word file 2016 corporate law outline

7/21/2019 Word File 2016 Corporate Law Outline

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ATENEO DE MANILA LAW SCHOOL2ND SEMESTER, SY 2015-2016

OUTLINE IN PHILIPPINE

CORPORATE LAW1

DEAN CESAR L. VILLANUEVA ATTY. JOEY G. HOFILEÑA

ATTY. TERESA V. TIANSAY

I. x H ISTORICAL AC!GROUND1. P"#$#%%#&' C()%()*+' L*2 A-Sort-of Codification of American Corporate Law

When attention was drawn to the fact that there was no entity in Spanish law corresponding to thenotion of the American “corporation”, the Philippine Commission enacted the Corporation Law (Act No.!"#$, to introd%ce the American corporation in the Philippines as the standard commercial entity and tohasten the day when the Spanish sociedad anónima wo%ld &e o&solete. 'he stat%te is a sort of codificationof American Corporate Law. Harden v. Benguet Consolidated Mining , " Phil. ! (#))$.

*.Sociedades Anónimas

'he sociedades anónimas were introd%ced in Philippine *%risdiction on + ecem&er with thee-tension to Philippine territorial application of Articles " to "# of the Spanish Code of Commerce.'hose articles contained the feat%res of limited lia&ility and centralied management granted to a *%ridicalentity/ &%t they were more similar to the 0nglish *oint stoc1 companies than the modern corporations.

Benguet Consolidated Mining Co. v. Pineda, # Phil. 2 (#"3$.

A sociedad anónima was considered a commercial partnership “where %pon the e-ec%tion of the p%&licinstr%ment in which its articles of agreement appear, and the contri&%tion of f%nds and personal property,&ecomes a *%ridical person4an artificial &eing, in5isi&le, intangi&le, and e-isting only in contemplation of law4with power to hold, &%y, and sell property, and to s%e and &e s%ed4a corporation4not a generalpartnership nor a limited partnership . . . 'he inscri&ing of its articles of agreement in the commercialregister was not necessary to ma1e it a *%ridical person/ s%ch inscription only operated to show that itpartoo1 of the form of a commercial corporation.” Mead v. McCullough, 6 Phil. #" (#$.

'he old Corporation Law recognied the difference &etween sociedades anónimas and corporationsand the Co%rt will not apply legal pro5isions pertaining to the latter to the former. Phil. Product Co. v.Primateria Societe Anonyme, " SC7A )+ (#3"$.

2. T"' C()%()*+#(& L* (Act No. !"#$

'he Corporation Law as the first corporate stat%te &ecame effecti5e on + April #+3. 8t had piece9mealamendments d%ring its 2!9year history, &%t &ecame anti:%ated and %n9adapted to the changing times.

. T"' C()%()*+#(& C(/' (;atas Pam&ansa ;ilang 3$

'he c%rrent Corporation Code of the Philippines too1 effect on + <ay #+, adopting 5ario%s corporatedoctrines en%nciated &y the S%preme Co%rt %nder the old Corporation Law/ clarified the o&ligations of corporate directors and officers/ e-pressed in stat%tory lang%age esta&lished principles and doctrines/ andpro5ided for a chapter on close corporations.)

.P)(%') T)'*+'&+ ( P"#$#%%#&' C()%()*+' L* Altho%gh we ha5e a Corporation Code that pro5ides for stat%tory principles, &%t since Philippine

Corporate Law comes from the =.S. common law system, Philippine Corporate Law is essentially, andcontin%es to &e, a common law system and s%&*ect to de5elopments in commercial de5elopments, m%ch of

which can &e e-pected to happen in the world of commerce, and some e-pressed *%rispr%dential r%les thatapply and adopt corporate principles into the changing concepts and mechanism of the commercial world.

II. C ONCEPTS

1. D'#&#+#(& ( “Corporation” (SEC. 2$

A corporation is an artificial &eing created &y operation of law, in5ested &y law %pon coming intoe-istence with a personality separate and distinct from the persons composing it, and from any other legalentity to which it may &e related. PNB v. Andrada Electric & Engineering Co., ) SC7A 6!! (6++6$.!

2.FOUR CORPORATE ATTRIUTES ASED ON SECTION 2

*. A& A)+##3#*$ '#&4 “t has !uridical ca"acity to contract and enter into legal relationshi"s.”

. A C)'*+)' ( +"' L* “t is created #y o"eration of la$ and not #y mere agreement.”3. S+)(&4 J)#/#3*$ P')7(&*$#+8 “t has a right of succession.”

/. C)'*+)' ( L##+'/ P(')7 “t has only such "o$ers% attri#utes and "ro"erties as aree"ressly authori'ed #y la$ or incident to its eistence.”

=nless otherwise indicated, all references to sections pertain to the Corporation Code of the Philippines.

6'he whole &ody of stat%tory and *%rispr%dential r%les pertaining to corporations is referred to as “Corporate Law” to differentiate it from

the old stat%te 1nown as “'he Corporation Law,” or Act No. !"#.

)Corporation Code applies to corporations organied %nder the old Corporation Law. Castillo v. Balinghasay , !!+ SC7A !!6 (6++!$.

!Construction & (ev. Cor". of the Phils. v. Cuenca, !33 SC7A 2! (6++"$/ E(SA Shangri)*a Hotel and +esorts% nc. v. B, Cor"., ""3

SC7A 6" (6++$.



A corporation has no powers e-cept for those which are e-pressly conferred on it &y the CorporationCode, and those fo%nd in its charter, and are implied &y or are incidental to its e-istence. 8t e-ercises itspowers thro%gh its ;oard of irectors and>or its d%ly a%thoried officers and agents. Pascual and Sant os%nc. v. -he Mem#ers of the -ramo a/as Neigh#orhood Assn. nc. , !!6 SC7A !) (6++!$."

.9TRI-LEVEL E:ISTENCE; OF THE CORPORATION

*. 9ASSETS-ONLY; L'<'$ “-he cor"oration is an aggregation of Assets and resources0

. 9USINESS ENTERPRISE; L'<'$ 1-he cor"oration2s "rimary "ur"ose is to "ursue #usiness.0

3. 9JURIDICAL ENTITY; L'<'$ “-he cor"oration is a medium of "ursuing a #usiness enter"rise.0

. 9TRI-LEVEL RELATIONSHIPS; IN THE CORPORATE SETTING

*. 9JURIDICAL ENTITY LEVEL,” which treats of the aspects of the State9corporation relationship.

. 9INTRA-CORPORATE LEVEL,; which considers that the corporate setting is a contract%al relationship onfo%r (!$ le5els?

• ;etween the corporation and its agents>representati5es to act in the real world, i.e.,

directors and officers, which is go5erned also &y the Law on Agency

• ;etween the corporation and its shareholders or mem&ers

• ;etween the shareholders and the corporate directors, tr%stees and officers

•

;etween and among the shareholders in a common 5ent%re3. 9E:TRA-CORPORATE LEVEL,; which 5iews the relationship &etween the corporation and third9

parties or “o%tsiders”, essentially go5erned &y Contract Law and La&or Law.

• ;etween the corporation and its employees, go5erned &y La&or Laws

• ;etween the corporation and those it contracts with, go5erned &y Contract Laws

• ;etween the corporation and the p%&lic it affects with its enterprise, go5erned essentially

&y laws go5erning 'orts or 3uasi 9elicts.

5. THEORIES ON THE FORMATION OF CORPORATION

*. Theory of Concession: Tayag v. Benguet Consoidated , 26 SCRA 22 =1>6?@.

A @corporationsB claim of a *%ridical personality of its own and transact &%siness as s%ch, is not a matter

of a&sol%te right, #ut a "rivilege which may &e en*oyed only %nder s%ch terms as the State may deemnecessary to impose. cf. Ang Pue & Co. v. Sec. of Commerce & ndustry% " SC7A 3!" (#36$.

“8t is a &asic post%late that &efore a corporation may ac:%ire *%ridical personality, the State m%st gi5e itsconsent either in the form of a special law or a general ena&ling act,” and the "rocedure and conditions

"rovided under the la$ for the ac4uisition of such !uridical "ersonality must #e com"lied $ith . Altho%gh thestat%tory grant to an association of the powers to p%rchase, sell, lease and enc%m&er property can only &econstr%ed the grant of a *%ridical personality to s%ch an association ne5ertheless, the fail%re to complywith the stat%tory proced%re and conditions does not warrant a finding that s%ch association ac:%ired a

*%ridical personality, e5en when it adopts constit%tion and &y9laws. nt2l E"ress -ravel & -our Services%nc. v. CA% )!) SC7A 32! (6+++$.

All corporations, &ig or small, m%st a&ide &y the pro5isions of the Corporation Code/ e5en a simplefamily corporation cannot claim an e-emption nor can it ha5e r%les and practices other than thoseesta&lished &y law. -orres v. Court of A""eals, 62 SC7A 2#) (##2$.

. Theory of !nterprise !ntity ERLE, COLUMIA LAW REV. =1>@

A corporation is &%t an association of indi5id%als, allowed to transact %nder an ass%med corporatename, with a distinct legal personality. 8n organiing itself as a collecti5e &ody, it wai5es no constit%tionalimm%nities and per:%isites appropriate to s%ch a &ody. PSE v. Court of A""eals% 6 SC7A 6)6 (##2$.

Corporations are composed of nat%ral persons and their separate corporate personality is not a shieldfor the commission of in*%stice and ine:%ity, s%ch as to a5oid the e-ec%tion of the property of a sister company. -an Boon Bee & Co. v. 5arencio, 3) SC7A 6+" (#$.

6. ADVANTAGES AND DISADVANTAGES OF CORPORATE FORM

*. F() A/<*&+*4'(7 F'*+)'7 ( +"' C()%()*+' M'/#

=#@ STRONG AND SOLEMN JURIDICAL PERSONALITY (S'3. 2B A)+7. =@, 5, 6, *&/ 15, C#<#$ C(/'$

“While not in fact and in reality a person, the law treats the corporation as tho%gh it were a person &yprocess of fiction or &y regarding it as an artificial person distinct and separate from its indi5id%alstoc1holders.” +emo% 5r. v. AC , 26 SC7A !+" (##$.

Since stoc1holders are not co9owners of corporate assets, then the transfer of corporate assets tothe stoc1holders &y way of dissol%tion is an act of con5eyance and not in the nature of a "artitionamong co)o$ners. Stoc/holders of ,. 6uan'on and Sons% nc. v. +egister of (eeds of Manila , 3 SC7A)2) (#36$.

"(e *iano v. Court of A""eals, )2+ SC7A )!# (6++$/ Monfort Hermanos Agricultural (ev. Cor". v. Monfort , !)! SC7A 62 (6++!$/

7nited Paragon Mining Cor". v. Court of A""eals, !#2 SC7A 3) (6++3$/ Ce#u Bionic Builders Su""ly% nc. v. (BP , 3)" SC7A ) (6++$.

6



/. C((%')*+#<'7 =A)+. , R.A. N(. 6>?@Cooperati5es are esta&lished to pro5ide a strong social and economic organiation to ens%re that the

tenant9farmers will en*oy on a lasting &asis the &enefits of agrarian reforms. Cor"u' v. 6ros"e% ))) SC7A!6" (6+++$.

'. 7#&'77 T)7+7 (Art. !!6, Ci5il Code$

. Cuentas en "articipacion =A)+. 15, C#<#$ C(/'@Cuentas en "artici"acion is an accidental partnership constit%ted in a manner that its e-istence was only

1nown to those who had an interest in the same, there &eing no m%t%al agreement &etween the partners,and witho%t a corporate name indicating to the p%&lic in some way that there were other people &esides theone who ostensi&ly managed and cond%cted the &%siness, go5erned %nder Art. 6)# of the Code of Commerce. 'hose who contract with the person %nder whose name the &%siness of s%ch partnership of cuentas en "artici"acion is cond%cted, shall ha5e only a right of action against s%ch person and not againstthe other persons interested, and the latter, on the other hand, shall ha5e no right of action against thirdperson who contracted with the manager %nless s%ch manager formally transfers his right to them. Bournsv. Carman, 2 Phil. 2 (#+3$.

III. N ATURE AND A TTRIUTES OF A C ORPORATION

1. P(') +( C)'*+' * C()%()*+#(& I7 L'4#7$*+#<' #& C"*)*3+') (S'3. 16, A)+#3$' :II, 1>? C(&7+#++#(&$

Congress cannot enact a law creating a pri5ate corporation with a special charter, and it follows thatCongress can create corporations with special charters only if s%ch are go5ernment9owned9or9controlledcorporations (GDCCs$. ,eliciano v. Commission on Audit , !# SC7A )3) (6++!$/ 9eterans ,ederation of the Phili""ines v. +eyes, !) SC7A "63 (6++3$.

P.. 22 creating New Agri-, 8nc. 5iolated the constit%tional prohi&ition on the formation of a pri5atecorporation &y special legislati5e act which is not a GDCC, since NC was merely re:%ired to e-tend aloan to the new corporation, and the new stoc1s of the corporation were to &e iss%ed to the old in5estorsand stoc1holders of the insol5ent Agri- %pon proof of their claims against the a&olished corporation. N(C v. Phili""ine 9eterans Ban/% #6 SC7A 6"2 (##+$.

PN7C which was constit%ted %nder a special law, is not a GDCC &eca%se it is not &y its charter owned&y the Go5ernment, altho%gh it is intended to do p%&lic f%nctions, it is owned &y the pri5ate sector.

Conse:%ently, the PN7C Charter, insofar as it creates the PN7C as a pri5ate corporation and grants itcorporate powers, is 5oid for &eing %nconstit%tional. 'he other pro5isions of the PN7C Charter remain 5alidas they can &e considered as a recognition &y the State that the %nincorporated PN7C is the local NationalSociety of the 8nternational 7ed Cross and 7ed Crescent <o5ement, and th%s entitled to the &enefits,e-emptions and pri5ileges set forth in the PN7C Charter. *i#an v. 6ordon, "#) SC7A 3 (6++#$.

2. CORPORATION AS A PERSON

*. E&+#+$'/ +( D' P)(3'77 *&/ E*$ P)(+'3+#(&'he d%e process cla%se is %ni5ersal in its application to all persons, and co5ers pri5ate corporations

within the scope of the g%aranty insofar as their properties are concerned. Smith Bell & Co. v. Natividad , !+Phil. )3 (#6+$.

. U&)'*7(&*$' S'*)3"'7 *&/ S'#)'

A corporation is protected &y the constit%tional g%arantee against %nreasona&le searches and sei%res,&%t its officers ha5e no ca%se of action to assail the legality of the sei%res, regardless of the amo%nt of shares of stoc1 of each in said corporation &eca%se the corporation has a personality distinct and separatefrom those of said officers. Stonehill v. (io/no, 6+ SC7A )) (#32$.

A corporation is &%t an association of indi5id%als %nder an ass%med name, with a distinct legal entity. 8norganiing itself as a collecti5e &ody it wai5es no constit%tional imm%nities appropriate for s%ch &ody. 8tsproperty cannot &e ta1en witho%t compensation/ can only &e proceeded against &y d%e process of law/ andis protected against %nlawf%l discrimination. Bache & Co. :Phil.;% nc. v. +ui' , )2 SC7A 6) (#2$.

3. N(+ E&+#+$'/ +( P)#<#$'4' A4*#&7+ S'$ I&3)##&*+#(&

“8t is elementary that the right against self9incrimination has no application to *%ridical persons.” BataanShi"yard & Engineering v. PC66, "+ SC7A (#2$.

While an indi5id%al may lawf%lly ref%se to answer incriminating :%estions %nless protected &y an

imm%nity stat%te, a corporation, 5ested with special pri5ileges and franchises &y the State, may not ref%seto show its hand when charged with an a&%se of s%ch pri5ilege. Hale v. Hen/el , 6+ =.S. !) (#+3$.#

.P)*3+#3' ( P)('77#(&Corporations cannot engage in the practice of a profession since they lac1 the moral and technical

competence re:%ired &y the P7C. 7*EP v. -he *egal Clinic , 66) SC7A )2 (##)$.

A corporation engaged in the selling of eyeglasses and which hires optometrists is not engaged in thepractice of optometry. Samahan ng ?"tometrists v. Ace#edo nt2l Cor".% 62+ SC7A 6# (##2$/ Alfafara v.

Ace#edo ?"tical Co.% ) SC7A 6#) (6++6$.

#ilson v. 7nited States% 66 =.S. )3 (#$/ 7nited States v. hite% )66 =.S. 3#! (#!!$.

!



C #$%T!& -& !'#L$T(#% ? 9A)3"#+'3+)*$ P)('77#(&*$ C()%()*+#(&7; *$$('/ &/') R'%. A3+ N(. >266.

. L#*#$#+8 () T()+7 A corporation is ci5illy lia&le for torts in the same manner as nat%ral persons, &eca%se the r%les

go5erning the lia&ility of a principal for a tort committed &y an agent are the same whether the principal &ea nat%ral person or a corporation, and whether the agent &e a nat%ral or artificial person. PNB v. Court of

A""eals, ) SC7A 6)2 (#2$.

“Cor"orate tort ” consists in the 5iolation of a right gi5en or the omission of a d%ty imposed &y law/ a

&reach of a legal d%ty. 'he fail%re of the corporate employer to comply with the d%ty %nder the La&or Codeto grant separation pay to employees in case of cessation of operations constit%tes tort and its stoc1holder who was acti5ely engaged in the management or operation of the &%siness sho%ld &e held personallylia&le. Sergio ,. Naguiat v. N*+C , 63# SC7A "3! (##2$.

Sta/eholders2 -heory@ While in theory a hospital as a *%ridical entity cannot practice medicine, in reality it%tilies doctors, s%rgeons and medical practitioners in the cond%ct of its &%siness of facilitating medical ands%rgical treatment. Within that reality, three legal relationships crisscross? ($ &etween the hospital and thedoctor practicing within its premises/ )*+ ,etween the hospita and the patient ,eing treated or examined within its premises/ and ()$ &etween the patient and the doctor. 7egardless of its relationshipwith the doctor, the hospital may &e held directly lia&le to the patient for its own negligence or fail%re tofollow esta&lished standard of cond%ct to which it sho%ld conform as a corporation. "rofessiona Services (nc. v. Court of Appeas, 611 SCRA 2?2 =2010@.

5. C()%()*+' C)##&*$ L#*#$#+8 =A)+7. 102 *&/ 10, R'<#7'/ P'&*$ C(/'@

*. N( C)##&*$ S#+ C*& L#' A4*#&7+ * C()%()*+#(&

Corporations cannot &e held criminally lia&le within Philippine *%risdiction since there is no law relating tothe practice and proced%re in criminal actions where&y a corporation may &e &ro%ght to co%rt to &eproceeded against criminally. est Coast Life (ns. Co. v. /urd , 2 P"#$. 01 =1>1@.

A corporation lac1s the element for malice to &e held lia&le for a criminal act. -imes% nc. v. +eyes, )#SC7A )+) (#2$.

;%t, a corporation can &e a real9party9in9interest for the p%rpose of &ringing a ci5il action for malicio%sprosec%tion for the damages inc%rred &y the corporation for the criminal proceedings &ro%ght against itsofficer. Cometa v. Court of A""eals, )+ SC7A !"# (###$.

. S+(3"($/')7 A7 S3" C*&&(+ ' H'$/ L#*$' () * C()%()*+' C)##&*$ A3+

'he “owners” of a corporate organiation are its stoc1holders and they are to &e disting%ished from itsdirectors and officers. Stoc1holders, &eing &asically in5estors in the corporation, and with the managementof its &%siness generally 5ested in the ;oard of irectors, cannot &e held lia&le for the criminal offensecommitted on &ehalf of the corporation, %nless they personally too1 part in the same. Es"iritu v. PetronCor"., 3+" SC7A 6!" (6++#$.

3. I+ I7 +"' A3+#&4 O#3')7 W"( S"*$$ ' C)##&*$$8 L#*$' () +"' C()%()*+' A3+

When a criminal stat%te for&ids the corporation itself from doing an act, the prohi&ition e-tends to the;oard of irectors, and to each director separately and indi5id%ally. Peo"le v. Conce"cion% !! Phil. 6#(#66$.

Apart from its sweeping allegation that respondents misappropriated or con5erted its moneyplacements, petitioner failed to esta&lish the partic%lar role or act%al participation of each respondent in thecriminal act/ neither was it shown that they assented to its commission. 8t is &asic that only corporateofficers shown to ha5e participated in the alleged anomalo%s acts may &e held criminally lia&le. Cru'vale%nc. v. Edu4ue, "# SC7A ")! (6++#$.

'he e-istence of the corporate entity does not shield from prosec%tion the corporate agent who1nowingly and intentionally ca%ses the corporation to commit the crime. 'he corporation o&5io%sly acts,and can act, only &y and thro%gh its h%man agents, and it is their cond%ct which the law m%st deter. 'heemployee or agent of a corporation engaged in %nlawf%l &%siness nat%rally aids and a&ets in the carryingon of s%ch &%siness and will &e prosec%ted as principal if, with 1nowledge of the &%siness, its p%rpose andeffect, he conscio%sly contri&%tes his efforts to its cond%ct and promotion @illegal recr%itment/ ta- e5asionB,howe5er slight his contri&%tion may &e. The !xecutive Secretary v. Court of Appeas, 2> SCRA ?1=200@B"eope v. Tan Boon 0ong , 5 P"#$. 60 =1>0@.+

Prior to the passage of the 'r%st 7eceipts Law, a corporate officer who signs the tr%st receipt co%ld not&e held criminally lia&le for the crime of estafa p%nished %nder the 7e5ised Penal Code, for his criminallia&ility co%ld not &e pro5en &eyond reasona&le do%&t %nder the doctrine that “the corporation was @notB

directly re:%ired &y law to do an act in a gi5en manner, and the same law ma1es the person who fails toperform the act in the prescri&ed manner e-pressly lia&le criminally.” Sia v. Court of A""eals, 6 SC7A3"" (#)$.

'he 'r%st 7eceipts Law now recognies the impossi&ility of imposing the penalty of imprisonment on acorporation, hence, if the entr%stee is a corporation, the law ma1es the officers or employees or other persons responsi&le for the offense lia&le to s%ffer the penalty of imprisonment. ?ng v. Court of A""eals,!+ SC7A 3!2 (6++)$.

8f the crime is committed &y a corporation, the directors, officers, employees or other officers thereof responsi&le for the offense shall &e charged and penalied for the crime, precisely &eca%se of the nat%re of

++e"u#lic 6as Cor". v. Petron Cor"., 3# SC7A 333 (6+)$.

"



the crime and the penalty therefor. A corporation cannot &e arrested and imprisoned/ hence, cannot &epenalied for a crime p%nisha&le &y imprisonment. Howe5er, a corporation may &e charged andprosec%ted for a crime if the imposa&le penalty is fine. 05en if the stat%te prescri&es &oth fine andimprisonment as penalty, a corporation may &e prosec%ted and, if fo%nd g%ilty, may &e fined. Ching v.Secretary of 1ustice, ?1 SCRA 602 =2006@.

When a criminal stat%te designates an act of a corporation or a crime and prescri&es p%nishmenttherefor, it creates a criminal offense which, otherwise, wo%ld not e-ist and s%ch can &e committed only &ythe corporation. ;%t when a penal stat%te does not e-pressly apply to corporations, it does not create an

offense for which a corporation may &e p%nished. Dn the other hand, if the stat%te, defines a crime thatmay &e committed &y a corporation &%t prescri&es the penalty therefor to &e s%ffered &y the officers,directors, or employees of s%ch corporation or other persons responsi&le for the offense, only s%chindi5id%als will s%ffer s%ch penalty. Corporate officers or employees, thro%gh whose act, defa%lt or omissionthe corporation commits a crime, are themsel5es indi5id%ally g%ilty of the crime. Ching v. Secretary of 1ustice, ?1 SCRA 602 =2006@.

6.R'3(<')8 ( M()*$ *&/ O+"') D**4'7 A corporation, &eing an artificial person, cannot e-perience physical s%fferings, mental ang%ish, fright,

serio%s an-iety, wo%nded feelings, moral shoc1 or social h%miliation which are &asis for moral damages%nder Art. 662 of the Ci5il Code. Ho$ever% a cor"oration may have a good re"utation $hich% if #esmirched% may #e a ground for the a$ard of moral damages. Mam#ulao *um#er Co. v. Phili""ineNational Ban/% 66 SC7A )"# (#3$/ AP- v. Court of A""eals% )++ SC7A "2# (##$.

B$T : 'he statement in Manero and Mam#ulao *um#er that a corporation may reco5er moral damages if it “has a good rep%tation that is de&ased, res%lting in social h%miliation” is an o#iter dictum. +ecovery of acor"oration $ould #e under Articles % = and = of the Civil Code% #ut $hich re4uires a clear "roof of malice or #ad faith. ABS)CBN Broadcasting Cor". v. Court of A""eals, )+ SC7A "# (###$.

% #%!T/!L!SS : Li1ewise, an ed%cational corporations claim for moral damages arising from li&el falls%nder Article 66#(2$ of the Ci5il Code, which e-pressly a%thories the reco5ery of moral damages in casesof li&el, slander or any other form of defamation, and does not :%alify whether the plaintiff is a nat%ral or

*%ridical person. 'herefore, a *%ridical person can 5alidly complain for li&el or any other form of defamationand claim for moral damages. ,ili"inas Broadcasting Net$or/ v. Ago Medical and Educational Center , !!SC7A !) (6++"$.

" &!'A(L(%2 & $L! : A corporation, &eing an artificial person and ha5ing e-istence only in legalcontemplation, has no feelings, emotions nor senses/ therefore, it cannot e-perience physical s%ffering andmental ang%ish. <ental s%ffering can &e e-perienced only &y one ha5ing a ner5o%s system and it flowsfrom real ills, sorrows, and griefs of life4all of which cannot &e s%ffered &y an artificial person. Prime hiteCement Cor". v. AC , 66+ SC7A +) (##)$.

.CORPORATE NATIONALITY

*. P)#*)8 9"ace of (ncorporation Test ; =S'3. 12@ 'he corporation is a national of the co%ntry %nder whose laws it is organied or incorporated.6

.A&3#$$*)8 9Contro Test ; 8n cases in5ol5ing properties, &%siness or ind%stries reser5ed for Iilipinos, inaddition to the pace of incorporation test , the nationality of a corporation is determined &y thenationality of the “controlling” stoc1holders.

3. S-S'+7 ( +"' C(&+)($ T'7+

=1@ O)#4#&*$ DOJ-SEC G)*&/*+"') R$' ,or "ur"oses of investment holdings% shares &elong to

corporations at least 3+E of the capital of which is owned &y Iilipino citiens shall &e consideredas of Philippine nationality. ;%t if the percentage of Iilipino ownership in the corporation is leastthan 3+E, then only the n%m&er of shares corresponding to s%ch percentage shall &e co%nted asof Philippine nationality.

3#1-S!C &ue? Dpinion of DF No. , s. ##, # Fan%ary ##/ S0C Dpinion, 3 No5em&er ##, JJ8K S0C =A7'07LM ;=LL0'8N (No. 9 <arch ##+$/ S0C Dpinion, ! ecem&er ##,JJ8K S0C =A7'07LM ;=LL0'8N (No. 6 9F%ne ##+$

=2@ FIA T'7+ ( P"#$#%%#&' N*+#(&*$? Sec. )(a$ (&$ of I8A (7.A. 2+!6$, considers for p%rpose of in5estment a “Philippine national” as a corporation organied %nder the laws of the Philippines of which at least 3+E of the capital stoc1 o%tstanding and entitled to 5ote is owned and held &ycitiens of the Philippines, or a tr%stee of f%nds for pension or other employee retirement or separation &enefits, where the tr%stee is a Philippine national and at least 3+E of the f%nd will

accr%e to the &enefit of Philippine nationals.)

=nder Sec. ) of the I8A #, a corporation organied %nder the laws of the Philippines of whichat least 3+E of the ca"ital stoc/ outstanding and entitled to vote is o$ned and held &y citiens of the Philippines, is considered a Philippine National. 7nchuan v. *o'ada% "" SC7A !6 (6++#$.

*BC E"ress% nc. v. Court of A""eals% 6)3 SC7A 3+6 (##!$/ Acme Shoe% +u##er & Plastic Cor". v. Court of A""eals, 63+ SC7A 2!

(##3$/ Solid Homes% nc. v. Court of A""eals, 62" SC7A 632 (##2$/ NPC v. Phili"" Brothers ?ceanic% nc., )3# SC7A 36# (6++$/ ,light Attendants and Ste$ards Association of the Phili""ines v. Phili""ine Airlines% ""# SC7A 6"6 (6++$/ Em"loyees 7nion of Bayer Phils. 9.Bayer Phili""ines% nc., 3)3 SC7A !2) (6++$.

6Sec. 6).) Affirmed in 7nchuan v. *o'ada, "" SC7A !6 (6++#$.

3



=@N' SEC C(&+)($ T'7+ As a res%lt of the 6am#oa r%lings, SEC M'()*&/ C#)3$*) N(. ?, 7.201, was iss%ed and pro5ides that? all co5ered corporations shall, at all times, o&ser5e theconstit%tional or stat%tory ownership re:%irement in that “the re:%ired percentage of Iilipinoownership shall &e applied to ;D'H (a$ the total n%m&er of o%tstanding shares of stoc1 entitled to5ote in the election of directors/ AN (&$ the total n%m&er of o%tstanding shares of stoc1, whether or not entitled to 5ote in the election of directors.”

'he Constit%tion “pro5ides for the Iilipiniation of p%&lic %tilities &y re:%iring that any from of a%thoriation for the operation of p%&lic %tilities sho%ld &e granted only to Ocitiens of the Philippines

or to corporation or associations organied %nder the laws of the Philippines at least si-ty per cent%m of whose capital is owned &y s%ch citiens. T"' %)(<#7#(& #7 *& '%)'77 )'3(4&#+#(& ( +"' 7'&7#+#<' *&/ <#+*$ %(7#+#(& ( %$#3 +#$#+#'7 (+" #& +"' &*+#(&*$ '3(&(8 *&/ () &*+#(&*$ 7'3)#+8.” 'he e5ident p%rpose of the citienship re:%irement is to pre5ent aliens fromass%ming control of p%&lic %tilities, which may &e inimical to the national interest. . . .We r%le thatthe term 1ca"ital0 in Sec. , Art. J88 of the Constit%tion sho%ld co5er &oth/ (a$ the control test thatco5ers only shares of stoc1 entitled to 5ote in the election of directors/ and the &eneficial interesttest, that the 3+E9!+E e:%ity in fa5or of Iilipinos shall apply to each and e5ery class of shares, tocommon shares, to preferred non95oting shares, to preferred 5oting shares, and other classes of shares.2am,oa v. Teves, 652 SCRA 6>0 =2011@% e"anded in 6?2 SCRA > =2012@.

/. $nawfu 4Corporate Layering5:

'he grandfather r%le can only e-tend to s%ch limited as to those who ha5e act%al control of the affairs of

the corporation. Palting v. San 5ose Petroleum nc., SC7A #6! (#33$.Lately, the S0C o5ert%rned the %se of the form%la “3+E9or9more9e:%als9++E9Iilipino9ownership.”

Accordingly, we opine that we m%st loo1 into the citienship of the indi5id%alstoc1holders, i.e.% nat%ral persons, of that in5estor9corporation in order to determine if theConstit%tional and stat%tory restrictions are complied with. 8f the shares of stoc1 of theimmediate in5estor corporation is in t%rn held and controlled &y another corporation, then wem%st loo1 into the citienship of the indi5id%al stoc1holders of the latter corporation. 8n other words, if there are lawyers of inter5ening corporations in5esting in a mining *oint 5ent%re, wem%st del5e into the citienship of the indi5id%al stoc1holders of each corporation. 'his is thestrict application of the grandfather r%le, which the Commission has &een consistentlyapplying prior to the ##+s. (S0C9DGC Dpinion No. +9), dated +# ecem&er 6++,addressed to <r. Leonardo A. Ci5il, Chairman of the ;oard of Co9D Small Scale <iners Association, 8nc., penned &y General Co%nsel Kernette G. =mali9Paco$

Altho%gh the “control test” is still the pre5ailing mode of determining whether or not a corporation is aIilipino corporation, within the am&it of Sec. 6, Art. 88 of #2 Constit%tion are entitled to %nderta1e thee-ploration, de5elopment and %tiliation of the nat%ral reso%rces of the Philippines/ howe5er, when there isdo%&t in the minds of the co%rt, &ased on the attendant facts and circ%mstances of the case, in the 3+9!+Iilipino9e:%ity ownership in the corporation, then it may apply the “grandfather r%le.” %arra %ic6e 7ining v. &edmont Consoidated 7ines, 22 SCRA ?2 =201@.

'he application of the “grandfather r%le” does not eschew the “control test”. 'he grandfather %leimplements the intent of the Iilipiniation pro5isions of the Constit%tion. 'here sho%ld &e a distinction

&etween the “&eneficial ownership” test from the “control test”. %arra %ic6e 7ining and 3eveopment Corp. v. &edmont Consoidated 7ines Corp ., G.R. N(. 1>55?0 =R'7($+#(&@, 2?J*&*)8 2015.

'. A%%$#3*+#(& ( +"' C(&+)($ T'7+7

=1@ artime Test:

8n war time, domestic corporations which are %nder the control of nationals of the enemy co%ntry aredeemed foreign enemy corporations. Ha$ Pia v. China Ban/ing Cor"., + Phil. 3+! (#!$.!

=2@ E%$(#+*+#(& ( N*+)*$ R'7()3'7 (S'3. 10B S'3. 2, A)+. :II, 1>? C(&7+#++#(&$

=@ O&')7"#% ( P)#<*+' L*&/ (S'3. , A)+. :II, 1>? C(&7+#++#(&$

'he registration of the donation of land to an unincorporated reigious organi8ation, whosetr%stees are foreigners, wo%ld 5iolate constit%tional prohi&ition and the ref%sal wo%ld not &e in 5iolationof the freedom of religion cla%se. 'he fact that the religio%s association “has no capital stoc1 does nots%ffice to escape the constit%tional inhi&ition, since it is admitted that its mem&ers are of foreignnationality. . . and the s"irit of the Constitution demands that in the a#sence of ca"ital stoc/% thecontrolling mem#ershi" should #e com"osed of ,ili"ino citi'ens.”&egister of 3eeds of &i8a v. $ng

Sui Si Tempe, > P"#$. 5? =1>[email protected]$T : A corporation sole &eing a creat%re prior to the constit%tion, has no nationality. 8f a nationality isso%ght to &e determined, the same depends of the nationality of the ma*ority of the lay mem&ers andnot on the nationality of the sole corporator. &oman Cathoic Apostoic Administrator of 3avao(nc. v. L&C and the &egister of 3eeds of 3avao, 102 P"#$. 5>6 =1>5@.

8f foreign shareholdings in a landholding corporation e-ceed !+E, it is not the foreign stoc1holdersownership of the shares which is ad5ersely affected &y the capacity of the corporation to own land4that

!,ili"inas Com"ania de Seguros v. Christern% Huenefeld & Co.% nc., # Phil. "! (#"$/ (avis inshi" v. Phili""ine -rust Co., #+ Phil.

2!! (#"6$.

2



is, the corporation &ecomes dis:%alified to own land. 'he prohi&ition in the Constit%tion applies only toownership of land/ it does not e-tend to immo5a&le or real property as defined %nder Article !" of theCi5il Code. Dtherwise, we wo%ld ha5e a strange sit%ation where the ownership of immo5a&le propertys%ch as trees, plants and growing fr%it attached to the land wo%ld &e limited to Iilipinos and Iilipinocorporations only. 5.6. Summit Holdings% nc. v. Court of A""eals, !"+ SC7A 3# (6++"$.

7adstoc1, a foreign corporation with %n1nown owners whose nationalities are also %n1nown, is not:%alified to own land in the Philippines, and therefore also dis:%alified to own the rights to ownership of lands in the Philippines4it is &asic that an assignor or seller cannot assign or sell something he does

not own at the time the ownership, or the rights to the ownership, are to &e transferred to the assigneeor &%yer. 'he assignment &y PNCC of the real properties to a nominee to &e designated &y 7adstoc1 isa circ%m5ention of the constit%tional prohi&ition against a pri5ate foreign corporation owning lands in thePhilippines. Strategic Alliance (ev. Cor". v. +adstoc/ Securities *td., 3+2 SC7A !) (6++#$.

=@ P$#3 U+#$#+#'7 (S'3. 11, A)+. :II, C(&7+#++#(&$

'he nationality test for p%&lic %tilities applies not at the time of the grant of the primary franchise thatma1es a corporation a *%ridical person, &%t at the grant of the secondary franchise that a%thories thecorporation to engage in a nationalied ind%stry."eope v. 9uasha, > P"#$. =1>5$.

