988).

A corporation is but an association of individuals, allowed to transact under an assumed corporatename, and with a distinct legal personality. In organizing itself as a collective body, it waives noconstitutional immunities and perquisites appropriate to such a body. x Philippine Stock Exchange, Inc. v.Court of Appeals, 281 SCRA 232 (1997).

5. Four Attributes of Corporation from Statutory Definition:

(a) A corporation is an artificial being(b) Created by operation of law(c) With right of succession(d) Only has powers, attributes and properties expressly authorized by law or incident to its existence

6. Advantages and Disadvantages of Corporate Form:

(a) Four Basic Advantageous Characteristics of Corporate Organization:

(i) Strong Legal Personality- Entity attributable powers- Continuity of existence- Purpose

The corporation was evolved to make possible the aggregation and assembling of hugeamounts of capital upon which big business depends; and has the advantage of non-dependenceon the lives of those who compose it even as it enjoys certain rights and conducts activities of natural persons. Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000.

(ii) Centralized Management.

(iii) Limited Liability to Investors

One advantage of a corporate business organization is the limitation of an investors liabilityto the amount of the investment, which flows from the legal theory that a corporate entity isseparate and distinct from its stockholders. x San Juan Structural and Steel Fabricators, Inc. v.Court of Appeals , 296 SCRA 631, 645 (1998).

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(iv) Free Transferability of Units of Ownership for Investors

(b) Disadvantages:

(i) Abuse of corporate management(ii) Abuse of limited liability feature(iii) Cost of maintenance(iv) Double taxation

Dividends received by individuals from domestic corporations are subject to final 10% tax(Sec. 24(B)(2), NIRC of 1997) for income earned on or after 1 January 1998. Inter-corporatedividends between domestic corporations, however, are not subject to any income tax (Sec. 27(D)(4), NIRC of 1997).

In addition, there has been a re-imposition of the improperly accumulated earnings tax,under Section 29 of the NIRC of 1997 for corporations at the rate of 10% annually.

7. Compared With Other Media of Business Endeavors

- Distribution of Risk, Profit and Control

(a) Sole Proprietorships(b) Business Trusts (Article 1442, Civil Code)(c) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code)

- Can a defective attempt o form a corporation result at least in the formation of a partnership?Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989).

(d) Joint VenturesJoint venture is defined as an association of persons or companies jointly undertaking some

commercial enterprise; generally all contribute assets and share risks. It requires a community of interest inthe performance of the subject matter, a right to direct and govern the policy in connection therewith, andduty, which may be altered by agreement to share both in profit and losses. the acts of working together ina joint project. x Kilosbayan, Inc. v. Guingona, Jr. , 232 SCRA 110, 143 (1994), citing B LACKS L AW DICTIONARY , Sixth ed., 839.

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

(f) Sociedades Annimas

A sociedad annima was considered a commercial partnership, a sort of a corporation, where uponthe execution of the public instrument in which its articles of agreement appear, and the contribution of funds and personal property, becomes a juridical personan artificial being, invisible, intangible, andexisting only in contemplation of lawwith power to hold, buy, and sell property, and to sue and be sueda corporationnot a general copartnership nor a limited copartnership . . . The inscribing of its articles of agreement in the commercial register was not necessary to make it a juridical persona corporation. Suchinscription only operated to show that it partook of the form of a commercial corporation. x Mead v.McCullough , 21 Phil. 95,106 (1911).

The sociedades annimas were introduced in Philippine jurisdiction on 1 December 1888 with theextension 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 juridicalentity. But they were more similar to the English joint stock companies than the modern commercialcorporations. x Benguet Consolidated Mining Co. v. Pineda , 98 Phil. 711 (1956)

Our Corporation Law recognizes the difference between sociedades annimas and corporations andwill not apply legal provisions pertaining to the latter to the former xPhil. 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 a manner that itsexistence was only known to those who had an interest in the same, there being no mutual agreementbetween the partners, and without a corporate name indicating to the public in some way that there wereother people besides the one who ostensibly managed and conducted the business, governed under article239 of the Code of Commerce.

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Those who contract with the person under whose name the business of such partnership of cuentasen participacion is conducted, shall have only a right of action against such person and not against theother persons interested, and the latter, on the other hand, shall have no right of action against third personwho contracted with the manager unless such manager formally transfers his right to them. xBourns v.Carman , 7 Phil. 117 (1906).

III. NATURE AND ATTRIBUTES OF A CORPORATION

1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitution)2. Corporation as a Person :

(a) Entitled to due processThe 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 guarantyinsofar as their property is concerned." x Smith Bell & Co. v. Natividad , 40 Phil. 136, 144 (1920).

(b) Equal protection clause (xSmith Bell & Co. v. Natividad , 40 Phil. 136 [1920]).

(c) Unreasonable Searches and SeizureCorporations are protected by the constitutional guarantee against unreasonable searches and

seizures, but that the officers of a corporation from which documents, papers and things were seized haveno 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 corporation, and whatever the offices they hold therein may be,because the corporation has a personality distinct and separate from those of said officers. The legality of a seizure can be contested only by the party whose rights have been impaired thereby; and the objection toan unlawful search is purely personal and cannot be availed of by such officers of the corporation whointerpose it for their personal interests. x Stonehill v. Diokno , 20 SCRA 383 (1967).

A corporation is but an association of individuals under an assumed name and with a distinct legalentity. In organizing itself as a collective body it waives no constitutional immunities appropriate for suchbody. Its property cannot be taken without compensation; can only be proceeded against by due process of law; and is protected against unlawful discrimination. xBache & Co. (Phil.), Inc. v. Ruiz , 37 SCRA 823, 837(1971), quoting from xHale v. Henkel, 201 U.S. 43, 50 L.Ed. 652.

(d) But a corporation is 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 Co v. PCGG , 150 SCRA 181, 234-235 (1987).

While an individual may lawfully refuse to answer incriminating questions unless protected by animmunity statute, it does not follow that a corporation, vested with special privileges and franchises mayrefuse to show its hand when charged with an abuse of such privilege. x Hale v. Henkel , 201 U.S. 43(1906); x Wilson v. United States, 221 U.S. 361 (1911); x United States v. White, 322 U.S. 694 (1944).

3. Liability for Torts

A corporation is civilly liable in the same manner as natural persons for torts, because generallyspeaking, the rules governing the liability of a principal or master for a tort committed by an agent or servantare 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 expresslydirects or authorizes, is just as true of a corporation as a natural person. PNB v. CA , 83 SCRA 237 (1978).

Our jurisprudence is wanting as to the definite scope of corporate tort. Essentially, tort consists in theviolation of a right given or the omission of a duty imposed by law. Simply stated, tort is a breach of a legalduty. When it was found that Clark Field Taxi failed to comply with the obligation imposed under Article 283 of the Labor Code which mandates that the employer to grant separation pay to employees in case of closure or cessation of operations of establishments or undertaking not due to serious business losses or financialreverses; consequently, its stockholder who was actively engaged in the management or operation of thebusiness should be held personally liable. x Sergio F. Naguiat v. NLRC , 269 SCRA 564 (1997).

As a general rule, a banking corporation is liable for the wrongful or tortuous acts and declarations of itsofficers or agents within the course and scope of their employment. A bank will be held liable for thenegligence of its officers or agents when acting within the course and scope of their employment, even as

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regards that species of tort of which malice is an essential element. In this case, we find a situation where thePCIBank appears also to be the victim of the scheme hatched by a syndicate in which its own managementemployees had participated . Philippine Commercial International Bank vs. Court of Appeals , G.R. No.121413, 29 January 2001.

4. Criminal Liability of a Corporation (West Coast Life Ins. Co. v. Hurd , 27 Phil. 401 (1914); People v. TanBoon Kong , 54 Phil. 607 [1930]; Sia v. CA , 121 SCRA 655 [1983] ; Articles 102 and 103, Revised PenalCode).

No criminal suit can lie against an accused who is a corporation. x 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. xPeople v. Concepcion, 44 Phil. 129(1922).

5. Recovery of Moral Damages 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 bea ground for the award of moral damages . xMambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359(1968) .