'he primary franchise, that is, the right to e-ist as s%ch, is 5ested in the indi5id%als who compose thecorporation and not in the corporation itself and cannot &e con5eyed in the a&sence of a legislati5ea%thority to do so. 'he secondary franchises are 5ested in the corporation and may ordinarily &econ5eyed or mortgaged %nder a general power granted to a corporation to dispose of its property,

e-cept s%ch special or secondary franchises as are charged with a p%&lic %se. 5.+.S. Business Cor". v.m"erial nsurance, SC7A 3)! (#3!$.

When a Contract of Lease mandates contri&%tion into the 5ent%re on the part of the p%rportedlessee, and ma1es the lessee participate not only in the re5en%es generated from the 5ent%re, and infact a&sor& most of the ris1s in5ol5ed therein, then a *oint 5ent%re arrangement has really &eenconstit%ted &etween the p%rported lessor and lessee, since %nder the Law on Partnership, whene5er there is an agreement to contri&%te money, property or ind%stry to a common f%nd, with an agreementto share the profits and losses therein, then a partnership arises. 0ios,ayan (nc. v. 2uingona 1r.,22 SCRA 110 =1>>@.

'he Constit%tion re:%ires a franchise for the operation of a p%&lic %tility/ howe5er, it does not re:%irea franchise &efore one can own the facilities needed to operate a p%&lic %tility so long as it does notoperate them to ser5e the p%&lic. 'here is a clear distinction &etween “operation” of a p%&lic %tility andthe ownership of the facilities and e:%ipment %sed to ser5e the p%&lic. Tatad v.2arcia 1r., 2 SCRA

6 =1>>5@.

=5@ M*77 M'/#* (S'3. 11=1@, A)+. :VI, 1>? C(&7+#++#(&B P.. )3, amended &y P..s # and #2/Sec. 6, P.. "23/ DF Dpinion 3), s. #2)/ DF Dpinion No. 6+, s. #6/ S0C Dpinion, 6! <arch#)/ S0C Dpinion, " F%ly ##, JJK S0C =A7'07LM ;=LL0'8N, (No. ! 9 ecem&er, ##$, p. ).$

=6@ C*$' I&/7+)8 “Ca&le 'K operations shall &e go5erned &y 0.D. No. 6+" (s.#2$. 8f CA'Koperators offer p%&lic telecomm%nications ser5ices, they shall &e treated *%st li1e a p%&lictelecomm%nications entity.” (N'C <emo Circ%lar No. 9#9#"$

Ca&le 'K is “a form of mass media which m%st, therefore, &e owned and managed &y Iilipinocitiens, or corporations, cooperati5es or associations, wholly9owned and managed &y Iilipinocitiens p%rs%ant to the mandate of the Constit%tion.” (DF Dpinion No. #", s. ###, citing Allied Broadcasting% nc. v. ,ederal Communications Commission% !)" I.6d 2+$.

=@ A/<')+#7#&4 7#&'77 (S'3. 11=2@, A)+. :VI, 1>? C(&7+#++#(&$

.S%'3#*$ C$*77##3*+#(&7 ( C()%()*+#(&7 (S'3. 10$

IV. C LASSIFICATIONS OF C ORPORATIONS

1. I& R'$*+#(& +( +"' S+*+'

*. P$#3 C()%()*+#(& (S'3. , A3+ N(. 15>$.

. 9uasi -P$#3 C()%()*+#(&. Marilao ater Consumers Asso. v. AC , 6+ SC7A !)2 (##$.

3. P)#<*+' C()%()*+#(& (S'3. , A3+ 15>$.

Go5ernments ma*ority shares does not ma1e an entity a p%&lic corporation, for it remains a pri5atecorporation organied %nder the Corporation Law. National Coal Co.% v. Collector of nternal +evenue, !3

Phil. ") (#6!$.

;%t &eing a GDCC ma1es it lia&le for laws and pro5isions applica&le to the Go5ernment or its entitiesand s%&*ect to the control of the Go5ernment. Cervantes v. Auditor 6eneral , # Phil. )"# (#"6$.

Altho%gh ;oy Sco%ts of the Philippines does not recei5e any monetary or financial s%&sidy from theGo5ernment, and its f%nds and assets are not considered go5ernment in nat%re and not s%&*ect to a%dit &ythe CDA, the fact that it recei5ed a special charter from the go5ernment, that its go5erning &oard areappointed &y the Go5ernment, and that its p%rpose are of p%&lic character, for they pertain to theed%cational, ci5ic and social de5elopment of the yo%th which constit%te a 5ery s%&stantial and importantpart of the nation, it is not a p%&lic corporation in the same sense that m%nicipal corporation or localgo5ernments are p%&lic corporation since its does not go5ern a portion of the state, &%t it also does not



ha5e proprietary f%nctions in the same sense that the f%nctions or acti5ities of go5ernment9owned or controlled corporations, is may still &e considered as s%ch, or %nder the #2 Administrati5e Code as aninstr%mentality of the Go5ernment, and it employees are s%&*ect to the Ci5il Ser5ice Law. Boy Scouts of thePhili""ines v. N*+C , #3 SC7A 23 (##$.

'he doctrine that employees of GDCCs, whether created &y special law or formed as s%&sidiaries %nder the general corporation law are go5erned &y the Ci5il Ser5ice Law and not &y the La&or Code, has &eens%pplanted &y the #2 Constit%tion. 'he present doctrine in determining whether a GDCC is s%&*ect to theCi5il Ser5ice Law is the manner of its creation, s%ch that go5ernment corporations created &y special

charter are s%&*ect the Ci5il Ser5ice Law, while those incorporated %nder the general corporation law arego5erned &y the La&or Code. PN?C)Energy (ev. Cor". v. N*+C , 6+ SC7A !2 (##$/ (avao City ater (istrict v. Civil Service Commission, 6+ SC7A "#) (##$.

Sec. ) of Corporation Code (*ia#ility of (irectors and ?fficers$ is applica&le to corporations which ha5e&een organied &y special charters since Sec. ! of Corporation Code renders the pro5isionss%pplementarily applica&le to all corporations, incl%ding those with special or indi5id%al charters, s%ch ascooperati5es organied %nder P.. 63#, so long as those pro5isions are not inconsistent with s%ch charters.Benguet Electric Coo"erative% nc. v. N*+C , 6+# SC7A "" (##6$.

A corporation is created &y operation of law %nder the Corporation Code while a go5ernmentcorporation is normally created &y special law referred to often as a charter. Bliss (ev. Cor". Em"loyees7nion v. Calle!a% 6)2 SC7A 62 (##!$.

'he test to determine whether a corporation is go5ernment owned or controlled, or pri5ate in nat%re issimple. 8s it created &y its own charter for the e-ercise of a p%&lic f%nction, or &y incorporation %nder thegeneral corporation law 'hose with special charters are go5ernment corporations s%&*ect to its pro5isions,and its employees are %nder the *%risdiction of the Ci5il Ser5ice Commission, and are comp%lsory mem&ersof the GS8S. Cam"aredondo v. N*+C , )6 SC7A !2 (###$.

While p%&lic &enefit and p%&lic welfare may &e attri&%ta&le to the operation of the ;ases Con5ersionand e5elopment A%thority (;CA$, yet it is certain that the f%nctions it performs are &asically proprietaryin nat%re4the promotion of economic and social de5elopment of Central L%on, partic%larly, and theco%ntrys goal for enhancement. 'herefore, the r%le that prescription does not r%n against the State will notapply to ;CA, it &eing said that when title of the 7ep%&lic has &een di5ested, its grantees, altho%ghartificial &odies of its own creation, are in the same category as ordinary persons. Shi"side nc. v. Court of

A""eals% )"6 SC7A ))! (6++$.

;eyond ca5il, a GDCC has a personality of its own, distinct and separate from that of the go5ernment,and the inter5ention in a transaction of the Dffice of the President thro%gh the 0-ec%ti5e Secretary does not

change the independent e-istence of a go5ernment entity as it deals with another go5ernment entity. P7P v. Court of A""eals, )3 SC7A 3# (6++$.

Water districts can 5alidly e-ists as corporate entities %nder P #, and pro5ided they are GDCCs, andtheir &oard of directors and other personnel are go5ernment employees s%&*ect to ci5il ser5ice laws andanti9graft laws. ,eliciano v. C?A, !# SC7A )3) (6++!$.

When the law 5ests in a go5ernment instr%mentality corporate powers, it does not &ecome necessarily acorporation. A go5ernment9owned or controlled corporation m%st &e organied as a stoc1 or non9stoc1corporation. 'he <8AA is not a go5ernment9owned or controlled corporation &eca%se it is not constit%ted of capital di5ided into shares of stoc1, and neither is it a nonstoc1 corporation &eca%se it has no mem&ers.<8AA is a go5ernment instr%mentality 5ested with corporate powers to perform efficiently its go5ernmentf%nctions. MAA v. Court of A""eals, !#" SC7A "# (6++3$.

Altho%gh PN7C has its special charter, the Chairman of PN7C is not appointed &y the President or anymem&er of the 0-ec%ti5e ;ranch. Altho%gh Cam"orendodo v. N*+C had r%led that PN7C is GDCC

&eca%se it is constit%ted %nder a special charter, it failed to consider the definition of a GDCC as pro5ided%nder Sec. 6()$ of the Administrati5e Code of #2, which re:%ires that a GDCC to &e s%ch m%st &e(&'/ &y the go5ernment, and in the case of a stoc1 corporation, at least a ma*ority of its capital stoc1m%st &e owned &y the go5ernment. *i#an v. 6ordon, "#) SC7A 3 (6++#$.

2. A7 +( P$*3' ( I&3()%()*+#(&

*. D('7+#3 C()%()*+#(&

. F()'#4& C()%()*+#(& (S'3. 12$

. A7 +( P)%(7' ( I&3()%()*+#(&

*. M&#3#%*$ C()%()*+#(&

. R'$#4#(7 C()%()*+#(& (S'37. 10> *&/ 116$

Since in matters p%rely ecclesiastical the decisions of the proper ch%rch tri&%nals are concl%si5e %ponthe ci5il tri&%nals, then a ch%rch mem&er who is e-pelled from the mem&ership &y the ch%rch a%thorities, or a priest or minister who is &y them depri5ed of his sacred office, is witho%t remedy in the ci5il co%rts. *ong v. Basa, )33 SC7A ) (6++$.

3. E/3*+#(&*$ C()%()*+#(&7 (S'37. 106, 10 *&/ 10?B S'3. 25, .P. $4. 22$

/. C"*)#+*$', S3#'&+##3 () V(3*+#(&*$ C()%()*+#(&7

'. 7#&'77 C()%()*+#(&

. A7 +( N') ( M'')7

*. A44)'4*+' C()%()*+#(&

#



. C()%()*+#(& Soe (S'37. 110 +( 115$

A corporation sole has no nationality &eing an instit%tion that e-isted prior to the 7ep%&lic. ;%t if anynationality is to &e accorded to a corporation sole it is to &e *%dged from the nationality of the ma*ority of the faithf%ls thereof. +oman Catholic A"ostolic Administrator of (avao% nc. v. *+C and the +egister of (eeds of (avao City , +6 Phil. "#3 @#"2B$.

'he doctrine in +e"u#lic v. 9illanueva, ! SC7A 2" (#6$ and +e"u#lic v. glesia ni Cristo, 62SC7A 32 (#!$, that a corporation sole is dis:%alified to ac:%ire>hold aliena&le lands of the p%&licdomain, &eca%se of the constit%tional prohi&ition :%alifying only indi5id%als to ac:%ire land and the

pro5ision %nder the P%&lic Land Act which applied only to Iilipino citiens or nat%ral persons, has &eenexpressy overturned in (irector of *and v. AC , !3 SC7A "+# (#3$.

5. A7 +( L'4*$ S+*+7

*.3e 1ure C()%()*+#(&

. 3e acto C()%()*+#(& (S'3. 20$

3. C()%()*+#(& 8 E7+(%%'$ (S'3. 21$

6. A7 +( E#7+'&3' ( S"*)'7 (S'37. *&/ 5$?

*. S+(3 C()%()*+#(&

. N(&-S+(3 C()%()*+#(&

V. SEPARATE JURIDICAL PERSONALITY AND DOCTRINEOF P IERCING THE V EIL OF C ORPORATE F ICTION

A. MAIN DOCTRINE A Corporation /as a "ersonaity Separate and 3istinct from (ts 3irectors or Trustees #fficers (ts Stoc6hoders or 7em,ers. =S'3. 2B A)+. , C#<#$ C(/'@

A corporation is a *%ridical entity with a legal personality separate and distinct from the peoplecomprising it, hence, assets of the stoc1holders may not &e considered as assets of the corporation, andvice)versa. Situs (ev. Cor". v. Asiatrust Ban/ , 322 SC7A !#" (6+6$.

1. I%()+*&3' ( M*#& D(3+)#&'

A corporation, %pon coming into e-istence, is in5ested &y law with a personality separate and distinctfrom those persons composing it as well as from any other legal entity to which it may &e related, with the

following conse:%ences?

(a$ 'he corporation may not &e made to answer for acts and lia&ilities of its stoc1holders or those of legal entities to which it may &e connected or vice versa. 6eneral Credit Cor". v. Alsons (ev. and nvestment Cor"., ") SC7A 66" (6++2$.6

(&$ 'his separate and distinct personality is, howe5er, merely a fiction created &y law for con5eyanceand to promote the “ends of ;ustice.” LB" v. Court of Appeas 6 SCRA 5 =2001@.)

2.APPLICATIONS

*. M*()#+8 E#+8 O&')7"#% *&/ I&+')$(3#&4 D#)'3+()7"#%?

<ere ownership &y a single stoc1holder or &y another corporation of all or nearly all of the capital stoc1sof the corporation is not, &y itself, a s%fficient gro%nd for disregarding the separate corporate personality.Dther than mere ownership of capital stoc1s, circ%mstances showing that the corporation is &eing %sed tocommit fra%d or proof of e-istence of a&sol%te control o5er the corporation ha5e to &e pro5en. 8n short,&efore the corporate fiction can &e disregarded, alter9ego elements m%st first &e s%fficiently esta&lished."acific &ehouse Corp. v. Court of Appeas, 1> SCRA 665 =201@.

Dwnership of a ma*ority of capital stoc1 and the fact that ma*ority of directors of a corporation are thedirectors of another corporation creates no employer9employee relationship with the latters employees.(BP v. N*+C , 3 SC7A ! (##+$."

Ha5ing interloc1ing directors, corporate officers and shareholders is not eno%gh *%stification to piercethe 5eil of corporate fiction in the a&sence of fra%d or other p%&lic policy considerations. 9elarde v. *o"e' ,!# SC7A !66 (6++!$.3

?verturning affirmed in +e"u#lic v. glesia ni Cristo, 62 SC7A 32 (#!$/ +e"u#lic v. AC , 3 SC7A 3" (#$.

6Mc*eod v. N*+C , "6 SC7A 666 (6++2$/ 7y v. 9illanueva, "63 SC7A 2) (6++2$/ Pantranco Em"loyees Association :PEA)P-6?; v.

N*+C , " SC7A "# (6++#$/ Shrim" S"ecialists% nc. v. ,u!i)-rium"h Agri)ndustrial Cor". , 3+ SC7A (6++#$/ Saverio v. Puyat , 2+SC7A 2!2 (6+)$.

)Martine' v. Court of A""eals, !) SC7A )# (6++!$/ Prudential Ban/ v. Alviar , !3! SC7A )") (6++"$/ E(SA Shangri)*a Hotel and

+esorts% nc. v. B, Cor"., ""3 SC7A 6" (6++$/ Siain Enter"rises% nc v. Cu"ertino +ealty Cor"., "#+ SC7A !)" (6++#$.

!Sunio v. N*+C , 62 SC7A )#+ (#!$/ Asionics Phili""ines% nc. v. N*+C% 6#+ SC7A 3! (##$/ ,rancisco v. Me!ia% )36 SC7A 2)

(6++$/ Matutina ntegrated ood Products% nc. v. CA, 63) SC7A !#+ (##3$/ Manila Hotel Cor". v. N*+C , )!) SC7A (6+++$/ Secosav. Heirs of Er$in Suare' ,ancisco, !)) SC7A 62) (6++!$/ E(SA Shangri)*a Hotel and +esorts% nc. v. B, Cor". , ""3 SC7A 6" (6++$/Pantranco Em"loyees Association :PEA)P-6?; v. N*+C , " SC7A "# (6++#$/ Saverio v. Puyat , 2+ SC7A 2!2 (6+)$

" Also Suldao v. Cimech System Construction% nc., "+3 SC7A 6"3 (6++3$/ 7nion Ban/ of the Phili""ines v. ?ng , !# SC7A " (6++3$/

Shrim" S"ecialists% nc. v. ,u!i)-rium"h Agri)ndustrial Cor". , 3+ SC7A (6++#$/ Hacienda *uisita% nc. v. Presidential Agrarian +eformCouncil , 33+ SC7A "6" (6+$.

3 Also Ses#reno v. Court of A""eals, 666 SC7A !33 (##)$/ 160 Holdings% nc. v. National Mines and Allied or/ers 7nion *ocal% D

:NAMA7;, 3+! SC7A 2) (6++$.

+



.G'&')*$ R$' C()%()*+' R'%)'7'&+*+#<'7 D( N(+ '3('P')7(&*$$8 L#*$' () C()%()*+' C(&+)*3+7

A conse:%ence of a corporations separate personality is that consent &y a corporation thro%gh itsrepresentati5es is not consent of the representati5e, personally. 8ts o&ligations, inc%rred thro%gh official actsof its representati5es, are its own. A stoc1holder, director, or representati5e does not &ecome a party to acontract *%st &eca%se a corporation e-ec%ted a contract thro%gh that stoc1holder, director or representati5e.Hence, a corporationQs representati5es are generally not &o%nd &y the terms of the contract e-ec%ted &ythe corporation. 'hey are not personally lia&le for o&ligations and lia&ilities inc%rred on or in &ehalf of thecorporation.Lanu8a 1r. v. B Corp. SCRA 25 =201@.

3. '#&4 C()%()*+' O#3') ;eing an officer or stoc1holder of a corporation does not &y itself ma1e ones property also that of the

corporation, and vice)versa, for they are separate entities, and that shareholders who are officers are in nolegal sense the owners of corporate property which is owned &y the corporation as a distinct legal person.6ood Earth Em"orium% nc. v. CA, #! SC7A "!! (##$.2

8t is horn&oo1 law that corporate personality is a shield against personal lia&ility of its officers4acorporate officer and his spo%se cannot &e made personally lia&le %nder a tr%st receipt where he enteredinto and signed the contract clearly in his official capacity. ntestate Estate of Aleander -. -y v. Court of

A""eals% )"3 SC7A 3 (6++$.

'he mere fact that one is President does not render the property he owns the property of thecorporation, since the president, as an indi5id%al, and the corporation are separate entities. Cru' v. (alisay ,"6 SC7A !2 (#2$/ Booc v. Bantuas, )"! SC7A 62# (6++$.

'he President of the corporation which &ecomes lia&le for the accident ca%sed &y its tr%c1 dri5er cannot&e held solidarily lia&le for the *%dgment o&ligation arising from 4uasi 9delict, since the fact alone of &eingPresident is not s%fficient to hold him solidarily lia&le for the lia&ilities ad*%dged against the corporation.Secosa v. Heirs of Er$in Suare' ,ancisco, !)) SC7A 62) (6++!$.

Since a corporation has a distinct *%ridical personality, when the comp%lsory co%nterclaim filed againstcorporate officers for their alleged fra%d%lent act indicate that s%ch corporate officers are indispensa&leparties in the litigation, the original incl%sion of the corporation in the s%it does not there&y allow the denialof a specific co%nter9claim &eing filed to ma1e the corporate officers personally lia&le. *afarge Cement Phils., nc. v. Continental Cement Cor"., !!) SC7A "66 (6++!$.

/.O& P)#<#$'4'7 E&(8'/ 'he ta- e-emption cla%se in the charter of a corporation cannot &e e-tended tonor en*oyed e5en &y the controlling stoc1holders. Manila 6as Cor". v. Collector of nternal +evenue , 36Phil. #" (#)3$.

'. O$#4*+#(&7 *&/ D'+7Corporate de&t or credit is not the de&t or credit of the stoc1holder nor is the stoc1holderQs de&t or credit

that of the corporation. -raders +oyal Ban/ v. CA, 22 SC7A 2# (##$.

e&ts inc%rred &y directors, officers, and employees acting as corporate agents are not their directlia&ility &%t of the corporation they represent. Crisologo v. Peo"le, 33 SC7A 26 (6+6$/ Heirs of ,e -an7y v. nternational Echange Ban/ , 3#+ SC7A "# (6+)$.

'he ma*ority stoc1holder cannot &e held personality lia&le for the attorneys fees charged &y a lawyer for representing the corporation. *a"eral (ev. Cor". v. CA, 66) SC7A 63 (##)$.

'he o&ligations of a stoc1holder in one corporation cannot &e offset from the o&ligation of the

stoc1holder in a second corporation, since the corporation has a separate *%ridical personality. C8H ndustrial and (ev. Cor" v. Court of A""eals% 626 SC7A ))) (##2$.

A corporation has no legal standing to file a s%it for reco5ery of certain parcels of land owned &y itsmem&ers in their indi5id%al capacity, e5en when the corporation is organied for the &enefit of themem&ers. Sulo ng Bayan v. Araneta% nc ., 26 SC7A )!2 (#23$.

Stoc1holders ha5e no personality to inter5ene in a collection case co5ering the loans of the corporationsince the interest of shareholders in corporate property is p%rely inchoate. Sa$ v. CA, #" SC7A 2!+(##$/ and vice)versa. ,rancisco Motors Cor". v. Court of A""eals% )+# SC7A 26 (###$.

Stoc1holders are not themsel5es the real parties in interest to claim and reco5er compensation for thedamages arising from the wrongf%l attachment of the assets of the corporation. Stronghold nsurance Co.v. Cuenca% 3#6 SC7A !2) (6+)$.

A corporate defendant against whom a writ of possession has &een iss%ed, cannot %se the fact that it

has o&tained controlling e:%ities in the corporate plaintiffs to s%spend enforcement of the writ, for they areseparate *%ridical persons, and th%s their separate &%siness and proprietary interests remain. Silverio% 5r. v.,ili"ino Business Consultants% nc., !33 SC7A "! (6++"$.

. PIERCING THE VEIL OF CORPORATE FICTION

1. S()3' ( I&3*&+*+#(&$.S. v. 7iwau6ee &efrigerator Transit Co., 12 F'/. 2 =1>05@.

2Bautista v. Auto Plus -raders% nc. "3 SC7A 66) (6++$/ Prisma Construction & (ev. Cor". v. Menchave' , 3! SC7A "#+ (6++$/

Saverio v. Puyat , 2+ SC7A 2!2 (6+)$.

Consolidated Ban/ and -rust Cor". v. Court of A""eals , )"3 SC7A 32 (6++$.



'he notion of corporate entity will &e pierced or disregarded and the indi5id%als composing it will &etreated as identical if the corporate entity is &eing %sed as a cloa1 or co5er for fra%d or illegality/ as a

*%stification for a wrong/ or as an alter ego, an ad*%nct, or a &%siness cond%it for the sole &enefit of thestoc1holders. 6ochan v. oung , )"! SC7A 6+2 (6++$.#

As a general r%le, a corporation will &e loo1ed %pon as a legal entity, %nless and %ntil s%fficient reason tothe contrary appears. When the notion of legal entity is %sed to defeat p%&lic con5enience, *%stify wrong,protect fra%d, or defend crime, the law will regard the corporation as an association of persons. Also, thecorporate entity may &e disregarded in the interest of *%stice in s%ch cases as fra%d that may wor1

ine:%ities among mem&ers of the corporation internally, in5ol5ing no rights of the p%&lic or third persons. 8n&oth instances, there m%st ha5e &een fra%d and proof of it. Ior the separate *%ridical personality of acorporation to &e disregarded, the wrong9doing m%st &e clearly and con5incingly esta&lished. 8t cannot &epres%med. Suldao v. Cimech System Construction% nc., "+3 SC7A 6"3 (6++3$.

'he legal fiction of separate corporate e-istence is not at all times in5inci&le and the same may &epierced when employed as a means to perpetrate a fra%d, conf%se legitimate iss%es, or %sed as a 5ehicleto promote %nfair o&*ecti5es or to shield an otherwise &latant 5iolation of the prohi&ition against for%m9shopping. While it is settled that the piercing of the corporate 5eil has to &e done with ca%tion, thiscorporate fiction may &e disregarded when necessary in the interest of *%stice. +ovels Enter"rises% nc. v.?cam"o, )# SC7A 23 (6++6$.

2.Current Attitude of the Court to the "iercing 3octrine:

While the co%rts ha5e &een granted the colossal a%thority to wield the sword which pierces thro%gh the

5eil of corporate fiction, concomitant to the e-ercise of this power, is the responsi&ility to %phold thedoctrine of separate entity, when rightly so/ as it has for so long enco%raged &%sinessmen to enter intoeconomic endea5ors fra%ght with ris1s and where only a few dared to 5ent%re. Hence, any application of the doctrine of piercing the corporate 5eil sho%ld &e done with ca%tion. A co%rt sho%ld &e mindf%l of themilie% where it is to &e applied. 8t m%st &e certain that the corporate fiction was mis%sed to s%ch an e-tentthat in*%stice, fra%d, or crime was committed against another, in disregard of its rights. 'he wrongdoingm%st &e clearly and con5incingly esta&lished/ it cannot &e pres%med. Dtherwise, an in*%stice that wasne5er %nintended may res%lt from an erroneo%s application. Pacific +ehouse Cor". v. Court of A""eals%2# SC7A 33" (6+!$.

. O'3+#<'7 *&/ E'3+7 ( +"' A%%$#3*+#(& ( +"' P#')3#&4 D(3+)#&'=nder the doctrine of “ "iercing the veil of cor"orate fiction,” the co%rts loo1 at the corporation as a mere

collection of indi5id%als or an aggregation of persons %nderta1ing &%siness as a gro%p, disregarding theseparate *%ridical personality of the corporation %nifying the gro%p. Traders &oya Ban6 v. Court of

Appeas, 26> SCRA 15 =1>>@.+

“'he rationale &ehind piercing a corporations identity in a gi5en case is to remo5e the &arrier &etweenthe corporation from the persons comprising it to thwart the fra%d%lent and illegal schemes of those who%se the corporate personality as a shield for %nderta1ing certain proscri&ed acti5ities. Howe5er, in the caseat &ar, instead of holding certain indi5id%als or person responsi&le for an alleged corporate act, the sit%ationhas &een re5ersed. 8t is the petitioner as a corporation which is &eing ordered to answer for the personallia&ility of certain indi5id%al directors, officers and incorporators concerned. Hence, it appears to %s that thedoctrine has &een t%rned %pside down &eca%se of its erroneo%s in5ocation.” ($ rancisco 7otorsCorp. v CA, 0> SCRA 2 =1>>>@.

Another form%lation of this doctrine is that when two (6$ &%siness enterprises are owned, cond%cted andcontrolled &y the same parties, &oth law and e:%ity will, when necessary to protect the rights of thirdparties, disregard the legal fiction that two corporations are distinct entitled and treat them as identical or one and the same. 6eneral Credit Cor". v. Alsons (ev. and nvestment Cor". , ") SC7A 66" (6++2$.

'he attempt to ma1e the sec%rity agencies appear as two separate entities, when in reality they were&%t one, was a de5ise to defeat the law @i.e., in this case to a5oid lia&ilities %nder la&or lawsB and sho%ldnot &e permitted. Enri4ue' Security Services% nc. v. Ca#ota!e, !#3 SC7A 3# (6++3$.

*.&ecent Attempts to %arrow the O'3+#<'7 () A<*#$#&4 ( P#')3#&4 Piercing is not allowed %nless theremedy so%ght is to ma1e the officer or another corporation pec%niarily lia&le for corporate de&ts. ($(ndophi Textie 7i or6ers $nion-"T2# v. Caica, 205 SCRA 6> =1>>2@.

B$T S !! : La Campana Coffee actory v. 0aisahan ng 7anggagawa, > P"#$. 160 =1>5@.

. A%%$#3*$' +( 9T"#)/-P*)+#'7; 'hat respondents are not stoc1holders of the sister corporations doesnot ma1e them non9parties to this case, since it is alleged that the sister corporations are mere alter egos of the directors9petitioners, and that the sister corporations ac:%ired the properties so%ght to &erecon5eyed to IGS7C in 5iolation of directors9petitioners fid%ciary d%ty to IGS7C. 'he notion of

corporate entity will &e pierced and the indi5id%als composing it will &e treated as identical if thecorporate entity is &eing %sed as a cloa1 or co5er for fra%d or illegality/ as a *%stification for a wrong/ or as an alter ego, an ad*%nct, or a &%siness cond%it for the sole &enefit of the stoc1holders. 6ochan v.oung , )"! SC7A 6+2 (6++$.

#(BP v. Court of A""eals, )"2 SC7A 363, )" SC7A "+, )3) SC7A )+2 (6++$/ 9elarde v. *o"e' , !# SC7A !66 (6++!$/ + & E

-rans"ort% nc. v. *atag , !66 SC7A 3# (6++!$/ Secosa v. Heirs of Er$in Suare' ,ancisco, !)) SC7A 62) (6++!$/ Martine' v. Court of A""eals, !) SC7A )# (6++!$/ Mc*eod v. N*+C , "6 SC7A 666 (6++2$/ Siain Enter"rises% nc v. Cu"ertino +ealty Cor"., "#+ SC7A !)"(6++#$.

+Pantranco Em"loyees Association :PEA)P-6?; v. N*+C , " SC7A "# (6++#$/ *anu'a% 5r. v. B, Cor".% 2)2 SC7A 62" (6+!$.

Mar4ues v. ,ar East Ban/ and -rust Co. , 3)# SC7A )6 (6+$/ Sarona v. N*+C , 33) SC7A )#! (6+6$.

6



. N*+)' ( +"' P#')3#&4 D(3+)#&' *7 *& E#+*$' R''/8 'he doctrine of piercing the corporate 5eil isan e:%ita&le doctrine de5eloped to address sit%ations where the separate corporate personality of acorporation is a&%sed or %sed for wrongf%l p%rposes. "%B v. &itratto 2roup (nc. 62 SCRA [email protected] C #%S!9$!%TL< :

*.I+ I7 * R''/8 ( L*7+ R'7()+ Piercing the corporate 5eil is remedy of last resort and is not a5aila&lewhen other remedies are still a5aila&le. $mai v. Court of Appeas, 1?> SCRA 52> =1>>0@.

. C*& ' A<*#$'/-( O&$8 +( P)'<'&+ F)*/ () +( R'&/') E#+8 #& * S#+*+#(&

Piercing doctrine is meant to pre5ent fra%d, and cannot &e employed when the net res%lt wo%ld &e toperpetrate fra%d or a wrong. 6regorio Araneta% nc. v. -uason de Paterno and 9idal , # Phil. 23 (#"6$.

'he theory of corporate entity was not meant to promote %nfair o&*ecti5es or otherwise, nor to shieldthem. 9illanueva v. Adre, 26 SC7A 23 (##$.

'he creation &y ;P as the mother company of the three mining corporations to manage and operatethe assets ac:%ired in the foreclos%re sale lest they deteriorate from non9%se and lose their 5al%e, does notindicate fra%d or wrongdoing and will not constit%te application of the piercing doctrine. (BP v. Court of

A""eals% )3) SC7A )+2 (6++$.

3. D('7 N(+ A%%$#3*$' +( T"'()##&4 () +( A/<*&3'KC)'*+' N' R#4"+7 () I&+')'7+ Piercing of the5eil of corporate fiction is not allowed when it is resorted %nder a theory of co9ownership to *%stifycontin%ed %se and possession &y stoc1holders of corporate properties. Boyer-&oxas v. Court of

Appeas, 211 SCRA 0 =1>>2@.

B$T S !! : Where clear e5idence presented s%pport the fact that a corporations affiliates ha5e recei5edlarge amo%nts which &ecame the consideration for the company e-ec%tion of a real estate mortgage o5er its properties, then the piercing doctrine shall &e applied to s%pport the fact that the real estate mortgagewas 5alid and s%pported &y proper consideration. Siain Enter"rises% nc v. Cu"ertino +ealty Cor". , "#+SC7A !)" (6++#$.

'he piercing cannot &e a5ailed of in order to dislodge from S0Cs *%risdiction a petition for s%spensionof payments filed %nder P.. #+69A, on the gro%nd that the petitioning indi5id%als sho%ld &e treated as thereal petitioners to the e-cl%sion of the petitioning corporate de&tor? “doctrine only applies when s%chcorporate fiction is %sed to defeat p%&lic con5enience, *%stify wrong, protect fra%d or defend crime.” 7nionBan/ v. Court of A""eals% 6#+ SC7A # (##$.

Application of the piercing of the s%&sidiary company to merge it with the holding company cannot &eallowed to s%pport a theory of set9off or compensation, there &eing no allegation m%ch less any proof of

fra%d. Nisce v. E4uita#le PC Ban/% nc., "3 SC7A 6) (6++2$. An employee who has officially retired from the company and a5ailed of her retirement &enefit, &%t who

contin%ed to &e employed as a cons%ltant with affiliate companies, cannot employ piercing in order to treather stint with the affiliate companies as part of her employment with the main company she retired from4there is no fra%d or employment of %nfair shielding. +ivera v. 7nited *a#oratories% nc. , "3 SC7A 63#(6++#$.

/. *7#7 M7+ ' C$'*) E<#/'&3''o disregard the separate *%ridical personality of a corporation, it is elementary that the wrongdoing

cannot &e pres%med and m%st &e clearly and con5incingly esta&lished. Application of the doctrine of piercing the corporate 5eil sho%ld &e done with ca%tion. A co%rt sho%ld &e mindf%l of the milie% where it is to&e applied. 8t m%st &e certain that the corporate fiction was mis%sed to s%ch an e-tent that in*%stice, fra%d,or crime was committed against another, in disregard of its rights. 'he wrongdoing m%st &e clearly andcon5incingly esta&lished/ it cannot &e pres%med. Dtherwise, an in*%stice that was ne5er %nintended mayres%lt from an erroneo%s application. PNB v. Andrada Electric & Engineering Co., ) SC7A 6!! (6++6$.)

'h%s?

• 'he organiation of the corporation at the time when the relationship &etween the landowner and the

de5eloper were still cordial cannot &e %sed as a &asis to hold the corporation lia&le later on for the o&ligationsof the landowner to the de5eloper %nder the mere allegation that the corporation is &eing %sed to e5ade theperformance of o&ligation &y one of its ma*or stoc1holders. *uuria Homes% nc. v. Court of A""eals% )+6SC7A )" (###$.

• 8n this case, the Co%rt finds that the 7emington failed to discharge its &%rden of pro5ing &ad faith on the part

of <arind%:%e <ining and its transferees in the mortgage and foreclos%re of the s%&*ect properties to *%stifythe piercing of the corporate 5eil. (BP v. Court of A""eals, )3) SC7A )+2 (6++$.!

• Neither has it &een alleged or pro5en that <erryland is so organied and controlled and its affairs are so

cond%cted as to ma1e it merely an instr%mentality, agency cond%it or ad*%nct of Cardale. 05en ass%ming thatthe &%sinesses of Cardale and <erryland are interrelated, this alone is not *%stification for disregarding their

separate personalities, a&sent any showing that <erryland was p%rposely %sed as a shield to defra%dcreditors and third persons of their rights. ,rancisco v. Me!ia, )36 SC7A 2) (6++$."

• 'he mere assertion &y a Iilipino litigant against the e-istence of a “tandem” &etween two Fapanese

corporations cannot &e the &asis for piercing, which can only &e applied &y showing wrongdoing &y clear andcon5incing e5idence. Maru#eni Cor". v. *irag% )36 SC7A 36+ (6++$.

6Commissioner of Customs v. ?ilin/ nternational Cor"., 26 SC7A !3# (6+!$.

)*im v. CA% )6) SC7A +6 (6+++$/ 6eneral Credit Cor". v. Alsons (ev. and nvestment Cor". , ") SC7A 66" (6++2$/ Pantranco

Em"loyees Association :PEA)P-6?; v. N*+C , " SC7A "# (6++#$/ Halley v. Print$ell% nc. 3!# SC7A 3 (6+$.

! Also Mc*eod v. N*+C , "6 SC7A 666 (6++2$/ 7y v. 9illanueva, "63 SC7A 2) (6++2$.

" Also +amoso v. Court of A""eals% )!2 SC7A !3) (6+++$/ 6uatson nt2l -ravel and -ours% nc. v. N*+C% 6)+ SC7A " (##+$.

)



'he party see1ing to pierce has the &%rden of presenting clear and con5incing e5idence to *%stify thesetting aside of the separate corporate personality r%le. 'he :%estion of whether a corporation is a merealter ego is a p%rely one of fact, and the &%rden is on the party who alleges it. PNB v. Andrada Electric &Engineering Co., ) SC7A 6!! (6++6$.3

'.Piercing is a power &elonging to the co%rt and cannot &e ass%med impro5idently &y a sheriff. Cru' v.(alisay , "6 SC7A !6 (#2$/ (.+. CA-C Services v. +amos, !22 SC7A (6++"$.

. "iercing /as #ny &es 1udicata !ffect A""lication of the doctrine to a "articular case does not deny

the cor"oration of legal "ersonality for any and all "ur"oses , &%t only for the partic%lar transaction or instance, or the partic%lar o&ligation for which the doctrine was applied. 8o""el :Phil.; nc. v. atco, 22Phil. !#3 (#!3$.2

5.CLASSIFICATION OF PIERCING CASES

• DEFEAT OF PULIC CONVENIENCE =EUITY PIERCING@? When the application of the separate corporate

personality wo%ld &e inconsistent with the &%siness p%rpose of the legal fiction, or when piercing thecorporate fiction is necessary to achie5e *%stice or e:%ity for those who deal in good faith with thecorporation, or when the %se of the separate *%ridical personality is %sed to conf%se legitimateiss%es.

• FRAUD PIERCING When corporate entity %sed to commit a crime, to %nderta1e fra%d or do a wrong, or

that the corporate 5eil is %sed as a means to e5ade the conse:%ences of ones criminal or fra%d%lent

acts ALTER-EGO PIERCING When corporate entity merely a farce since the corporation is merely the alter

ego, &%siness cond%it, or instr%mentality of a person or another entity

A%thorities are agreed on at least three ()$ &asic areas where piercing the 5eil, with which the lawco5ers and isolates the corporation from any other legal entity to which it may &e related, is allowed. 'heseare? $ defeat of p%&lic con5enience, as when the corporation is %sed as 5ehicle for the e5asion of e-istingo&ligation/ 6$ fra%d cases or when the corporate entity is %sed to *%stify wrong, protect fra%d, or defend acrime/ or )$ alter ego cases, where the corporation is merely a farce since it is a mere alter ego or &%sinesscond%it of a person, or where the corporation is so organied and controlled and its affairs are socond%cted as to ma1e it merely an instr%mentality, agency, cond%it or ad*%nct of another corporation.2enera Credit Corp. v. Asons 3ev. and (nvestment Corp., 51 SCRA 225 =200@1? citing K8LLAN=0KA, CD<<07C8AL L AW 70K80W (6++! ed$, at p. "23.

*.R&/(& (& P#')3#&4 A%%$#3*+#(&: 'his Co%rt pierced the corporate 5eil to ward off a *%dgment credit,to a5oid incl%sion of corporate assets as part of the estate of the decedent, to escape lia&ility arising for a de&t, or to perpet%ate fra%d and>or conf%se legitimate iss%es either to promote or to shield %nfair o&*ecti5es to co5er %p an otherwise &latant 5iolation of the prohi&ition against for%m shopping. Dnly isthese and similar instances may the 5eil &e pierced and disregarded. PNB v. Andrada Electric &Engineering Co., ) SC7A 6!! (6++6$.

. S*)8 ( P)(*+#<' F*3+()7: Concept Buiders (nc. v. %L&C , 25 SCRA 1> =1>>6@.# 'hea&sence of these elements pre5ents piercing the corporate 5eil. *im v. CA, )6) SC7A +6 (6+++$.6+

3.D#7+#&3+#(& '+''& F)*/ P#')3#&4 *&/ A$+')-'4( P#')3#&4 Lipat v. "acific Ban6ing Corp., 02SCRA > =200@.

6. DEFEAT OF PULIC CONVENIENCE =EUITY PIERCING@ J)#/#3*$ P')7(&*$#+8 C*&&(+ ' E%$(8'/

*. To Confuse Legitimate (ssues: Teephone !ngineering and Service Co. (nc. '. CC , 10 SCRA5 =1>?1@.

. To &aise Lega Technicaities: !miio Cano !nterprises v. C(& , 1 SCRA 2>1 =1>[email protected] cannot e5ade ci5il lia&ility &y incorporating properties or the &%siness. Palacio v. ,ely

-rans"ortation Co., " SC7A + (#36$.6

Where a de&tor registers his residence to a family corporation in e-change of shares of stoc1 andcontin%es to li5e therein, then the separate *%ridical personality may &e disregarded. PBCom v. CA, #"SC7A "32 (##$.

Where corporate fiction was %sed to perpetrate social in*%stice or as a 5ehicle to e5ade o&ligations or conf%se the legitimate iss%es (as in this case where the actions of management of the two corporations

3 Also Conce"t Builders% nc. v. N*+C% 6"2 SC7A !# (##3$/ Heirs of +amon (urano% Sr. v. 7y% )!! SC7A 6) (6+++$/ M+ Holdings%

*td. 9. Ba!ar , )+ SC7A 32 (6++6$/ +amire' v. Mar ,ishing Co.% nc., 326 SC7A )2 (6+6$/ Pacific +ehouse Cor". v. Court of A""eals ,2# SC7A 33" (6+!$/ Commissioner of Customs v. ?ilin/ nternational Cor"., 26 SC7A !3# (6+!$/ PM nternational -rading% nc. v.*a#ayen, 2)" SC7A 6## (6+!$.

2-antoco v. 8aisahan ng Mga Manggaga$a sa *a Cam"ana , +3 Phil. # (#"#$/ ,rancisco v. Me!ia, )36 SC7A 2) (6++$.

Also Pantranco Em"loyees Association :PEA)P-6?; v. N*+C , " SC7A "# (6++#$/ Prisma Construction & (ev. Cor". v.

Menchave' , 3! SC7A "#+ (6++$/ Sarona v. N*+C , 33) SC7A )#! (6+6$/ *anu'a% 5r. v. B, Cor".% 22 SC7A 62" (6+!$.

#PNB v. +itratto 6rou"% nc., )36 SC7A 63 (6++$/ 9elarde v. *o"e' , !# SC7A !66 (6++!$/ 5ardine (avies% nc. v. 5+B +ealty% nc.,

!3) SC7A """ (6++"$/ Pantranco Em"loyees Association :PEA)P-6?; v. N*+C , " SC7A "# (6++#$/ Malarayat +ural Ban/% nc.%2# SC7A "3" (6+!$/ Pacific +ehouse Cor". v. Court of A""eals% 2# SC7A 33" (6+!$/ ?longa"o City v. Su#ic ater and Se$erageCo.% nc., 2)6 SC7A )) (6+!$.

6+Child *earning Center% nc. v. -agorio, !2" SC7A 6)3 (6++"$/ 6eneral Credit Cor". v. Alsons (ev. and nvestment Cor". , ") SC7A

66" (6++2$/ Nisce v. E4uita#le PC Ban/% nc., "3 SC7A 6) (6++2$.

6 Also Mendo'a and oto/o v. Banco +eal (ev. Ban/ , !2+ SC7A 3 (6++"$.

!



created conf%sion as to the proper employer of claimants$, the two corporations wo%ld &e merged as one. A'cor Manufacturing% nc. v. N*+C% )+) SC7A 63 (###$.

'he corporate 5eil cannot &e %sed to &latantly 5iolate the prohi&ition against for%m9shopping. Where thecorporation itself has not &een remiss in 5igoro%sly prosec%ting or defending corporate ca%ses and in %singand applying remedies a5aila&le to it, then shareholders, whether s%ing as the ma*ority in direct actions or as the minority in a deri5ati5e s%it, cannot &e allowed to p%rs%e the same claims. ,irst Phili""inenternational Ban/ v. Court of A""eals, 6"6 SC7A 6"# (##3$.

3.The Case for Thiny-Capitai8ed Corporations

7cConne v. CA, 1 SCRA 22 =1>61@.'he DF 7esol%tion e-plicitly identified the false pretense, fra%d%lent act or fra%d%lent meansperpetrated %pon the in5esting p%&lic who were made to &elie5e that AS;H8 had the financial capacity torepay the loans it enticed petitioners to e-tend, despite the fact that the deficient capitaliation e5idenced&y its articles of incorporation, the treas%rers affida5it, the a%dited financial statements. “<oreo5er,respondents arg%ment ass%mes that there is legal o&ligation on the part of petitioners to %nderta1e anin5estigation of AS;H8 &efore agreeing to pro5ide the loans. 'here is no s%ch o&ligation. 8t is %nfair toe-pect a person to proc%re e5ery a5aila&le p%&lic record concerning an applicant for credit to satisfyhimself of the latters financial standing. At least, that is not the way an a5erage person ta1es care of hisconcerns.” 6a#ion'a v. Court of A""eals, "3" SC7A ) (6++$.

Where the corporation was %nder the control of its stoc1holders who ran9%p :%ite a high o&ligation withthe printing company 1nowing f%lly well that their corporation was not in a position to pay for the acco%nts,and where in fact they personally &enefited from the operations of the company to which they ne5er paid

their s%&scription in f%ll, wo%ld constit%te piercing of the 5eil to allow the creditor to &e a&le to collect whatotherwise were de&ts owed &y the company which has no 5isi&le assets and has ceased all operations./aey v. "rintwe (nc. 6> SCRA 116 =2011@.

/. Avoidance or 7inimi8ation of Taxes <utivo Sons /ardware v. Court of Tax Appeas 1 SCRA160 =1>61@/ *iddell & Co. v. Collector of nternal +evenue, 6 SC7A 3)6 (#3$.

=se of nominees to constit%te the corporation for the &enefit of the controlling stoc1holder who so%ght to

a5oid payment of ta-es. Marvel Building v. (avid , # Phil. )23 (#"$.

'he plea to pierce the 5eil of corporate fiction on the allegation that the corporations tr%e p%rpose is toa5oid payment &y the incorporating spo%ses of the estate ta-es on the properties transferred to thecorporations? “With regard to their claim that @the companiesB 0llice and <argo were meant to &e %sed asmere tools for the a5oidance of estate ta-es, s%ffice it to say that the legal right of a ta-payer to red%ce theamo%nt of what otherwise co%ld &e his ta-es or altogether a5oid them, &y means which the law permits,

cannot &e do%&ted.” 6ala v. Ellice Agro)ndustrial Cor"., ! SC7A !) (6++)$.

/ #!'!& : 'he mere e-istence of parent9s%&sidiary relations, or the fact that one corporation is affiliatedwith another corporation does not *%stify piercing &ased on ser5ing p%&lic con5enience. Comm. of nternal +evenue v. Norton and Harrison, SC7A 2+! (#"!$.66

.FRAUD CASES

When the legal fiction of the separate corporate personality is a&%sed, s%ch as when the same is %sedfor fra%d%lent or wrongf%l ends, the co%rts ha5e not hesitated to pierce the corporate 5eil. ,rancisco v.Me!ia% )36 SC7A 2) (6++$.

'he general r%le is that o&ligations inc%rred &y a corporation, acting thro%gh its directors, officers or employees, are its sole lia&ilities. Howe5er, there wo%ld &e piercing of the 5eil when the corporation is %sed&y any of them as a cloa1 or co5er for fra%d or illegality or in*%stice. Here, the fra%d was committed &y

petitioners to the pre*%dice of respondent &an1. Mendo'a v. Banco +eal (ev. Ban/ , !2+ SC7A 3 (6++"$.Ira%d and &ad faith on the part of certain corporate officers or stoc1holders may warrant the piercing of

the 5eil of corporate fiction so that the said indi5id%al may not see1 ref%ge therein, &%t may &e heldindi5id%ally and personally lia&le for his or her actions. *afarge Cement Phils.% nc. v. Continental Cement Cor"., !!) SC7A "66 (6++!$. Howe5er, mere allegation of fra%d or &ad faith, witho%t e5idence s%pportings%ch claims cannot warrant the piercing of the corporate 5eil. (BP v. Court of A""eals, )"2 SC7A 363,)" SC7A "+, )3) SC7A )+2 (6++$.

*. A3+7 8 C(&+)($$#&4 S"*)'"($/') 'he fact alone that a corporation owns all of the stoc1s of another corporation does not *%stify their

&eing treated as one entity. 8f %sed to perform legitimate f%nctions, a s%&sidiarys separate e-istence shall&e respected, and the lia&ility of the parent corporation, as well as the s%&sidiary shall &e confined to thosearising in their respecti5e &%siness. Nisce v. E4uita#le PC Ban/% nc., "3 SC7A 6) (6++2$.6)

Where a stoc1holder, who has a&sol%te control o5er the affairs of the corporation, entered into acontract with another corporation thro%gh fra%d and false representations, s%ch stoc1holder shall &e lia&lesolidarily with co9defendant corporation e5en when the contract s%ed %pon was entered into on &ehalf of the corporation. Namarco v. Associated ,inance Co., # SC7A #36 (#32$.

Where the corporation is %sed as a means to appropriate a property &y fra%d which property was later resold to the controlling stoc1holders, then piercing sho%ld &e allowed. Heirs of +amon (urano% Sr. v. 7y ,)!! SC7A 6) (6+++$.

66-omas *ao Construction v. N*+C , 62 SC7A 23 (##2$. Mar4ues v. ,ar East Ban/ and -rust Co. , 3)# SC7A )6 (6+$.

6)Mar4ues v. ,ar East Ban/ and -rust Co. , 3)# SC7A )6 (6+$.

"



Piercing will &e applied in the present case when there is an ind%&ita&le lin1 &etween C;;s clos%re and;inswangers incorporation? C;; ceased to e-ist only in name/ it re9emerged in the person of ;inswanger to a5oid payment &y C;; of the last two installments of its monetary o&ligation to Li5esey, as well as itsother financial lia&ilities. *ivesey v. Bins$anger Phili""ines% 2# SC7A !)) (6+!$.

.T* E<*7#(& () F)*/ 8n a n%m&er of cases, the Co%rt has shredded the 5eil of corporate identity and r%led that where a

corporation is merely an ad*%nct, &%siness cond%it or alter ego of another corporation or when they practicefra%d on internal re5en%e laws, the fiction of their separate and distinct corporate identities shall &edisregarded, and &oth entities treated as one ta-a&le person, s%&*ect to assessment for the same ta-a&letransaction. Commissioner of nternal +evenue v. Menguito, "3" SC7A !3 (6++$.

3. G#/#&4 P)#&3#%$'7 #& F)*/ C*7'7 hy is there inordinate showing of ater-ego eements=

• 'here m%st ha5e &een fra%d or an e5il moti5e in the affected transaction, and the

mere proof of control of the corporation &y itself wo%ld not a%thorie piercing/

• 'he corporate fiction is %sed as a means to commit the fra%d or a5oid the

conse:%ences thereof/ and

• 'he main action sho%ld see1 for the enforcement of pec%niary claims pertaining to

the corporation against corporate officers or stoc1holders.

'wo corporations may &e engaged in the same &%siness or e5en share the same address, or ha5e

interloc1ing incorporators, directors or officers, in the a&sence of fra%d or other p%&lic policy consideration,does not warrant piercing the 5eil of corporate fiction. Mc*eod v. N*+C , "6 SC7A 666 (6++2$.6!

<ere s%&stantial identity of incorporators of two corporations does not necessarily imply fra%d, nor warrant the piercing of the 5eil of corporate fiction. 8n the a&sence of clear and con5incing e5idence to showthat the corporate personalities were %sed to perpet%ate fra%d, or circ%m5ent the law, the corporations areto &e rightly treated as distinct and separate from each other. *aguio v. N*+C% 636 SC7A 2" (##3$.6"

?.ALTER-EGO CASES

*. U7#&4 C()%()*+#(& *7 C(&/#+ () A$+') E4(Where the capital stoc1 is owned &y one person and it f%nctions only for the &enefit of s%ch indi5id%al

owner, the corporation and the indi5id%al sho%ld &e deemed the same. Arnold v. illets and Patterson%*td., !! Phil. 3)! (#6)$.

When corporation is merely an ad*%nct, &%siness cond%it or alter ego of another corporation, the fictionof separate and distinct corporation entities sho%ld &e disregarded. -an Boon Bee & Co. v. 5arencio% 3)SC7A 6+" (#$.63

F%st &eca%se two foreign companies came from the same co%ntry and closely wor1ed together oncertain pro*ects wo%ld the concl%sion arise that one was the cond%it of the other, th%s piercing the 5eil of corporate fiction. Maru#eni Cor". v. *irag% )36 SC7A 36+ (6++$.

=se of a controlling stoc1holders initials in the corporate name is not s%fficient reason to pierce, since&y that practice alone does it mean that the said corporation is merely a d%mmy of the indi5id%alstoc1holder, pro5ided s%ch act is lawf%l. *BP v. Court of A""eals% )3! SC7A )2" (6++$.

A corporation has a personality separate and distinct from the persons composing it, as well as from anyother legal entity to which it may &e related. 0:%ally well9settled is the principle that the corporate mas1may &e remo5ed or the corporate 5eil pierced when the corporation is *%st an alter ego of a person or of another corporation. Sarona v. N*+C , 33) SC7A )#! (6+6$.

.M##&4-% O%')*+#(&7B D#7)'7%'3+ +( +"' C()%()*+' E&+#+8 <i-ing of personal acco%nts with corporate &an1 deposit acco%nts wo%ld a%thorie piercing to protect

the *%dgment creditors.&amire8 Teephone Corp. v. Ban6 of America, 2> SCRA 1>1 =1>6>@.

'he fact that the ma*ority stoc1holder had %sed his own money to pay part of the loan of the corporationcannot &e %sed as the &asis to pierce? “8t is %nderstanda&le that a shareholder wo%ld want to help hiscorporation and in the process, ass%re that his sta1es in the said corporation are sec%red.” LB" v. Court of Appeas 6 SCRA 5 =2001@.

Where two &%siness enterprises are owned, cond%cted, and controlled &y the same parties, &oth lawand e:%ity will, when necessary to protect the rights of third persons, disregard the legal fiction that twocorporations are distinct entities and treat them as identical. Si#agat -im#er Cor". v. 6arcia, 63 SC7A 2+(##6$.

0mployment of same wor1ers/ single place of &%siness, etc., may indicate alter ego sit%ation. Shoemart v. N*+C% 66" SC7A ) (##)$.

'he facts that two corporations may &e sister companies, and that they may &e sharing personnel andreso%rces, witho%t more, is ins%fficient to pro5e that their separate corporate personalities are &eing %sedto defeat p%&lic con5enience, *%stify wrong, protect fra%d, or defend crime. "adia v. Court of Appeas,0 SCRA 20? =2001@.

6!ndo"hil -etile Mill or/ers 7nion v. Calica, 6+" SC7A 3#2 (##6$, and (el +osario v. N*+C , 2 SC7A 222 (##+$/ Par/ Hotel v.

Soriano, 3+ SC7A )6 (6+6$/ Heirs of ,e -an 7y v. nternational Echange Ban/ , 3#+ SC7A "# (6+)$.

6"Martine' v. Court of A""eals, !) SC7A )+ (6++!$.

636eneral Credit Cor". v. Alsons (ev. and nvestment Cor". , ") SC7A 66" (6++2$.

3



'he ficti5e 5eil of corporate personality holds lesser sway for s%&sidiary corporations whose shares arewholly if not almost wholly owned &y its parent company. 'he str%ct%ral and systems o5erlap inherent inparent and s%&sidiary relations often render the s%&sidiary as mere local &ranch, agency or ad*%nct of theforeign parent. 'h%s, when the foreign parent company leased a large parcel of land p%rposely for the&enefit of its s%&sidiary, which too1 o5er possession of the leased premises, the s%&sidiary was a merealter ego of 0SSD 0astern. Mariano v. Petron Cor"., 3+ SC7A !2 (6++$.

3. G#/#&4 P)#&3#%$'7 #& A$+')-E4( C*7'7

•

octrine applies e5en in the a&sence of e5il intent, &eca%se of the direct 5iolation of a centralcorporate law principle of separating ownership from management/

• octrine in s%ch cased is &ased on estoppel? if stoc1holders do not respect the separate entity,

others cannot also &e e-pected to &e &o%nd &y the separate *%ridical entity/

• Piercing in alter ego cases may pre5ail e5en when no monetary claims are so%ght to &e enforced

against the stoc1holders or officers of the corporation.

/ #!'!& 'he mere e-istence of a parent9s%&sidiary relationship &etween two corporation, or that onecorporation is affiliated with another company does not &y itself allow the application of the alter9egopiercing doctrine. 8o""el :Phil.;% nc. v. atco, 22 Phil. #2 (#!3$.62

A s%&sidiary corporation has an independent and separate *%ridical personality, distinct from that of itsparent company, hence, any claim or s%it against the latter does not &ind the former and vice)versa.5ardine (avies% nc. v. 5+B +ealty% nc., !3) SC7A """ (6++"$.6

8f %sed to perform legitimate f%nctions, a s%&sidiarys separate e-istence shall &e respected, and thelia&ility of the parent corporation as well as the s%&sidiary will &e confined to those arising in their respecti5e &%sinesses. 05en when the parent corporation agreed to the terms to s%pport a stand&y creditagreement in fa5or of the s%&sidiary, does not mean that its personality has merged with that of thes%&sidiary. M+. Holdings% *td. 9. Ba!ar , )+ SC7A 32 (6++6$.6#

>.PIERCING DOCTRINE AND THE DUE PROCESS CLAUSE

*. A Suit Against (ndividua Sharehoders (s %ot a Suit Against the Corporation that wi aow the piercing doctrine to ,e appied . Iail%re to implead the corporations as defendants and merelyanne-ing a list of s%ch corporations to the complaints is a 5iolation of d%e process for it wo%ld in effect&e disregarding their distinct and separate personality witho%t a hearing. PC66 v. Sandigan#ayan% )3"SC7A ") (6++$.

. hen Corporate #fficers Are Sued in Their #fficia Capacity , the Corporation hich as %ot 7ade a "arty (s %ot 3enied 3ue "rocess. Emilio Cano Enter"rises v. C+ , ) SC7A 6# (#3"$.

B$T S !! : Altho%gh &oth lower co%rts fo%nd s%fficient &asis for the concl%sion that PRA and Phoeni-Dmega were one and the same, and the former is merely a cond%it of the other the S%preme Co%rt held5oid the application of a writ of e-ec%tion on a *%dgment held only against PRA, since the 7'C o&tainedno *%risdiction o5er the person of Phoeni- Dmega which was ne5er s%mmoned as formal party to thecase. 'he general principle is that no person shall &e affected &y any proceedings to which he is astranger, and strangers to a case are not &o%nd &y the *%dgment rendered &y the co%rt. "adia v.Court of Appeas, 0 SCRA 20? =2001@.

3. To 7a6e Acting #fficers "ersonay Lia,e under "iercing 3octrine (s There a %eed to Bring a%ew Case Against the #fficer 7cConne v. CA, 1 SCRA 2 =1>61@.

'here is no denial of d%e process to hold officers lia&le %nder the piercing doctrine, pro5ided that

e5idential &asis has &een add%ced during tria to apply the piercing doctrine.1acinto v. Court of Appeas, 1>? SCRA 211 =1>>1@/ Arcilla v. Court of A""eals, 6" SC7A 6+ (##6$.

“We s%ggest as m%ch in Arcilla v. Court of A""eals% an appellate proceedings in5ol5ing petitioner Arcillas &id to a5oid the ad5erse CA decision on arg%ment that he is not personally lia&le for the amo%ntad*%dged since the same constit%tes a corporate lia&ility which ne5ertheless cannot &e enforced againstthe corporation which has not &een impleaded as a party &elow. 9iolago v. BA ,inance Cor".% ""#SC7A 3# (6++$.

'he elements of “control” laid down in Conce"t Builders to allow the application of piercing m%st &eproperly pleaded and pro5ed d%ring the hearing on the merits, and cannot &e merely raised for the firsttime in the motion for the iss%ance of an alias writ of e-ec%tion. Pacific +ehouse Cor". v. Court of

A""eals% 2# SC7A 33" (6+!$.

62PH9(EC v. Court of A""eals, SC7A 33# (##+$.

6,ortune v. 3uinsayas, 3#+ SC7A ))3 (6+)$/ ?longa"o City v. Su#ic ater and Se$erage Co.% nc., 2)6 SC7A )) (6+!$.

6#Pacific +ehouse Cor". v. Court of A""eals, 2# SC7A 33" (6+!$.

2



VI. C ORPORATE C ONTRACT L AW

1. P)'-I&3()%()*+#(& C(&+)*3+7

*. ho (s a "romoter “Promoter ” is a person who, acting alone or with others, ta1es initiati5e in fo%nding and organiing the

&%siness or enterprise of the iss%er and recei5es consideration therefor. (Sec. ).+, Sec%rities 7eg%lationCode @7.A. 2##B$

. N*+)' ( P)'-#&3()%()*+#(& A4)'''&+7 (S'37. 60 *&/ 61$3. T"'()#'7 (& L#*#$#+#'7 () P)((+')7 C(&+)*3+7

Cagayan ishing 3ev. Co. (nc. v. Teodoro Sandi6o, 65 P"#$. 22 =1>@.

&i8a Light > (ce Co. (nc. v. "u,ic Service Comm., 25 SCRA 2?5 =1>6?@.

Caram 1r. v. CA, 151 SCRA 2 =1>?@.

2. 3e acto C()%()*+#(& (S'3. 20$

*. E$''&+7 Arnod /a v. "iccio, ?6 P"#$. 6 =1>50@.;y its fail%re to s%&mit its &y9laws on time, the A88;P may &e considered a de facto corporation whose

right to e-ercise corporate powers may not &e in:%ired into collaterally in any pri5ate s%it to which s%chcorporations may &e a party. Sa$ad!aan v. Court of A""eals, !"# SC7A "3 (6++"$.

. C()%()*+#(& 8 E7+(%%'$ D(3+)#&' (S'3. 21$Savatierra v. 2aritos, 10 P"#$. 5 =1>5?@.

A,ert v. $niversity "u,ishing Co., 1 SCRA ? =1>65@.

Asia Ban6ing Corp. v. Standard "roducts, 6 P"#$. 15 1>2$

*. N*+)' ( D(3+)#&'Io%nded on principles of e:%ity and designed to pre5ent in*%stice and %nfairness, the doctrine applies

when persons ass%me to form a corporation and e-ercise corporate f%nctions and enter into &%sinessrelations with third persons. Where no third person is in5ol5ed in the conflict, there is no corporation &yestoppel. A failed consolidation therefore cannot res%lt in a consolidated corporation &y estoppel. *o'ano v.(e *os Santos, 62! SC7A !"6 (##2$

A party cannot challenge the personality of the plaintiff as a d%ly organied corporation after ha5ingac1nowledged same when entering into the contract with the plaintiff as s%ch corporation for the

transportation of its merchandise. ?hta (ev. Co. v. Steamshi" Pom"ey% !# Phil. 2 (#63$.)+

A person who accepts employment in an %nincorporated charita&le association is estopped fromalleging its lac1 of *%ridical personality. Christian Children2s ,und v. N*+C% 2! SC7A 3 (##$.

Dne who deals with an %nincorporated association is not estopped to deny its corporate e-istence whenhis p%rpose is not to a5oid lia&ility, &%t precisely to enforce the contract against the action for the p%rportedcorporation. nt2l E"ress -ravel v. Court of A""eals% )!) SC7A 32! (6+++$.

.T( L'<'$7 =#@ W#+" 9F)*/B; *&/ =##@ W#+"(+ 9F)*/;When the incorporators represent themsel5es to &e officers of the corporation which was ne5er d%ly

registered with S0C, and engage in the name of the p%rported corporation in illegal recr%itment, they areestopped from claiming that they are not lia&le as corporate officers %nder Sec. 6" of Corporation Codewhich pro5ides that all persons who ass%me to act as a corporation 1nowing it to &e witho%t a%thority to doso shall &e lia&le as general partners for all the de&ts, lia&ilities and damages inc%rred or arising as a res%lt

thereof. Peo"le v. 6arcia, 62 SC7A 36 (##2$.

3. Can a 3efective Attempt to orm a Corporation &esut at Least in a "artnership= While it is ordinarily held that persons who attempt, &%t fail, to form a corporation and who carry on

&%siness %nder the corporate name occ%py the position of partners inter se, howe5er, s%ch a relation doesnot necessarily e-ist, for ordinarily persons cannot &e made to ass%me the relation of partners, as &etweenthemsel5es, when their p%rpose is that no partnership shall e-ist, and it sho%ld &e implied only whennecessary to do *%stice &etween the parties. 'h%s, one who ta1es no part e-cept to s%&scri&e for stoc1 in aproposed corporation which is ne5er legally formed does not &ecome a partner with other s%&scri&ers whoengage in &%siness %nder the name of the pretended corporation, so as to &e lia&le as s%ch in an action for settlement of the alleged partnership and contri&%tion. A partnership relation &etween certain stoc1holdersand other stoc1holders, who were also directors, will not &e implied in the a&sence of an agreement, so asto ma1e the former lia&le to contri&%te for payment of de&ts illegally contracted &y the latter "ioneer (nsurance v. Court of Appeas, 15 SCRA 66? =1>?>@.

=nder the law on estoppel incl%ding that %nder Sec. 6, those acting on &ehalf of an ostensi&lecorporation and those #enefited #y it% /no$ing it to #e $ithout valid eistence% are held lia&le as generalpartners.Lim Tong Lim v. "hiippine ishing 2ear (ndustries (nc., 1 SCRA 2? =1>>>@.

. TRUST FUND DOCTRINE

*. C(')3#*$KC((& L* P)'#7' E#+8 versus D'+7B P)'')'&3' ( C)'/#+()7 (<') E#+8H($/')7 (A)+. 226, C#<#$ C(/'$

)+'he same principle applied in Com"ania Agricole de 7ltramar v. +eyes, ! Phil. (#$, &%t that case pertained to a commercial

partnership which re:%ired registration in the registry %nder the terms of the Code of Commerce$.



'he re:%irement of %nrestricted retained earnings to co5er the shares is &ased on the tr%st f%nd doctrinewhich means that the capital stoc1, property and other assets of a corporation are regarded as e:%ity intr%st for the payment of corporate creditors. 'he reason is that creditors of a corporation are preferred o5er the stoc1holders in the distri&%tion of corporate assets. 'here can &e no distri&%tion of assets among thestoc1holders witho%t first paying corporate creditors. Hence, any disposition of corporate f%nds to thepre*%dice of creditors is n%ll and 5oid. Boman Environmental (ev. Cor". v. CA, 32 SC7A "!+ (#$.

=nder the tr%st f%nd doctrine, the capital stoc1, property and other assets of the corporation areregarded as e:%ity in tr%st for the payment of the corporate creditors. Comm. of nternal +evenue v. Court

of A""eals% )+ SC7A "6 (###$.

. N*+)' *&/ C(<')*4' ( +"' T)7+ F&/ D(3+)#&' 'he s%&scriptions to the capital stoc1 of a corporation constit%te a f%nd to which the creditors ha5e

aright to loo1 for satisfaction of their claims and that the assignee in insol5ency can maintain an action%pon any %npaid stoc1 s%&scription in order to realie assets for the payment of its de&ts. Phil. -rust Co. v.+ivera, !! Phil. !3# (#6)$.

05en when foreclos%re on corporate assets was wrongf%l done, stoc1holders ha5e no standing toreco5er for themsel5es moral damages/ otherwise, it wo%ld amo%nt to the appropriation &y, and thedistri&%tion to, s%ch stoc1holders of part of the corporations assets &efore the dissol%tion and theli:%idation of its de&ts and lia&ilities. AP- v. Court of A""eals% )++ SC7A "2# (##$.

'he “trust fund ” doctrine considers the s%&scri&ed capital stoc1 as a tr%st f%nd for the payment of thede&ts of the corporation, to which the creditors may loo1 for satisfaction. =ntil the li:%idation of the

corporation, no part of the s%&scri&ed capital stoc1 may &e t%rned o5er or released to the stoc1holder (e-cept in the redemption of the redeema&le shares$ witho%t 5iolating this principle. 'h%s di5idends m%stne5er impair the s%&scri&ed capital stoc1/ s%&scription commitments cannot &e condoned or remitted/ nor can the corporation &%y its own shares %sing the s%&scri&ed capital as the consideration therefore. N-C v.Court of A""eals% ) SC7A "+ (###$.

We clarify that the trust fund doctrine is not limited to reaching the stoc1holders %npaid s%&scriptions.'he scope of the doctrine when the corporation is insol5ent encompasses not only the capital stoc1, &%talso other property and assets generally regarded in e:%ity as a tr%st f%nd for the payment of corporatede&ts. All assets and property &elonging to the corporation held in tr%st for the &enefit of creditors that weredistri&%ted or in the possession of the stoc1holders, regardless of f%ll payment of their s%&scriptions may &ereached &y the creditors in satisfaction of its claim. /aey v. "rintwe (nc. 6> SCRA 116 =2011@, citing K8LLAN=0KA, PH8L8PP8N0 CD7PD7A'0 L AW (6++$, p. "".

3. T( P)3"*7' O& S"*)'7 (S'37. ?, 1, *&/ 122, $*7+ %*)*4)*%"$=nder common law, there were originally conflicting 5iews on whether a corporation had the power to

p%rchase its own stoc1s. Dnly a few American *%risdictions adopted the strict 0nglish r%le for&idding acorporation from p%rchasing its own shares. 8n some American states where the 0nglish r%le %sed to &eadopted, stat%tes granting a%thority to p%rchase o%t of s%rpl%s f%nds were enacted, while in others, sharesmight &e p%rchased e5en o%t of capital pro5ided the rights of creditors were not pre*%diced. 'he reason%nderlying the limitation of share p%rchases sprang from the necessity of imposing safeg%ards against thedepletion &y a corporation of its assets and against the impairment of its capital needed for the protectionof creditors. -urner v. *oren'o Shi""ing Cor"., 3)3 SC7A ) (6++$.

/. R'73#77#(& ( S73)#%+#(& A4)'''&+

Kiolation of terms em&odied in a S%&scription Agreement, with are personal commitments, do notconstit%te legal gro%nd to rescind the s%ch agreement?. “8n the instant case, the rescission of the Pre9S%&scription Agreement will effecti5ely res%lt in the %na%thoried distri&%tion of the capital assets and

property of the corporation, there&y 5iolating the 'r%st I%nd octrine and the Corporation Code, since therescission of a s%&scription agreement is not one of the instances when distri&%tion of capital assets andproperty of the corporation is allowed.” istri&%tion of corporate assets among the stoc1holders cannote5en &e resorted to achie5e “corporate peace.” #ng <ong v. Tiu , 01 SCRA 1 =200@.

VII. A RTICLES OF INCORPORATION

1. N*+)' ( C"*)+') 'he charter is in the nat%re of a contract &etween the corporation and the State.6overnment of P.. v. Manila +ailroad Co., "6 Phil. 3## (#6#$.

'he articles of incorporation has &een descri&ed as one that defines the charter of the corporation andthe contract%al relationships &etween the state and the corporation, the stoc1holders and the State, and&etween the corporation and its stoc1holders. *anu'a v. Court of A""eals, !"! SC7A "! (6++"$.

*. C('&3''&+ ( C()%()*+' E#7+'&3' (S'3. 1>$.

2. P)(3'/)' *&/ D(3'&+*)8 R'#)''&+7 (S'3. 1 *&/ 15$

*. A7 +( N') *&/ R'7#/'&38 ( I&3()%()*+()7 (S'3. 10$

8t is possi&le for a &%siness to &e wholly owned &y one indi5id%al, and the 5alidity of its incorporation isnot affected when he gi5es nominal ownership of only one share of stoc1 to each of the other fo%r incorporators. 'his arrangement is not necessarily illegal, &%t it 5alid only &etween and among theincorporators pri5y to the agreement. 8t does not &ind the corporation which will consider all stoc1holders of record as the lawf%l owners of their registered shares. As &etween the corporation on the one hand, and its

#



stoc1holders and third persons on the other, the corporation loo1s only to its &oo1s for the p%rpose of determining who its shareholders are. Nautica Canny Cor". v. umul , !2) SC7A !" (6++"$.

. C()%()*+' N*' (S'37. 1?, 1=1@ *&/ 2$

=#@ !ssence of the Corporate %ame

'he name of a corporation is essential not only for its e-istence as a *%ridical person, &%t also inmanner of dealing with it, and in the e-ercise of its *%ridical capacities/ it cannot &e changed e-cept inthe manner pro5ided for &y law. +ed *ine -rans. v. +ural -ransit , 3+ Phil. "!# (#)!$.

A corporation may change its name &y the amendment of its articles of incorporation, &%t the same isnot effecti5e %ntil appro5ed &y the S0C. Phil. ,irst nsurance Co. v. Hartigan, )! SC7A 6"6 (#2+$.

A corporation has no right to inter5ene in a s%it %sing a name, not e5en its acronym, other than itsregistered name, as the law re:%ires and not another name which it had not registered. *aureanonvestment and (ev. Cor". v. Court of A""eals, 626 SC7A 6") (##2$.