Even when the corporation's reputation and goodwill have been prejudiced, "there can be no award for moral damages under Article 2217 and succeeding articles of Section 1 of Chapter 3 of Title XVIII of the CivilCode in favor of a corporation." x Prime White Cement Corp. vo Intermediate Appellate Court , 220 SCRA 103,113-114 (1993).

Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety,besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation,being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, nosenses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can beexperienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of lifeall of which cannot be suffered by respondent bank as an artificial person. x LBC Express, Inc. v. Court of Appeals,236 SCRA 602 (1994); xAcme Shoe, Rubber & Plastic Corp. v. Court of Appeals , 260 SCRA 714 (1996);xSolid Homes, Inc. v. Court of Appeals , 275 SCRA 267 (1997).

In Asset Privatization Trust v. Court of Appeals, 300 SCRA 579 (1998), the Supreme Court seemed to

have gone back to the original doctrine that [u]nder Article 2217 of the Civil Code, moral damages includebesmirched reputation which a corporation may possibly suffer.

The award of moral damages cannot be granted in favor of a corporation because, being an artificialperson and having existence only in legal contemplation, it has no feelings, no emotions, no senses. It cannot,therefore, experience physical suffering and mental anguish, which can be experienced only by one having anervous system. The statement in People v. Manero [218 SCRA 85 (1993)] and Mambulao Lumber Co. v. PNB[130 Phil. 366 (1968)], that a corporation may recover moral damages if it has a good reputation that isdebased, resulting in social humiliation is an obiter dictum. . . The possible basis of recovery of a corporationwould be under Articles 19, 20 and 21 of the Civil Code, but which requires a clear proof of malice or bad faith.x ABS-CBN Broadcasting Corp. v. Court of Appeals , 301 SCRA 589 (1999).

While it is true that a criminal case can only be filed against the officers of a corporation and not againstthe corporation itself, it does not follow from this, however, 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 thecorporation for the criminal proceedings brought against its officer. x Cometa v. Court of Appeals , 301 SCRA459 (1999).

6. Nationality of Corporation: C OUNTRY U NDER W HOSE L AWS I NCORPORATED (Sec. 123).

Exceptions: The T EST OF C ONTROLLING O WNERSHIP 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]).

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The donation of land to an unincorporated religious organization, whose trustees are foreigners,cannot be allowed registration for being violation of the constitutional prohibition and it would not beviolation of the freedom of religion clause. The fact that the religious association has no capital stock doesnot suffice to escape the constitutional inhibition, since it is admitted that its members are of foreignnationality. The purpose of the sixty per centum requirement is obviously to ensure that corporations or associations allowed to acquire agricultural land or to exploit natural resources shall be controlled byFilipinos; and the spirit of the Constitution demands that in the absence of capital stock, the controllingmembership should be composed of Filipino citizens. x Register of Deeds of Rizal v. Ung Sui Si Temple ,97 Phil. 58 (1955)

(b) Public Utilities (Sec. 11, Article XII, 1987 Constitution ; People v. Quasha , 93 Phil. 333 [1953]).

The primary franchise of a corporation, that is, the right to exist as such, is vested in the individualswho compose the corporation and not in the corporation itself and cannot be conveyed in the absence of alegislative authority so to do. But the special or secondary franchises of a corporation are vested in thecorporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporationto dispose of its property, except such special or secondary franchises as are charged with a public use.xJ.R.S. Business Corp. v. Imperial Insurance , 11 SCRA 634 (1964).

The Constitution, in no uncertain terms, requires a franchise for the operation of a public utility;however, it does not requires a franchise before one can own the facilities needed to operate a public utilityso long as it does not operate them to serve the public. In law there is a clear distinction between the"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)

A distinction should be made between shares of stock, which are owned by stockholders, the sale of which requires only NTC approval, and the franchise itself which is owned by the corporation as thegrantee thereof, the sale or transfer of which requires Congressional sanction. Since stockholders own theshares of stock, they may dispose of the same as they see fit. They may not, however, transfer or assignthe property of a corporation, like its franchise. In other words, even if the original stockholders hadtransferred their shares to another group of shareholders, the franchise granted to the corporation subsistsas long as the corporation, as an entity, continues to exist. The franchise is not thereby invalidated by thetransfer of the shares. A corporation has a personality separate and distinct from that of each stockholder.It has the right of continuity or perpetual succession Corporation Code, Sec. 2). Philippine Long Distance Telephone Co. v. National Telecommunications Commission , 190 SCRA 717, 732 (1990).

(c) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution)

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

Cable Industry

The National Telecommunications Commission (NTC), which regulates and supervises the cabletelevision industry in the Philippines under Section 2 of Executive Order No. 436, s. 1997, has providedunder NTC Memorandum Circular No. 8-9-95, under item 920(a) thereof provides that Cable TVoperations shall be governed by E.L. No. 205, s. 1987. If CATV operators offer public telecommunicationsservices, they shall be treated just like a public telecommunications entity.

Under DOJ Opinon No. 95, series of 1999, the Secretary of Justice, taking its cue from Allied Broadcasting, Inc. v. Federal Communications Commission, 435 F. 2d 70, considered CATV as a form of mass media which must, theefore, 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.

(d) Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution)

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

(f) Investment Test as to "Philippine Nationals" (Sec. 3(a),(b), R.A. 7042, Foreign Investment Act of 1992)

(g) The Grandfather Rule (Opinion of DOJ No. 18, s. 1989, dated 19 January 1989; SEC Opinion, dated 6November 1989, XXIV SEC Q UARTERLY BULLETIN (No. 1- March 1990); SEC Opinion, dated 14 December 1989, XXIV SEC Q UARTERLY BULLETIN (No. 2 -June 1990)

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Up to what level do you apply the grandfather rule? (Palting v. San Jose Petroleum Inc. , 18 SCRA924 [1966]).

(h) Special Classifications (Sec. 140)

IV. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCINGVEIL OF CORPORATE FICTION

See relevant portions of VILLANUEVA , Restatement of the Doctrine of Piercing TheVeil of Corporate Fiction , 37 A TENEO L.J. 19 (No. 2, June 1993).

A. Main Doctrine: A C ORPORATION HAS A P ERSONALITY S EPARATE AND DISTINCT FROM ITS S TOCKHOLDERS OR MEMBERS .

Rudimentary is the rule that a corporation is invested by law with a personality distinct and separatefrom its stockholders or membersby legal fiction and convenience it is shielded by a protective mantel andimbued by law with a character alien to the persons comprising it. x Lim v. Court of Appeals, 323 SCRA 102(2000).

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

2. Importance of Protecting Main Doctrine:

The separate juridical personality includes: right of succession; limited liability; centralizedmanagement; and generally free transferability of shares of stock. Therefore, an undermining of the separate juridical personality of the corporation, such as the application of the piercing doctrine, necessarily dilutesany or all of those attributes.

One of the advantages of a corporate form of business organization is the limitation of an investorsliability to the amount of the investment. This feature flows from the legal theory that a corporate entity isseparate and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil maybe used only for legitimate purposes. On equitable considerations, the veil can be disregarded when it isutilized as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimateissues; or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunctof another corporation. x San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals , 296 SCRA 631,645 (1998).

3. Applications: (a) Majority Ownership of or Dealings in Shareholdings : Ownership of a majority of capital stock and

the fact that majority of directors of a corporation are the directors of another corporation creates noemployer-employee relationship with the latter's employees. DBP v. NLRC , 186 SCRA 841 (1990);Francisco, et al. v. Mejia, G. R. No. 141617, 14 August 2001.

The mere fact that a stockholder sells his shares of stock in the corporation during the pendencyof a collection case against the corporation, does not make such stockholder personally liable for thecorporate debt, since the disposing stockholder has no personal obligation to the creditor, and it is theinherent right of the stockholder to dispose of his shares of stock anytime he so desires. x Remo, Jr. v.Intermediate Appellate Court , 172 SCRA 405, 413-414 (1989).

Mere ownership by a single stockholder or by another corporation of all or nearly all of the capitalstock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.

xSunio v. NLRC , 127 SCRA 390 (1984); x Asionics Philippines, Inc. v. National Labor RelationsCommission, 290 SCRA 164 (1998); x Lim v. Court of Appeals, 323 SCRA 102 (2000); x Manila Hotel Corp. v. NLRC, 343 SCRA 1 (2000); x Francisco v. Mejia, G. R. No. 141617, 14 August 2001.

Mere substantial identity of the incorporators of the two corporations does not necessarily implyfraud, nor warrant the piercing of the veil of corporate fiction. In the absence of clear and convincingevidence 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. x Laguio v. NLRC,262 SCRA 715 (1996).

(b) Dealings Between the Corporation and Stockholders: The transfer of the corporate assets to thestockholder 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).

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As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholdersor those of the legal entities which it may be connected and vice-versa. x ARB Constructions Co., Inc. v.Court of Appeals, 332 SCRA 427 (200)

(c) On Issues of Privileges Enjoyed: The tax privileges enjoyed by a corporation do not extend to itsstockholders. "A corporation has a personality distinct from that of its stockholders, enabling the taxingpower to reach the latter when they receive dividends from the corporation. It must be considered assettled in this jurisdiction that dividends of a domestic corporation which are paid and delivered in cash

to foreign corporations as stockholders are subject to the payment of the income tax, the exemptionclause to the charter [of the domestic corporation] notwithstanding." x Manila Gas Corp. v. Collector of Internal Revenue , 62 Phil. 895, 898 (1936).

(d) Being a Corporate Officer: Being an officer or stockholder of a corporation does not by itself makeone's property also of the corporation, and vice-versa , for they are separate entities, and thatshareholders are in no legal sense the owners of corporate property which is owned by the corporationas a distinct legal person. Good Earth Emporium, Inc. v. CA , 194 SCRA 544 (1991)

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 corporationare separate entities. x Cruz v. Dalisay , 152 SCRA 487 (1987).

(e) Properites, Obligations and Debts: Likewise, a corporation has no legal standing to file a suit for recovery of certain 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 SCRA347 [1976]).

The corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder'sdebt or credit that of the corporation. x Traders Royal Bank v. CA , 177 SCRA 789 (1989).

Stockholders have no personality to intervene in a collection case covering the loans of thecorporation on the ground that the interest of shareholders in corporate property is purely inchoate.xSaw v. CA , 195 SCRA 740 [1991])

The interests of payees in promissory notes cannot be off-set against the obligations between thecorporations to which they are stockholders absent any allegation, much less, even a scintilla of substantiation, that the parties interest in the corporation are so considerable as to merit a declarationof unity of their civil personalities. x Industrial and Development Corp. v. Court of Appeals , 272 SCRA333 (1997).

It is a basic postulate that a corporation has a personality separate and distinct from itsstockholders. Therefore, even when the foreclosure on the assets of the corporation was wrongful anddone in bad faith, the stockholders of the corporation have no standing to recover for themselvesmoral damages. Otherwise, it would amount to the appropriation by, and the distribution to, suchstockholders of part of the corporations assets before the dissolution of the corporation and theliquidation of its debts and liabilities. x Asset Privatization Trust v. Court of Appeals, 300 SCRA 579,617 (1998).

Where real properties included in the inventory of the estate of a decedent are in the possessionof and are registered in the name of the corporations, in the absence of any cogency to shred the veilof corporate fiction, the presumption of conclusiveness of said titles in favor of said corporationsshould stand undisturbed. x Lim v. Court of Appeals, 323 SCRA 102 (2000).

(f) Third-Parties : The fact that respondents are not stockholders of the disputed corporations does not

make them non-parties to the case, since the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the Complaint. In this case, it is alleged that the aforementionedcorporations are mere alter egos of the directors-petitioners, and that the former acquired theproperties sought to be reconveyed to FGSRC in violation of directors-petitioners fiduciary duty toFGSRC. The notion of corporate entity will be pierced or disregarded and the individuals composing itwill be treated as identical if, as alleged in the present case, the corporate entity is being used as acloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or abusiness conduit for the sole benefit of the stockholders . Gochan v. Young, G.R. No. 131889, 21March 2001.

B. Piercing the Veil of Corporate Fiction:

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1. Source of Incantation: xUnited States v. Milwaukee Refrigerator Transit Co. , 142 Fed. 247 [1905]). xSeealso Francisco v. Mejia, G. R. No. 141617, 14 August 2001.

2. Nature of the Piercing Doctrine ( Traders Royal Bank v. Court of Appeals , 269 SCRA 15 [1997])

Piercing the veil of corporate entity requires the court to see through the protective shroud whichexempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguishes onecorporation from a seemingly separate one, were it not for the existing corporate fiction. x Lim v. Court of

Appeals, 323 SCRA 102 (2000).

This Court has pierced the veil of corporate fiction in numerous cases where it was used, amongothers, to avoid a judgment credit, to avoid inclusion of corporate assets as part of the estate of adecedent, to avoid liability arising from debt; when made use of as a shield to perpetrate fraud and/or confuse legitimate issues, or to promote unfair objectives or otherwise to shield them. x Reynoso, IV v.Court of Appeals, G.R. No. 116124-25, 22 November 2000; also xRamoso v. Court of Appeals, G.R. No.117416, 8 December 2000.

3. When Piercing Doctrine Not Applicable:

(a) Piercing the veil of corporate fiction is remedy of last resort and is not available when other remediesare still available. Umali v. CA , 189 SCRA 529 (1990).

(b) Piercing is not allowed unless the remedy sought is to make the officer or another corporationpecuniarily liable for corporate debts. Umali v. CA , 189 SCRA 529 (1990) ; Indophil Textile Mill Workers Union-PTGWO v. Calica , 205 SCRA 697 (1992).

(c) Piercing is not available when the personal obligations of an individual are sought to be enforcedagainst the corporation. x Robledo v. NLRC, 238 SCRA 52 (1994)

The rationale behind piercing a corporations identity in a given case is to remove the barrier between the corporation from the persons comprising it to 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 allegedcorporate act, the situation has been reversed. It is the petitioner as a corporation which is beingordered to answer for the personal liability of certain individual directors, officers and incorporatorsconcerned. Hence, it appears to us that the doctrine has been turned upside down because of itserroneous invocation. Francisco Motors Corp. v Court of Appeals , 309 SCRA 72, 83 (1999).

(d) To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly andconvincingly established. It cannot be presumed. This is elementary. The organization of the

corporation at the time when the relationship between the landowner and the developer were stillcordial cannot be used as a basis to hold the corporation liable later on for the obligations of thelandowner to the developer under the mere allegation that the corporation is being used to evade theperformance of obligation by one of its major stockholders. x Luxuria Homes, Inc. v. Court of Appeals,302 SCRA 315 (1999); x Development Bank of the Philippines vs. Court of Appeals, G.R. No. 126200,16 August 2001.

(e) Not Applicable to Theorizing: Piercing of the veil of corporate fiction is not allowed when it is resortedto justify under a theory of co-ownership the continued use and possession by stockholders of corporate properties. Boyer-Roxas v. Court of Appeals , 211 SCRA 470 [1992]).

The piercing doctrine cannot be availed of in order to dislodge from the jurisdiction of the SEC athe petition for suspension of payments filed under Section 5(e) of Pres. Decree No. 902-A, on theground that the petitioning individuals should be treated as the real petitioners to the exclusion of thepetitioning corporate debtor. The doctrine of piercing the veil of corporate fiction heavily relied uponby the petitioner is entirely misplaced, as said doctrine only applies when such corporate fiction is usedto defeat public convenience, justify wrong, protect fraud or defend crime. x Union Bank of thePhilippines v. Court of Appeals, 290 SCRA 198 (1998).

Changing of the petitionerss subsidiary liabilities by converting them to guarantors of bad debtscannot be done by piercing the veil of corporate identity. x Ramoso v. Court of Appeals, G.R. No.117416, 8 December 2000.

(f) Piercing doctrine is meant to prevent fraud, and cannot be employed to perpetrate fraud or a wrong .Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal , 91 Phil. 786 (1952).

The theory of corporate entity was not meant to promote unfair objectives or otherwise, nor toshield them. xVillanueva v. Adre , 172 SCRA 876 (1989).

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5. Alter-Ego Cases:

(a) Where the stock of a corporation is owned by one person whereby the corporation functions only for thebenefit of such individual owner, the corporation and the individual should be deemed the same.

Arnold v. Willets and Patterson, Ltd. , 44 Phil. 634 (1923).