/ #!'!& : 'here wo%ld &e no denial of d%e process when a corporation is s%ed and *%dgment isrendered against it %nder its %nregistered trade name? “A corporation may &e s%ed %nder the name &ywhich it ma1es itself 1nown to its wor1ers.” Pison)Arceo Agri. (ev. Cor". v. N*+C% 62# SC7A )6(##2$.

=##@ 3eceptivey Simiar Corporate %ames

8ncorporators m%st choose a name at their peril/ and the %se of a name similar to one adopted &yanother corporation, $hether a #usiness or a non"rofit organi'ation , if misleading or li1ely to in*%re the

e-ercise of its corporate f%nctions, regardless of intent, may &e pre5ented &y the corporation ha5ing aprior right. Ang Mga 8aani# sa glesia ng (ios 8ay 8risto Hesus v. glesia ng (ios 8ay 8risto 5esus ,)26 SC7A 2 (6++$.

Similarity in corporate names &etween two corporations wo%ld ca%se conf%sion to the p%&licespecially when the p%rposes stated in their charter are also the same type of &%siness. 7niversal MillsCor". v. 7niversal -etile Mills nc., 2 SC7A 36 (#22$.

'o fall within the prohi&ition of the law 7e5ised G%idelines in the Appro5al of Corporate andPartnership Names, two re:%isites m%st &e pro5en, to wit? (a$ 'hat the complainant corporationac:%ired a prior right o5er the %se of s%ch corporate name/ and (&$ the proposed name is either? (i$identical, or (ii$ decepti5ely or conf%singly similar to that of any e-isting corporation or to any other namealready protected &y law/ or (iii$ patently decepti5e, conf%sing or contrary to e-isting laws. Phili"s E"ort B.9. v. Court of A""eals% 6+3 SC7A !"2 (##6$.

'he policy &ehind Sec. of Corporation Code, which e-pressly prohi&its the %se of a corporatename which is “identical or dece"tively or confusingly similar to that of any eisting cor"oration or to any other name already "rotected #y la$ or is "atently dece"tive% confusing or contrary to eisting la$s%0 isto a5oid fra%d %pon the p%&lic that will occasion to deal with the entity concerned, the e5asion of legalo&ligations and d%ties, and the red%ction of diffic%lties of administration and s%per5ision o5er corporations. ndustrial +efractories Cor". v. Court of A""eals, )#+ SC7A 6"6 (6++6$.)

=###@ !ffect of Change of Corporate %ame

A change in the corporate name does not ma1e a new corporation, and has no effect on the identityof the corporation, or on its property, rights, or lia&ilities. +e"u#lic Planters Ban/ v. Court of A""eals,63 SC7A 2) (##6$.)6

3.P)%(7' C$*7'7 =S'37. 1=2@ *&/ 2@'he statement of the primary p%rpose in the articles of incorporation is means to protect shareholders

so they will 1now the main &%siness of the corporation and file deri5ati5e s%its if the corporation de5iatesfrom the primary p%rpose. 7y Siuliong v. (irector of Commerce and ndustry , !+ Phil. "! (##$.

“'he &est proof of the p%rpose of a corporation is its articles of incorporation and &y9laws. 'he articles of incorporation m%st state the primary and secondary p%rposes of the corporation, while the &y9laws o%tlinethe administrati5e organiation of the corporation, which, in t%rn, is s%pposed to ins%re or facilitate theaccomplishment of said p%rpose.” 'herefore, the allegation that the corporations were organied to illegallya5oid the pro5isions on land reform and to a5oid the payment of estate ta-es, constit%te prohi&itedcollateral attac1. 6ala v. Ellice Agro)ndustrial Cor"., ! SC7A !) (6++)$.

/. C()%()*+' T') (S'3. 11$

No e-tension of term can &e effected once dissol%tion stage has &een reached, as it constit%tes new&%siness. Alham#ra Cigar v. SEC , 6! SC7A 63# (#3$.

Article 3+" of Ci5il Code “clearly limits any %s%fr%ct constit%ted in fa5or of a corporation or association to

"+ years. A %s%fr%ct is meant only as a lifetime grant. =nli1e a nat%ral person, a corporation or associations lifetime may &e e-tended indefinitely. 'he %s%fr%ct wo%ld then &e perpet%al. 'his is especiallyin5idio%s in cases where the %s%fr%ct gi5en to a corporation or association co5ers p%&lic land.” NHA v.Court of A""eals, !"3 SC7A 2 (6++"$.

'. P)#&3#%*$ P$*3' ( 7#&'77 (S'3. 51$

Altho%gh the 7%les of Co%rt do not pro5ide that when the plaintiff is a corporation, the complaint sho%ld&e filed in the location of its principal office as indicated in its articles of incorporation, *%rispr%dence has,howe5er, settled that the place where the principal office of a corporation is located, as stated in the

) Also *yceum of the Phili""ines v. Court of A""eals% 6# SC7A 3+, 3" (##)$.

)6P.C. 5avier & Sons% nc. v. Court of A""eals, !36 SC7A )3 (6++"$/ Fuellig ,reight and Cargo Systems v. N*+C% 2+ SC7A "36 (6+)$.

6+



articles, indeed esta&lishes its residence. 'his r%ling is important in determining the 5en%e of an action &yor against a corporation, as in the present case. Hyatt Elevators and Escalators Cor". v. 6oldstar Elevators% Phils.% nc., !2) SC7A 2+" (6++"$, citing K8LLAN=0KA, PH8L8PP8N0 CD7PD7A'0 L AW (##$, p. 36.

Place of residence of the corporation is the place of its principal office. Clavecilla +adio System v. Antillon, # SC7A )2# (#32$

'he residence of its president is not the residence of the corporation &eca%se a corporation has apersonality separate and distinct from that of its officers and stoc1holders. Sy v. -yson Enter"rises% nc.,# SC7A )32 (#6$.

. M#&# C*%#+*$#*+#(& (S'3. 12$? hy is maximum capitai8ation re?uired to ,e indicated=

4. S73)#%+#(& *&/ P*#/-% R'#)''&+7 (S'3. 1$

'he entries in the articles of incorporation of the original iss%ances of shares of stoc1 has a stronger weight that the stoc1 and transfer &oo1 in determining the 5alidity and iss%ance of s%ch shares. *anu'a v.Court of A""eals, !"! SC7A "! (6++"$.

". S+'%7 *&/ D(3'&+7 R'#)'/ #& SEC

. G)(&/7 () D#7*%%)(<*$ (S'3. 1$

When the proposed articles show that the o&*ect is to organie a &arrio into a separate corporation for the p%rpose of ta1ing possession and ha5ing control of all m%nicipal property within the incorporated &arrioand administer it e-cl%si5ely for the &enefit of the residents, the o&*ect is %nlawf%l and the articles can &edenied registration. Asuncion v. (e riarte, 6 Phil. 32 (#!$.

8t is well to note that, if a corporations p%rpose, as stated in the articles of incorporation, is lawf%l, thenthe S0C has no a%thority to in:%ire whether the corporation has p%rposes other than those stated, andmandamus will lie to compel it to iss%e the certificate of incorporation.” 6ala v. Ellice Agro)ndustrial Cor".,! SC7A !) (6++)$.

. A'&/'&+7 +( +"' A)+#3$'7 ( I&3()%()*+#(& (S'3. 16$.

VIII. Y- L AWS

1. N*+)', F&3+#(& *&/ C(&+'&+7 (S'3. $

'he power to adopt &y9laws is an inherent power on the part of those forming a corporation or any other form of association.2o6ongwei v. S!C , ?> SCRA =1>>@.

As the “r%les and reg%lations or pri5ate laws enacted &y the corporation to reg%late, go5ern and controlits own actions, affairs and concerns and its stoc1holders or mem&ers and directors and officers withrelation thereto and among themsel5es in their relation to it,” &y9laws are indispensa&le to corporations.'hese may not &e essential to corporate &irth &%t certainly, these are re:%ired for an orderly go5ernanceand management of corporations. *oyola 6rand 9illas Homeo$ners v. CA% 623 SC7A 3 (##2$.

;y9laws hare traditionally defined as reg%lations, ordinances, r%les or laws adopted &y an associationor corporation or the li1e for its internal go5ernance, incl%ding r%les for ro%tine matters s%ch as callingmeetings and the li1e. 8f those 1ey &y9law pro5isions on matters s%ch as :%or%m re:%irements, meetings,or on the internal go5ernance of the local>chapter are themsel5es already pro5ided for in the constit%tion,then it wo%ld &e feasi&le to o5erloo1 the re:%irements for &y9laws. 8ndeed in s%ch an e5ent, to insist on thes%&mission of a separate doc%ment denominated as “;y9Laws” wo%ld &e an %nd%e technicality, as well asa red%ndancy. San Miguel Cor". v. Mandaue Pac/ing Products Plants 7nion),, , !32 SC7A +2 (6++"$.

*. C((& L* L##+*+#(&7 (& 8-L*7

=#@ By-Laws Cannot Be Contrary to Law and the Charter

A &y9law pro5ision that empowers the ;oard of irectors to cancel the shares of any mem&er andret%rn to the owner thereof the 5al%e thereof is 5oid for &eing in 5iolation of the Corporation Law thatpro5ided that capital can only &e ret%rned after dissol%tion . 6overnment of P.. v. El Hogar ,ili"ino, "+Phil. )## (#62$.

A &y9law pro5ision granting to a stoc1holder permanent seat in the ;oard of irectors is 5oid, e5enwhen formally adopted &y the mem&ers of the association, &eca%se it is contrary to the pro5ision inCorporation Code re:%iring all mem&ers of the ;oard to &e elected &y the stoc1holders. 6race ChristianHigh School v. Court of A""eals% 6 SC7A )) (##2$.

'he &y9laws pro5isions cannot &e s%ch or &e amended to &e a&le to go aro%nd the sec%rity of ten%recla%se of employees nor impair the o&ligation of e-isting contracts or rights/ otherwise, it wo%ld ena&lean employer to remo5e any employee from his employment &y the simple e-pediency of amending its

&y9laws and pro5iding that his>her position shall cease to e-ist %pon the occ%rrence of a specifiede5ent.” Salafranca v. Philamlife :Pam"lona; 9illage Homeo$ners% )++ SC7A !3# (##$.

=##@ By-Law "rovisions Cannot Be $nreasona,e or Be Contrary to the %ature of By-aws.

;y9laws are intended merely for the protection of the corporation, and prescri&e reg%lation, notrestrictions on property rights of stoc1holders/ they are always s%&*ect to the charter of the corporation.+ural Ban/ of Salinas% nc. v. Court of A""eals, 6+ SC7A "+ (##6$.

A%thority granted to a corporation to reg%late the transfer of its stoc1 does not empower thecorporation to restrict the right of a stoc1holder to transfer his shares, &%t merely a%thories theadoption of reg%lations as to the formalities and proced%re to &e followed in effecting transfer. -homsonv. Court of A""eals% 6# SC7A 6+ (##$.

6



=###@ By-Law "rovisions Cannot 3iscriminate Among (ts Stoc6hoders or 7em,ers

. #&/#&4 E'3+7 (& 8-$*7 (& +"' D'*$#&4 P$#3

;y9law pro5isions on the re:%ired :%or%m for special meetings of the ;oard ha5e the force of law andare &inding e5en on third9parties who deal with the properties of the corporation. "e@a v. Court of

Appeas, 1> SCRA 1 =1>>1@.

'he nat%re of &y9laws &eing intram%ral instr%ments wo%ld mean that they are not &inding on third9parties, e-cept those who ha5e act%al 1nowledge of their contents. China Ban6ing Corp. v. Court of

Appeas, 20 SCRA 50 =1>>@.Contracts entered into on &ehalf of the corporation not signed &y the Chairman of the ;oard in 5iolation

of the specific &y9law pro5ision are not 5oid, since &y9laws operate merely as internal r%les among thestoc1holders, they cannot affect or pre*%dice third persons who deal with the corporation, %nless they ha5e1nowledge of the same.” PM Colleges v. N*+C , 622 SC7A !36 (##2$.

2. A/(%+#(& P)(3'/)' (S'3. 6$

'here can &e no automatic dissolution simply &eca%se the incorporators failed to file the re:%ired &y9laws %nder Sec. !3 of Corporation Code. 'here is no o%tright “demise” of corporate e-istence. Proper notice and hearing are cardinal components of d%e process in any democratic instit%tion, agency or society.8n other words, the incorporators m%st &e gi5en the chance to e-plain their neglect or omission and remedythe same.” *oyola 6rand 9illas Homeo$ners v. CA% 623 SC7A 3 (##2$.

A corporation which has failed to file its &y9laws within the prescri&ed period does not i"so facto lose its

powers as s%ch, and may &e considered a de facto corporation whose right to e-ercise corporate powersmay not &e in:%ired into collaterally in any pri5ate s%it to which s%ch corporations may &e a party. ($Sa$ad!aan v. Court of A""eals, !"# SC7A "3 (6++"$.

. A'&/'&+7 *&/ R'<#7#(&7 ( 8-L*7 (S'3. ?$

I:. C ORPORATE P OWERS AND A UTHORITY

1. C()%()*+' P(') *&/ C*%*3#+8 (A)+. 6, C#<#$ C(/'B S'37. 6 *&/ 5$

*. C$*77##3*+#(& ( C()%()*+' P(')7 !xpress, (mpied , *&/ (ncidenta

A corporation has only s%ch powers as are e-pressly granted to it &y law and &y its articles of incorporation (e"ress "o$ers;, those which may &e incidental to s%ch conferred powers, those reasona&ly

necessary to accomplish its p%rposes ( im"lied "o$ers$ and those which may &e incident to its e-istence asa *%ridical entity (incidental "o$ers$. Pili"inas *oan Co. v. SEC% )"3 SC7A #) (6++$.

. W"')' C()%()*+' P(') L(/4'/ (*)/ ( D#)'3+()7KT)7+''7 A corporation has no power e-cept those e-pressly conferred on it &y the Corporation Code and those

that are implied or incidental to its e-istence. 8n t%rn, a corporation e-ercises said powers thro%gh its &oardof directors and>or its d%ly a%thoried officers and agents. . . 8n t%rn, physical acts of the corporation, li1ethe signing of doc%ments, can &e performed only &y nat%ral persons d%ly a%thoried for the p%rpose &ycorporate &y9laws or &y a specific act of the &oard of directors. Shi"side nc. v. Court of A""eals, )"6SC7A ))! (6++$.))

2. E%)'77 P(')7

*.E&')*+'/ P(')7 =S'3. 6@

. E+'&/ () S"()+'& C()%()*+' T') (S'37. *&/ ?11$3. I&3)'*7' () D'3)'*7' C*%#+*$ S+(3 (S'3. ?$

espite the &oard resol%tion appro5ing the increase in capital stoc1 and the receipt of payment on thef%t%re iss%es of the shares from the increased capital stoc1, s%ch f%nds do not constit%te part of the capitalstoc1 of the corporation %ntil appro5al of the increase &y S0C. Central -etile Mills% nc. v. NPC , 63+SC7A)3 (##3$.

A red%ction of capital to *%stify the mass layoff of employees, especially of %nion mem&ers, amo%nts tonothing &%t a premat%re and plain distri&%tion of corporate assets to o&5iate a *%st sharing to la&or of the5ast profits o&tained &y its *oint efforts with capital thro%gh the years, and wo%ld constit%te %nfair la&or practice. Madrigal & Co. v. Famora, " SC7A )"" (#2$.

/. I&3), C)'*+' () I&3)'*7' (&/'/ I&/'+'/&'77 (S'3. ?$

'. S'$$ () D#7%(7' ( A77'+7 (S'3. 0$'he property of the corporation is not the property of the stoc1holders or mem&ers, and as s%ch, may

not &e sold witho%t e-press a%thority from the ;oard of irectors. *iton!ua v. Eternit Cor"., !#+ SC7A 6+!(6++3$.

Sale &y ;oard of 'r%stees of the only corporate property witho%t compliance with Sec. !+ re:%iringratification of mem&ers representing at least two9thirds of the mem&ership, wo%ld ma1e the sale n%ll and5oid. slamic (irectorate v. CA% 626 SC7A !"! (##2$/ PeGa v. CA, #) SC7A 22 (##$.

))Salenga v. Court of A""eals, 33! SC7A 3)" (6+6$/ Ellice Agro)ndustrial Cor". v. oung , 33 SC7A " (6+6$/ gnacio v. Home

Ban/ers Savings and -rust Co., 3# SC7A 2) ( 6+)$.

66



'he Corporation Code defines a sale or disposition of s%&stantially all assets and property of acorporation as one &y which the corporation “wo%ld &e rendered incapa&le of contin%ing the &%siness or accomplishing the p%rpose for which it was incorporated” any sale or disposition short of this will not needstoc1holder ratification, and may &e p%rs%ed &y the ma*ority 5ote of the ;oard of irectors. Strategic

Alliance (ev. Cor". v. +adstoc/ Securities *td., 3+2 SC7A !) (6++#$.

. I&<'7+ C()%()*+' F&/7 () N(&-P)#*)8 P)%(7' E&/'*<() (S'3. 2$

8n5estment &y a s%gar central in the e:%ity of a *%te9&ag man%fact%ring company %sed in pac1ing s%gar,

falls within the implied powers of the s%gar central as part of its primary p%rpose and does not needratification &y the stoc1holders. 3e a &ama v. 7a-ao Sugar Centra Co., 2 SCRA 2 =1>6>@.

4. D'3$*)' D#<#/'&/7 (S'3. $

i5idends from retained earnings can only &e declared to those who are stoc1holders of thecorporation/ di5idends cannot &e declared to creditors as part of the settlement of de&ts. Nielson & Co. v.*e"anto Consolidated Mining Co., 63 SC7A "!+ (#3$.

Stoc1 di5idend is the amo%nt that the corporation transfers from its s%rpl%s profit acco%nt to its capitalacco%nt. 8t is the same amo%nt that can loosely &e termed as the “tr%st f%nd” of the corporation. N-C v. CA%) SC7A "+ (###$.

". M*&*4''&+ C(&+)*3+7 (S'3. $? hy the difference in rue ,etween entity and individua=

A management contract is not an agency contract, and therefore is not re5oca&le at will. Nielson & Co.v. *e"anto Consolidated Mining , 63 SC7A "!+ (#3$/ +icafort v. Moya, #" SC7A 6!2 (##$.

. I%$#'/ P(')7

When the articles e-pressly pro5ide that the p%rpose was to “engage in the transportation of person #y $ater ,” s%ch corporation cannot engage in the &%siness of land trans"ortation, which is an entirely differentline of &%siness. *uneta Motor Co. v. A.(. Santos% nc ., " SC7A +# (#36$.

A corporation whose primary p%rpose is to generate electric power has no a%thority to %nderta1este5edoring ser5ices to %nload coal into its pier since it is not reasona&ly necessary for the operation of itspower plant. NPC v. 9era% 2+ SC7A 26 (##$.

A corporation organied to engage as a lending in5estor cannot engage in pawn&ro1er. Phili"inas *oanCo. v. SEC , )"3 SC7A #) (6++$.

A mining company has not power to engage in real estate de5elopment. Heirs of Antonio Pael v. Court of A""eals% )26 SC7A "2 (6++$.

An officer who is a%thoried to p%rchase the stoc1 of another corporation has implied power to performall other o&ligations arising therefrom s%ch as payment of the shares of stoc1. nter)Asia nvestmentsndustries v. Court of A""eals, !+) SC7A !"6 (6++)$.

. I&3#/'&+*$ P(')7'he act of iss%ing chec1s is within the am&it of a 5alid corporate act, for it as for sec%ring a loan to

finance the acti5ities of the corporation, hence, not an ultra vires act. Atrium Management Cor". v. Court of A""eals, )") SC7A 6) (6++$.

5. O+"') P(')7 =S'3. 6@

*. S'$$ L*&/ *&/ O+"') P)(%')+#'7

When the corporations primary p%rpose is to mar1et, distri&%te, e-port and import merchandise, thesale of land is not within the act%al or apparent a%thority of the corporation acting thro%gh its officers, m%ch

less when acting thro%gh the treas%rer. Articles 2! and 2 of Ci5il Code re:%ires that when land is soldthro%gh an agent, the agents a%thority m%st &e in writing, otherwise the sale is 5oid. San 5uan Structural v.CA, 6#3 SC7A 3) (##$.)!

.())( F&/7'he power to &orrow money is one of those cases where e5en a special power of attorney is re:%ired

%nder Art. 2 of Ci5il Code. 'here is in5aria&ly a need of an ena&ling act of the corporation to &eappro5ed &y its ;oard of irectors. 'he arg%ment that the o&taining of loan was in accordance with theordinary co%rse of &%siness %sages and practices of the corporation is de5oid of merit &eca%se thepre5ailing practice in the corporation was to e-plicitly a%thorie an officer to contract loans in &ehalf of thecorporation. China Ban/ing Cor". v. Court of A""eals, 62+ SC7A "+) (##2$.

3. P(') +( S' *&/ ' S'/ As a creat%re of the law, the powers and attri&%tes of a corporation are those set o%t, e-pressly or

implied, in the law. Among the general powers granted &y law to a corporation is the power to s%e in its ownname. 'his power is granted to a d%ly9organied corporation, %nless s"ecifically re5o1ed &y another law.7male v. ASB +ealty Cor"., 3"6 SC7A 6" (6+$.

=nder Sec. )3 in relation to Sec. 6) of Corporation Code, where a corporation is an in*%red party, itspower to s%e is lodged with its ;oard of irectors. A minority stoc1holder who is a mem&er of the ;oard hasno s%ch power or a%thority to s%e on the corporations &ehalf. -am ing -a/ v. Ma/asiar , )"+ SC7A !2"(6++$.)"

=#@ P(') +( #&/ +"' C()%()*+#(& #& * S#+

)! A, +ealty & (ev.% nc. v. (ieselman ,reight Services Co.% )2) SC7A )" (6++6$/ ,irme v. Bu/al Enter"rises and (ev. Cor"., !!

SC7A #+ (6++)$/ Cosco Phili""ines Shi""ing% nc. v. 8em"er nsurance Com"any , 32+ SC7A )!) (6+6$.

6)



When the power to s%e is delegated &y the &y9laws to a partic%lar officer, s%ch officer may appointco%nsel to represent the corporation in a pre9trial hearing witho%t need of a formal &oard resol%tion.Citi#an/% N.A. v. Chua% 66+ SC7A 2" (##)$.

Ior co%nsel to sign the certification for the corporation, he m%st specifically &e a%thoried &y the;oard of irectors. BP *easing Cor". v. CA, !3 SC7A ! (6++)$/ Mariveles Shi"yard Cor". v. CA, !"SC7A "2) (6++)$.

=##@ C')+##3*+' ( N(&-F() S"(%%#&4

8f the petitioner is a corporation, a &oard resol%tion a%thoriing a corporate officer to e-ec%te thecertification against for%m shopping is necessary4a certification not signed &y a d%ly a%thoried personrenders the petition s%&*ect to dismissal. 6on'ales v. Clima Mining *td., !"6 SC7A 3+2 (6++"$/)3 s%chas the administrator or pro*ect manager, Este#an% 5r. v. 9da. de ?norio% )3+ SC7A 6)+ (6++$/ or theGeneral <anager, Central Coo"erative Echange nc. v. Enciso, 36 SC7A 2+3 (#$.

Nonetheless, s%ch lac1 of a%thority may &e c%red? e5en if the co%nsel e-ec%ted the 5erification andcertificate of non9for%m shopping &efore the &oard a%thoried him, the passing of the &oard resol%tion of a%thoriation &efore the act%al filing of the complaint. Median Container Cor". v. Metro"olitan Ban/ and -rust Co., "3 SC7A 366 (6++$/ the s%&mission in the motion for reconsideration of the a%thority tosign the 5erification and certification constit%tes s%&stantial compliance with the proced%ralre:%irements. Asean Pacific Planners v. City of 7rdaneta, "33 SC7A 6# (6++$.

When a corporate officers has &een granted e-press power &y the ;oard of irectors to instit%te as%it, the same is considered &road eno%gh to incl%de the power of said corporate officer to e-ec%te the

5erification and certification against for%m shopping re:%ired in initiatory pleadings %nder the 7%les of Co%rt. Cunanan v. 5um"ing 5a" -rading Cor"., "3 SC7A 36+ (6++#$.

A President, among other en%merated corporate officers and employees, can sign the 5erificationand certification against non9for%m shopping in &ehalf of the corporation witho%t the &enefit of a &oardresol%tion. South Cota#ato Communications Cor". v. Sto. -omas, 3) SC7A "33 (6+$.

Howe5er, the following officials or employees of the company can sign a 5erification and certificationagainst for%m9shopping witho%t need of a &oard resol%tion? ($ the Chairperson of the ;oard of irectors, (6$ the President of a corporation, ()$ the General <anager or Acting General <anager, (!$Personnel Dfficer, and ("$ an 0mployment Specialist in a la&or case. While the a&o5e cases do notpro5ide a complete listing of a%thoried signatories to the 5erification and certification re:%ired &y ther%les, the determination of the s%fficiency of the a%thority was done on a case to case &asis. Pasos v.PNCC , 2++ SC7A 3+ (6+)$.

=###@ S')<#3' ( S(&7 (& C()%()*+#(&7Section , 7%le ! of the ##2 7%les of Ci5il Proced%re %ses the term “general manager” and %nli1e

the old pro5ision in the 7%les of Co%rt, it does not incl%de the term “agent”. Conse:%ently, theen%meration of persons to whom s%mmons may &e ser5ed is “restricted, limited and e-cl%si5e” followingthe r%le on stat%tory constr%ction e"ressio unios est eclusion alterius. 'herefore, the earlier cases that%phold ser5ice of s%mmons %pon a constr%ction pro*ect manager/)2 a corporations assistant manager/)

ordinary cler1 of a corporation/)# pri5ate secretary of corporate e-ec%ti5es/!+ retained co%nsel/! officialswho had charge or control of the operations of the corporation, li1e the assistant general manager/ !6 or the corporations Chief Iinance and Administrati5e Dfficer/ !) no longer apply since they were decided%nder the old r%le that allows ser5ice of s%mmons %pon an agent !! of the corporation. E.B. 9illarosa &Partners Co.% *td. v. Benito, )6 SC7A 3" (###$.

Ior ser5ice of s%mmons %pon a pri5ate domestic corporation to &e effecti5e and 5alid, it sho%ld &e

made on the person en%merated in the 7%le. Con5ersely, ser5ice of s%mmons on anyone other than thepresident, manager, secretary, cashier, agent or director, is not 5alid on the corporation. Ellice Agro)ndustrial Cor". v. oung , 33 SC7A " (6+6$.

/.H#)' E%$(8''7 *&/ A%%(#&+ A4'&+7

)"Shi"side nc. v. Court of A""eals% )"6 SC7A ))! (6++$/ SSS v. C?A, )! SC7A "! (6++6$/ 7nited Paragon Mining Cor". v. Court of

A""eals, !#2 SC7A 3) (6++3$/ Mediserv% nc. v. Court of A""eals, 32 SC7A 6! (6++$/ Ce#u Bionic Builders Su""ly% nc. v. (BP , 3)"SC7A ) (6++$/ Ellice Agro)ndustrial Cor". v. oung , 33 SC7A " (6+6$/ S$edish Match Phils v. -reasurer of Manila , 2++ SC7A !6(6+)$/ Esguerra v. Holcim Phili""ines% nc., 2+! SC7A !#+ (6+)$.

)3 Also (BP v. Court of A""eals, !!+ SC7A 6++ (6++!$/ Pu#lic Estates Authority v. 7y , )26 SC7A + (6++$/ Phili""ine Airlines% nc. v.

,light Attendance and Ste$ards Association of the Phili""ines :,ASAP;, !2# SC7A 3+" (6++3$/ Metro (rug (istri#ution% nc. v. Narcisco,

!#" SC7A 63 (6++3$/ Cagayan 9alley (rug Cor". v. Commissioner of nternal +evenue, "!" SC7A + (6++$ Mediserv% nc. v. Court of A""eals, 32 SC7A 6! (6++$/ Cosco Phili""ines Shi""ing% nc. v. 8em"er nsurance Com"any , 32+ SC7A )!) (6+6$.

)28anlaon Construction Enter"rises Co.% nc. v. N*+C% 62# SC7A ))2 (##2$.

)6esulgon v. N*+C% 6# SC7A "3 (##)$.

)#6olden Country ,arms% nc. v. Sanvar (evelo"ment Cor"., 6! SC7A 6#" (##6$/ 6 & 6 -rading Cor". v. Court of A""eals, " SC7A

!33 (#$.

!+Summit -rading and (ev. Cor". v. AvendaGo% )" SC7A )#2 (#"$/ also 9lason Enter"rises Cor". v. Court of A""eals% )+ SC7A 63

(###$.

!+e"u#lic v. 8er & Co.% *td.% SC7A 6+2 (#33$.

!69illa +ey -ransit% nc. v. ,ar East Motor Cor"., SC7A 6# (#2$.

!),ar Cor"oration v. ,rancisco% !3 SC7A #2 (#3$.

!!,iloil Mar/eting Cor". v. Marine (ev. Cor". of the Phili""ines, 22 SC7A 3 (#6$.

6!



0-cept where the a%thority of employing ser5ants and agents is e-pressly 5ested in the &oard of directors or tr%stees, an officer or agent who has general control and management of the corporations&%siness, or a specific part thereof, may &ind the corporation &y the employment of s%ch agents andemployees as are %s%al and necessary in the cond%ct of s%ch &%siness. ;%t the contracts of employmentm%st &e reasona&le. u Chuc/ v. 18ong *i Po,” !3 Phil. 3+ (#6!$.

'. P)(<#/' G)*+#+8 P*8 () E%$(8''7 (S'3. 610$Pro5iding grat%ity pay for employees is an e-press power of a corporation %nder the Corporation Code,

and cannot &e considered to &e ultra vires to a5oid any lia&ility arising from the iss%ance of resol%tiongranting s%ch grat%ity pay. *o"e' +ealty v. ,ontecha, 6!2 SC7A ), #6 (##"$.

. T( M*' D(&*+#(&7 (S'3. 6>$

4. T( E&+') I&+( * P*)+&')7"#% () J(#&+ V'&+)'? Tuason > Co. v. Boanos, >5 P"#$. 106 =1>5@/SEC O%#&#(&, 2> F')*)8 1>?0.

6. $ LT&A ' (&!S DOCTRINE

*. T8%'7 ( $tra 'ires A3+7 (S'3. 5$

A corporation has no power e-cept those e-pressly conferred on it &y the Corporation Code, its charter,and those that are implied or incidental to its e-istence. 8n t%rn, a corporation e-ercises said powersthro%gh its ;oard of irectors and >or its d%ly a%thoried officers and agents. Monfort Hermanos

Agricultural (ev. Cor". v. Monfort , !)! SC7A 62 (6++!$.

=#@ irst Type $tra 'ires: An ultra vires act is one committed o%tside the o&*ect for which a corporationis created as defined &y the law of its organiation and therefore &eyond the power conferred %pon it&y law. 'he term “ultra vires“ is “disting%ished from an illegal act for the former is merely 5oida&lewhich may &e enforced &y performance, ratification, or estoppel, while the latter is 5oid and cannot&e 5alidated.” Atrium Management Cor". v. CA, )") SC7A 6) (6++$.

=##@ Second Type $tra 'ires: When the President enters into spec%lati5e contracts witho%t prior &oardappro5al, and witho%t s%&se:%ent ;oard ratification, nor were the transactions incl%ded in thereports of the corporation, s%ch contracts do not &ind the corporation. 8t m%st &e pointed o%t that the;oard of irectors, not the President, e-ercises corporate powers. Safic Alcan & Cie v. m"erial 9egeta#le ?il Co.% nc., )"" SC7A ""# (6++$.

Contracts or acts of a corporation m%st &e made either &y the ;oard of irectors or &y acorporate agent d%ly a%thoried &y the ;oard4a&sent s%ch 5alid delegation>a%thoriation, the r%le is

that the declaration of an indi5id%al directors relating to the affairs of the corporation, &%t not in theco%rse of, or connected with the performance of a%thoried d%ties of s%ch director, are held not&inding on the corporation. Manila Metal Container Cor". v. PNB, " SC7A !!! (6++3$.

=###@ Third Type $tra 'ires: Altho%gh arrangements &etween the two mining companies was prohi&ited%nder the terms of the Corporation Law, the S%preme Co%rt did not declare the n%llity of theagreements on the gro%nd that only pri5ate rights and interests, not p%&lic interests, were in5ol5ed inthe case./arden v. Benguet Consoidated 7ining Co., 5? P"#$. 10 =1>@.

. G'&')*$ J/#3#*$ A++#+/' T(*)/7 +"' $tra 'ires D(3+)#&' 'he plea of “ultra vires” will not &eallowed to pre5ail, whether interposed for or against a corporation, when it will not ad5ance *%stice &%t,on the contrary, will accomplish a legal wrong to the pre*%dice of another who acted in good faith. Fomer (ev. Cor". v. nt2l Echange Ban/ , " SC7A " (6++#$.

3. R*+##3*+#(& ( $tra 'ires A3+7

Acts done &y the ;oard of irectors which are ultra vires cannot &e set9aside if the acts ha5e &eenratified &y the stoc1holders."irovano v. 3e a &ama Steamship Co. (nc., >6 P"#$. 5 =1>5@.

05en when a partic%lar corporate act does not fall within the e-press or implied powers of thecorporation, ne5ertheless it will not &e set aside when, not &eing malum "rohi#itum, the corporation,thro%gh its senior officers or its ;oard of irectors, are estopped from :%estioning the legality of s%ch act,contract or transaction. Carlos v. Mindoro Sugar Co., "2 Phil. )!) (#)6$.!"

Acts done in e-cess of corporate officers scope of a%thority cannot &ind the corporation. Howe5er,when s%&se:%ently a compromise agreement was on &ehalf of the corporation &eing represented &y itsPresident acting p%rs%ant to a ;oard of irectors resol%tion, s%ch constit%ted as a confirmatory actsignifying ratification of all prior acts of its officers. NPC v. Alon'o)*egasto, !!) SC7A )!6 (6++!$.

:.D IRECTORS, T RUSTEES AND O FFICERS

!"+e"u#lic v. Aco!e Mining Co., ) SC7A )3 (#3)$/ Crisologo 5ose v. Court of A""eals, 22 SC7A "#! (##$.

6"



“;oard of irectors” is the &ody which ($ e-ercises all powers pro5ided for %nder the Corporation Code/(6$ cond%cts all &%siness of the corporation/ and ()$ controls and holds all property of the corporation. 8tsmem&ers ha5e &een characteried as tr%stees or directors clothed with a fid%ciary character. 8t is clearlyseparate and distinct from the corporate entity itself. Hornilla v. Salunat , !+" SC7A 66+ (6++)$.

1. DOCTRINE OF CENTRALIED MANAGEMENT P(')7 ( (*)/ ( D#)'3+()7 (S'3. 2$

Section 6) e-pressly pro5ides that the corporate powers of all corporations shall &e e-ercised &y the;oard of irectors. F%st as a nat%ral person may a%thorie another to do certain acts in his &ehalf, so may

the ;oard of irectors 5alidly delegate some of its f%nctions to indi5id%al officers or agents appointed &y it.'h%s, contracts or acts of a corporation m%st &e made either &y the ;oard of irectors or &y a corporateagent d%ly a%thoried &y the &oard. A&sent s%ch 5alid delegation>a%thoriation, the r%le is that thedeclarations of an indi5id%al director relating to the affairs of the corporation, &%t not in the co%rse of, or connected with the performance of a%thoried d%ties of s%ch director, are held not &inding on thecorporation. Manila Metal Container Cor". v. PNB, " SC7A !!! (6++3$.!3

A 5er&al promise gi5en &y the Chairman and President of the company to the general manager andchief operating officer to gi5e the latter %nlimited sic1 lea5e and 5acation lea5e &enefits and its cashcon5ersion %pon his retirement or resignation, when not an integral part of the companys r%les andpolicies, is not &inding on the company when it is witho%t the appro5al of the ;oard of irectors. 8$o/ v.Phili""ine Car"et Manufacturing Cor"., !"2 SC7A !3" (6++"$.

*.&ationae for 4Centrai8ed 7anagement5 3octrine@

'he raison d2etre &ehind the conferment of corporate powers on the ;oard of irectors is not lost on theCo%rt indeed, the concentration in the ;oard of the powers of control of corporate &%siness andappointment of corporate officers and managers is necessary for efficiency in any large organiation.Stoc1holders are too n%mero%s, scattered and %nfamiliar with the &%siness of a corporation to cond%ct its&%siness directly. And so the plan of corporate organiation is for the stoc1holders to choose the directorswho shall control and s%per5ise the cond%ct of corporate &%siness. iipinas "ort Services v. 2o, 51?SCRA 5 =200@.