(b) When the corporation is merely an adjunct, business conduit or alter ego of another corporation, thefiction of separate and distinct corporation entities should be disregarded. xTan Boon Bee & Co. v.Jarencio, 163 SCRA 205 (1988).

The corporation veil cannot be used to shield an otherwise blatant violation of the prohibitionagainst forum-shopping. Shareholders, whether suing as the majority in direct actions or as theminority in a derivative suit, cannot be allowed to trifle with court processes, particularly where, as inthis case, the corporation itself has not been remiss in vigorously prosecuting or defending corporatecauses and in using and applying remedies available to it. x First Philippine International Bank v. Court of Appeals , 252 SCRA 259 (1996).

(c) Employment of same workers; single place of business, etc. La Campana Coffee Factory v. Kaisahanng Manggagawa , 93 Phil. 160 (1953).

The doctrine that a corporation is a legal entity or a person in law distinct from the personscomposing it is merely a legal fiction for purposes of convenience and to subserve the ends of justice.This fiction cannot be extended to a point beyond its reason and policy. Where, as in this case, thecorporation fiction was used as a means to perpetrate a social injustice or as a vehicle to evadeobligations or confuse the legitimate issues, it would be discarded and the two (2) corporations would

be merged as one, the first being merely considered as the instrumentality, agency conduit or adjunctof the other. In this case, because of the actions of management of the two corporations, there wasmuch confusion as to the proper employment of the claimant. x Azcor Manufacturing, Inc. v. NLRC, 303SCRA 26 (1999).

(d) Use of nominees. x Marvel Building v. David , 9 Phil. 376 (1951) .

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

(f) Mixing of bank deposit accounts. xRamirez Telephone Corp. v. Bank of America , 29 SCRA 191 (1969).

(g) Where it appears that two business enterprises are owned, conducted, and controlled by the sameparties, both law and equity will, when necessary to protect the rights of third persons, disregard thelegal fiction that two corporations are distinct entities and treat them as identical. x Sibagat Timber

Corp. v. Garcia , 216 SCRA 70 (1992).(h) Thinly-capitalized corporations. McConnel v. Court of Appeals , 1 SCRA 722 (1961).

(i) Parent-subsidiary relationship. Koppel (Phil.), Inc. v. Yatco , 77 Phil. 97 (1946); xPhilippine VeteransInvestment Development Corporation v. CA , 181 SCRA 669 (1990).

(j) Affiliated companies. x Guatson International Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990).

(k) Summary of Probative Factors: Philippine National Bank vs. Ritratto Group, Inc., et al., G.R. No.142616, 31 July 2001; x Concept Builders, Inc. v. NLRC , 257 SCRA 149 (1996).

Whether the existence of the corporation should be pierced depends on questions of facts,appropriately pleaded. Mere allegation that a corporation is the alter ego of the individual stockholdersis insufficient. The presumption is that the stockholders or officers and the corporation are distinctentities. The burden of proving otherwise is on the party seeking to have the court pierce the veil of

corporate entity. x Ramoso v. Court of Appeals, G.R. No. 117416, 8 December 2000.(l) Guiding Principles in Alter-Ego Cases:

(i) The doctrine applies in this case even in the absence of evil intent; it applies because of thedirect violation of a central corporate law principle of separating ownership frommanagement.

(ii) The doctrine in such cased is based on estoppel: if stockholders do not respect the separateentity, others cannot also be expected to be bound by the separate juridical entity.

(iii) Piercing in alter ego cases may prevail even when no monetary claims are sought to beenforced against the stockholders or officers of the corporation.

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6. Equity Cases:

(a) When used to confuse legitimate issues. Telephone Engineering and Service Co., Inc. V. WCC , 104SCRA 354 (1981).

(b) When used to raise technicalities. x Emilio Cano Ent. v. CIR , 13 SCRA 291 (1965).

7. Piercing Doctrine and Due Process Clause

(a) The need to bring a new case against the officer. McConnel v. Court of Appeals , 1 SCRA 723 (1961).

(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. Court of Industrial Relations , 13SCRA 291 (1965).

(c) Provided that evidential basis has been adduced during trial to apply the piercing doctrine. Jacinto v.Court of Appeals , 198 SCRA 211 (1991); xArcilla v. Court of Appeals , 215 SCRA 120 (1992).

V. CLASSIFICATIONS OF CORPORATIONS1. In Relation to the State:

(a) Public corporations (Sec. 3, Act No. 1459)

Organized for the government of the portion of the state (e.g., barangay, municipality, city andprovince)Majority shares by the Government does not make an entity a public corporation. xNational Coal Co.,v. Collector of Internal Revenue , 46 Phil. 583 (1924).

(b) Quasi -public corporations xMarilao Water Consumers Associates v. IAC , 201 SCRA 437 (1991) Although Boy Scouts of the Philippines does not receive any monetary or financial subsidy from the

Government, and that its funds and assets are not considered government in nature and not subject toaudit by the COA, the fact that it received a special charter from the government, that its governing boardare appointed by the Government, and that its purpose are of public character, for they pertain to theeducational, civic and social development of the youth which constitute a very substantial and importantpart of the nation, it is not a public corporation in the same sense that municipal corporation or localgovernments are public corporation since its does not govern a portion of the state, but it also does nothave proprietary functions in the same sense that the functions or activities of government-owned or controlled corporations such as the National Development Company or the National Steel Corporation, ismay still be considered as such, or under the 1987 Administrative Code as an instrumentality of theGovernment. Therefore, the employees are subject to the Civil Service Law. x Boy Scouts of thePhilippines v. NLRC , 196 SCRA 176 (1991).

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

A government-owned or -controlled corporation when organized under the Corporation Code is still aprivate corporation. But being a government-owned or -controlled corporation makes it liable for laws andprovisions applicable to the Government or its entities and subject to the control of the Government.xCervantes v. Auditor General , 91 Phil. 359 (1952).

A private corporation is created by operation of law under the Corporation while a governmentcorporation is normally created by special law referred to often as a charter. xBliss Dev. Corp. Employees

Union v. Calleja, 237 SCRA 271 (1994).The doctrine that employees of government-owned and -controlled corporations, whether created by

special law or formed as subsidiaries under the general corporation law are governed by the Civil ServiceLaw and not by the Labor Code, has been supplanted by the 1987 Constitution. The present doctrine indetermining whether a government-owned or -controlled corporation is subject to the Civil Service Law isthe manner of its creation , such that government corporations created by special charter are subject to theCivil Service Law, while those incorporated under the general corporation law are governed by the Labor Code. x PNOC-Energy Development Corp. v. NLRC , 201 SCRA 487 (1991); x Davao City Water District v.Civil Service Commission , 201 SCRA 593 (1991).

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The test to determine whether a corporation is government owned or controlled, or private in natureis simple. Is it created by its own charter for the exercise of a public function, or by incorporation under thegeneral corporation law? Those with special charters are government corporations subject to its provisions,and its employees are under the jurisdiction of the Civil Service Commission, and are compulsorymembers of the Government Service Insurance System. x Camparedondo v. NLRC , 312 SCRA 47 (1999).

Section 31 of the Corporation Code (Liability of Directors and Officers) is applicable to corporationswhich have been organized by special charters since Sec. 4 of the Corporation Code renders theprovisions of thereof applicable in a supplementary manner to all corporations, including those with special

or individual charters, such as cooperatives organized under Pres. Decree No. 269, so long as thoseprovisions are not inconsistent with such charters. xBenguet Electric Cooperative, Inc. v. NLRC , 209 SCRA55 (1992).

2. As to Place of Incorporation:(a) Domestic Corporation(b) Foreign Corporation (Sec. 123)

3. As to Purpose of Incorporation:(a) Municipal or Public corporation(b) Religious corporation (Secs. 109 and 116)(c) Educational corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)

(d) Charitable, Scientific or Vocational corporations(e) Business corporation

4. As to Number of Members:(a) Aggregate Corporation(b) Corporation Sole (Secs. 110 to 115; x Roman Catholic Apostolic Administrator of Davao, Inc. v. LRC and

the Register of Deeds of Davao City , 102 Phil. 596 (1957).

xDirector of Land v. IAC , 146 SCRA 509 (1986), which held that a corporation sole has no nationality,overturned the previous doctrine (x Republic v. Villanueva , 114 SCRA 875 [1982] and Republic v. Iglesia Ni Cristo , 127 SCRA 687 [1984]) that a corporation sole is disqualified to acquire or hold alienable lands of the public domain, because of the constitutional prohibition qualifying only individuals to acquire land of thepublic domain and the provision under the Public Land Act which applied only to Filipino citizens or natural

persons. x Republic v. Iglesia ni Cristo , 127 SCRA 687 (1984); x Republic v. IAC , 168 SCRA 165 (1988).