A corporation is an artificial &eing and can only e-ercise its powers and transact its &%siness thro%gh theinstr%mentalities of its ;oard of irectors, and thro%gh its officers and agents, when a%thoried &yresol%tion or &y its &y9laws. Conse:%ently, when legal co%nsel was clothed with a%thority thro%gh formal&oard resol%tion, his acts &ind the corporation which m%st &e held &o%nd the act%ations of its co%nsel of record. (e *iano v. Court of A""eals, )2+ SC7A )!# (6++$.

“'he physical acts of the corporation, li1e the signing of doc%ments, can &e performed only &y nat%ral

persons d%ly a%thoried for the p%rpose &y corporate &y9laws or &y a special act of the &oard of directors.”,irme v. Bu/al Enter"rises and (ev. Cor"., !! SC7A #+ (6++)$.!2

.T"'()#'7 (& S()3' ( (*)/ P(') =#@ 3octrine of 3irecty-'ested "ower Section =D% Cor"oration Code.

=##@ 3eegated "owers Coming from the Stoc6hoders: 'he ;oard of irectors is a creation of thestoc1holders and controls and directs the affairs of the corporation &y delegation of the stoc1holders.;y drawing themsel5es the powers of the corporation, they occ%py positions of tr%steeship in relationto the stoc1holders. Angees v. Santos, 6 P"#$. 6> =1>@.

Dne of the most important rights of a :%alified shareholder or mem&er is the right to 5ote for thedirectors or tr%stees who are to manage the corporate affairs. 'he right to choose the persons whowill direct, manage and operate the corporation is significant, &eca%se it is the main way in which astoc1holder can ha5e a 5oice in the management of corporate affairs, or in which a mem&er in a

nonstoc1 corporation can ha5e a say on how the p%rposes and goals of the corporation may &eachie5ed. Dnce the directors or tr%stees are elected, the stoc1holders or mem&ers relin:%ishcorporate powers to the &oard in accordance with law.Tan v. Sycip, >> SCRA 216 =2006@.

'he theory of delegated power of the &oard of directors similarly e-plains why, %nder Section 6#of the Corporation Code, in cases where the 5acancy in the corporations &oard of directors isca%sed not only &y the e-piration of a mem&ers term, the s%ccessor “so elected to fill in a 5acancyshall &e elected only for the une"ired term of his predecessors in office. 'he law has a%thoried theremaining mem&ers of the &oard to fill in a 5acancy only in specified instances, so as not to retard or impair the corporations operations/ yet, in recognition of the stoc1holders right to elect the mem&ersof the &oard, it limited the period d%ring which the s%ccessor shall ser5e only to the “une"ired termof his predecessor in office.” 'ae 'erde Country Cu, (nc. v. Africa , 5>? SCRA 202 =200>@.

3. (*)/ M7+ A3+ A7 * (/8 (S'3. 25$

0-ercise of powers &y the ;oard of irectors may either &e e-press and formal thro%gh the adoption of a &oard resol%tion in a meeting called for the p%rpose, or it may &e implied where the ;oard collecti5elyand 1nowingly allows the President to enter into important contracts in the p%rs%it of the corporate&%siness.Board of Li?uidators v. /eirs of 7aximo 7. 0aaw , 20 SCRA >? =1>6@.

!3u Chuc/ v. 18ong *i Po,” !3 Phil. 3+, 3! (#6!$/ 6am#oa v. 9ictoriano, #+ SC7A !+ (#2#$/ +eyes v. +CP Em"loyees Credit

7nion% nc., !## SC7A )# (6++3$/ asuma v. Heirs of Cecilio S. (e 9illa , !## SC7A !33 (6++3$/ +aniel v. 5ochico, "2 SC7A 66(6++2$/ +e"u#lic v. Coal#rine nternational , 32 SC7A !# (6++$/ ?longa"o City v. Su#ic ater and Se$erage Co.% nc.% 2)6 SC7A )6(6+!$.

!2Shi"side nc. v. Court of A""eals, )"6 SC7A ))! (6++$/ *anu'a% 5r. v. B, Cor".% 2)2 SC7A 62" (6+!$.

63



A irector9'reas%rer has no power to &ind the company e5en in transactions that are p%rs%ant to theprimary p%rpose its corporation, especially when the &y9laws specifically pro5ided that the acts entered intocan only &e done &y the ;oard of irectors. +amire' v. ?rientalist Co., ) Phil. 3)! (#$.

;etween the act of the ;oard as a &ody affirming informally the perfection of a contract entered into in&ehalf of the corporation &y a senior officer, and the s%&se:%ent formal &oard resol%tion re*ecting the samecontract, the former m%st pre5ail %nder the doctrine of estoppel. AcuGa v. Batac Producers Coo"erativeMar/eting Assn., 6+ SC7A "63 @#32B$.

A corporation, thro%gh its ;oard of irectors, sho%ld act in the manner and within the formalities

prescri&ed &y its charter or &y the general law. 'h%s, directors m%st act as a &ody in a meeting calledp%rs%ant, otherwise, any action ta1en therein may &e :%estioned &y any o&*ecting director or shareholder.;e that as it may, *%rispr%dence tells %s that an action of the ;oard of irectors d%ring a meeting, whichwas illegal for lac1 of notice, may &e ratified either e-pressly, &y the action of the directors in s%&se:%entlegal meeting, or impliedly, &y the corporations s%&se:%ent co%rse of cond%ct. *o"e' +ealty v. ,ontecha,6!2 SC7A ) (##"$.

Howe5er, the actions ta1en in s%ch a meeting &y the directors or tr%stees may &e ratified e-pressly or impliedly. “7atification means that the principal 5ol%ntarily adopts, confirms and gi5es sanction to some%na%thoried act of its agent on its &ehalf. 8t is this 5ol%ntary choice, 1nowingly made, which amo%nts to aratification of what was theretofore %na%thoried and &ecomes the a%thoried act of the party so ma1ingthe ratification. 'he s%&stance of the doctrine is confirmation after cond%ct, amo%nting to a s%&stit%te for aprior a%thority. 7atification can &e made either e-pressly or impliedly. 8mplied ratification may ta1e 5ario%sforms 4 li1e silence or ac:%iescence, acts showing appro5al or adoption of the act, or acceptance andretention of &enefits flowing therefrom.” *o"e' +ealty% nc. v. S"ouses -an!angco% 2)# SC7A 3!! (6+!$.

/. E'3+7 ( 9(47; (*)/ 'he acts or contracts effected &y a &og%s &oard wo%ld &e 5oid p%rs%ant to Art. ) of Ci5il Code &eca%se of the lac1 of “consent”. slamic (irectorate of the Phili""ines v. Court of A""eals, 626 SC7A !"! (##2$.

'. E'3+#<' C(#++'' (S'3. 5$

8t is within the power of the ;oard of irectors to a%thorie any person or committee to %nderta1ecorporate acts. 'he &oard has power to constit%te e5en an e-ec%ti5e committee, e5en when no s%chcommittee is pro5ided for in the articles and &y9laws of the corporation. ,ili"inas Port Services% nc. v. 6o," SC7A !") (6++2$.

2. USINESS JUDGMENT RULE

*. JR F#)7+ )*&3" #n the Transactions !ntered (ntoWhen a resol%tion is passed in good faith &y the &oard of directors, it is 5alid and &inding, and whether

or not it will ca%se losses or decrease the profits of the corporation, the co%rt has no a%thority to re5iewthem. 8t is a well91nown r%le of law that :%estions of policy or management are left solely to the honestdecision of officers and directors of a corporation, and the co%rt is witho%t a%thority to s%&stit%te its

*%dgment @for thatB of the &oard of directors/ the &oard is the &%siness manager of the corporation, and solong as it acts in good faith its orders are not re5iewa&le &y the co%rts. 7ontei,ano v. Bacood-7urcia7iing Co. (nc., 5 SCRA 6 =1>62@.

While S0C is the agency with the primary say as to whether or not sec%rities, incl%ding shares of stoc1of a corporation, may &e traded or not in the stoc1 e-change, it does not mean that PS0s managementprerogati5es are %nder the a&sol%te control of the S0C. 'he PS0 is, after all, a corporation a%thoried &yits corporate franchise to engage in its proposed and d%ly appro5ed &%siness. Dne of the PS0s mainconcerns, as s%ch, is still the generation of profit for its stoc1holders. "hiippine Stoc6 !xchange v.Court of Appeas, 6 SC7A 6)6 (##2$.

No co%rt can, in resol5ing the iss%es &etween s:%a&&ling stoc1holders, order the corporation to%nderta1e certain corporate acts, since it wo%ld &e in 5iolation of the &%siness *%dgment r%le. #ng <ong v. Tiu , 01 SCRA 1 =200@, citing K8LLAN=0KA, PH8L8PP8N0 CD7PD7A'0 L AW (## ed$, p. 6.

'he ;oard of irectors is the &%siness manager of the corporation, and so long as it acts in good faith,its orders are not re5iewa&le &y the co%rts. Estacio v. Pam"anga Electric Coo"erative% nc., "#3 SC7A"!6 (6++#$.

%estions of policy and management are left to the honest decision of the officers and directors of acorporation, and the co%rts are witho%t a%thority to s%&stit%te their *%dgment for the *%dgment of the &oardof directors. Cua% 5r. v. -an, 3+2 SC7A 3!" (6++#$.

. JR S'3(&/ )*&3" #n the "ersona Lia,iity of the 7em,ers of the Board

irectors and officers who p%rport to act for the corporation, 1eep within the lawf%l scope of their a%thority and act in good faith, do not &ecome lia&le, whether ci5illy or otherwise, for the conse:%ences of their acts, which are properly attri&%ted to the corporation alone. Benguet Electric Coo"erative% nc. v.N*+C , 6+# SC7A "" (##6$.

8f the ca%se of the losses is merely error in &%siness *%dgment, not amo%nting to &ad faith or negligence,directors and>or officers are not lia&le. Ior them to &e held acco%nta&le, the mismanagement and theres%lting losses on acco%nt thereof are not the only matters to &e pro5en/ it is li1ewise necessary to showthat the directors and>or officers acted in &ad faith and with malice in doing the assailed acts. ;ad faithdoes not simply connote &ad *%dgment or negligence/ it imports a dishonest p%rpose or some moralo&li:%ity and conscio%s doing of a wrong, a &reach of a 1nown d%ty thro%gh some moti5e or interest or ill9will parta1ing of the nat%re of fra%d. ,ili"inas Port Services% nc. v. 6o, " SC7A !") (6++2$.

62



. COUNTER-VEILING DOCTRINES TO PROTECT CORPORATE CONTRACTS

*. T"'()8 ( !stoppe () R*+##3*+#(&'he principle of estoppel precl%des a corporation and its ;oard of irectors from denying the 5alidity of

the transaction entered into &y its officer with a third party who in good faith, relied on the a%thority of theformer as manager to act on &ehalf of the corporation. Lipat v. "acific Ban6ing Corp. 02 SCRA >=200@.

8n order to ratify the %na%thoried act of an agent and ma1e it &inding on the corporation, it m%st &e

shown that the go5erning &ody or officer a%thoried to ratify had f%ll and complete 1nowledge of all thematerial facts connected with the transaction to which it relates. 7atification can ne5er &e made on the partof the corporation &y the same person who wrongf%lly ass%me the power to ma1e the contract, &%t theratification m%st &e &y the officer or go5erning &ody ha5ing a%thority to ma1e s%ch contract. 9icente v.6eralde' , "6 SC7A 6+ (#2)$.

'he admission &y co%nsel on &ehalf of the corporation of the latters c%lpa&ility for personal loanso&tained &y its corporate officers cannot &e gi5en legal effect when the admission was “witho%t anyena&ling act or attendant ratification of corporate act,” as wo%ld a%thorie or e5en ratify s%ch admission. 8nthe a&sence of s%ch ratification or a%thority, s%ch admission does not &ind the corporation. Aguen'a v.Metro"olitan Ban/ and -rust Co.% 62 SC7A (##2$.

Per its Secretarys Certificate, the fo%ndation had gi5en its President ostensi&le and apparent a%thorityto inter alia deal with the respondent ;an1, and therefore the fo%ndation is estopped from :%estioning thePresidents a%thority to o&tain the s%&*ect loans from the respondent ;an1. *a"ula"u ,oundation% nc.% v.

Court of A""eals, !6 SC7A )6 (6++!$.When an officer in a &an1ing corporation arrange a credit line agreement and forwards the same to the

legal department at its head officer, and the &an1 did no disaffirm the contract, then it is &o%nd &y it.Premier (ev. Ban/ v. Court of A""eals, !62 SC7A 33 (6++!$.

'he acceptance of the offer to p%rchase &y the cler1 of the &ranch of the &an1, and the representationthat the manager had already appro5ed the sale (which in fact was not tr%e$, cannot &ind the &an1 to thecontract of sale, it &eing o&5io%s that s%ch a cler1 is not among the &an1 officers %pon whom p%tati5ea%thority may &e reposed &y a third party. 'here is, th%s, no legal &asis to &ind the &an1 into any 5alidcontract of sale with the &%yers, gi5en the a&sol%te a&sence of any appro5al or consent &y any responsi&leofficer of the &an1. (BP v. ?ng , !3+ SC7A 2+ (6++"$.

=nder Article #+ of the New Ci5il Code, acts done &y s%ch officers &eyond the scope of their a%thoritycannot &ind the corporation %nless it has ratified s%ch acts e-pressly or tacitly, or is estopped from denyingthem. . . . 'h%s, contracts entered into &y corporate officers &eyond the scope of a%thority are%nenforcea&le against the corporation %nless ratified &y the Corporation. oodchid /odings (nc. v.&oxas !ectric Constructions Co. (nc., 6 SCRA 25 =200@.

Acts done in e-cess of officers scope of a%thority cannot &ind the corporation/ howe5er, whens%&se:%ently a compromise agreement was on &ehalf of the corporation &eing represented &y itsPresident acting p%rs%ant to a ;oard of irectors resol%tion, s%ch constit%ted as ratification of all prior actsof its officers. National Po$er Cor". v. Alon'o)*egasto, !!) SC7A )!6 (6++!$.

. D(3+)#&' ( L*3"'7 () 9Stae 3emands;'he principle of laches or “stale demands” pro5ides that the fail%re or neglect, for an %nreasona&le and

%ne-plained length of time, to do that which &y e-ercising d%e diligence co%ld or sho%ld ha5e &een doneearlier, or the negligence or omission to assert a right within a reasona&le time, warrants a pres%mptionthat the party entitled to assert it either has a&andoned it or declined to assert it. +ovels Enter"rises% nc. v.?cam"o, )# SC7A 23 (6++6$.

3. D(3+)#&' ( A%%*)'&+ A+"()#+8 A)+. 1??, C#<#$ C(/'.

8f a corporation 1nowingly permits one of its officers to act within the scope of an apparent a%thority, itholds him o%t to the p%&lic as possessing the power to do those acts, the corporation will, as againstanyone who has in good faith dealt with it thro%gh s%ch agent, &e estopped from denying the agentsa%thority.rancisco v. 2S(S , SCRA 5 =1>6@.!

A corporation cannot disown its Presidents act of applying to the &an1 for credit accommodation, simplyon the gro%nd that it ne5er a%thoried the President &y the lac1 of any formal &oard resol%tion. 'hefollowing placed the corporation and its ;oard of irectors in estoppel in "ais? Iirstly, the &y9laws pro5idesfor the powers of the President, which incl%des, e-ec%ting contracts and agreements, &orrowing money,signing, indorsing and deli5ering chec1s/ secondly, there were already pre5io%s transaction of disco%ntingthe chec1s in5ol5ing the same personalities wherein any ena&ling resol%tion from the ;oard was dispensedwith and yet the &an1 was a&le to collect from the corporation. Nyco Sales Cor". v. BA ,inance Cor".% 6++

SC7A 3)2 (##$.'he a%thority of a corporate officer dealing with third persons may &e act%al or apparent . . . the

principal is lia&le for the o&ligations contracted &y the agent. 'he agent apparent representation yields tothe principalQs tr%e representation and the contract is considered as entered into &etween the principal andthe third person. ,irst Phili""ine nt2l Ban/ v. Court of A""eals, 6"6 SC7A 6"# (##3$.

Persons who deal with corporate agents within circ%mstances showing that the agents are acting ine-cess of corporate a%thority, may not hold the corporation lia&le. -raders +oyal Ban/ v. Court of A""eals,63# SC7A 3+ (##2$.

!+ural Ban/ of Milaor :Camarines Sur; v. ?cfemia, )6" SC7A ## (6+++$/ Soler v. Court of A""eals, )" SC7A "2 (6++$/c-7nited

Coconut Planters Ban/ v. Planters Products% nc., 326 SC7A 6" (6+6$.

6



Apparent a%thority may &e ascertained thro%gh ($ the general manner in which the corporation holdso%t an officer or agent as ha5ing the power to act, or, in other words the apparent a%thority to act in generalwith which is clothes them/ or (6$ the ac:%iescence in his acts of a partic%lar nat%re, with act%al or constr%cti5e 1nowledge thereof, within or &eyond the scope of his ordinary powers. nter)Asia nvestment ndustries v. Court of A""eals% !+) SC7A !"6 (6++)$.

'he doctrine of apparent a%thority pro5ides that a corporation will &e estopped from denying theagents a%thority if it 1nowingly permits one of its officers or any other agent to act within the scope of an apparent a%thority, and it holds him o%t to the p%&lic as possessing the power to do those acts.

'he doctrine of apparent a%thority does not apply if the principal did not commit any acts or cond%ctwhich a third party 1new and relied %pon in good faith as a res%lt of the e-ercise of reasona&lepr%dence. <oreo5er, the agents acts or cond%ct m%st ha5e prod%ced a change of position to the thirdpartys detriment. Advance "aper Corp. v. Arma Traders Corp. 12 SCRA 1 =201@.

'he general r%le remains that, in the a&sence of a%thority from the ;oard of irectors, no person, note5en its officers, can 5alidly &ind a corporation. 8f a corporation, howe5er, conscio%sly lets one of itsofficers, or any other agent, to act within the scope of an apparent a%thority, it will &e estopped fromdenying s%ch officers a%thority. . . =nmista1a&ly, the Co%rts directi5e in ao 8a Sin -rading is that acorporation sho%ld first pro5e &y clear e5idence that its corporate officer is &(+ in fact a%thoried to act onits &ehalf ,efore the &%rden of e5idence shifts to the other party to pro5e, &y pre5io%s specific acts, that anofficer was clothes &y the corporation with apparent a%thority. estmont Ban6 v. (nand Constructionand 3ev. Corp., 5?2 SCRA 20 =200>@.

+ationale for the (octrine of A""arent Authority@ “Nat%rally, the third person has little or no informationas to what occ%rs in corporate meeting/ and he m%st necessarily rely %pon the e-ternal manifestations of corporate consent. 'he integrity of commercial transactions can only &e maintained &y holding thecorporation strictly to the lia&ility fi-ed %pon it &y its agents in accordance with law. What transpires in thecorporate &oard room is entirely an internal matter. Hence, petitioner may not imp%te negligence on thepart of the respondents in failing to find o%t the scope of Atty. Sol%tas a%thority. 8ndeed, the p%&lic has theright to rely on the tr%stworthiness of &an1 officers and their acts.” Associated Ban6 v. "ronstroer ,55? SCRA 11 =200?@.

.*$##3*+#(&7 ( D#)'3+()7KT)7+''7 (S'37. 2 *&/ 2$

'he :%alifications pro5ided for in the law are only minim%m :%alifications/ additional :%alifications anddis:%alifications can &e pro5ided for &%t only &y proper pro5isions in the &y9laws of the corporation.2o6ongwei 1r. v. S!C , ?> SCRA 6 =1>>@.

A director m%st own at least one share of stoc1. PeGa v. CA, #) SC7A 22 (##$.!#

;eneficial ownership %nder K'A no longer :%alifies as a director owning at least one share of stoc1 inhis name.Lee v. CA, 205 SCRA 52 =1>>2@.

'he law does not re:%ire that a Kice9President &e a stoc1holder. Baguio v. Court of A""eals, 663 SC7A)33 (##)$.

5. E$'3+#(& ( D#)'3+()7 *&/ T)7+''7

*. D#)'3+()7 =S'37. 2 *&/ 26$

A &y9law pro5ision or company practice of gi5ing a stoc1holder a permanent seat in the ;oard wo%ld &eagainst the pro5isions of Corporation Code which re:%ires mem&er of the &oard of corporations to &eelected. 6race Christian High School v. Court of A""eals% 6 SC7A )) (##2$.

'he %nderlying policy of the Corporation Code is that the &%siness and affairs of a corporation m%st &ego5erned &y a &oard of directors whose mem&ers ha5e stood for election, and who ha5e act%ally &een

elected &y the stoc1holders, on an ann%al &asis. Dnly in that way can the directors contin%edacco%nta&ility to the shareholders, and the legitimacy of their decisions that &ind the corporationsstoc1holders, &e ass%red. 'he shareholder 5ote is critical to the theory that legitimies the e-ercise of power &y the directors or officers o5er properties that they do not own. 'ae 'erde Country Cu, (nc. v.

Africa, 5>? SCRA 202 =200>@.

Since %nder Sec. 63 all corporations are mandated to s%&mit a formal report to the S0C on the changesin their directors and officers, then only those directors and officers appearing in s%ch report (General8nformation Sheet$ to the S0C are deemed legally constit%ted to &ind the corporation, especially in the&ringing of s%its in &ehalf of the corporation. "remium 7ar,e &esources v. CA 26 SCRA 11 =1>>6@BMonfort Hermanos Agricultural (ev. Cor". v. Monfort , !)! SC7A 62 (6++!$.

'he proper remedy to :%estion the legality and proper :%alification of persons elected to the &oard is a4uo $arranto proceeding. Ponce v. Encarnacion, #! Phil. (#")$.

. CUMULATIVE VOTING (S'3. 2/Cumuative 'oting in Corporate !ections: (ntroducing Strategy inthe !?uation 5 SOUTH CAROLINA L. REV. 2>5$

3. T)7+'' (S'37. >2 *&/ 1?$

6. T') ( O#3', V*3*&38 *&/ H($/(<') P)#&3#%$' =S'3. 2>@ irectors may lawf%lly fill 5acancies occ%rring in the &oard, and s%ch officials, as well as the original

directors, hold9o5er %ntil :%alification of their s%ccessors. 6overnment v. El Hogar ,ili"ino, "+ Phil. )##(#62$.

!# Also (etective & Protective Bureau% nc. v. Clori#el , 63 SC7A 6"" (#3#$.

6#



'he remaining mem&ers of a corporations &oard of directors cannot elect another director to fill in a5acancy ca%sed &y the resignation of a hold9o5er director. 'he holdo5er period is not part of the term of office of a mem&er of the &oard of directors. Conse:%ently, when d%ring the holdo5er period, a director resigns from the &oard, the 5acancy can only &e filled9%p &y the stoc1holders, since there is no term left tofill9%p p%rs%ant to the pro5isions of Section 6# of the Corporation which mandates that a 5acancy occ%rringin the &oard of directors ca%sed &y the e-piration of a mem&ers term shall &e filled &y the corporationsstoc1holders. 'hat a director contin%es to ser5e after one year from his election (i.e., on a holdo5er capacity$, cannot &e considered as e-tending his term. 'his holdo5er period, howe5er, is not to &e

considered as part of his term, which, as declared, had already e-pired.

'ae 'erde Country Cu, (nc.v. Africa, 5>? SCRA 202 =200>@

. R'(<*$ ( D#)'3+()7 () T)7+''7 (S'3. 2?$

A stoc1holders meeting called for the remo5al of a director is 5alid only when called &y at least two9thirds of the o%tstanding capital stoc1. +oas v. (e la +osa, !# Phil. 3+# (#63$.

Dnly stoc1holders or mem&ers ha5e the power to remo5e the directors or tr%stees elected &y them, aslaid down in Sec. 6 of Corporation Code. +aniel v. 5ochico, "2 SC7A 66, 6)+ (6++2$.

*. E$'3+#(& C(&+'7+ (R$' 6, I&+')# R$'7 ( P)(3'/)' () I&+)*-C()%()*+' C(&+)(<')7#'7$

All election contests o5er directors and tr%stees now fall within the original and e-cl%si5e *%risdiction of the 7'C Special Commercial Co%rts and no longer with the S0C. 6SS v. Court of A""eals, "" SC7A 32#(6++#$.

S0C retains its reg%latory power o5er pro-y iss%es on matters other than election of directors or tr%stees, &%t not on matters relating to elections of directors or tr%stees. 'he test is whether the contro5ersyrelates to s%ch election. All matters affecting the manner and cond%ct of the election of directors areproperly cognia&le &y the reg%lar co%rts. Dtherwise, these matters may &e &ro%ght &efore the S0C for resol%tion &ased on the reg%latory powers it e-ercises o5er corporations, partnerships and associations.Securities and Echange Commission v. Court of A""eals% 2)# SC7A ## (6+!$.

?. D#)'3+()7 () T)7+''7 M''+#&47 (S'37. >, 5, 5 *&/ >2$

*. ()Ior stoc1 corporations, the “:%or%m” referred to in Section "6 is &ased on the n%m&er of outstanding

voting stoc1s. Ior nonstoc1 corporations, only those who are actual% living mem&ers with voting rights shall&e co%nted in determining the e-istence of a :%or%m d%ring mem&ers meetings. ead mem&ers shall not&e co%nted. -an v. Syci", !## SC7A 63 (6++3$.

When the principle for determining :%or%m for stoc1 corporations is applied &y analogy to non9stoc1corporations, only those who are act%al mem&ers with 5oting rights sho%ld &e co%nted. -an v. Syci", !##SC7A 63 (6++3$.

. A7+'&+#(& 8n a &oard meeting, an a&stention is pres%med to &e co%nted as an affirmati5e 5ote insofar as it may #e construed as an ac4uiescence in the action of those $ho voted affirmativelyI &%t s%chpres%mption, &eing merely "rima facie wo%ld not hold in the face of clear e5idence to the contrary.*o"e' v. Ericta, !" SC7A ")# (#26$.

3. M#&+'7 ( M''+#&47'he signing of the min%tes &y all the mem&ers of the &oard is not re:%ired4there is no pro5ision in the

Corporation Code that re:%ires that the min%tes of the meeting sho%ld &e signed &y all the mem&ers of the&oard. 'he signat%re of the corporate secretary gi5es the min%tes of the meting pro&ati5e 5al%e andcredi&ility. Peo"le v. (umlao, "+ SC7A !+# (6++#$.

'he entries contained in the min%tes are "rima facie e5idence of what act%ally too1 place d%ring themeeting, p%rs%ant to Section !!, 7%le )+ of the 7e5ised 7%le on 05idence. Peo"le v. (umlao, "+ SC7A!+# (6++#$.

+esolution versus Minutes of Meetings: A resol%tion is distinct and different from the min%tes of themeeting4a &oard resol%tion is a formal action &y a corporate &oard of directors or other corporate &odya%thoriing a partic%lar act, transaction, or appointment, while, on the other hand, min%tes are a &rief statement not only of what transpired at a meeting, %s%ally of stoc1holders>mem&ers or directors>tr%stees,&%t also at a meeting of an e-ec%ti5e committee. Peo"le v. (umlao, "+ SC7A !+# (6++#$.

When there is e5idence to show that other directors and the corporate secretary ref%sed to sign themin%tes, then the pres%mption in (umlao does not pre5ail. *o"e' +ealty% nc. v. S"ouses -an!angco% 2)#SC7A 3!! (6+!$.

10. COMPENSATION OF DIRECTORS (S'3. 0$

irectors and tr%stees are not entitled to salary or other compensation when they perform nothing morethan the %s%al and ordinary d%ties of their office, fo%nded on the pres%mption that directors and tr%steesrender ser5ice grat%ito%sly, and that the ret%rn %pon their shares ade:%ately f%rnishes the moti5es for ser5ice, witho%t compensation. ;%t they can recei5e rem%nerations for e-ec%ti5e officer position.estern (nstitute of Technoogy (nc. v. Saas 2? SCRA 216 =1>>@."+

"+Singson v. Commission on Audit , 362 SC7A )3 (6++$.

)+



11.FIDUCIARY DUTIES OF DIRECTORS AND OFFICERS

*. D#)'3+()7 *7 F#/3#*)#'7

Pre)Cor"oration Code ,iduciary +ule for Cor"orate ?fficers@ "ating v. San 1ose "etroeum (nc. ,1? SCRA >2.

8n Philippine *%risdiction, the mem&ers of the ;oard of irectors ha5e a three9fold d%ty? d%ty of o&edience, d%ty of diligence, and the d%ty of loyalty. Accordingly, the mem&ers of the &oard of directors ($shall direct the affairs of the corporation only in accordance with the p%rpose for which it was organied/ (6$

shall not willf%lly and 1nowingly 5ote for or assent to patently %nlawf%l acts of the corporation or act in &adfaith or with gross negligence in directing the affairs of the corporation/ and ()$ shall not ac:%ire anypersonal or pec%niary interest in conflict with their d%ty as s%ch directors or tr%stees. Strategic Aiance3ev. Corp. v. &adstoc6 Securities Ltd., 60 SCRA 1 =200>@, citing K8LLAN=0KA, PH8L8PP8N0 CD7PD7A'0

L AW, 6++, p. ).

. D+8 ( O'/#'&3' =S'3. 25@'he ;oard of irectors sho%ld act in the manner and within the formalities, if any, prescri&ed &y its

charter or &y the general law. *o"e' +ealty% nc. v. ,ontecha, 6!2 SC7A ) (##"$

3. D+8 ( D#$#4'&3' (S'3. 1$

'he President &eing closer to the &an1s operations on a day to day &asis is more lia&le for &reach of diligence when compared to directors who m%st act on the &asis of reports and representations to themd%ring &oard meetings.Bates v. 3resser , 251 U.S. 52, 6 L. E/. ?? =1>1>@.

'he directors shall &e personally lia&le to reim&%rse the corporation for the amo%nts of di5idendswrongf%lly declared and paid to stoc1holders, when they failed to consider that therecoreded retainedearnings in the &oo1s of the corporation was ill%sory considering the 5ario%s acco%nts recei5a&les that hadto &e written off as %ncollecti&le.Stein,erg v. 'easco, 52 P"#$. >5 =1>2>@.

Altho%gh directors ha5e the protection of the &%siness *%dgment r%le against personal lia&ility for decisions that ca%se damage to the corporation, s%ch protection is a5aila&le only when they act or decide&ased on an informed ;udgment and not merely accept the representations and reports of the C0D.Smith v. 'an 2or6am, ?? A.2/ ?5?, S%)'' C()+ ( D'$**)', 1>?5$.

'o ma1e a director personally lia&le for de&ts of the corporation, the wrongdoing appro5ed or assentedto &y the director m%st &e a %*+'&+$8 &$*$ *3+. <ere fail%re to comply with the notice re:%irement of la&or laws on company clos%re or dismissal of employees does not amo%nt to a patently %nlawf%l act.Patently %nlawf%l acts are those /'3$*)'/ &$*$ 8 $* which imposes penalties for commission of

s%ch %nlawf%l acts. 'here m%st &e a law declaring the act %nlawf%l and penaliing the act. Carag v. N*+C ,"6+ SC7A 6 (6++2$/ (y)(umalasa v. ,ernande' , "#) SC7A 3"3 (6++#$.

Holding a corporate officer personally lia&le for directing the corporate affairs with gross negligence or in &ad faith does not amo%nt to an application of the doctrine of piercing the 5eil of corporate fiction, for s%ch personal lia&ility is imposed directly %nder Section ) to directors and officers of corporation who areg%ilty of 5iolating their d%ty of diligence. Sanche' v. +e"u#lic , 3+) SC7A 66# (6++#$.

/. D+8 ( L(8*$+8 (S'37. 1 +( $

=#@ 3octrine of Corporate #pportunity

=##@ U7#&4 I&7#/' I&()*+#(&

When a director9ma*ority stoc1holder, who is the administrator of corporate affairs directly negotiatingthe sale of corporate landholdings to the Go5ernment at great prices, p%rchases the stoc1s of a

shareholder witho%t informing the latter of the on9going negotiations, s%ch director is deemed to ha5efra%d%lently ac:%ired the shareholdings &y way of deceit practiced &y means of concealing his1nowledge of important corporate affairs. Strong v. +e"ide, ! Phil. #!2 (#+#$.

octrine of corporate opport%nity applies to confidential employees of the corporation. cf. Sing 5ucov. *lorente, !) Phil. "# (#66$.

8t is well esta&lished that corporate officers are not permitted to %se their position of tr%st andconfidence to f%rther their pri5ate interests. 'he doctrine of “corporate opport%nity” s precisely arecognition &y the co%rts that the fid%ciary standards co%ld not &e %pheld where the fid%ciary was actingfor two entities with competing interest. 'he doctrine rest f%ndamentally on the %nfairness, in partic%lar circ%mstances, of an officer or director ta1ing ad5antage of an opport%nity for his personal profit whenthe interest of the corporation *%stly calls for protection.2o6ongwei v. S!C , ?> SCRA 6 =1>>@.

=###@ S'$-D'*$#&47 ( D#)'3+()7 *&/ O#3')7 (S'3. 2$

'he pro5isions of Section )6 on self9dealings &y directors>tr%stees and officers merely incorporatewell9esta&lished principles in Corporate Law. A director who enters into a distri&%torship agreement withthe corporation wo%ld ma1e the contract 5oida&le at the option of the corporation especially when theterms are disad5antageo%s to the corporation. 'he director cannot claim the same doctrine as ano%tsider dealing in good faith with the corporation. "rime hite Cement Corp. v. (AC , 220 SCRA10 =1>>@.

'. C(&+)*3+7 '+''& C()%()*+#(&7 #+" I&+')$(3#&4 D#)'3+()7 (S'3. $

'he r%le %nder Sec. )) of Corporation Code allowing ann%lment of contracts &etween corporations withinterloc1ing directors res%lting in the pre*%dice to one of the corporation, has no application to cases wherefra%d is alleged to ha5e &een committed to third parties. (BP v. Court of A""eals% )3) SC7A )+2 (6++$.

)



. D+8 +( C)'/#+()7 *&/ O+7#/')7

=nder the tr%st f%nd doctrine, it wo%ld &e a 5iolation of the right of creditors to allow the ret%rn to thestoc1holders of any portion of their capital or declare di5idends o%tside of the %nrestricted retainedearnings, and that %pon the corporations insol5ency, the ;oard of irectors are d%ty &o%nd to hold itsassets primarily for the payment of the creditors.7ead v. 7cCuough, 21 P"#$. >5 =1>11@.

4. S+*'"($/') T"'()8 =versus the Theory of (ncreasing Sharehoders 'aue+: SEC R'<#7'/ C(/' ( C()%()*+' G(<')&*&3' (SEC M'()*&/. C#)3$*) N(. 6, 7. 200>, *7 *'&/'/ 8 SEC M'(.C#)3$*) N(. >, 7. 201$

12. CORPORATE OFFICERS

'he general principles of agency go5ern the relation &etween the corporation and its officers or agents,s%&*ect to the articles of incorporation, &y9laws, or rele5ant pro5isions of law4when a%thoried, their acts&ind the corporation, otherwise, their acts cannot &ind it. asuma v. Heirs of Cecilio S. (e 9illa, !## SC7A!33 (6++3$/ *iton!ua v. Eternit Cor"., !#+ SC7A 6+! (6++3$.

*. P(')7 ( C()%()*+' O#3')7

05en tho%gh a *%dgment or order is addressed to the corporation only, the officers as well as thecorporation itself, may &e p%nished for contempt for diso&edience to its terms, at least if they 1nowinglydiso&ey the co%rts mandate, since a lawf%l *%dicial command to a corporation is in effect a command to theofficers. Heirs of -rinidad de *eon 9da. (e +oas v. Court of A""eals, !66 SC7A + (6++!$.

A corporation may not distance itself from the acts of a senior officer? “the d%al roles of 7om%lo I. S%gaysho%ld not &e allowed to conf%se the facts.” +.,. Sugay v. +eyes, 6 SC7A 2++ (#3$.

While the Co%rt agrees that those who &elong to the %pper corporate echelons wo%ld ha5e morepri5ileges, it cannot &e pres%me the e-istence of s%ch pri5ileges or &enefits4he who claims the same is&%rdened to pro5e not only the e-istence of s%ch &enefits &%t also that he is entitled to the same. 8$o/ v.Phili""ine Car"et Manufacturing Cor"., !"2 SC7A !3" (6++"$.

While it is a general r%le that, in the a&sence of a%thority from the &oard of directors, no person, note5en its officers, can 5alidly &ind a corporation, the ;oard may 5alidly delegate some of its f%nctions andpowers to its officers, committee and agents. Associated Ban6 v. "ronstroer , 55? SCRA 11 =200?@."