5. As to Legal Status:

(a) De Jure Corporation

(b) De Facto Corporation (Sec. 20)

(c) Corporation by Estoppel (Sec. 21)

6. As to Existence of Shares (Secs. 3 and 5)(a) Stock Corporation(b) Non-Stock Corporation

VI. CORPORATE CONTRACT LAWSee relevant portion of VILLANUEVA , Corporate Contract Law, 38 A TENEO L.J. 1

(No. 2, June 1994)

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1. Pre-Incorporation Contracts

(a) Who Are Promoters?

Promoter is a person who, acting alone or with others, takes initiative in founding and organizingthe business or enterprise of the issuer and receives consideration therefor. (Sec. 3.10, SecuritiesRegulation Code [R.A. 8799])

(b) Nature of Pre-incorporation Agreements (Secs. 60 and 61; Bayla v. Silang Traffic Co., Inc. , 73 Phil. 557[1942])

(c) Theories on Liabilities for Promoter's Contracts (Cagayan Fishing Development Co., Inc. v. TeodoroSandiko , 65 Phil. 223 [1937]; Rizal Light & Ice Co., Inc. v. Public Service Commission , 25 SCRA 285[1968]; Caram, Jr. v. CA , 151 SCRA 372 [1987]).

2. De Facto Corporation (Sec. 20)

(a) Elements for Existence of De Facto Corporation :

(1) Valid law under which incorporated;(2) Attempt in good faith to incorporate; colorable compliance;(3) Assumption of corporate powers; and(4) Issuance of certificate of incorporation. Arnold Hall v. Piccio , 86 Phil. 634

(1950).

3. Corporation by Estoppel Doctrine (Sec. 21; Salvatierra v. Garlitos , 103 Phil. 757 [1958] ; Albert v. University Publishing Co. , 13 SCRA 84 [1965]; International Express Travel & Tour Services, Inc. v. Court of Appeals, 343SCRA 674 (2000); x Asia Banking Corporation v. Standard Products , 46 Phil. 145 [1924]; xMadrigal Shipping Co., Inc. v. Ogilvie , Supreme Court Advanced Decision, 55 O.G. No. 35, p. 7331).

An individual should be held personally liable for the unpaid obligations of the unincorporated associationin whose behalf he entered into such transactions, under the principle that any person acting or purporting toact on behalf of a corporation which has no valid existence assumes such privileges and becomes personallyliable for contract entered into or for other acts performed as such agent. International Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000).

(a) Nature of Doctrine

Corporation by estoppel doctrine is founded on principles of equity and is designed to preventinjustice and unfairness. It applies when persons assume to form a corporation and exercise corporatefunctions and enter into business relations with third persons. Where there is no third person involved andthe conflict arises only among those assuming the form of a corporation, who therefore know that it has notbeen registered, there is no corporation by estoppel. Lozano v. De Los Santos , 274 SCRA 452 (1997)

A party cannot challenge the personality of the plaintiff as a duly organized corporation after havingacknowledged same when entering into the contract with the plaintiff as such corporation for thetransportation of its merchandise. ( xOhta Dev. Co. v. Steamship Pompey, 49 Phil. 117 [1926]); the sameprinciple applied in xCompania Agricole de Ultramar v. Reyes , 4 Phil. 1 [1911] but that case pertained to acommercial partnership which required registration in the registry under the terms of the Code of Commerce.

(b) Two Levels : (i) With "fraud" and (ii) Without "fraud"

When incorporating individuals represent themselves to be officers of the corporation never duly

registered with SEC, and engages in the name of purported corporation in illegal recruitment, they areestopped from claiming that they are not liable as corporate officers, since Section 25 of Corporation Codeprovides that all persons who assume to act as a corporation knowing it to be without authority to do soshall be liable as general partners for all the debts, liabilities and damages incurred or arising as a resultthereof. x People v. Garcia , 271 SCRA 621 (1997).

An individual cannot avoid his liabilities to the public as an incorporator of a corporation whoseincorporation was not consummated, when he held himself out as officer of the corporation and receivedmoney from applicants who availed of their services. Such individual is estopped from claiming that theyare not liable as corporate officers for illegal recruitment under the corporation by estoppel doctrine under Sec. 25 of the Corporation Code which provides that all persons who assume to act as a corporationknowing it to be without authority to do so shall be liable as general partners for all the debts, liabilities and

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damages incurred or arising as a result thereof. x People v. Pineda , G.R. No. 117010, 18 April 1997(Unpublished).

4. Trust Fund Doctrine

See VILLANUEVA , "The Trust Fund Doctrine Under Philippine Corporate Setting ,"31 A TENEO L.J. (No. 1, Feb. 1987).

(a) Commercial/Common Law Premise on Equity vis-a-vis Debts

(b) Nature of DoctrineUnder 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. x Commissioner of Internal Revenuev. Court of Appeals, 301 SCRA 152 (1999).

The requirement of unrestricted retained earnings to cover the shares is based on the trust funddoctrine which means that the capital stock, property and other assets of a corporation are regarded asequtiy in trust for the payment of corporate creditors. The reason is that creditors of a corporation arepreferred over the stockholders in the distribution of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporatefunds to the prejudice of creditors is null and void. x Boman Environmental Dev. Corp. v. CA , 167 SCRA540 (1988).

The Trust Fund doctrine considers the subscribed capital as a trust fund for the payment of thedebts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of thecorporation, 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 mustnever 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, 514-515 (1999).

(c) Corporation Purchasing Own Shares (Secs. 8, 41, 43 and 122, last paragraph; Phil. Trust Co. v. Rivera ,44 Phil. 469 [1923]; Steinberg v. Velasco , 52 Phil. 953 [1929])

VII. ARTICLES OF INCORPORATIONSee relevant portions of VILLANUEVA , Corporate Contract Law, 38 A TENEO L.J. 1

(No. 2, June 1994).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).

2. Procedure and Documentary Requirements (Sec. 14 and 15)

(a) As to Number and Residency of Incorporators (Sec. 10)(b) Corporate Name (Secs. 18, 14(1) and 42; Red Line Trans. v. Rural Transit , 60 Phil. 549 [1934]).

A corporation may change its name by the amendment of its articles of incorporation, but the sameis not effective until approved by the SEC. x Philippine First Insurance Co. v. Hartigan , 34 SCRA 252(1970)

A change in the corporate name does not make a new corporation, and whether affected by specialact or under a general law, has no effect on the identity of the corporation, or on its property, rights, or liabilities. xRepublic Planters Bank v. CA , 216 SCRA 738 (1992).

Similarity in corporate names between two corporations would cause confusion to the publicespecially when the purposes stated in their charter are also the same type of business. xUniversal MillsCorp. v. Universal Textile Mills Inc. , 78 SCRA 62 [1977]).

A corporation has not right to intervene in a suit using a name other than its registered name; if acorporation legally and truly wants to intervene, it should have used its corporate name as the law requiresand not another name which it had not registered. x Laureano Investment and Development Corporation v.Court of Appeals , 272 SCRA 253 (1997).

There would be no denial of due process when a corporation is sued and judgment is renderedagainst it under its unregistered trade name, holding that a corporation may be sued under the name by

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which it makes itself known to its workers. x Pison-Arceo Agricultural Development Corp. v. NLRC, 279SCRA 312 (1997)

(c) Purpose Clause (Secs. 14(2) and 42; Uy Siuliong v. Director of Commerce and Industry , 40 Phil. 541[1919])

(d) Corporate Term (Sec. 11).No extension can be effected once dissolution stage has been reached. x Alhambra Cigar v. SEC , 24

SCRA 269 (1968).