=#@ &ue on Corporate #fficers "ower to Bind Corporation

F%st as a nat%ral person may a%thorie another to do certain acts for and on his &ehalf, the ;oard of irectors may 5alidly delegate some of its f%nctions and powers to officers, committees or agents4the

a%thority of s%ch indi5id%als to &ind the corporation is generally deri5ed from law, corporate &y9laws or a%thoriation from the &oard, either e-pressly or impliedly &y ha&it, c%stom or ac:%iescence in thegeneral co%rse of &%siness. Ce#u Mactan Mem#ers Center nc. v. -su/ahara, "#) SC7A 26 (6++#$."6

As a general r%le, the acts of corporate officers within the scope of their a%thority are &inding on thecorporation, &%t when these officers e-ceeded their a%thority, their actions cannot &ind the corporation,%nless it has ratified s%ch acts or is estopped from disclaiming them. +eyes v. +CP Em"loyees Credit 7nion% nc., !## SC7A )# (6++3$.

(octrine of A""arent Authority@ Corporate policies need not &e in writing. Contracts entered into &y acorporate officer or o&ligations or prestations ass%med &y s%ch officer for and in &ehalf of s%chcorporation are &inding on the said corporation only if s%ch officer acted within the scope of his a%thorityor if s%ch officer e-ceeded the limits of his a%thority, the corporation has ratified s%ch contracts or o&ligations. 8$o/ v. Phili""ine Car"et Manufacturing Cor"., !"2 SC7A !3" (6++"$.

=##@ "resident 8n the a&sence of a charter or &ylaw pro5ision to the contrary, the president is pres%med to ha5e the

a%thority to act within the domain of the general o&*ecti5es of the corporations &%siness and within thescope of his or her %s%al d%ties. Hence, it has &een r%led in other *%risdiction that the president of thecorporation possesses the power to enter into a contract for the corporation, when the “cond%ct on thepart of &oth the president and the corporation @showsB that he had &een in the ha&it of acting in similar matters on &ehalf of the company and that the company had a%thoried him so to act and had

recognied, appro5ed and ratified his former and similar actions.” "eopes Aircargo v. Court of

Appeas, 2> SCRA 10 =1>>?@.

8t is the ;oard of irectors, not the President, that e-ercises corporate powers. 8t m%st &eemphasied that the &asis for agency is representation and a person dealing with an agent is p%t %ponin:%iry and m%st disco5er %pon his peril the a%thority of the agent. Safic Alcan & Cie v. m"erial 9egeta#le ?il Co.% nc.% )"" SC7A ""# (6++$.

'he President is considered as the corporations agent, and as s%ch, his 1nowledge of the repeal of a resol%tion in another *%ridical person in which his corporation has an interest, is ascri&ed to hisprincipal %nder the theory of imp%ted 1nowledge. +ovels Enter"rises v. ?cam"o, )#6 SC7A 23 (6++6$.

'he President of the corporation which &ecomes lia&le for the accident ca%sed &y its tr%c1 dri5er cannot &e held solidarily lia&le for the *%dgment o&ligation arising from :%asi9delict, since the fact alone

"u Chuc/ v. 18ong *i Po,” !3 Phil. 3+, 3! (#6!$/ Ce#u Mactan Mem#ers Center nc. v. -su/ahara, "#) SC7A 26 (6++#$/ Pasos v.

PNCC , 2++ SC7A 3+ (6+)$.

"69icente v. 6eralde' , "6 SC7A 6+ (#2)$/ Boyer)+oas v. Court of A""eals, 6 SC7A !2+ (##6$.

Advance Pa"er Cor". v. Arma -raders Cor".% 26 SC7A )) (6+)$.

)6



of &eing President is not s%fficient to hold him solidarily lia&le for the lia&ilities ad*%dged against thecorporation and its employee. Secosa v. Heirs of Er$in Suare' ,ancisco , !)) SC7A 62) (6++!$.

=###@ Corporate Secretary

8n the a&sence of pro5isions to the contrary, the corporate secretary is the c%stodian of corporaterecords4he 1eeps the stoc1 and transfer &oo1 and ma1es proper and necessary entries therein. 8t ishis d%ty and o&ligation to register 5alid transfers of stoc1 in the &oo1s of the corporation/ and in thee5ent he ref%ses to comply with s%ch d%ty, the transferor9stoc1holder may rightf%lly &ring s%it to compelperformance. -orres% 5r. v. Court of A""eals% 62 SC7A 2#) (##2$.

Altho%gh the corporate secretarys d%ty to record transfers of stoc1 is ministerial, he cannot &ecompelled to do so when the transferees title to said shares has no "rima facie 5alidity or is %ncertain.<ore specifically, a pledgor, prior to foreclos%re and sale, does not ac:%ire ownership rights o5er thepledged shares and th%s cannot compel the corporate secretary to record his alleged ownership of s%chshares on the &asis merely of the contract of pledge. Mandamus will not iss%e to esta&lish a right, &%tonly to enforce one that is already esta&lished. *im -ay v. Court of A""eals% 6#) SC7A 3)! (##$/ -C*Sales Cor". v. Court of A""eals% )!# SC7A )" (6++$.

A sale that fails to comply with Sec. !+ of Corporation Code, cannot &e in5alidated when the &%yer relies %pon a Secretarys Certificate confirming a%thority. A secretarys certificate which is reg%lar on itsface can &e relied %pon &y a third party who does not ha5e to in5estigate the tr%ths of the factscontained in s%ch certification/ otherwise &%siness transactions of corporations wo%ld &ecometort%o%sly slow and %nnecessarily hampered. Esguerra v. Court of A""eals% 632 SC7A )+ (##2$.

=#<@ Corporate Treasurer A corporate treas%rers f%nction ha5e generally &een descri&ed as “to recei5e and 1eeps f%nds of the

corporation, and to dis&%rse them in accordance with the a%thority gi5en him &y the &oard or theproperly a%thoried officers.” =nless d%ly a%thoried, a treas%rer, whose power are limited, cannot &indthe corporation in a sale of its assets, which o&5io%sly is foreign to a corporate treas%rers f%nction. San5uan Structural v. Court of A""eals, 6#3 SC7A 3), 3!" (##$.

A corporate treas%rer whose negligence in signing a confirmation letter for redisco%nting of crossedchec1s, 1nowing f%lly well that the chec1s were strictly endorsed for deposit only to the payees acco%ntand not to &e f%rther negotiated, may &e personally lia&le for the damaged ca%sed the corporation.

Atrium Management Cor". v. Court of A""eals, )") SC7A 6) (6++$.

=<@ 7anager

Altho%gh a &ranch manager of a &an1, within his field and as to third persons, is the general agent

and is in general charge of the corporation, with apparent a%thority commens%rate with the ordinary&%siness entr%sted him and the %s%al co%rse and cond%ct thereof, yet the power to modify contracts of the &an1 remains generally with the &oard of directors. ;eing a &ranch manager alone is ins%fficient tos%pport the concl%sion that he has &een clothed with “apparent a%thority” to 5er&ally alter terms of the&an1s written contract, s%ch a the mortgage contract. Banate v. Phili""ine Countryside +ural Ban/ :*iloan% Ce#u;% nc., 36" SC7A 6 (6++$.

.POWER OF THE OARD TO APPOINT AND TERMINATE CORPORATE OFFICERS

=#@ ho (s a 4Corporate #fficer5= (S'3. 25$

“Cor"orate officers” in the conte-t of P.. No. #+69A are those officers of the corporation who aregi5en that character &y the Corporation Code or &y the corporations &y9laws. 2urrea v. Le8ama, 10P"#$. 55 =1>[email protected]

'he position of 0-ec%ti5e Secretary, which is pro5ided for in the Societys &y9laws, is an “officer”position. Since the appointment of the inc%m&ent did not contain a fi-ed term, the implication was thatthe appointee held the appointent at the pleas%re of the ;oard of irectors, s%ch that when the ;oardopted to replace the inc%m&ent, technically there was no remo5al &%t only an e-piration of the term andthere was no need of prior notice, d%e hearing or s%fficient gro%nds &efore the inc%m&ent co%ld &eseparated from office.7ita "ardo de Tavera v. Tu,ercuosis Society , 112 SCRA 2 =1>?2@.)

When the &y9laws pro5ide for the position of “S%perintendent> Administrator,” it is clearly a corporateofficer position and iss%es of reinstatement wo%ld &e within the *%risdiction of the S0C and not theNL7C. ?ng/ingco v. N*+C , 62+ SC7A 3) (##2$.

A mere manager not so named in the &y9laws does is not an officer of the corporation. Pam"lonaPlantation Com"any v. Acosta, "+ SC7A 6!# (6++3$.

Dne who is incl%ded in the &y9laws of a corporation in its roster of corporate officers is an officer of said corporation and not a mere employee4&eing a corporate officer, his remo5al is deemed to &e an

intra9corporate disp%te cognia&le &y the S0C and not &y the La&or Ar&iter. 6arcia v. Eastern-elecommunications Phili""ines% "" SC7A !"+ (6++#$.

Drdinary company employees are generally employed not &y action of the directors andstoc1holders &%t &y that of the <anagement of the corporation who also determines the compensationto &e paid s%ch employees. Corporate officers, on the other hand, are elected or appointed &y the

66arcia v. Eastern -elecommunications Phili""ines% "" SC7A !"+ (6++#$/ 3PP Mar/eting Communications% nc. v. 6alera, 33 SC7A

!66 (6++$.

)PSBA v. *eaGo, 62 SC7A 22 (#!$/ (y v. N*+C , !" SC7A 6 (#3$/ 9isayan v. N*+C , #3 SC7A !+ (##$/ Easycall

Communications Phils.% nc. v. 8ing , !2 SC7A +6 (6++"$/ Marc Mar/eting% nc. v. 5oson, 336 SC7A )" (6+$/ Bar#a v. *iceo deCagayan 7niversity% 33 SC7A 3! (6+6$/ Cosare v. Broadcom Asia% nc.% 2" SC7A ")! (6+!$.

))



directors or stoc1holders, and are those who are gi5en that character either &y the Corporation Code or &y the corporations &y9laws. 6ome' v. PN?C (ev. and Management Cor"., 3+3 SC7A 2 (6++#$.!

Altho%gh the &y9laws pro5ide e-pressly that the ;oard of irectors “shall ha5e f%ll power to createnew offices and to appoint the officers thereto,” any office created, and any officer appointed p%rs%ant tos%ch cla%se does not &ecome a “corporate officer”, &%t is an employee and the determination of therights and lia&ilities relating to his remo5al are within the *%risdiction of the NL7C/ they do not constit%teintra9corporate contro5ersies. “A different interpretation can easily lea5e the way open for the ;oard of irectors to circ%m5ent the constit%tionally g%aranteed sec%rity of ten%re of the employee &y the

e-pedient incl%sion in the ;y9Laws of an ena&ling cla%se on the creation of *%st any corporate officer position.” 'he r%lings in -a#ang v. N*+C% 633 SC7A !36 (##2$, and Nac"il v. nternational Broadcasting Cor"., )2# SC7A 3") (6++6$, “sho%ld no longer &e controlling.”7ating (ndustria and Commercia Corp. v. Coros, 6 SCRA 12 =2010@."

=##@ %ature of !xercise of "ower to Terminate #fficers

An officers remo5al is a corporate act, and if s%ch remo5al occasions an intra9corporate contro5ersy,its nat%re is not altered &y the reason or wisdom, or lac1 thereof, with which the ;oard of irectorsmight ha5e in ta1ing s%ch action. Perforce, the matter wo%ld come within the area of corporate affairsand management, and s%ch a corporate contro5ersy wo%ld call for S0C ad*%dicati5e e-pertise @now7'C Special Commercial Co%rtsB, not that of NL7C.3e &ossi v. %L&C , 1 SCRA 25 =1>>>@/ ?/ol v. Slimmers orld nternational , 3+ SC7A #2 (6++#$.

1. LIAILITIES OF CORPORATE OFFICERS =S'3. 1$ *.GENERAL RULE C()%()*+' O#3')7 N(+ L#*$' () C()%()*+' D'+7

<ere ownership &y an officer (President$ of ma*ority of the e:%ity of the corporation do not warrant apiercing of the 5eil of corporate fiction to ma1e s%ch officer personally lia&le for the de&ts of the corporation.Palay% nc. v. Clave, 6! SC7A 3) (##)$.3

'o hold a director personally lia&le for de&ts of the corporation, and th%s pierce the 5eil of corporatefiction, the &ad faith or wrongdoing of the director m%st &e esta&lished clearly and con5incingly. ;ad faith isne5er pres%med. ;ad faith does not connote &ad *%dgment or negligence. ;ad faith imports a dishonestp%rpose. ;ad faith means @aB &reach of a 1nown d%ty thro%gh some ill moti5e or interest. ;ad faith parta1esof the nat%re of fra%d. Carag v. N*+C , "6+ SC7A 6 (6++2$.2

Corporate officers who entered into and signed contracts on &ehalf of the corporation in their officialcapacities cannot &e made personally lia&le there%nder in the a&sence of stip%lation to that effect, d%e to

the personality of the corporation &eing separate and distinct from the persons composing it. estern Agrondustrial Cor". v. Court of A""eals, SC7A 2+# (##+$.

=nless they ha5e e-ceeded their a%thority, corporate officers are, as a general r%le, not personally lia&lefor their official acts, &eca%se a corporation, &y legal fiction, has a personality separate and distinct from itsofficers, stoc1holders and mem&ers. Price v. nnodata Phils.% nc., "32 SC7A 63# (6++$.#

A corporation has a personality separate and distinct from the persons composing or representing it/hence, personal lia&ility attaches only in e-ceptional cases, s%ch as when the director, tr%stee, or officer isg%ilty of &ad faith or gross negligence in directing the affairs of the corporation. Continental Cement Cor".v. Asea Bro$n Boveri% nc., 3"# SC7A )2 (6+$.+

D&ligations inc%rred as a res%lt of the directors and officers acts as corporate agents, are not their personal lia&ility &%t the direct responsi&ility of the corporation they represent. Polymer +u##er Cor". v.Salamuding , 2+6 SC7A ") (6+)$.

.&undown on Corporate Lia,iity: Tramat 7ercantie (nc. v. CA, 2? SCRA 1 =1>>@.

;efore a director or officer of a corporation can &e held personally lia&le for corporate o&ligations, thefollowing re:%isites m%st conc%r? (a$ the complaint m%st allege that the director or officer assented topatently %nlawf%l acts of the corporation, or the officers or directors were g%ilty of gross negligence or &ad

!?/ol v. Slimmers orld nt2l , 3+ SC7A #2 (6++#$/ ,9+ S/ills and Services E"onents v. Seva, 2)# SC7A 62 (6+!$.

"+eiterated in Marc Mar/eting% nc. v. 5oson, 336 SC7A )" (6+$/ Bar#a v. *iceo de Cagayan 7niversity% 33 SC7A 3! (6+6$/

Cosare v. Broadcom Asia% nc ., 2" SC7A ")! (6+!$.

3Pa#alan v. N*+C% ! SC7A !#" (##+$/ Sulo ng Bayan% nc. v. Araneta% nc. nc., 26 SC7A )!2 (#23$/ Mindanao Motors *ines% nc. v.

C+ , 3 SC7A 2+ (#36$.

2EP6 Constructions Co. v. CA, 6+ SC7A 6)+ (##6$.

Ban4ue 6enerale Belge v. alter Bull and Co., ! Phil. 3! (#!#$I +ustan Pul" & Pa"er Mills% nc. v. AC , 6! SC7A 33" (##6$/*a#orte v. Pagsan!an -ourism Consumers2 Coo"erative% 2) SC7A ")3 (6+!$.

#+e"u#lic Planters Ban/ v. Court of A""eals, 63 SC7A 2) (##6$/ *o$e% nc. v. Court of A""eals, "#3 SC7A !+ (6++#$/ Marc

Mar/eting% nc. v. 5oson, 336 SC7A )" (6+$/ St. -omas v. Salac , 3" SC7A 6!" (6+6$/ Cosare v. Broadcom Asia% nc ., 2" SC7A ")!(6+!$.

+Prisma Construction & (ev. Cor". v. Menchave' , 3! SC7A "#+ (6++$/ 7r#an Ban% nc. v. Pena, 3"# SC7A ! (6+$ / 6otesco

Pro"erties% nc. v. ,a!ardo, 3#6 SC7A )# (6+)$ / ?livare' +ealty Cor". v. Castillo, 26# SC7A "!! (6+!$.

MAM +ealty v. N*+C% 6!! SC7A 2#2 (##"$/ N,A v. Court of A""eals% ) SC7A 2++ (###$/ Atrium Management Cor". v. Court of

A""eals% )") SC7A 6) (6++$/ Malayang Samahan ng mga Mangga$ga$a sa M. 6reenfield v. +amos, )"2 SC7A 22 (6++$/ Po$tonConglomerate% nc. v. Agcolicol , !++ SC7A "6) (6++)$/ H.*. Carlos Construction% nc. v. Marina Pro"erties Cor"., !6 SC7A !6 (6++!$/ Mc*eod v. N*+C , "6 SC7A 666 (6++2$/ A#ott *a#oratories Phil. 9. Alcara' , 2+ SC7A 36 (6+)$/ SP -echnologies% nc. v. Ma"ua%26+ SC7A2!) (6+!$/ *anu'a% 5r. v. B, Cor".% 2)2 SC7A 62" (6+!$/ Montallana v. *a Consolacion College Manila, 2!! SC7A 3)(6+!$/ Ban/ of Commerce v. Nite, G.7. No. 6")", 66 F%ly 6+".

)!



faith/ and (&$ the complainant m%st clearly and con5incingly pro5e s%ch %nlawf%l acts, negligence or &adfaith. Heirs of ,e -an 7y v. nternational Echange Ban/ , 3#+ SC7A "# (6+)$.6

An officer9stoc1holder who signs in &ehalf of the corporation to a fra%d%lent contract cannot claim the&enefit of separate *%ridical entity? “'h%s, &eing a party to a sim%lated contract of management, petitioner =y cannot &e permitted to escape lia&ility %nder the said contract &y %sing the corporate entity theory. 'hisis one instance when the 5eil of corporate entity has to &e pierced to a5oid in*%stice and ine:%ity.” ParadiseSauna Massage Cor"oration v. Ng , SC7A 2# (##+$.

'he finding of solidary lia&ility among the corporation, its officers and directors wo%ld patently &e

&aseless when the decision contains no allegation, finding or concl%sion regarding partic%lar actscommitted &y said officers and director that show them to ha5e &een indi5id%ally g%ilty of %nmista1a&lemalice, &ad faith, or ill9moti5e in their personal dealings with third parties. When corporate officers anddirectors are s%ed merely as nominal parties in their official capacities as s%ch, they cannot &e held lia&lepersonal for the *%dgment rendered against the corporation. NPC. v. Court of A""eals, 62) SC7A !#(##2$.)

While the limited lia&ility doctrine is intended to protect the stoc1holder &y imm%niing him frompersonal lia&ility for the corporate de&ts, a corporate officer may ne5ertheless di5est himself of thisprotection &y 5ol%ntarily &inding himself to the payment of the corporate de&ts. -oh v. Solid Ban/ Cor".,!+ SC7A "!! (6++)$.

'he corporate representati5es signing as a solidary g%arantee as corporate representati5e did not%nderta1e to g%arantee personally the payment of the corporations de&t em&odied in the tr%st receipts.e&ts inc%rred &y directors, officers and employees acting as s%ch corporate agents are not theirs &%t thedirect lia&ility of the corporation they represent. As an e-ception, directors or officers are personally lia&lefor the corporations de&t if they so contract%ally agree or stip%late. -u"a' 9 v. Court of A""eals, !23SC7A )# (6++"$.

Dfficers of a corporation may &ecome lia&le for its loans when they ha5e &reached their d%ty of diligence %nder Section ) of the Corporation Code. Aratea v. Suico, " SC7A "+ (6++2$/!

“Bad faith” does not arise *%st &eca%se a corporation fails to pay its o&ligation, &eca%se the ina&ility topay ones o&ligation is not synonymo%s with fra%d%lent intent not to honor the o&ligations. 8n order to piecethe 5eil of corporate fiction, for reasons of negligence &y the director, tr%stee or officer in the cond%ct of thetransactions of the corporation, s%ch negligence m%st &e “gross”. Magaling v. ?ng , "36 SC7A "6 (6++$.

irectors or tr%stees who willf%lly or 1nowingly 5ote for or assent to patently %nlawf%l acts of thecorporation or ac:%ire any pec%niary interest in conflict with their d%ty as s%ch directors or tr%stees shall &elia&le *ointly and se5erally for all damages res%lting therefrom s%ffered &y the corporation. E(SA Shangri)

*a Hotel and +esorts% nc. v. B, Cor"., ""3 SC7A 6" (6++$.Where the Chairman President has made himself acco%nta&le in the promissory note “in his "ersonal

ca"acity and as authori'ed #y the Board 7esol%tion,” and in the a&sence of any representation on the partof corporation that the o&ligation is all its own &eca%se of its separate corporate identity, we see nooccasion to consider piercing the corporate 5eil as material to the case.” Prisma Construction & (ev. Cor".v. Menchave' , 3! SC7A "#+ (6++$.

3.SPECIAL PROVISIONS IN LAOR LAWS

Since a corporate employer is an artificial person, it m%st ha5e an officer who can &e pres%med to &ethe em"loyer , &eing the “person acting in the interest of (the$ employer” as defined in Art. 6) of the La&or Code. A.C. &ansom La,or $nion-CCL$ v. %L&C , 12 SCRA 26> =1>?6@.

=#@ #verturning the A.C. &ansom &uing:

Article 66(e$ of the La&or Code, &y itself, does not ma1e a corporate officer personally lia&le for thede&ts of the corporation &eca%se Section ) of the Corporation Code is still the go5erning law onpersonal lia&ility of officers for the de&ts of the corporation. (avid v. National ,ederation of *a#or 7nions% "3 SC7A ++ (6++#$.

Corporate officers cannot &e held personally lia&le for damages on acco%nt of employees dismissal&eca%se the employer corporation has a personality separate and distinct from its officers who merelyacted as its agents. Malayang Samahan . . . sa M. 6reenfields v. +amos% )"2 SC7A 22 (6++$."

Corporate officers are not personally lia&le for money claims of discharged employees %nless theyacted with e5ident malice and &ad faith in terminating their employment. AHS<Phili""ines v. Court of

A""eals% 6"2 SC7A )# (##3$.3

Dnly the responsi&le officer of a corporation who had a hand in illegally dismissing an employeesho%ld &e held personally lia&le for the corporate o&ligations arising from s%ch act. Maglutac v. N*+C ,

# SC7A 232 (##+$/2

and for the separate *%ridical personality of a corporation to &e disregarded as6 A#ott *a#oratories Phil. 9. Alcara' , 2+ SC7A 36 (6+)$/ Polymer +u##er Cor". v. Salamuding , 2+6 SC7A ") (6+)$/ co v.

Systems -echnology nstitute% nc., 26# SC7A !)# (6+!$/ ,9+ S/ills and Services E"onents v. Seva, 2)# SC7A 62 (6+!$.

)Emilio Cano Enter"rises% nc. v. C+ , ) SC7A 6# (#3"$/ Arcilla v. Court of A""eals, 6" SC7A 6+ (##6$.

!Singian% 5r. v. Sandigan#ayan, !2 SC7A )! (6++"$

" AMA Com"uter College)East +i'al v. gnacio, "#+ SC7A 3)), 3"#933+ (6++#$.

3+eiterated in Nicario v. N*+C% 6#" SC7A 3# (##$/ ,light Attendants and Ste$ards Association of the Phili""ines v. Phili""ine

Airlines% ""# SC7A 6"6 (6++$/ MJ Fander Phili""ines% nc. v. Enri4ue' , " SC7A "#+ (6++#$/ AMA Com"uter College)East +i'al v.gnacio, "#+ SC7A 3)), 3"#933+ (6++#$/ *o$e% nc. v. Court of A""eals, "#3 SC7A !+, "" (6++#$/ PeGaflor v. ?utdoor ClothingManufacturing Cor"., 3 SC7A 6+ (6++$.

2+eiterated in 6ude' v. N*+C , ) SC7A 3!! (##+$/ Chua v. N*+C , 6 SC7A )") (##+$/ +eahs Cor". v. N*+C% 62 SC7A 6!2

(##2$

)"



to ma1e the highest corporate officer personally lia&le on la&or claims, the wrongdoing m%st &e clearlyand con5incingly esta&lished. (el +osario v. N*+C , 2 SC7A 222 (##+$.

A corporation, &eing a *%ridical entity, may act only thro%gh its directors, officers and employees ando&ligations inc%rred &y them, acting as corporate agents, are not theirs &%t the direct acco%nta&ilities of the corporation they represent. 8n la&or cases, corporate directors and officers are solidarily lia&le withthe corporation for the termination of employment of employees done with malice or &ad faith. Brent Hos"ital% nc. v. N*+C% 6#6 SC7A )+! (##$.

8n la&or cases, corporate directors and officers are solidarily lia&le with the corporation for the

termination of employment of corporate employees done with malice or in &ad faith. 8n this case, it is%ndisp%ted that the corporate officers ha5e a direct hand in the illegal dismissal of the employees. 'heywere the one, who as high9ran1ing officers and directors of the corporation, signed the ;oard 7esol%tionretrenching the employees on the feigned gro%nd of serio%s &%siness losses that had no &asis apartfrom an %nsigned and %na%dited Profit and Loss Statement which, to repeat, had no e5identiary 5al%ewhatsoe5er. 7ichico v. N*+C , 62) SC7A )" (##2$.

=##@ Limiting the A.C. &ansom &uing to (nsovent Corporation

A.C. +ansom is not in point &eca%se there the corporation act%ally ceased operations after thedecision of the Co%rt was prom%lgated against it, ma1ing it necessary to enforce it against its former president. When the corporation is still e-isting and a&le to satisfy the *%dgment in fa5or of the pri5aterespondent, the corporate officers cannot &e held personally lia&le. *im v. N*+C , 2 SC7A )6 (##$.

A.C. +ansom will apply only where the persons who are made personally lia&le for the employees

claims are stoc1holders9officers of employer9corporation. 8n the case at &ar, a mere general manager while admittedly the highest ran1ing local representati5e of the corporation, is ne5ertheless not astoc1holder and m%ch less a mem&er of the ;oard of irectors nor an officer thereof. (e 6u'man v.N*+C , 6 SC7A 26) (##6$.

=###@ A.C. +ansom doctrine has &een reiterated s%&se:%ently in +estuarante *as Conchas v. *lego, )!SC7A 6! (###$.#

=#<@ 3efinitive #verturning of A.C. &ansom &uing:

8t is settled that in the a&sence of malice, &ad faith, or specific pro5isions of law, a stoc1holder or anofficer of a corporation cannot &e made personally lia&le for corporate lia&ilities. Mc*eod v. N*+C , "6SC7A 666 (6++2$.6+

Clearly, in A.C. +ansom% 7ANSD<, thro%gh its President, organied 7DSA78D to e5ade payment of &ac1wages to the 66 stri1ers. 'his sit%ation, or anything similar showing malice or &ad faith on the part

of Patricio, does not o&tain in the present case. @What applies therefore is the r%ling @iBn Santos v.N*+C , @6"! SC7A 32) (##3$B. Mc*eod v. N*+C , "6 SC7A 666 (6++2$.6

8t was clarified in Carag v. N*+C , "6+ SC7A 6 (6++2$, and Mc*eod v. N*+C , "6 SC7A 66 (6++2$,that Article 66(e$ of the La&or Code, &y itself, does not ma1e a corporate officer personally lia&le for the de&ts of the corporation4the go5erning law on personal lia&ility of directors or officers for de&ts of the corporation is still Section ) of the Corporation Code. Pantranco Em"loyees Assn. :PEA)P-6?;v. N*+C , " SC7A "# (6++#$.66

/.P')7(&*$ L#*#$#+8 ( T)7+''7 *&/ O#3')7 ( N(&-S+(3 C()%()*+#(&7'he non9stoc1 corporation acted in clear &ad faith when it sent the final notice to a mem&er %nder the

pretense they &elie5ed him to &e still ali5e, when in fact it had 5ery well 1nown that he had already died.Non9stoc1 corporations and their officers are not e-empt from the o&ligation imposed &y Articles #, 6+ and6 %nder the Chapter on H%man 7elations of the Ci5il Code, which pro5isions en%nciate a generalo&ligation %nder law for e5ery person to act fairly and in good faith towards one another. 9alley 6olf and Country Clu#% nc. v. 9da. (e Caram% "" SC7A 6 (6++#$.

Culili v. Eastern -elecommunications Phili""ines% nc., 3!6 SC7A )) (6+$/ 6randte4 ndustrial Steel Products% nc. v. Estrella, 3!3

SC7A )# (6+$/ Alert Security and nvestigation Agency% nc. v. Pasa$ilan, 3"2 SC7A 3"" (6+$/ *ynvil ,ishing Enter"rises% nc. v. Ariola, 33! SC7A 32# (6+6$/ Blue S/y -rading Co.% nc. v. Blas, 332 SC7A 262 (6+6$/ Polymer +u#er Cor". v. Salamuding% 2+6 SC7A

") (6+)$/ co v. S-% nc.% 26# SC7A !)# (6+!$.#9illanueva v. Adre, 26 SC7A 23 (##$/ Carmelcraft Cor". v. N*+C% 3 SC7A )#) (##+$/ 9alderrama v. N*+C , 6"3 SC7A !33

(##3$/ N8 nt2l 8nit$ear Cor". Phil. v. N*+C , )#2 SC7A 3+2 (6++)$.

6+Citing *and Ban/ of the Phili""ines v. Court of A""eals , )3! SC7A )2" (6++$/ Bogo)Medellin Sugarcane Planters Asso.% nc. v.

N*+C , 6#3 SC7A + (##$/ Com"le Electronics Em"loyees Assn. v. N*+C , )+ SC7A !+) (###$/ Acesite Cor". v. N*+C , !!# SC7A)3+ (6++"$/ Coca)Cola Bottlers Phils.% nc. v. (aniel , !3+ SC7A !#! (6++"$/ Suldao v. Cimech System Construction% nc., "+3 SC7A 6"3(6++3$/ Su"reme Steel Pi"e Cor". v. Barda!e, "66 SC7A "" (6++2$/ Culili v. Eastern -elecommunications Phili""ines% nc., 3!6 SC7A)) (6+$. 6randte4 ndustrial Steel Products% nc. v. Estrella, 3!3 SC7A )# (6+$/ Mirant :Phili""ines; Cor". v. Caro% 26) SC7A !3"(6+!$/ .

6+eiterated in H.+. Carlos Construction% nc. v. Marina Pro"erties Cor"., !6 SC7A !6 (6++!$/ Pam"lona Plantation Com"any v.

Acosta, "+ SC7A 6!# (6++3$/ Elcee ,arms% nc. v. N*+C , "6 SC7A 3+6 (6++2$/ 7y v. 9illanueva, "63 SC7A 2) (6++2$.

66+eiterated in (avid v. National ,ederation of *a#or 7nions% "3 SC7A ++ (6++#$/ Alert Security and nvestigation Agency% nc. v.

Pasa$ilan, 3"2 SC7A 3"" (6+$.

)3



:I. R IGHT OF S TOC!HOLDERS AND M EMERS

1. W"*+ D('7 * 9Share; R'%)'7'&+While shares of stoc1 constit%te personal property, they do not represent property of the corporation

@i.e.% they are properties of the stoc1holders who own themB. A share of stoc1 only typifies an ali:%ot part of the corporations property, or the right to share in its proceeds to that e-tent $hen distri#uted according tola$ and e4uity% &%t the holder is not the owner of any part of the capital @propertiesB of the corporation, nor is he entitled to the possession of any definite portion of its assets. 'he stoc1holder is not a co9owner of corporate property. Stoc6hoders of . 2uanson and Sons (nc. v. &egister of 3eeds of 7ania , 6SCRA =1>62@.

'he registration of shares in a stoc1holders name, the iss%ance of stoc1 certificates, and the right torecei5e di5idends which pertain to the shares are all rights that flow from ownership. *im -ay v. Court of

A""eals% 6#) SC7A 3)! (##$/ -C* Sales Cor". v. Court of A""eals, )!# SC7A )" (6++$.

“As early as the case of ,isher v. -rinidad , the Co%rt already declared that “@tBhe distinction &etween thetitle of a corporation, and the interest of its mem&ers or stoc1holders in the property of the corporation, isfamiliar and well9settled. 'he ownership of that property is in the corporation, and not in the holders of shares of its stoc1. 'he interest of each stoc1holder consists in the right to a proportionate part of the

profits whene5er di5idends are declared &y the corporation, d%ring its e-istence, %nder its charter, and to ali1e proportion of the property remaining, %pon the termination or dissol%tion of the corporation, after payment of its de&ts.” Mo#ilia Products% nc. v. 7me'a$a, !"6 SC7A 2)3 (6++"$.

2. P)''%+#<' R#4"+7 (S'3. >$

Pre9empti5e right %nder Section )# refers to the right of a stoc1holder of a stoc1 corporation to s%&scri&eto all iss%es or disposition of shares of any class, in proportion to their respecti5e shareholdings. Altho%gh itcan 5alidly &e withdrawn, it cannot &e done in &reach of fid%ciary d%ties s%ch as to perpet%ate control o5er the corporation.7a;ority Stoc6hoders of &u,y (ndustria Corp. v. Lim, 650 SCRA 61 =2011@.

'he early prono%ncement in (atu -agoranao Benito v. SEC , 6) SC7A 266 (#)$ that pre9empti5eright only co5ers increases in a%thoried capital stoc1, the new wordings %nder Section )# as to co5er alliss%ances of shares has &een corrected in (ee v. SEC , ## SC7A 6) (##$.

. R#4"+ +( T)*&7') () D#7%(7' ( S"*)'"($/#&47 (S'3. 6$

Shares of stoc1 of a corporation are not owned or are the assets of the corporation4they are owned &ythe stoc1holders of record. 'he corporation whose shares of stoc1 are the s%&*ect of transfer transaction(thro%gh sale, assignment, donation, or any other mode of con5eyance$ need not &e a part to transactionto &e 5alid/ ho$ever% to #ind the cor"oration as $ell as third "arties% it is necessary that the transfer isrecorded in the #oo/s of the cor"oration. orest /is 2of > Country Cu, v. 'ertex Saes and Trading (nc., 6>2 SCRA 06 =201@.

*. R'7+)#3+#(& (& T)*&7')7, I& G'&')*$

+estraint of -rade: An agreement &y which a person o&liges himself not to engage in competiti5e tradefor fi5e years is 5alid and reasona&le and not an %nd%e or %nreasona&le restraint of trade and is o&ligatoryon the parties who 5ol%ntarily enter into s%ch agreement. -?llendorf v. A#rahamson% ) Phil. "" (#$.

A contract%al %nderta1ing on restriction of transfer of shares that has a reasona&le &%siness p%rposeand limited in co5erage is 5alid and &inding.Lam,ert v. ox , 26 P"#$. 5?? =1>1@.

. RIGHT OF REFUSAL

Section 3) contemplates no restriction as to whom the stoc1s may &e transferred. 8t does not s%ggestthat any discrimination may &e created &y the corporation in fa5or of, or against a certain p%rchaser. 'heowner of shares, as owner of personal property, is at li&erty, %nder said section to dispose them in fa5or of whome5er he pleases, witho%t limitation in this respect, than the general pro5isions of law. eishcher v. Botica %oasco, P"#$. 5? =1>25@.

'he indication on th face of the stoc1 certificate that it is “Nontranfera&le” alone odes no compel thecorporation to &%y &ac1 the shares from the stoc1holder, and held that “in the a&sence of a similar contract%al o&ligation and of a legal pro5ision applica&le thereto, it is logical to concl%de that it wo%ld &e%n*%st and %nreasona&le to compel the corporation to comply with a non9e-istent or imaginary o&ligation.”"adgett v. Ba,coc6 > Tempeton (nc., 5> P"#$. 22 =1>@.

'he “right of first refusal ” is primarily an attri&%te of ownership. Con5ersely, a wai5er thereof is an act of ownership. 'o allow the PCGG to 5ote the se:%estered shares for this p%rpose wo%ld &e sanctioning itse-ercise of an act of strict ownership. PC66 v. SEC , G.7. No. 6, )+ F%ne # (%nrep.$

A corporation cannot &y its &oard, its &y9laws, or the act of its officers, create restrictions in stoc1transfers, &eca%se “7estrictions in the traffic of stoc1 m%st ha5e their so%rce in legislati5e enactment, asthe corporation itself cannot create s%ch impediment. ;y9laws are intended merely for the protection of thecorporation, and prescri&e relation, not restriction/ they are always s%&*ect to the charter of thecorporation.” 'he only limitation imposed &y Sec. 3) is when the corporation holds any %npaid claimagainst the shares intended to &e transferred. +ural Ban/ of Salinas v. CA, 6+ SC7A "+ (##6$.