(e) Principal Place of Business

Place of residence of the corporation is the place of its principal office. x Clavecilla Radio System v. Antillon , 19 SCRA 379 (1967)

The residence of its president is not the residence of the corporation because a corporation has apersonality separate and distinct from that of its officers and stockholders. x Sy v. Tyson Enterprises, Inc. ,119 SCRA 367 (1982).

(f) Minimum Capitalization (Sec. 12)

- Why is maximum capitalization required to be indicated?

(g) Subscription and Paid-up Requirements (Sec. 13)

(h) Steps and Documents Required in SEC

3. Grounds for Disapproval (Sec. 17)

When the proposed articles presented show that the object of incorporation is to organize a barrio of agiven municipality into a separate corporation for the purpose of taking possession and having control of allmunicipal property within the barrio so incorporated and administer it exclusively for the benefit of theresidents, the object is unlawful and the articles can be denied registration. x Asuncion v. De Yriarte , 28 Phil. 67[1914]).

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

5. Commencement of Corporate Existence (Sec. 19)

VIII. BY-LAWSSee 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]; Pea v. CA , 193 SCRA 717 [1991])

As the rules and regulations or private laws enacted by the corporation to regulate, govern and controlits own actions, affairs and concerns and its stockholders or members and directors and officers with relationthereto and among themselves in their relation to it, by-laws are indispensable to corporations in this

jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an orderlygovernance and management of corporations. Nonetheless, failure to file them within the period required bylaw by no means tolls the automatic dissolution of a corporation. Loyola Grand Villas Homeowners (South)

Association, Inc. v. Court of Appeals, 276 SCRA 681 (1997).

(a) Common Law Limitations on By-Laws

(i) By-Laws Cannot Be Contrary to Law and Articles of Incorporation

A by-law provision granting to a stockholder a permanent representation in the Board of Directors is contrary to the Corporation Code requiring all members of the Board to be elected by thestockholders or members. Even when the members of the association may have formally adopted theprovision, their action would be of no avail because no provision of the by-laws can be adopted if it iscontrary to law. x Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997).

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Although the right to amend by-laws lies solely in the discretion of the employer, this being in theexercise of management prerogative or business judgment, such right cannot impair the obligation of existing contracts or rights or undermine the right to security of tenure of a regular employee.Otherwise, it would enable an employer to remove any employee from employment by the simpleexpediency of amending its by-laws and providing the position shall cease to exist upon occurrence of a specified event. x Salafranca v. Philamlife (Pamplona) Village Homeowners Association, Inc. , 300SCRA 469, 479 (1998).

(ii) By-Laws Cannot Be Unreasonable or Be Contrary to Nature of By-laws . xGovernment of thePhilippine Islands v. El Hogar Filipino , 50 Phil. 399 (1927).

Authority granted to a corporation to regulate the transfer of its stock does not empower corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes theadoption of regulations as to the formalities and procedure to be followed in effecting transfer.xThomson v. Court of Appeals, 298 SCRA 280 (1998).

By-laws are intended merely for the protection of the corporation, and prescribe regulation, notrestrictions; they are always subject to the charter of the corporation. x Rural Bank of Salinas, Inc. v.CA, 210 SCRA 510 (1992), quoting from Thompson on Corporation Sec. 4137, cited in xFleischer v.Nolasco , 47 Phil. 583 .

(iii) By-Laws Cannot Discriminate

(b) Binding Effects of By-laws (China Banking Corp. v. Court of Appeals , 270 SCRA 503 [1997]).

Neither can we concede that such contract would be invalid just because the signatory thereon wasnot the Chairman of the Board which allegedly violated the corporations by-laws. Since by-laws operatemerely as internal rules among the stockholders, they cannot affect or prejudice third persons who dealwith the corporation, unless they have knowledge of the same. PMI Colleges v. NLRC , 277 SCRA 462(1997).

2. Adoption Procedure (Sec. 46)

Section 46 of the Corporation, which requires the filing of by-laws, does not expressly provide for theconsequence of their non-filing within the period provided therein; however, Pres. Decree 902-A allows theSEC to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations which fail to file their by-laws. Clearly, there can be no automatic corporate dissolution simplybecause the incorporators failed to abide by the required filing of by-laws, and there is no outright demise of corporate existence. Proper notice and hearing are cardinal components of due process in any democraticinstitution, agency or society, which would require that the incorporators must be given the chance to explaintheir neglect or omission and remedy the same. x Loyola Grand Villas Homeowners (South) Association, Inc. v.Court of Appeals, 276 SCRA 681 (1997).

3. Contents (Sec. 47)

4. Amendments (Sec. 48)

Power to amend may be delegated to the board of directors

IX. CORPORATE POWERS, AUTHORITY AND ACTIVITIES1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45; Land Bank of the Philippines v. COA ,

190 SCRA 154 [1990]) 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 directorsand/or its duly authorized officers and agents, since the physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose of by corporate by-laws or by a specific act of the board of directors. x Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000.

Precisely because the corporation is such a prevalent and dominating factor in the business life of thecountry, the law has to look carefully into the exercise of powers by these artificial persons it has created.Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000.

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(a) Classification of Corporate Powers: Express; Implied; and Incidental

There is basis to rule that the act of issuing the checks on behalf of the corporation was well withinthe ambit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation,hence, not an ultra vires act. Atrium Management Corporation vs. Court of Appeals , G.R. No. 109491, 28February 2001.

(b) Where Corporate Power is Lodged (Sec. 23)

Unless otherwise provided by the Corporation Code, corporate powers, such as the power to enter into contracts, are exercised by the Board of Directors. However, the Board may delegate such powers toeither an executive committee or officials or contracted managers, which delegation, except for theexecutive committee, must be for specific purposes. The delegated officers makes the latter agents of thecorporation, and rules of agency as to the binding effects of their acts would apply. For such officers to bedeemed fully clothed by the corporation to exercise a power of the Board, the latter must speciallyauthorize them to do so. x ABS-CBN Broadcasting Corporation v. Court of Appeals , 301 SCRA 572 (1999).

2. Ultra Vires Acts

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

(a) Concept and Types (Sec. 45)

An ultra vires act is one committed outside the object for which a corporation is created as define bythe law of its organization and therefore beyond the power conferred upon it by law. The term ultra vire isdistinguished from an illegal act from the former is merely voidable which may be enforced byperformance, ratification, or estoppel, while the latter is void and cannot be validated. Atrium Management Corporation vs. Court of Appeals , G.R. No. 109491, 28 February 2001.

(b) Ratification of Ultra Vires Acts: (Pirovano v. De la Rama Steamship Co., Inc. , 96 Phil. 335 [1954]; Carlosv. Mindoro Sugar Co. , 57 Phil. 343 [1932]; Republic v. Acoje Mining Co. , 3 SCRA 361 [1963]; CrisologoJose v. CA , 177 SCRA 594 [1989];

(i) Theory of Estoppel or Ratification

In order to ratify the unauthorized act of an agent and make it binding on the corporation, it mustbe shown that the governing body or officer authorized to ratify had full and complete knowledge of allthe material facts connected with the transaction to which it relates. Ratification can never be made onthe part of the corporation by the same person who wrongfully assume the power to make the contract,but the ratification must be by the officer or governing body having authority to make such contract.The act or conduct for which the corporation may be liable under the doctrine of estoppel must be bythose of the corporation, its governing body or authorized officers, and not those of the purported agentwho is himself responsible for the misrepresentation. x Vicente v. Geraldez , 52 SCRA 210 (1973).

When the counsel representing the corporation in a collection suit admits on behalf of thecorporation that the latter admitted culpability for personal loans obtained by its corporate officers,such admission cannot be given legal effect to the detriment of the corporation. The admission madein the answer by the counsel for the corporation was without any enabling act or attendant ratificationof corporate act, as would authorize or even ratify such admission. In the absence of such ratificationor authority, such admission does not bind the corporation. Also, the letter issued by the corporateofficers who obtained the loan as indicating the corporate liability of the corporation, cannot alsoserve to make the corporation liable. The documents and admissions cannot have the effect of aratification of an unauthorized act. Ratification can never be made on the part of the corporation by thesame persons who wrongfully assume the power to make the contract, but the ratification must be bythe officers as governing body having authority to make such contract. xAguenza v. Metropolitan Bank and Trust Co., 271 SCRA 1 (1997).

(ii) Doctrine of Apparent Authority (Prime White Cement Corp. v. Intermediate Appellate Court , 220SCRA 103, 113-114 [1993]; Francisco v. GSIS , 7 SCRA 577 [1963])

A contract signed by the President/Chairman without authority from the Board of Directors isvoid. Although the by-laws grant authority to the President "to execute and sign for and in behalf of thecorporation all contracts and agreements which the corporation may enter into," the same presupposes

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a prior act of the corporation exercised through its Board of Directors. Yao Ka Sin Trading v. CA , 209SCRA 763 (1992).

Although an officer or agent acts without, or in excess of, his actual authority if he acts within thescope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as having such authority, the corporation is bound thereby in favor of aperson who deals with him in good faith in reliance on such apparent authority, as where an officer isallowed to exercise a particular authority with respect to the business, or a particular branch of it,continuously and publicly, for a considerable time. Yao Ka Sin Trading v. CA , 209 SCRA 763 (1992).

Persons who deal with corporate agents within circumstances showing that the agents are actingin excess of corporate authority, may not hold the corporation liable. x Traders Royal Bank v. Court of Appeals , 269 SCRA 601 (1997); also Art. 1883, Civil Code.

The authority of a corporate officer in dealing with third persons may be actual or apparent. . .the principal is liable for the obligations contracted by the agent. The agent's apparent representationyields to the principal's true representation and the contract is considered as entered into between theprincipal and the third person. x First Philipine International Bank v. Court of Appeals , 252 SCRA 259(1996).

If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus,the corporation will, as against anyone who has in good faith dealt with it through such agent, beestopped from denying the agents authority. x Soler v. Court of Appeals, G.R. No. 123892, 21 May2001.

Under Article 1898 of the Civil Code, the acts of an agent beyond the scope of his authority do nobind the principal unless the latter ratifies the same expressly or implied. It also bears emphasizing thatwhen the third person knows that the agent was acting beyond his power or authority, the principal cannot be held liable for the acts of the agent. If the said third person is aware of such limits of authority, heis to blame, and is not entitled to recover damages from the agent, unless the latter undertook to securethe principals ratification. In the case of the corporation as the principal, there was no such ratification.Therefore, when the officer entered into the speculative contracts without securing the Boards approval,nor did he submit the contracts to the Board after their consummation nor were they recorded in thebooks of the corporation, there was, in fact, no occasion at all for ratification. x Safic Alcan & Cie. V.Imperial Vegetable Co., G.R. No. 126751, 28 March 2001.

(iii) Theory of No State Damage ( Harden v. Benguet Consolidated Mining Co. , 58 Phil. 140 [1933]).

3. Specific (Express) Powers

(a) Enumerated Powers (Secs. 36)

Example of Poor Draftsmanship:

When the article of incorporation expressly provides that the purpose of the corporation was toengage in the transportation of person by water , such corporation cannot engage in the business of land transportation , which is an entirely different line of business, and, for which reason, may not acquire anycertificate of public convenience to operate a taxicab service. x Luneta Motor Co. v. A.D. Santos, Inc ., 5SCRA 809 [1962]).

Power to Sue

Under section 36 of the Corporation Code, in relation to Section 23, it is clear that where acorporation is an injured party, its power to sue is lodged with its board of directors or trustees. A minoritystockholder and member of the Board, who fails to show any proof that he was authorized by the Board of Directors, has no such power or authority to sue on the corporations behalf. Nor can we uphold this as aderivative suit. For a derivative suit to prosper, it is required that the minority stockholder suing for and onbehalf of the corporation must allege in his complaint that he is suing on a derivative cause of action onbehalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit.There is now showing that petitioner has complied with the foregoing requisites. x Tam Wing Tak v.Makasiar, G.R. 122452, 29 January 2001.

(b) Power to Extend or Shorten Corporate Term (Secs. 37 and 81 [1])

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(c) Power to Increase or Decrease Capital Stock (Sec. 38)

Prior to SEC approval of the increase in the authorized capital stock, and despite the Boardresolution approving the increase in capital stock, and the receipt of payment on the future issues of theshares from the increased capital stock, such funds do not constitute part of the capital stock of thecorporation until approval of the increase by SEC. x Central Textile Mills, Inc. v. National Wages and Productivity Commission , 260 SCRA368 (1996).

A reduction of capital to justify the mass layoff of employees, especially of union members, amountsto nothing but a premature and plain distribution of corporate assets to obviate a just hearing to labor of the

vast profits obtained by its joint efforts with capital through the years, and would constitute unfair labor practice. xMadrigal & Co. v. Zamora , 151 SCRA 355 [1987]);

(d) Incur, Create or Increase Bonded Indebtedness (Sec. 38)

(e) Sell or Dispose of Assets (Sec. 40).Sale by the Board of the only property of the corporation without compliance with the provisions of

Sec. 40 of the Corporation Code requiring the ratification of members representing at least two-thirds of the membership, would make the sale null and void. x Islamic Directorate of the Philippines v. Court of

Appeals , 272 SCRA 454 (1997); also xPea v. CA , 193 SCRA 717 (1991).

(f) Invest Corporate Funds in Another Corporation or Business or For Any Other Purpose (Sec. 42; Dela Rama v. Ma-ao Sugar Central Co ., 27 SCRA 247 [1969]).

(g) Declare Dividends (Sec. 43; Nielson & Co. v. Lepanto Consolidated Mining Co. , 26 SCRA 540 [1968]).

Stock dividend is the amount that the corporation transfers from its surplus profit account to itscapital account. It is the same amount that can loosely be terms as the trust fund of the corporation.xNational Telecommunications Commission v. Court of Appeals, 311 SCRA 508, 514-515 (1999).

Although the certificates of stock granted the stockholder the right to receive quarterly dividends of 1%, cumulative and participating, the stockholders do not become entitled to the payment thereof as amatter of right without necessity of a prior declaration of dividends. . . Both Sec. 16 of the Corporation Lawand Sec. 43 of the present Corporation Code prohibit the issuance of any stock dividend without theapproval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at aregular or special meeting duly called for the purpose. These provisions underscore the fact that paymentof dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, interestbearing stocks, on which the corporation agrees absolutely to pay interest before dividends are paid to the

common stockholders, is legal only when construed as requiring payment of interest as dividends from netearnings or surplus only. x Republic Planters Bank v. Agana , 269 SCRA 1 (1997).

(i) Enter into Management Contracts (Sec. 44; Nielson & Co., Inc. v. Lepanto Consolidated Mining , 26 SCRA540 [1968]; Ricafort v. Moya , 195 SCRA 247, at pp. 266-267 [1991]). Why the difference in rule betweenentity and individual?

(j) Other Powers

- To Sell Land and Other Properties

A corporation whose primary purpose is to market, distribute, export and import merchandise, thesale of land is not within the actual or apparent authority of the corporation acting through its officers,much less when acting through the treasurer. Likewise Article 1874 and 1878 of the Civil Code requires

that when land is sold through an agent, the agents authority must be in writing, otherwise the sale isvoid. x San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals , 296 SCRA 631, 645 (1998).

- To Borrow Funds

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

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- To Provide Gratuity Pay for Employees

Providing gratuity pay for its employees is one of the express powers of a corporation under theCorporation Code, and cannot be considered to be ultra vires to avoid any liability arising from theresolution granting such gratuity pay. x Lopez Realty v. Fontecha , 247 SCRA 183, 192 (1995).

- To Donate

- To Enter Into Partnership, Joint Venture . Tuason & Co. v. Bolanos , 95 Phil. 106 (1954).

X. DIRECTORS, TRUSTEES AND OFFICERS1. Powers of Board of Directors or Trustees (Sec. 23; Gamboa v. Victoriano , 90 SCRA 40 [1979]).

(a) Two Theories on Source of Power of Board of Directors ( Angeles v. Santos , 64 Phil. 697 [1937]).

(b) Board Must Act As Body (Sec. 25; The Board of Liquidators v. Heirs of Maximo M. Kalaw , 20 SCRA 987[1967]; Ramirez v. Orientalist Co. and Fernandez , 38 Phil. 634 [1918]; Acua v. Batac ProducersCooperative Marketing Association , 20 SCRA 526 [1967]).