8n a landholding corporation which &y constit%tional mandate is limited to !+E foreign e:%ity, and wherethere e-ists a right of first ref%sal agreement &etween the co9shareholders, the fact that the corporations

)2



owns land cannot depri5e stoc1holders of their right of first ref%sal. No law dis:%alifies a person fromp%rchasing shares in a landholding corporation e5en if the latter will e-ceed the allowed foreign e:%ity,what the law dis:%alifies is the corporation from owning land. 5.6. Summit Holdings% nc. v. Court of

A""eals, !"+ SC7A 3# (6++"$.

3. R''/8 I R'4#7+)*+#(& R'7'/Mandamus will not lie to compel the corporate secretary to register the transfer of shares in the

corporate &oo1s when the petitioner is not the registered stoc1holder nor does he hold a power of attorneyfrom the latter. 'his is %nder the general r%le that as &etween the corporation one the one hand and itsshareholders on other, the corporation loo1s only to its &oo1s for the p%rpose of determining who itsshareholders are, so that a mere indorsee of a certificate of stoc1, claiming to &e the owner, will notnecessarily &e recognied as s%ch &y the corporation and its officers, in a&sence of e-press instr%ctions of the registered owner to ma1e s%ch transfer to the indorsee, or a power of attorney a%thoriing s%chtransfer./ager v. Bryan, 1> P"#$. 1? =1>[email protected])

Period to Enforce. Considering that the law does not prescri&e a period within which the registration of p%rchase of shares sho%ld &e effected, the action to enforce the right does not accr%e %ntil there has &eena demand and a ref%sal concerning the transfer.” Ponce v. Alsons Cement Cor"., )#) SC7A 3+6 (6++6$.

A stip%lation on the stoc1 certificate that any assignment wo%ld not &e &inding on the corporation %nlessregistered in the corporate &oo1s as re:%ired %nder the &y9laws and witho%t pro5iding when registrationsho%ld &e made, wo%ld mean that the ca%se of action and the determination of prescription period wo%ld&egin only when demand for registration is made and not at the time of the assignment of the certificate.

on v. ac/ ac/ 6olf & Country Clu# , +! Phil. !33 (#"$.'he claim for damages of what the shares co%ld ha5e sold had the demand for their registration in the

name of the &%yer &een complied with is deemed to &e spec%lati5e damage and non9reco5era&leBatong Buhay 2od 7ines v. CA, 1 SCRA =1>?@.

.R#4"+7 +( D#<#/'&/7 (S'3. $

'he term “di5idend” in its technical sense and ordinary acceptation is that part of portion of the profits of the enterprise which the corporation, &y its go5erning agents, sets apart for rata&le di5ision among theholders of it capital stoc14it is a payment, and the right thereto is an incident of ownership of stoc1.Co!uangco v. Sandigan#ayn, "3 SC7A 2#+ (6++#$.

Altho%gh stoc1 certificates grant the stoc1holder the right to recei5e :%arterly di5idends of E,c%m%lati5e and participating, the stoc1holders do not &ecome entitled to the payment thereof as a matter of right witho%t necessity of a prior declaration of di5idends. Sec. !) of Corporation Code prohi&its the

iss%ance of any stoc1 di5idend witho%t the appro5al of stoc1holders, representing not less than two9thirds(6>)$ of the o%tstanding capital stoc1, which %nderscores the fact that payment of di5idends to astoc1holder is not a matter of right &%t a matter of consens%s. I%rthermore, “interest &earing stoc1s”, onwhich the corporation agrees a#solutely to pay interest &efore di5idends are paid to the commonstoc1holders, is legal only when constr%ed as re:%iring payment of interest as di5idends from net earningsor s%rpl%s only. +e"u#lic Planters Ban/ v. Agana, 63# SC7A (##2$.

When the Co%rt directed that a total of ,!" shares of PL' &e recon5eyed to the 7ep%&lic &y wayof declaring the 7ep%&lic to &e the rightf%l owner of said shares, that necessarily incl%ded therecon5eyance to the 7ep%&lic of the di5idends and interest accr%ing thereto. Co!uangco v. Sandigan#ayn,"3 SC7A 2#+ (6++#$.

5. R#4"+ +( V(+' *&/ +( A++'&/ M''+#&47 (S'37. 6 *&/ ?>$

=ntil challenged s%ccessf%lly in proper proceedings, a registered stoc1holder has a right to participate in

any meeting, and in the a&sence of fra%d the action of the stoc1holders meeting cannot &e collaterallyattac1ed on acco%nt of s%ch participation, e5en if it &e shown later on that the shares had &een pre5io%slysold (&%t not recorded$. Price and Sulu (ev. Co. v. Martin, " Phil. 2+2 (#))$.

Dne of the rights of a stoc1holder is the right to participate in the control and management of thecorporation that is e-ercised thro%gh his 5ote4a right inherent in and incidental to the ownership of corporate stoc1, and as s%ch is a property right. Castillo v. Balinghasay , !!+ SC7A !!6 (6++!$.

'he right to 5ote is inherent in and incidental to the ownership of corporate stoc1s. 8t is settled that%niss%ed stoc1s may not &e 5oted or considered in determining whether a :%or%m is present in astoc1holders meeting, or whether a re:%isite proportion of the stoc1 of the corporation is 5oted to adopt acertain meas%re or act. Dnly stoc1 actually iss%ed and o%tstanding may &e 5oted. =nder Section 3, eachshare of stoc1 is entitled to 5ote, %nless otherwise pro5ided in the articles of incorporation or declareddelin:%ent %nder Section 32. Neither the stoc1holders nor the corporation can 5ote or represent shares thatha5e ne5er passed to the ownership of stoc1holders, or, ha5ing so passed, ha5e again &een p%rchased &y

the corporation. 'hese shares are not to &e ta1en into consideration in determining ma*orities. When thelaw spea1s of a gi5en proportion of the stoc1, it m%st &e constr%ed to mean shares that have "assed fromthe corporation, and that may &e 5oted. -an v. Syci", !## SC7A 63 (6++3$.

'he se:%estration of shares does not entitle the go5ernment to e-ercise acts of ownership o5er theshares/ e5en se:%estered shares may &e 5oted %pon &y the registered stoc1holder. Co!uangco 5r. v.+oas, #" SC7A 2#2 (##$. 'he PCGG may, howe5er, &e granted s%ch 5oting right pro5ided it can ($show "rima facie e5idence that the wealth and>or the shares are indeed ill9gotten/ and (6$ demonstrateimminent danger of dissipation of the assets, th%s necessitating their contin%ed se:%estration and 5oting &ythe go5ernment %ntil a decision, r%ling with finality on their ownership, is prom%lgated &y the proper co%rt.

6)+ivera v. ,lorendo% !! SC7A 3!) (#3$/ Ponce v. Alsons Cement Cor"., )#) SC7A 3+6 (6++6$.

)



Ne5ertheless, the foregoing Ttwo9tieredT test does not apply when the f%nds that are "rima facie p%&lic incharacter or, at least, are affected with p%&lic interest. 8nasm%ch as the s%&*ect =CP; shares in the presentcase were %ndisp%ta&ly ac:%ired with coco le5y f%nds which are p%&lic in character, then the right to 5otethem shall &e e-ercised &y the PCGG. 8n s%m, the Tp%&lic characterT test, not the Ttwo9tieredT one, applies.+e"u#lic v. C?C?,E(% )26 SC7A !36 (6++$/ -rans Middle East :Phils; v. Sandigan#ayan, !#+ SC7A!"" (6++3$.

*. I&7+*&3'7 W"'& S+(3"($/')7 E&+#+$'/ +( V(+'9 Amendment of articles of incorporation (Sec. 3$

9 0lection of directors and tr%stees (Sec. 6!$

9 8n5estment in another &%siness or corporation (Secs. )3 and !6$

9 8ncrease and ecrease of capital stoc1 (Sec. )$

9 8nc%rring, or increasing &onded inde&tedness (Sec. )$

9 Sale, disposition or enc%m&rance of all or s%&stantially all of the corporate assets (Sec. !+$

9 eclaration of stoc1 di5idends (Sec. !)$.

9 <anagement contracts (Sec. !!$

9 Adoption, amendment and repeal of &y9laws (Sec. !$.

9 Ii-ing of consideration of no par 5al%e shares (Sec. 36$

9 <erger and consolidation (Sec. 26$

. J(#&+ O&')7"#% (S'3. 56$

3. P$'/4(), M()+4*4()7 *&/ A/#&#7+)*+()7 (S'3. 55$When shares are pledged &y means of endorsement in &lan1 and deli5ery of the co5ering certificates to

a loan, the pledgee does not &ecome the owner thereof simply &y the fail%re of the registered stoc1holder to pay his loan. Conse:%ently, witho%t proper foreclos%re, the lender cannot demand that the shares &eregistered in his name. *im -ay v. Court of A""eals% 6#) SC7A 3)! (##$.

Altho%gh the 7%les of Co%rt, while permitting an e-ec%tor or administrator to represent or to &ring s%itson &ehalf of the deceased, do no prohi&it the heirs from representing the deceased. When no administrator has &een appointed, there is all the more reason to recognie the heirs as the proper representati5es of thedeceased. 6ochan v. oung% )"! SC7A 6+2 (6++$.

/. T)'*7)8 S"*)' N( V(+#&4 R#4"+7 (S'3. 5$

'reas%ry shares cannot &e 5oted %pon. -an v. Syci", !## SC7A 63 (6++3$.

'. V(+#&4 R#4"+7 ( M'')7

8n stoc1 corporation, shareholders may generally transfer their shares/ and on the death of ashareholder, the e-ec%tor or administrator is 5ested with the legal title to the stoc1 and entitled to 5ote it.=ntil a settlement and di5ision of the estate is effected, the stoc1s of the decedent are held &y theadministrator or e-ec%tor .6! Dn the other hand, mem&ership in and all rights arising from a non9stoc1corporation are personal and non9transfera&le, %nless the articles of incorporation or the &ylaws of thecorporation pro5ide otherwise. 8n other words, the determination of whether or not “dead mem&ers” areentitled to e-ercise their 5oting rights (thro%gh their e-ec%tor or administrator$, depends on those articles of incorporation or &ylaws. -an v. Syci", !## SC7A 63 (6++3$.

=nder the ;y9Laws of GCHS, mem&ership in the corporation shall, among others, &e terminated &y thedeath of the mem&er. Section # of the Corporation Code f%rther pro5ides that termination e-ting%ishes allthe rights of a mem&er of the corporation, %nless otherwise pro5ided in the articles of the incorporation or the &ylaws. Applying Section # to the present case, we hold that dead mem&ers who are dropped from the

mem&ership roster in the manner for the ca%se pro5ided for in the ;y9Law of GCHS are not to &e co%ntedin determining the re:%isite 5ote in corporate matters or the re:%isite :%or%m for the ann%al mem&ersmeeting. With remaining mem&ers, the :%or%m in the present case sho%ld &e 3. therefore, there &eing a:%or%m, the ann%al mem&ers meeting, cond%cted with si- mem&ers present, was 5alid. -an v. Syci", !##SC7A 63 (6++3$.

.C(&/3+ ( S+(3"($/')7 M''+#&47

• 0inds and &e?uirements of 7eetings (S'37. > *&/ 50$/

• "ace and Time of 7eeting (S'37. 51 *&/ >$/

• 9uorum (S'3. 52$

%or%m is &ased on the totality of the shares which ha5e &een s%&scri&ed and iss%ed whether it &efo%nders shares or common shares. 'o &ase the comp%tation of :%or%m solely on the o&5io%sly deficient,

if not inacc%rate S';, and completely disregarding the iss%ed and o%tstanding shares indicated in thearticles of incorporation wo%ld wor1 in*%stice to the owners and>or s%ccessors in interest of the said shares.'he stoc1 and transfer &oo1 cannot &e %sed as the sole &asis for determining the :%or%m as it does notreflect the totality of shares which ha5e &een s%&scri&ed, more so when the articles of incorporation show asignificantly larger amo%nt of shares iss%ed and o%tstanding as compared to that listed in the stoc1 andtransfer &oo1. *anu'a v. CA, !"! SC7A "! (6++"$.

6. C(&+)*3+7 *&/ A4)'''&+ A'3+#&4 S"*)'"($/#&47

*. P)(8 (S'3. 5?$

6!+eiterated in *o"e' +ealty% nc. v. S"ouses -an!angco% 2)# SC7A 3!! (6+!$.

)#



Pro-y solicitation in5ol5es the sec%ring and s%&mission of pro-ies, while pro-y 5alidation concerns the5alidation of s%ch sec%red and s%&mitted pro-ies. 8t is possi&le that an intra9corporate contro5ersy mayanimate a disgr%ntled shareholder to complain to the Sec%rities and 0-change Commission (S0C$ acorporations 5iolations of S0C r%les and reg%lations, &%t that moti5e alone sho%ld not &e s%fficient todepri5e the S0C of its in5estigatory and reg%latory powers, especially so since s%ch powers aree-ercisa&le on a motu "ro"rio &asis. 6SS v. Court of A""eals% "" SC7A 32# (6++#$.

'he S0Cs power to pass %pon the 5alidity of pro-ies in relation to election contro5ersies has effecti5ely&een withdrawn, tied as it is to its a&rogated *%risdictional powers. 'he fact that the *%risdiction of the

reg%lar co%rts %nder Section "(c$ is confined to the 5oting on election of officers, and not on all matterswhich may &e 5oted %pon &y stoc1holders, el%cidates that the power of the Sec%rities and 0-changeCommission (S0C$ to reg%late pro-ies remains e-tant and co%ld 5ery well &e e-ercised when stoc1holders5ote on matters other than the election of directors. 6SS v. Court of A""eals% "" SC7A 32# (6++#$.

. V(+#&4 T)7+ A4)'''&+7 (S'3. 5>$

A K'A separates the 5oting rights and other rights co5ered of the stoc1 from other attri&%tes of ownership, intended to &e irre5oca&le for a definite period of time and the p%rpose of which is to gi5e to thetr%stee to ac:%ire 5oting control of the corporation.Lee v. CA, 205 SCRA 52 1>>2@.

'he tr%stor has a right to terminate the K'A for &reach thereof. Everett v. Asia Ban/ing Cor"oration, !#Phil. "6 (#63$.

Koting tr%st agreement as part of a loan arrangement. N(C v. A4uino, 3) SC7A ") (#$.

3. P(($#&4 A4)'''&+7 () S"*)'"($/')7 A4)'''&+7 (S'3. 100$

. R#4"+7 +( I&7%'3+ *&/ C(%8 C()%()*+' R'3()/7

*. *7#7 ( R#4"+'he stoc1holders right of inspection of corporate &oo1s and records is &ased on his ownership of the

assets and property of the corporation. 8t is therefore an incident of ownership of the corporate property,whether this ownership or interest &e termed an e:%ita&le ownership, a &eneficial ownership or a :%asi9ownership. 'he right of inspection is predicated %pon the necessity of self9protection on the part of thestoc1holder. 2o6ongwei 1r. v. S!C , ?> SCRA 6 =1>>@.

'he stoc1holders right of inspection of the corporations &oo1s and records is &ased %pon hisownership of shares in the corporation and the necessity for self9protection. Puno v. Puno Enter"rises, "##SC7A "" (6++#$.

. L##+*+#(&7 (& R#4"+ 'he only e-press limitations on the right of inspection %nder Sec. 2! of Corporation Code are? (a$ it

sho%ld &e e-ercised at reasona&le ho%rs on &%siness days/ (&$ the person demanding the right to e-amineand copy e-cerpts from the corporate records and min%tes has not improperly %sed any informationsec%red thro%gh any pre5io%s e-amination of records/ and (c$ the demand is made in good faith or for alegitimate p%rpose. Africa v. PC66, 6+" SC7A )# (##6$.

Summary of &uings: 'he right to inspect corporate &oo1s and records?

• 8s e-ercisa&le thro%gh agents and representati5es, otherwise it wo%ld often &e %seless to the stoc1holder who

does not 1now corporate intricacies. .6. Phil"otts v. Phili""ine Manufacturing Co., !+ Phil. !2 (##$.

• Cannot &e denied on the gro%nd that the director is on %nfriendly terms with the officers of the corporation whose

records are so%ght to &e inspected. 9eraguth v. sa#ela Sugar Co., "2 Phil. 633 (#)6$.

• Altho%gh it incl%des the right to ma1e copies, does not a%thorie &ringing the &oo1s or records o%tside of

corporate premises. 9eraguth v. sa#ela Sugar Co., "2 Phil. 633 (#)6$.

• oes not incl%de the right of access to min%tes %ntil s%ch min%tes ha5e &een written %p and appro5ed &y the

directors. 9eraguth v. sa#ela Sugar Co., "2 Phil. 633 (#)6$.

• Cannot &e limited to a period of ten days shortly prior to the ann%al stoc1holders meeting, as s%ch wo%ld &e an

%nreasona&le restriction and 5iolates the legal pro5ision granting the e-ercise of s%ch right “at reasona&le ho%rs.”Pardo v. Hercules *um#er Co., !2 Phil. #3! (#6!$.

3. S%'3##'/ R'3()/7 (S'37. , 5 *&/ 11$

/. R''/#'7 I D'&#'/ 7andamus

8n contrasting the lang%age of the present Corporation Code from the old Corporation Law, the law nowpro5ides for e-press limitation on the right to inspect and now re:%ires as a condition for s%ch e-aminationthat one re:%esting it m%st not ha5e &een g%ilty of %sing improperly any information sec%red thro%gh aprior e-amination, an that the person as1ing for s%ch e-amination m%st &e acting in good faith and for alegitimate p%rpose in ma1ing his demand. 'he stoc1holder see1ing to e-ercise the right of inspection m%stset forth the reasons and the p%rposes for which he desires s%ch inspection. 2on8aes v. "%B, 122SCRA ?> =1>?@.

;%rden of proof to show that e-amination is for improper p%rpose is on the part of the corporation.+e"u#lic v. Sandigan#ayan% ## SC7A )# (###$.

7ef%sal to allow stoc1holders (or mem&ers of a non9stoc1 corporation$ to e-amine &oo1s of thecompany is not a gro%nd for appointing a recei5er (or creating a management committee$ since there areother ade:%ate remedies, s%ch as a writ of mandamus. <iscond%ct of corporate directors or other officersis not a gro%nd for the appointment of a recei5er where there are one or more ade:%ate legal actionagainst the officers, where they are sol5ent, or other remedies. Ao)as v. Court of A""eals, !# SC7A ))#

!+



(6++3$.

'. C)##&*$ S*&3+#(& &/') S'3+#(& 18n Ang-A,aya v. Ang , 5 SCRA 12> =200?@, the Co%rt had the occasion to en%merate the re:%isites

&efore the penal pro5ision %nder Section !! of the Corporation Code may &e applied in a case of 5iolationof a stoc1holder or mem&ers right to inspect the corporate &oo1s>records as pro5ided for %nder Section 2!of the Corporation Code. Sy -iong Shiou v. Sy Chim, "6 SC7A "2 (6++#$.

8n a criminal complaint for 5iolation of Section 2! of the Corporation Code, the defense of improper %seor moti5e is in the nat%re of a *%stifying circ%mstance that wo%ld e-onerate those who raise and are a&le topro5e the same4where the corporation denies inspection on the gro%nd of improper moti5e or p%rpose,the &%rden of proof is ta1en from the shareholder and placed on the corporation. Sy -iong Shiou v. Sy Chim, "6 SC7A "2 (6++#$.

'he ref%sal of corporate officers to allow a stoc1holder to re5iew any corporate record, incl%ding thestoc1 and transfer &oo1, pro5ided for in Section 2! wo%ld constit%te a criminal offense %nder Section !!which anyway p%nishes all 5iolations of the Corporation Code. <u;uico v. 9uim,ao, 2 SCRA 262=201@.

. C(&#/'&+#*$ N*+)' ( SEC E*#&*+#(&7 (S'3. 12$

?. A%%)*#7*$ R#4"+ (S'37. ?1 +( ?6 *&/ 105$

A stoc1holder who dissents from certain corporate actions has the right to demand payment of the fair 5al%e of his or her shares. 'his right, 1nown as the right of appraisal, is e-pressly recognied in Section of the Corporation Code. Clearly, the right of appraisal may &e e-ercised when there is a f%ndamentalchange in the charter or articles of incorporation s%&stantially pre*%dicing the rights of the stoc1holders. 8tdoes not 5est %nless o&*ectiona&le corporate action is ta1en. 8t ser5es the p%rpose of ena&ling thedissenting stoc1holder to ha5e his interest p%rchased and to retire from the corporation. -urner v. *oren'oShi""ing Cor"., 3)3 SC7A ) (6++$.

>. RIGHT TO FILE DERIVATIVE SUITS

eri5ati5e s%its are go5erned &y a special set of proced%ral r%les 1nown as the 9I&+')# R$'7 ( P)(3'/)' G(<')&#&4 I&+)*-C()%()*+' C(&+)(<')7#'7 &/') R'%$#3 A3+ N(. ?>>; =A.M. N(. 01-2-0-SCB ''3+#<' 01 A%)#$ 2001@. Section , 7%le thereof e-pressly lists deri5ati5e s%its among the casesco5ered &y it. Hi)ield +ealty% nc. v. Court of A""eals, "#+ SC7A "!, ""3 (6++#$.

A “family” corporation is not e-empt from complying with the clear re:%irements and formalities of ther%les for filing a deri5ati5e s%it. 'here is nothing in the pertinent laws or r%les which state that there is adistinction &etween family corporations and other types of corporations in the instit%tion &y a stoc1holder of a deri5ati5e s%it. Ang v. S"ouses Ang , 3## SC7A 626 (6+)$.

*. D')#<*+#<' S#+ M7+ ' E'3+'/ W"'& (*)/ C*&&(+ P)(%')$8 E')3#7' 7#&'77 J/4'&+

2enera &ue <inority stoc1holders do not ha5e any stat%tory right to o5erride the &%siness *%dgments of the officers and ;oards of irectors. 8t is settled that a stoc1holderQs right to instit%te a deri5ati5e s%it is not&ased on any e-press pro5ision of the Corporation Code, or e5en the Sec%rities 7eg%lation Code, &%t isimpliedly recognied when the said laws ma1e corporate directors or officers lia&le for damages s%ffered &y

the corporation and its stoc1holders for 5iolation of their fid%ciary d%ties .Ching v. Su,ic Bay 2of and

Country Cu, (nc. SCRA 56> =201@.

8n the a&sence of a special a%thority from the ;oard of irectors to instit%te a deri5ati5e s%it for and in

&ehalf of the corporation, the president or managing director is dis:%alified &y law to s%e in her own name.'he power to s%e and &e s%ed in any co%rt &y a corporation is lodged in the ;oard that e-ercises itscorporate powers and not in the president or officer thereof. Bitong v. Court of A""eals% 6#6 SC7A "+)(##$.

While :%estions of policy and management are left to the honest decision of the officers and directors of a corporation, and the co%rts are witho%t a%thority to s%&stit%te their *%dgment for the *%dgment of the;oard of irectors/ yet where the corporate directors are g%ilty of &reach of tr%st4not of mere error of

*%dgment or a&%se of discretion4and intracorporate remedy is f%tile or %seless, a stoc1holder may instit%tea s%it in &ehalf of himself and other stoc1holders and for the &enefit of the corporation. Howe5er, thecorporation is the real party in interest in a deri5ati5e s%it and the s%ing stoc1holder is only a nominal party.

A deri5ati5e s%it m%st &e differentiated from a class s%it.Cua 1r. v. Tan, 60 SCRA 65 =200>@.

8n Cua% v. -an% 366 Phil. 33 (6++#$, the Co%rt held that &y 5irt%e of ratification, the acts of the &oard of directors &ecome the acts of the stoc1holders themsel5es, e5en if those acts were, at the o%tset,%na%thoried . . . ;y ratification, e5en an %na%thoried act of an agent &ecomes the a%thoried act of theprincipal. 'o declare the ;oard resol%tion n%ll and 5oid will ser5e no practical %se or 5al%e, or affect any of the rights of the parties, &eca%se the s%&se:%ent stoc1holders resol%tion appro5ing and ratifying saidac:%isition and the manner in which P7C8 shall constit%te the F'H ;oard of irectors, will still remain 5alidand &inding.Lope8 &eaty (nc. v. Spouses Tan;angco > SCRA 6 =201@.

=nder Sec. )3, in relation to Sec. 6), a corporations power to s%e is lodged with its &oard of directors or tr%stees. An indi5id%al stoc1holder is permitted to instit%te a deri5ati5e s%it on &ehalf of the corporationwherein he holds stoc1s in order to protect or 5indicate corporate rights, whene5er the officials of thecorporation ref%se to s%e, or are the ones to &e s%ed, or hold the control of the corporation. 8n s%ch actions,

!



the s%ing stoc1holder is regarded as a nominal party, with the corporation as the real party in interest.Chua v. Court of Appeas, SCRA 25> [email protected]"

.N*+)' ( +"' P(') +( F#$' D')#<*+#<' S#+ A deri5ati5e s%it is an action &ro%ght &y minority shareholders in the name of the corporation to redress

wrongs committed against the corporation, for which the directors ref%se to s%e. 8t is a remedy designed &ye:%ity and has &een the principal defense of the minority shareholders against a&%ses &y the ma*ority.estern nstitute of -echnology% nc. v. Salas% 62 SC7A 63 (##2$.63

'he whole p%rpose of the law a%thoriing a deri5ati5e s%it is to allow the stoc1holders>mem&er toenforce rights which are deri5ati5e (secondary$ in nat%re, i.e., to enforce a corporate ca%se of action. +.N.Symaco -rading Cor" v. Santos, !32 SC7A )6 (6++"$.62

A stoc1holders right to instit%te a deri5ati5e s%it is not ,ased on any e-press pro5ision of theCorporation Code, or e5en the Sec%rities 7eg%lation Code, &%t is impliedly recognied when the said lawsma1e corporate directors or officers lia&le for damages s%ffered &y the corporation and its stoc1holders for 5iolation of their fid%ciary d%ties. u v. u/ayguan, "# SC7A " (6++#$.

An indi5id%al stoc1holder is permitted to instit%te a deri5ati5e s%it on &ehalf of the corporation whereinhe holds stoc1s in order to protect or 5indicate corporate rights, whene5er officials of the corporation ref%seto s%e or are the ones to &e s%ed or hold the control of the corporation9in s%ch actions, the s%ingstoc1holder is regarded as the nominal party, with the corporation as the party in interest. Ma!ority Stoc/holders of +u#y ndustrial Cor". v. *im, 3"+ SC7A !3 (6+$.

3.R'#7#+'7 ( D')#<*+#<' S#+8n the case of, we en%merated the foregoing re:%isites &efore a stoc1holder can file a deri5ati5e s%it? (a$

the party &ringing s%it sho%ld &e a shareholder d%ring the time of the act or transaction complained of, then%m&er of shares not &eing material/ (&$ the party has tried to e-ha%st intra9corporate remedies, relief, &%tthe latter has failed or ref%sed to heed his plea/ and (c$ the ca%se of action act%ally de5ol5es on thecorporation/ the wrongdoing or harm ha5ing &een or &eing ca%sed to the corporation and not to thepartic%lar stoc1holder &ringing the s%it. San 7igue Corp. v. 0ahn, 16 SCRA =1>?>@.6

Section , 7%le of the 8nterim 7%les of Proced%re Go5erning 8ntra9Corporate Contro5ersies lays downthe following re:%irements which a stoc1holder m%st comply with in filing a deri5ati5e s%it? A stoc1holder or mem&er may &ring an action in the name of a corporation or association, as the case may &e, pro5ided,that? ($ He was a stoc1holder or mem&er at the time the acts or transactions s%&*ect of the action occ%rredand at the time the action was filed/ (6$ He e-erted all reasona&le efforts, and alleges the same withpartic%larity in the complaint, to e-ha%st all remedies a5aila&le %nder the articles of incorporation, &y9laws,

laws or r%les go5erning the corporation or partnership to o&tain the relief he desires/ ()$ No appraisal rightsare a5aila&le for the act or acts complained of/ and (!$ 'he s%it is not a n%isance or harassment s%it. <u v. <u6ayguan, 5?> SCRA 5?? =200>@.6#

An allegation that appraisal rights were not a5aila&le for the acts complained of is another re:%isite for filing deri5ati5e s%its %nder 7%le , Section ()$ of the 8nterim 7%les, 'iamor 1r. v. $mae, 6 SCRA25 =201@.

N%isance and harassment s%its are prohi&ited, and in determining whether a s%it is a n%isance or harassment s%it, the co%rt shall consider, among others, the follow? (a$ 'he e-tent of the shareholding or interest of the initiating stoc1holder or mem&er/ (&$ s%&*ect matter of the s%it/ (c$ legal and fact%al &asis of the complaint/ (d$ a5aila&ility of appraisal rights for the act or acts complained of/ and (e$ pre*%dice or damage to the corporation. 8n case of n%isance or harassments s%its, the co%rt may motu "ro"rio or %ponmotion dismiss the case. Ang v. Ang , 6>> SCRA 22 =201@.

/.ho 7ay Bring a 3erivative Suit 'he relators m%st &e stoc1holders &oth at time of occ%rrence of the e5ents constit%ting the ca%se of

action and at the time of the filing of the deri5ati5e s%it. "ascua v. #ro8co, 1> P"#$. ? =1>11@/ 6ochanv. oung , )"! SC7A 6+2 (6++$.

A minority stoc1holder can file a deri5ati5e s%it against the president for di5erting corporate income tohis personal acco%nts. Commart :Phils.; nc. v. SEC , # SC7A 2) (##$.

A lawyer engaged as co%nsel for a corporation cannot represent mem&ers of the same corporations&oard of directors in a deri5ati5e s%it &ro%ght against them. 'o do so wo%ld &e tantamo%nt to representingconflicting interests, which is prohi&ited &y the Code of Professional 7esponsi&ility.” Hornilla v. Salunat , !+"SC7A 66+ (6++)$.

A deri5ati5e action is a s%it &y a shareholder to enforce a corporate ca%se of action. 'he corporation is anecessary party to the s%it. And the relief which is granted is a *%dgment against a third person in fa5or of

the corporation. Similarly, if a corporation has a defense to an action against it and is not asserting it, a

6",ili"inas Port Services% nc. v. 6o, " SC7A !") (6++2$/ u v. u/ayguan, "# SC7A " (6++#$/ Hi)ield +ealty% nc. v. Court of

A""eals, "#+ SC7A "! (6++#$.

63 Ang v. Ang , 3## SC7A 626 (6+)$.

62Hi)ield +ealty% nc. v. Court of A""eals, "#+ SC7A "!, ""3 (6++#$/ Strategic Alliance (ev. Cor". v. +adstoc/ Securities *td ., 3+2

SC7A !) (6++#$.

6,ili"inas Port Services% nc. v. 6o, " SC7A !") (6++2$+eyes v. +egional -rial Court of Ma/ati% Br. >=% "3 SC7A "#) (6++$/ Hi)

ield +ealty% nc. v. Court of A""eals, "#+ SC7A "! (6++#$.

6#Hi)ield +ealty% nc. v. Court of A""eals, "#+ SC7A "!, ""3 (6++#$/ Strategic Alliance (ev. Cor". v. +adstoc/ Securities *td ., 3+2

SC7A !) (6++#$/ Cua% 5r. v. -an, 3+2 SC7A 3!" (6++#$/ Ang v. Ang , 3## SC7A 626 (6+)$.

!6



stoc1holder may inter5ene and defend on &ehalf of the corporation. Chua v. Court of Appeas, SCRA 25> =200@.)+

Since the ones to &e s%ed are the directors>officers of the corporation itself, a stoc1holder, li1e Cr%,may 5alidly instit%te a deri5ati5e s%it to 5indicate the alleged corporate in*%ry/ in which case Cr% is only anominal party while Iilport is the real party9in9interest. ,ili"inas Port Services v. 6o, " SC7A !") (6++2$.

A minority stoc1holder and mem&er of the &oard has no power or a%thority to s%e on the corporations&ehalf. Nor can we %phold this as a deri5ati5e s%it, since it is re:%ired that the minority stoc1holder s%ingfor and on &ehalf of the corporation m%st allege in his complaint that he is s%ing on a deri5ati5e ca%se of

action on &ehalf of the corporation and all other stoc/holders similarly situated $ho may $ish to !oin him inthe suit . 'here is now showing that petitioner has complied with the foregoing re:%isites. -am ing -a/ v.Ma/asiar% )"+ SC7A !2" (6++$/ Hi)ield +ealty% nc. v. Court of A""eals, "#+ SC7A "! (6++#$.

'he stat%s of heirs as co9owners of shares of stoc1s prior to the partition of the decedents estate doesnot immediately and necessarily ma1e them stoc1holders of the corporation9%nless and %ntil there iscompliance with the Section 3) of the Corporation Code on the manner of transferring shares, the heirs donot &ecome registered stoc1holders of the corporation. +eyes v. +egional -rial Court of Ma/ati% Br. >=%"3 SC7A "#) (6++$/ Puno and Puno Enter"rises% nc., "## SC7A "" (6++#$.

'.E"*7+#(& ( I&+)*-C()%()*+' R''/#'7 A condition precedent to the filing of a deri5ati5e s%it is that the party has tried to e-ha%st inta9corporate

remedies, i.e., has made a demand on the ;oard of irectors for the appropriate relief, &%t the latter hasfailed to or ref%sed to heed his plea. Everett v. Asia Ban/ing Cor".% !# Phil. "6 (#62$/ Angeles v. Santos%3! Phil. 3#2 (#)2$.

A deri5ati5e s%it to :%estion the 5alidity of the foreclos%re of the mortgage on corporate assets can &efiled witho%t prior demand %pon the ;oard of irectors where the legality of the constit%tion of the ;oardlies at the center of the iss%es. (BP v. Pundogar% 6 SC7A (##)$.

While it is tr%e that the complaining stoc1holder m%st satisfactorily show that he has e-ha%sted allmeans to redress his grie5ances within the corporation, e-cept when s%ch remedy is complete control of the person against whom the s%it is &eing filed. 'he reason is o&5io%s? a demand %pon the &oard toinstit%te an action and prosec%te the same effecti5ely wo%ld ha5e &een %seless and an e-ercise in f%tility.Hi)ield +ealty% nc. v. Court of A""eals, "#+ SC7A "!, ""2 (6++#$.

'he o&5io%s intent &ehind the r%le re:%iring the stoc1holder filing a deri5ati5e s%it to first e-ert allreasona&le efforts to e-ha%st all remedies a5aila&le %nder the articles of incorporation, &y laws, laws or r%les go5erning the corporation or partnership to o&tain relief he desires is to ma1e the deri5ati5e s%it the

final reco%rse of the stoc1holders, after all other remedies to o&tain the relief so%ght had failed. u v.u/ayguan, "# SC7A " (6++#$.)

.N*+)' ( R'$#' () R''/#'7 P)*8'/ F() 'he complaint cannot demand for the defendants to pay the s%ing stoc1holders the 5al%e of their

respecti5e participation in the assets that ha5e &een damaged, for a deri5ati5e s%it m%st ha5e ca%se of action for the &enefit of the corporation. Evangelista v. Santos, 3 Phil. )2 (#"+$.)6

Since it is the corporation that is the real party9in9interest in a deri5ati5e s%it, then the reliefs prayed for m%st &e for the &enefit or interest of the corporation. When the relief prayed for do not pertain to thecorporation, then it is an improper deri5ati5e s%it. *egas"i -o$ers D% nc. v. Muer , 32) SC7A !")(6+6$,)) citing K8LLAN=0KA, PH8L8PP8N0 CD7PD7A'0 L AW, ## ed., p. )2".

Allegations of in*%ry to the relators can co9e-ist with those pertaining to the corporation, and does notdis:%alify them from filing a deri5ati5e s%it on &ehalf of the corporation. 8t merely gi5es rise to an additional

ca%se of action for damages against the erring directors. 6ochan v. oung , )"! SC7A 6+2 (6++$.8n a deri5ati5e action, the real party in interest is the corporation itself, not the shareholders who act%ally

instit%ted it. A s%it to enforce preempti5e rights in a corporation is not a deri5ati5e s%it, and therefore atemporary restraining order en*oining a person from representing the corporation will not &ar s%ch action,&eca%se it is instit%ted on &ehalf and for the &enefit of the shareholder, not the corporation. *im v. *im)u%)"6 SC7A 63 (6++$.

Where directors ha5e committed a &reach of tr%st either &y their fra%ds, ultra vires acts, or negligence,and the corporation is %na&le or %nwilling to instit%te s%it to remedy the wrong % a stoc/holder may sue on#ehalf of himself and other stoc/holders and for the #enefit of the cor"oration , to &ring a&o%t a redress of the wrong done directly to the corporation and indirectly to the stoc1holders. 8n s%ch deri5ati5e s%it, thecorporation is the real party in interest while the stoc1holder filing s%it for the corporations &ehalf is onlynominal party. Hornilla v. Salunat , !+" SC7A 66+ (6++)$.