The general rule is that a corporation, through its broad of directors, should act in the manner andwithin the formalities, if any, prescribed by its charter or by the general law. Thus, directors must act as abody in a meeting called pursuant to the law or the corporation's by-laws, otherwise, any action takentherein may be questioned by any objecting director or shareholder. Be that as it may, jurisprudence tellsus that an action of the board of directors during a meeting, which was illegal for lack of notice, may beratified either expressly, by the action of the directors in subsequent legal meeting, or impliedly, by thecorporation's subseqeunt course of conduct. x Lopez Realty v. Fontecha , 247 SCRA 183, 192 (1995).

(c) Effects of a Bogus Board

The acts or contracts effected by a bogus board would be void pursuant to Art. 1318 of the CivilCode because of the lack of consent. Islamic Directorate of the Philippines v. Court of Appeals , 272SCRA 454 (1997).

(d) Executive Committee (Sec. 35)

2. BUSINESS J UDGMENT RULE (Montelibano v. Bacolod-Murcia Miling Co., Inc. , 5 SCRA 36 [1962]; PhilippineStock Exchange, Inc. v. Court of Appeals, 281 SCRA 232 [1997])

Board members and officers who purport to act for and in behalf of the corporation, keep within thelawful scope of their authority in so acting and act in good faith, do not become liable, whether civilly or otherwise, for the consequences of their acts. Those acts, when they are such a nature and are done under such circumstances, are properly attributed to the corporation alone and no personal liability is incurred bysuch officers and Board members. x Benguet Electric Cooperative, Inc. v. NLRC , 209 SCRA 55 (1992)

3. Qualifications of Directors and Trustees (Secs. 23 and 27; Gokongwei, Jr. v. SEC , 89 SCRA 336 [1979]).

(a) A director must own at least one share of stock ( xPea v. CA , 193 SCRA 717 [1991]; x Detective &Protective Bureau, Inc. v. Cloribel , 26 SCRA 255 [1969])

(b) Mere beneficial ownership in a voting trust arrangement no longer qualifies ( Lee v. CA , 205 SCRA 752[1992]).

4. Election of Directors and Trustees(a) Directors (Secs. 24 and 26; Premium Marble Resources v. Court of Appeals, 264 SCRA 11 [1996]).

(b) Trustee (Secs. 92 and 138)

(c) Cumulative Voting (Sec. 24; Cumulative Voting in Corporate Elections: Introducing Strategy in theEquation, 35 S OUTH C AROLINA L. R EV. 295)

5. Vacancy in Board (Sec. 29)

By-law provision or the practice giving a stockholder a permanent seat in the Board of Directors wouldbe against the provision of Sections 28 and 29 of the Corporation Code which requires member of the board of

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corporations to be elected. In addition, Section 23 of the Corporation Code which provides for the powers of the Board of Directors or Trustees expressly requires them to be elected from among the holders of stock, or where there is no stock, from among the members of the corporation. x Grace Christian High School v. Court of

Appeals, 281 SCRA 133 (1997).

6. Term of Office, Hold-over Principle

Directors may lawfully fill vacancies occurring in the board, and such officials, as well as the originaldirectors, hold until qualification of their successors. x Government v. El Hogar Filipino , 50 Phil. 399 (1927).

The remedy is quo warranto to question the legality and proper qualification of persons elected to theboard. x Ponce v. Encarnacion , 94 Phil. 81 (1953).

7. Removal of Directors or Trustees (Sec. 28; Roxas v. De la Rosa , 49 Phil. 609 [1926]).

8. Directors' or Trustees' Meetings (Secs. 49, 53, 54 and 92)

In a board meeting, an abstention is presumed to be counted as an affirmative vote insofar as it may beconstrued as an acquiescence in the action of those who voted affirmatively; but such presumption, beingmerely prima facie would not hold in the face of clear evidence to the contrary. x Lopez v. Ericta , 45 SCRA 539[1972]).

9. Compensation of Directors (Sec. 30)

Directors and trustees are not entitled to salary or other compensation when they perform nothing morethan the usual and ordinary duties of their office, founded on the presumption that directors and trustees render service gratuitously, and that the return upon their shares adequately furnishes the motives for service, withoutcompensation. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216, 223 (1997).

Under Section 30 of the Corporation Code, there are two (2) ways by which members of the board canbe granted compensation apart from reasonable per diems: (a) when there is a provision in the by-laws fixingtheir compensation; and (b) when the stockholders representing a majority of the outstanding capital stock at aregular or special meeting agree to give them compensation. From the language of Section 30, it may also bededuced that members of the board may also receive compensation, when they render services to thecorporation in a capacity other than as directors or trustees of the corporation. Western Institute of Technology,Inc. v. Salas, 278 SCRA 216 (1997).

The position of being Chairman and Vice-Chairman, like that of Treasurer and Secretary, wereconsidered by the officers as not mere directorship position, but officership position that would entitle theoccupants to compensation. Likewise, the limitation placed under Section 30 of the Corporation that directorscannot receive compensation exceeding 10% of the net income of the corporation, would not apply to thecompensation given to such positions since it is being given in their capacity as officers of the corporation andnot as board members. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).

10. Role of Directors

(a) Directors as Fiduciaries.

- Pre-Corporation Code. Palting v. San Jose Petroleum, Inc. , 18 SCRA 924 (1966).

- Nature of Duties of Directors and Officers. Prime White Cement Corp. v. IAC , 220 SCRA 103 (1993).

(b) Duty of Obedience A corporation, through its board of directors, should act in the manner and within the formalities, if

any, prescribed by its charter or by the general law. x Lopez Realty, Inc. v. Fontecha , 247 SCRA 183 (1995)(c) Duty of Diligence (Sec. 31; Steinberg v. Velasco , 52 Phil. 953 [1929]; Bates v. Dresser , 251 U.S. 524, 64

L. Ed. 388, 40 S. Ct. 247 [1919]; Smith v. Van Gorkam , 488 A.2d 858, Supreme Court of Delaware, 1985)..

(d) Duty of Loyalty (Secs. 31 to 34; Mead v. McCullough , 21 Phil. 95 [1911]).

- Doctrine of Corporate Opportunity (Gokongwei v. SEC , 89 SCRA 336 [1979]; See Annotations:Doctrine of Corporate Opportunity, 89 SCRA 412).

- Self-dealings (Secs. 32 and 33)

- Using Inside Information (Gokongwei v. SEC , 89 SCRA 336 [1979]).

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When a director, who also owns of the equity of the corporation, who has also been designated asthe administrator of corporate affairs, and who was directly negotiating the sale of the corporations largelandholdings to the Government at great prices, purchases the shares of stock of a shareholder withoutinforming the latter of the on-going negotiations, such director is deemed to have fraudulently acquired theshareholdings by way of deceit practiced by means of concealing his knowledge of the state of thenegotiations and their probable successful result. x Strong v. Repide , 41 Phil. 947 [1909];

- Applies to confidential employees ( cf. xSing Juco v. Llorente , 43 Phil. 589 [1922])

(e) Duty to Creditors and Outsiders

[xVILLANUEVA , The Fiduciary Duties of Directors and Officers Representing theCreditor Pursuant to a Loan Workout Arrangement: Parameters Under PhilippineCorporate Setting , 35 A TENEO L.J. (No. 1, Feb. 1991)]

(f) Corporate Dealings with Directors and Officers (Sec. 32; Gokongwei v. SEC , 89 SCRA 336 [1979];Prime White Cement Corp. v. IAC , 220 SCRA 103 [1993]).

(g) Contracts Between Corporations with Interlocking Directors (Sec. 33)

11. Who Is an "Officer" of the Corporation (Sec. 25; Gurrea v. Lezama , 103 Phil. 553 [1958]; Mita Pardo deTavera v. Tuberculosis Society , 112 SCRA 243 [1982]; PSBA v. Leao , 127 SCRA 778 [1984]; Dy v. NLRC ,145 SCRA 211 [1986]; xVisayan v. NLRC , 196 SCRA 410 [1991]).

Corporations act only through their officers and duly authorized agents. All acts within the powers of acorporation may be perfo