Appointment of recei5er can &e an ancillary remedy in a deri5ati5e s%it. Chase v. C, of Manila, SC7A 3+6 (#33$.

4.V'&' () D')#<*+#<' S#+=nder Section ", 7%le of the 8nterim 7%les, the proper 5en%e for deri5ati5e s%it wo%ld &e in the 7'C

which has *%risdiction o5er the principal office of the corporation. Hi)ield +ealty% nc. v. Court of A""eals,"#+ SC7A "! (6++#$.

)+6o v. (istinction Pro"erties (ev. and Construction% nc., 32 SC7A !3 (6+6$.

)Ching v. Su#ic Bay 6olf and Country Clu#% nc.% 2)! SC7A "3# (6+!$.

)6+eyes v. -an, ) SC7A # (#3$/ +e"u#lic Ban/ v. Cuaderno, # SC7A 32 (#32$.

)) Also +.N. Symaco -rading Cor". v. Santos, !32 SC7A )6 (6++"$/ Ang v. Ang , 3## SC7A 626 (6+)$.

!)



10. R#4"+ +( P)(%()+#(&*+' S"*)' ( R'*#&#&4 A77'+7 U%(& D#77($+#(& (S'3. 122$

8n the li:%idation of a corporation, after the payment of all corporate de&ts and lia&ilities, the remainingassets, if any, m%st &e distri&%ted to the stoc1holders in proportion to their interests in the corporation.'he share of each stoc1holder in the assets %pon li:%idation is what is 1nown as li4uidating dividend.President of P(C v. +eyes, !3+ SC7A !2) (6++"$.

:II. S HARES OF S TOC! AND C APITAL S TOC!

1. P(') ( +"' C()%()*+#(& +( I77' S"*)'7 ( S+(3

'he power to iss%e shares of stoc1 in a corporation is lodged in the &oard of directors and nostoc1holders meting is re:%ired to consider it &eca%se additional iss%ances of shares of stoc1 does notneed appro5al of the stoc1holders4what is only re:%ired is the &oard resol%tion appro5ing the additionaliss%ance of shares. Ma!ority Stoc/holders of +u#y ndustrial Cor". v. *im, 3"+ SC7A !3 (6+$.

2. C(&3'%+ ( 9Capita Stoc6 ; (S'3. 1$

;y e-press pro5ision of Sec. )2, paid9%p capital is that portion of the a%thoried capital stoc1 whichhas &een &oth s%&scri&ed and paid. . . Not all f%nds or assets recei5ed &y the corporation can &econsidered paid9%p capital, for this term has a technical signification in Corporation Law. S%ch m%st formpart of the a%thoried capital stoc1 of the corporation, s%&scri&ed and then act%ally paid %p. MSC)NAC7SP v. National ages and Productivity Comm.% 63# SC7A 2) (##2$.

'he term “ca"ital ” and other terms %sed to descri&e the capital str%ct%re of a corporation are of %ni5ersal acceptance, and their %sages ha5e long &een esta&lished in *%rispr%dence. ;riefly, capital refersto the 5al%e of the property or assets of a corporation. 'he capital s%&scri&ed is the total amo%nt of thecapital that persons (s%&scri&ers or shareholders$ ha5e agreed to ta1e and pay for, which need notnecessarily &e, and can &e more than, the par 5al%e of the shares. 8n fine, it is the amo%nt that thecorporation recei5es, incl%si5e of the premi%m if any, in consideration of the original iss%ance of the shares.N-C v. Court of A""eals, ) SC7A "+ (###$.

'he o%tstanding capital stoc1 is defined %nder Sec. )2 as “the total shares of stoc1 iss%ed tos%&scri&ers or stoc1holders whether or not f%lly or partially paid (as long as there is &inding s%&scriptionagreement$ e-cept treas%ry shares.” 'h%s, :%or%m is &ased on the totality of the shares which ha5e &eens%&scri&ed and iss%ed, whether it &e fo%nders shares or common shares. *anu'a v. Court of A""eals, !"!SC7A "! (6++"$.

An “in5estment”, &eing in the nat%re of e:%ity, is an e-pendit%re to ac:%ire property or other assets in

order to prod%ce re5en%e. 8t is the placing of capital or laying o%t of money in a way intended to sec%reincome or profit from its employment. =nli1e a deposit of money or a loan that earns interest, cannot &eass%red of a di5idend or an interest on the amo%nt in5ested, for di5idends on in5estments are granted onlyafter profits or gains are generated. President of P(C v. +eyes, !3+ SC7A !2) (6++"$.

“ Advances for ,uture Su#scri"tion” is a recei5a&le acco%nt and does not form part of the capital stoc1of the corporation since it does not correspond to any partic%lar iss%ance of shares of stoc1. Central -etileMills v. National age and Productivity Comm.% 63+ SC7A )3 (##3$. Conse:%ently there is no lia&ility for the payment of the doc%mentary stamp ta- on s%ch deposit for f%t%re s%&scription for the reason that thereis yet no s%&scription that creates rights and o&ligations &etween the s%&scri&er and the corporation.Commissioner of nternal +evenue v. ,irst E"ress Pa$nsho" Co.% nc., "# SC7A 6") (6++#$.

. C$*77##3*+#(& ( S"*)'7 (S'3. 6$

8t is not correct to say that holders of the preferred shares lose all their 5oting rights, since Section 3 of the Corporation Code pro5ides for the sit%ations where non95oting shares li1e preferred shares are granted5oting rights. Phili""ine Coconut Producers ,ederation. v. +e"u#lic , 3++ SC7A +6 (6++#$.

*. C((& S"*)'7“A common stoc1 represents the resid%al ownership interest in the corporation. 8t is a &asic class of

stoc1 ordinarily and %s%ally iss%ed witho%t e-traordinary rights or pri5ileges and entitles the shareholder toa "ro rata di5ision of profits.” Comm. of nternal +evenue v. Court of A""eals , )+ SC7A "6 (###$.

. P)''))'/ S"*)'7 =1@ "articipating and %on-participating =2@ Cumuative and %on-cumuative=@ "ar 'aue and %o "ar 'aue

05en for preferred shares iss%ed with a E di5idend rate, the stoc1holders do not &ecome entitled tothe payment thereof as a matter of right witho%t the necessity of a prior declaration of di5idends which can

only come from e-isting retained earnings. &epu,ic "anters Ban6 v. Agana, 26> SCRA 1 =1>>@.Preferred stoc1s are those which entitle the shareholder to some priority on di5idends and asset

distri&%tion. C+ v. Court of A""eals% )+ SC7A "6 (###$.

8n the a&sence of pro5isions in the articles of incorporation denying 5oting rights to preferred shares,preferred shares ha5e the same 5oting rights as common shares. Howe5er, preferred shareholders areoften e-cl%ded from any control, that is, depri5ed of the right to 5ote in the election of directors and on other matters, on the theory that the preferred shareholders are merely in5estors in the corporation for income inthe same manner as &ondholders. 8n fact, %nder the Corporation Code only preferred or redeema&leshares can &e depri5ed of the right to 5ote. Common shares cannot &e depri5ed of the right to 5ote in any

!!



corporate meeting, and any pro5ision in the articles of incorporation restricting the right of commonshareholders to 5ote is in5alid. 6am#oa v. -eves, 3"6 SC7A 3#+ (6+$.

3. R'/''*$' S"*)'7 (S'3. ?@?

When the certificates of stoc1 recognies redemption, &%t the option to do so is clearly 5ested inthe corporation, the redemption is clearly the type 1nown as “optional” and rest entirely with thecorporation, and that the stoc1holder is witho%t right to either compel or ref%se the redemption of hisshares of stoc1. &epu,ic "anters Ban6 v. Agana, 26> SCRA 1 =1>>$.

“+edem"tion” is rep%rchase, a reac:%isition of stoc1 &y a corporation which iss%ed the stoc1 ine-change for property, whether or not the ac:%ired stoc1 is cancelled, retired or held in the treas%ry.0ssentially, the corporation gets &ac1 some of its stoc1, distri&%tes cash or property to the shareholder inpayment for the stoc1, and contin%es in &%siness as &efore. 'he redemption of stoc1 di5idends pre5io%slyiss%ed is %sed as a 5eil for the constr%cti5e distri&%tion of cash di5idends. Commissioner of nternal +evenue v. Court of A""eals% )+ SC7A "6 (###$.

/. F(&/') S"*)'7 (S'3. $)!

'.T)'*7)8 S"*)'7 (S'3. >@

'reas%ry shares are stoc1s iss%ed and f%lly paid for and re9ac:%ired &y the corporation either &yp%rchase, donation, forfeit%re or other means, and do not ha5e the stat%s of &eing o%tstanding shares andare not entitled to &e 5oted %pon nor participate in di5idend declarations. Commissioner v. Manning , 33SC7A ! (#2"$.

A treas%ry share, which may &e common or preferred, may &e %sed for a 5ariety of corporate p%rposes,s%ch as for a stoc1 &on%s plan for management and employees, or for ac:%iring another company. 8t may&e held indefinitely, resold or retired. While held in the companys treas%ry, the stoc1 earns no di5idendsand has no 5ote in company affairs. Phili""ine Coconut Producers ,ederation% nc. v. +e"u#lic , 3++ SC7A+6 (6++#$.

. S+(3 W*))*&+7

4. S+(3 O%+#(&7

". R'-C$*77##3*+#(& ( S"*)'7“7eclassification of shares does not always &ring any s%&stantial alteration in the s%&scri&ers

proportional interest. ;%t the e-change is different4there wo%ld &e a shifting of the &alance of stoc1feat%res li1e priority in di5idend declarations or a&sence of 5oting rights. Met neither the reclassification nor

e-change "er se yields income for ta- p%rposes. . . 8n this case, the e-change of shares, witho%t more,prod%ces no realied income to the s%&scri&er. 'here is only a modification of the s%&scri&ers rights andpri5ileges4which is not a flow of wealth for ta- p%rposes. 'he iss%e of ta-a&le di5idend may arise onlyonce a s%&scri&er disposes of his entire interests and not when there is still maintenance of proprietaryinterest.” C+ v. Court of A""eals% )+ SC7A "6 (###$.

'he con5ersion of common shares into preferred shares, p%rs%ed to the amendment of the S<C articlesof incorporation, is a legitimate e-ercise of corporate powers %nder the Corporation Code. 'he con5ersiondoes not amo%nt to S<C %sing its f%nds to effect con5ersion, &%t wo%ld amo%nt merely to a reconfig%rationof said (common$ shares into preferred shares. Phili""ine Coconut Producers ,ederation% nc. v. +e"u#lic ,3++ SC7A +6 (6++#$.

. H8)#/ S'3)#+#'7 2overnment v. "hi. Sugar !states, ? P"#$. 15 =1>1?@.

5. 9uasi -R'()4*&#*+#(&

*. R'/3+#(& ( C*%#+*$ S+(3 (S'3. ?$

7ed%ction of capital stoc1 cannot &e employed to a5oid the corporations o&ligations %nder the La&or Code. Madrigal & Co. v. Famora, " SC7A )"" (#2$.

. S+(3 S%$#+7 versus S+(3 C(&7($#/*+#(&7

6. S"*)'"($/')7 N(+ C()%()*+' C)'/#+()7 2arcia v. Lim Chu Sing , 5> P"#$. 562 =1>@.

. S73)#%+#(& C(&+)*3+ (S'37. 60 *&/ 2/ overturned -rillana v. 3ue'on Colegialla, #) Phil. )) @#")B$.

*. “"urchase Agreement ; Baya v. Siang Traffic Co. (nc., P"#$. 55 =1>2@.

. P)'-I&3()%()*+#(& S73)#%+#(& =S'3. 61@When properties were assigned p%rs%ant to a pre9incorporation s%&scription agreement, &%t the

corporation fails to iss%e the co5ered shares, the ret%rn of s%ch properties to the s%&scri&er is a directconse:%ence of rescission and does not amo%nt to corporate distri&%tion of assets prior to dissol%tion. ?ng ong v. -iu, )2" SC7A 3! (6++6$.

3. R'$'*7' )( S73)#%+#(& O$#4*+#(& Tan v. Sycip, >> SCRA 216 =2006$.)"

/.C(&/#+#(& ( P*8'&+ P)(<#/'/ #& 8-$*7.

)!8n Castillo v. Balinghasay , !!+ SC7A !!6 (6++!$, the position that when the articles of incorporation pro5ide e-pressly a class of

shares to ha5e the e-cl%si5e right to 5ote and &e 5oted for into the ;oard of irectors, that s%ch shares wo%ld essentially &e fo%ndersshare was raised &%t not resol5ed &y the Co%rt.

)"9elasco v. Poi'at , )2 Phil. +6 (#$/ PNB v. Bituloc Sa$mill% nc., 6) SC7A )33 (#3$/ National Echange Co. v. (eter , " Phil.

3+ (#6$.

!"



?. CONSIDERATION (S'3. 62$? =*@ C*7" =3@ S')<#3' =/@ S"*)'7

=@ P)(%')+8 =/@ R'+*#&'/ E*)&#&47

Stoc1 di5idends are in the nat%re of shares of stoc1, the consideration for which is the amo%nt of %nrestricted retained earnings con5erted into e:%ity in the corporations &oo1s. *incoln Phil. *ife v. Court of

A""eals, 6#) SC7A #6 (##$.)3

*.W*+')'/ S+(37 (S'3. 65$

. U&%*#/ S73)#%+#(& (S'37. 66 *&/ 6@

A 5alid and &inding s%&scription for stoc1 of a corporation cannot &e cancelled so as to release thes%&scri&er from lia&ility thereon witho%t the consent of all the stoc1holders. Lingayen 2uf !ect "ower v. Bata8ar , > P"#$. 0 =1>5@.

A stoc1holder who is employed with the company, cannot offset his %npaid s%&scription against hisawarded claims for wages, where there has &een no call for the payment of s%ch s%&scription. A"odaca v.N*+C% 26 SC7A !!6 (##$.

3. D'$#&'&38 (& S73)#%+#(& (S'37. 6?, 6>, 0 *&/ 10

=nder the tr%st f%nd doctrine, a &oard resol%tion releasing the stoc1holders from payment of the&alance of their s%&scription is wholly ineffect%al/ and the tr%stee of the insol5ent corporation has stillreco5er the amo%nts wai5ed. Phili""ine -rust Co. v. +ivera, !! Phil. !3# (#6)$.

8n spite of a specific pro5ision in the &y9laws pro5iding for the manner of collection of %npaid

s%&scription, the ;oard of irectors still has the &%siness *%dgment prerogati5e of determining the &estmanner of collecting %npaid s%&scriptions, which may incl%de the filing of a collection s%it. (e Silva v.

A#oiti' & Co., !! Phil. 2"" (#6)$.

'he power of the ;oard of irectors to ma1e a call on %npaid s%&scription cannot &e limited &y thepro5isions of the s%&scription contract. Miranda v. -arlac +ice Mill Co., "2 Phil. 3# (#)6$.

'he prescripti5e period to reco5er on %npaid s%&scription does not commence from the time of s%&scription &%t from the time of demand &y ;oard of irectors to pay the &alance of s%&scription. 6arciav. Suare' , 32 Phil. !! (#)#$.

>. CERTIFICATE OF STOC! (S'3. 6$

*. N*+)' ( C')+##3*+'

A stoc1 certificate is not necessary to render one a stoc1holder in a corporation/ ne5ertheless, it is the

paper representati5e or tangi&le e5idence of the stoc1 itself and the 5ario%s interests therein. 'he stoc1certificate e-presses the contract &etween the corporation and the stoc1holder, &%t it is not essential to thee-istence of a share in stoc1 or the creation of the relation of shareholder to the corporation. Tan v. S!C ,206 SCRA 0 =1>>2@.)2

A certificate of stoc1 co%ld not &e considered iss%ed in contemplation of law %nless signed &y thepresident or 5ice9president and co%ntersigned &y the secretary or assistance secretary. Bitong v. Court of

A""eals% 6#6 SC7A "+) (##$.

'he fact that the stoc1 certificates registered in the name of one person are fo%nd in the possession of another stoc1holder does not pro5e that the possessor is the owner of the co5ered shares. A stoc1certificate is merely a tangi&le e5idence of ownership of shares of stoc1. 8ts presence or a&sence does notaffect the right of the registered owner to dispose of the shares co5ered &y the stoc1 certificate. +e"u#lic v.Estate of Hans Men'i , !2" SC7A 6+ (6++"$.

05en witho%t the co5ering certificate of stoc1 ha5ing &een iss%ed, yet, the registered s%&scri&er to theshares may 5alidly and legally transact with the shares, and sell and dispose of them to ay interest &%yer thereof pro5ided he complies with the right of first ref%sal pro5ided for in the &y9laws. ($ 7a6ati SportsCu, (nc. v. Cheng , 621 SCRA 10 =2010@.

.9uasi -N'4(+#*$' C"*)*3+') ( C')+##3*+' ( S+(3

A certificate of stoc1 is merely a 4uasi)negotia&le instr%ment in the sense that it may &e transferred &yendorsement, co%pled with deli5ery/ &%t it is not negotia&le &eca%se the holder thereof ta1es it witho%tpre*%dice to s%ch rights or defenses as the registered owners or transferors creditors may ha5e %nder thelaw, ece"t only insofar as such rights or defenses are su#!ect to the limitations im"osed #y the "rinci"lesgoverning esto""el.3e os Santos v. &epu,ic >6 P"#$. 5 =1>55@.

'he r%le is that the endorsement of the certificate of stoc1 &y the owner or his attorney9in9fact or anyother person legally a%thoried to ma1e the transfer shall &e s%fficient to effect the transfer of shares only if

the same is co%pled with deli5ery. 'he deli5ery of the stoc1 certificate d%ly endorsed &y the owner is theoperati5e act of transfer of shares from the lawf%l owner to the new transferee. ;%t to &e 5alid against thirdparties, the transfer m%st &e recorded in the &oo1s of the corporation. Bitong v. Court of Appeas 2>2SCRA 50 =1>>?@.)

)3'he &asis for determining the doc%mentary stamps d%e on stoc1 di5idends declared wo%ld &e their &oo1 5al%e as indicated in the

latest a%dited financial statements of the corporation, and not the par 5al%e thereof. Commissioner of nternal +evenue v. *incoln Phil. *i fensurance Co., )2# SC7A !6) (6++6$.

)2C.N. Hodges v. *e'ama, ! SC7A +)+ (#3"$/ *incoln Phil. *ife v. Court of A""eals, 6#) SC7A #6 (##$/ Ponce v. Alsons Cement

Cor"., )#) SC7A 3+6 (6++6$/ Nautica Canning Cor". v. umul , !2) SC7A !" (6++"$/ *ao v. *ao, "32 SC7A "" (6++$.

)+ivera 9. ,lorendo, !! SC7A 3!) (#3$/ +a'on v. AC , 6+2 SC7A 6)! (##6$/ +ural Ban/ of *i"a City v. Court of A""eals, )33

SC7A (6++$/ +a4uel)Santos v. Court of A""eals, "#6 SC7A 3# (6++#$.

!3



Since physical deli5ery of the certificates of stoc1 is one of the essential re:%isites for the transfer of ownership of the stoc1s p%rchased, then the fail%re of the seller9registered owner to deli5ery the stoc1certificates wo%ld constit%te a material &reach that warrants the rescission of the sale of the shares %ponthe option of the &%yer. ,il)Estate 6olf v. 9erte Sales and -rading , 3# SC7A 626 (6+)$.

3.R#4"+ +( C')+##3*+' ( S+(3 () F$$8 P*#/ S"*)'7 (S'3. 6$

'he ;oard resol%tion which prohi&ited from 5oting shares of stoc1s which were not f%lly paid, altho%ghcertificates ha5e &een iss%ed for them is %nlawf%l, since not f%lly paid shares which are not delin:%ent may

not &e denied their 5oting rights. =nless prohi&ited &y the &y9laws, certificates of stoc1 may &e iss%ed for less than the n%m&er of the shares s%&scri&ed for pro5ided the par 5al%e of ach of the stoc1s represented&y each of the certificates has &een paid. Bata8ar v. Lingayen 2uf !ect. "ower Co. (nc., 1 SCRA522 =1>65@.

/. L(7+ () D'7+)(8'/ C')+##3*+'7 (S'3. 6 *&/ $

While Sec. 2) appears to &e mandatory, the same admits e-ceptions, s%ch that a corporation may5ol%ntarily iss%e a new certificate in lie% of the original certificate of stoc1 which has &een lost witho%tcomplying with the re:%irements %nder said section. 8t wo%ld &e an internal matter for the corporation tofind meas%res in ascertaining who are the real owners of stoc1 for p%rposes of li:%idation. 8t is well9settledthat %nless pro5en otherwise, the “stoc/ and transfer #oo/0 is the &est e5idence to esta&lish stoc1ownership. (S0C Dpinion 6 Fan%ary ###, addressed to <s. <a. Cecilia Salaar9Santos$.

'. F()4'/ *&/ U&*+"()#'/ T)*&7')7.

A #ona fide pledgee or transferee of a stoc1 from the apparent owner is not chargea&le with 1nowledgeof the limitations laced on said certificates &y the real owner, or of any secret agreement relating to the %sewhich might &e made of the stoc1 &y the holder. When a stoc1 certificate has &een endorsed in &lan1 &ythe owner thereof, it &ecomes a “street certificate” so that %pon its face the holder is entitled to demand itstransfer into his name from the iss%ing corporation. As s%ch the certificate if :%asi9negotia&le and thetransferee thereof is *%stified in &elie5ing that it &elongs to the older and transferor. 1. Santamaria v./ong6ong and Shanghai Ban6ing Corp., ?> P"#$. ?0 =1>51@.

Since certificates of stoc1 are only 4uasi)negotia&le instr%ments, a transferee in good faith %nder aforged assignment ac:%ires no title which can &e asserted against the tr%e owner, unless the true o$ner2so$n negligence has #een such as to create an esto""el against him. 3eos Santos v. &epu,ic , >6P"#$. 5 =1>55@.

When the stoc1 certificates ha5e &een endorsed in &lan1 for p%rposes of showing the nominee

relations, the e5ent%al deli5ery and registration of the shares in 5iolation of the tr%st relationship and after their ha5ing &een stolen, wo%ld &e 5oid, e5en when s%ch transfers ha5e &een registered in the stoc1 andtransfer &oo1.%eugene 7ar6eting (nc. v. Court of Appeas, 0 SCRA 2>5 =1>>>@.

8ndeed, e5en if Gil&erts parents were not the &eneficial owners, an endorsement in &lan1 of the stoc1certificate co%pled with its deli5ery, entitles the holder thereof to demand the transfer of said stoc1certificate in his name from the iss%ing corporation.2uy v. 2uy , 6?0 SCRA 21 =2012@.

10. TRANSFERS, ENCUMRANCES AND OTHER DEALINGS WITH SHARES

*. S"*)' D#7%(7#+#(&7 *&/ +"' S+(3 *&/ T)*&7') (( =S'37. 6, 2 *&/ @

=#@ N*+)' ( +"' ST

'he stoc1 and transfer &oo1 records the names and addresses of all stoc1holders arrangedalpha&etically, the installments paid and %npaid on all stoc1 for which s%&scription has &een made, and

the date of payment thereof, a statement of e5ery alienation, sale or transfer of stoc1 made the datethereof and &y and to whom made, and s%ch other entries as may &e prescri&ed &y law. A stoc1 andtransfer &oo1, li1e other corporate &oo1s and records, is not in any sense a p%&lic record, and th%s isnot e-cl%si5e e5idence of the matters and things which ordinarily are or sho%ld &e written therein.Lanu8a v. Court of Appeas, 5 SCRA 5 =2005@.

As &etween the General 8nformation Sheet and the corporate &oo1s, it is the latter that is controllingas to the n%m&er of shares held &y shareholders. *ao v. *ao, "32 SC7A "" (6++$.

ho May Ma/e Entries in the S-B. 0ntries made on the stoc1 and transfer &oo1 &y any personother than the corporate secretary, s%ch as those made &y the President and Chairman, cannot &egi5en any 5alid effect. -orres% 5r. v. Court of A""eals% 62 SC7A 2#) (##2$.

A&sence of a deed of sale e5idencing sale of shares of stoc1 does not necessarily show irreg%laritysince Section 3) itself does not re:%ire any deed for the 5alidity of the transfer of shares stoc1, it &eing

s%fficient that s%ch transfer &e effected &y deli5ery of the stoc1 certificates d%ly endorsed. 8n fact, as has&een held in +ural Ban/ of *i"a City% nc. v. Court of A""eals, @)33 SC7A (6++$B the e-ec%tion nota deed of sale does not necessarily ma1e the transfer effecti5e. +e"u#lic v. Estate of Hans Men'i , !2"SC7A 6+ (6++"$.

'he stoc1 and transfer &oo1 records the names and addresses of all stoc1holders arrangedalpha&etically, the installments paid and %npaid on all stoc1 for which s%&scription has &een made, andthe date of payment thereof, a statement of e5ery alienation, sale or transfer of stoc1 made the datethereof and &y and to whom made, and s%ch other entries as may &e prescri&ed &y law. A stoc1 andtransfer &oo1, li1e other corporate &oo1s and records, is not in any sense a p%&lic record, and th%s isnot e-cl%si5e e5idence of the matters and things which ordinarily are or sho%ld &e written therein.Lanu8a v. Court of Appeas, 5 SCRA 5 =2005@.

!2



A&sence of a deed of sale e5idencing sale of shares of stoc1 does not necessarily show irreg%laritysince Section 3) itself does not re:%ire any deed for the 5alidity of the transfer of shares stoc1, it &eings%fficient that s%ch transfer &e effected &y deli5ery of the stoc1 certificates d%ly endorsed. 8n fact, as has&een held in +ural Ban/ of *i"a City% nc. v. Court of A""eals, @)33 SC7A (6++$B the e-ec%tion nota deed of sale does not necessarily ma1e the transfer effecti5e. +e"u#lic v. Estate of Hans Men'i , !2"SC7A 6+ (6++"$.

Sales and other dispositions of shares of stoc1 m%st %nder Section 3) &e registered in the stoc1 andtransfer &oo1? (a$ to ena&le the corporation to 1now at all times who are the act%al stoc1holders, and

who ha5e standing to e-ercise the rights pertaining to the shares/ (&$ to afford the corporation anopport%nity to o&*ect or ref%se its consent to s%ch transfer when it has claims against s%ch shares/ and(c$ to a5oid fictitio%s or fra%d%lent transfers. EscaGo v. ,ili"inas Mining Cor"oration, 2! Phil. 2 (#!!$/Batangas Laguna Taya,as Bus Company (nc. v. Bitanga, 62 SCRA 65 =2001@.

=##@ E'3+7 ( R'4#7+)*+#(&KN(&-R'4#7+)*+#(& ( T)*&7')7 #& +"' ST

'he fail%re to register a sale or disposition of shares of stoc1 in the &oo1s of the corporation wo%ldrender the same in5alid to all persons, incl%ding the attaching creditors of the seller. $son v.3iosomito, 61 P"#$. 55 =1>5@.

=ntil challenged in a proper proceeding, a stoc1holder of record has a right to participate in anymeeting/ his 5ote can &e properly co%nted to determine whether a stoc1holders resol%tion wasappro5ed, despite the claim of the alleged transferee. Dn the other hand, a person who has p%rchasedstoc1, and who desires to &e recognied as a stoc1holder for the p%rpose of 5oting, m%st sec%re s%ch a

standing &y ha5ing the transfer recorded on the corporate &oo1s. =ntil the transfer is registered, thetransferee is not a stoc1holder &%t an o%tsider. Batangas Laguna Taya,as Bus Company (nc. v.Bitanga, 62 SCRA 65 =2001@.)#

A transfer of shares which is not recorded in the &oo1s of the corporation is 5alid only as &etween theparties. Hence, the transferor has the right to di5idends as against the corporation witho%t notice of transfer &%t it ser5es as tr%stee of the real owner of the di5idends, s%&*ect to the contract &etween thetransferor and transferee as to who is entitled to recei5e the di5idends. Co!uangco v. Sandigan#ayn,"3 SC7A 2#+ (6++#$.

.P$'/4', M()+4*4' *&/ O+"') E&3)*&3'7 (& S"*)'7

<eaning of “7n"aid Claims” %nder Sec. 3). 'he “%npaid claims” %nder Sec. 3) refers to any %npaids%&scription, and not to any inde&tedness which a stoc1holder may owe the corporation arising from anyother transactions, li1e %npaid monthly d%es. ua Cun v. Summers, P"#$. 0 =1>2@.!+

Shares for which no certificate of stoc1 has &een iss%ed may 5alidly &e mortgaged in whole (an not *%stwith respect to the portion paid9%p$ and the corporation recei5ing notice thereof is &o%nd to respect thesec%rity arrangement.ua Cun v. Summers, P"#$. 0 =1>2@.

When the shares are co5ered &y a stoc1 certificate iss%ed in the name of the %s%fr%ct%ary &y theoriginal owner with the agreement &etween them that they sho%ld not &e disposed or sold, &%t theregistered owner had pledged the shares &y endorsement and deli5ery of the certificate to one who too1them in good faith and for 5al%e, the latter shall &e preferred since registration of a sec%rity arrangementco5ering shares of stoc1 does not re:%ire, for its 5alidity and &inding effect on the world, to &e registered inthe stoc1 and transfer &oo1. 7onserrat v. Ceran, 5? P"#$. 6> =1>@.

8n order for the chattel mortgage on shares of stoc1 &e 5alid and &inding on third parties, registrationthereof in the stoc1 and transfer &oo1 is not re:%ired and not legally effecti5e. What is necessary is that thechattel mortgage o5er the shares &e registered in the 7egistry of eeds of the principal place of &%siness

of the corporation, as well as in the 7egistry of eeds of the stoc1holders domicile.

Chua 2uan v.Samahang 7agsasa6a (nc ., 62 P"#$. 2 =1>5@.

'he pledge of shares of stoc1 co5ered &y a certificate is 5alid and &inding on third parties, when thecertificate of stoc1 has &een endorsed and deli5ered to the creditor, notwithstanding the fact that thecontract does not appear in a p%&lic instr%ment (chattel mortgage$. “Certificates of stoc1 . . . are 4uasi 9negotia&le instr%ments in the sense that they may &e gi5en in pledge or mortgage to sec%re an o&ligation.”Bachrach 7otor Co. v. Lacson Ledesma, 6 P"#$. 6?1 =1>@.

Dnly f%lly paid shares for which certificates of stoc1 ha5e &een iss%ed are s%&*ect to the registrationre:%irement in the stoc1 and transfer &oo1 in cases dealing with their sales and a&sol%te disposition.%ava v. "eers 7ar6eting Corp., SCRA 65 =1>6@.

'he process of registering lis "endens is inapplica&le to shares of stoc1 which are personal properties/howe5er, howe5er, formal notice gi5en to the Corporate Secretary of claims to the shares of stoc1 shall &e

deemed e:%i5alent of registration of an enc%m&rance or assignment of the shares on the corporate &oo1s/and that &y 5irt%e of s%ch registration thro%gh notice to the corporation, pending litigation, third parties, or potential transferees "endente lite% amy therefore #e charged $ith constructive notice of claimants line<titleover the su#!ect shares and the "ending litigation involving the same. 7& /odings Ltd. '. Ba;ar .!

3.A++*3"'&+7, E'3+#(& *&/ O+"') I&<($&+*)8 D'*$#&47 (& S"*)'7

Attachments of shares of stoc1 are not incl%ded in the term “transfer ” as pro5ided in Sec. 3) of Corporation Code. ;oth the 7e5ised 7%les of Co%rt and the Corporation Code do not re:%ire annotation in

)#Magsaysay)*a#rador v. CA, + SC7A 633 (##$/ Ponce v. Alsons Cement Cor"., )#) SC7A 3+6 (6++6$.

!+China Ban/ing Cor". v. CA, 62+ SC7A "+) (##2$.

!3) SC7A ))3 (6+6$.

!



the corporations S'; for the attachment of shares to &e 5alid and &inding on the corporation and thirdparties. Chem"hil E"ort & m"ort Cor". v. CA, 6" SC7A 6"2 (##"$.

A #ona fide transfer of shares, not registered in the corporate &oo1s, is not 5alid as against as%&se:%ent lawf%l attachment of said shares, regardless of whether the attaching creditor had act%al noticeof said transfer or not. All transfers not so entered on the &oo1s of the corporation are a&sol%tely 5oid/ not&eca%se they are witho%t notice or fra%d%lent in law or fact, &%t &eca%se they are made so 5oid &y stat%te.2arcia v. 1omouad , 2 SCRA 2 =2000@.

/. E#+*$' M()+4*4' A77#4&'&+ 'he assignment of 5oting shares as sec%rity for a loan operates to gi5e the assignee not only the rightto 5ote on the shares, &%t wo%ld also treat the assignee as the owner of the shares (not *%st an e:%ita&lemortgage$? “8t is tr%e that the assignment was predicated on the intention that it wo%ld ser5e as sec%rity vis)K)vis ;Ps financial accommodation e-tended to PF8, &%t it was a 5alid and d%ly e-ec%ted assignment,s%&*ect to a resol%tory condition, which was the settlement of PF8s loan o&ligation with ;P.” AP- v.Sandigan#ayan% )! SC7A "", "3+ (6+++$.

11. S#+7 ( S"*)'7 ( S+(37 (S'3. 55$

Sit%s of shares of stoc1 is the domicile of the corporation to which they pertain to. ells ,argo Ban/ and 7nion v. Collector , 2+ Phil. )6" (#!+$.!6

:III.A CUISITIONS,

M ERGERS AND

C ONSOLIDATIONS

A. ACUISITIONS AND TRANSFERS

1. C(&3'%+ ( 9Business !nterprise;, 9!conomic $nit ; () 92oing Concern; (S'3. 0$

;%siness enterprise constit%tes the goodwill, the c%stomer lists and all factors that ma1e a &%sinessprofita&le.'ia &ey Transit (nc. v. errer , 25 SCRA ?5 =1>6?@.

2. T8%'7 ( A3#7#+#(&7T)*&7')7 As a r%le, a corporation that p%rchases the assets of another will not &e lia&le for the de&ts of the selling

corporation, pro5ided the former acted in good faith and paid ade:%ate consideration for s%ch assets,e-cept when any of the following circ%mstances is present? ($ where the p%rchasers e-pressly or impliedlyagrees to ass%me the de&ts/ (6$ where the selling corporation fra%d%lently enters into the transactions toescape lia&ility for those de&ts ()$ where the p%rchasing corporation is merely a contin%ation of the sellingcorporation, and (!$ where the transaction amo%nts to a consolidation or merger of the corporations.!dward 1. %e Co. v. "acific , 15 SCRA 15 =1>65@.!)

'he disposition of the assets of a corporation shall &e deemed to co5er s%&stantially all the corporateproperty and assets, if there&y the corporation wo%ld &e rendered incapa&le of contin%ing the &%siness or accomplishing the p%rposes for which it was incorporated. S%ch a sale or disposition m%st &e %nderstoodas 5alid only if it does not pre*%dice the creditors of the assignor, which necessarily implies that theassignee ass%mes the de&ts of the assignor. 05en %nder the pro5isions of the Ci5il Code, a creditor has areal interest to go after any person to whom the de&tor fra%d%lently transferred its assets. Catex )"his.+ (nc. v. "%#C Shipping and Transport Corp., >? SCRA 00 =2006@.

PSAL< too1 ownership o5er most of NPCs assets &y operation of law4these properties may &e %sedto satisfy the Co%rts *%dgment, and s%ch &eing the case, the employees may go after s%ch properties.NPC (rivers and Mechanics Association :NPC (AMA; v. NPC , 3+3 SC7A !+# (6++#$.

.7#&'77 E&+')%)#7' T)*&7')7 A &%siness enterprise operated %nder a partnership and later incorporated, or where a corporation

ass%med all the assets and lia&ilities of the partnership, then the corporation cannot &e regarded, for p%rposes of the SSS Law, as ha5ing come into &eing only on the date of its incorporation &%t from the datethe partnership started the &%siness. *aguna -rans. Co.% nc. v. SSS, +2 Phil. )) (#3+$.!!

'he *%dgment in a s%it for wor1mens compensation can &e p%rs%ed against the corporation organied&y the controlling stoc1holder who as the sole proprietor organied the corporation to ins%late propertiestransferred thereto against the *%dgment de&t. A.(. Santos v. 9as4ue' , 66 SC7A "3 (#3$.

When the &%s operations &elonging to the estate of the deceased spo%ses is d%ly incorporated &y theadministratri- with the intention to ma1e the corporation lia&le for past and pending o&ligations of the estateas the transportation &%siness itself, then that lia&ility on the part of the corporation, 5is9U95is the estate,sho%ld contin%e to remain with it e5en after the percentage of the estates shares of stoc1 in the corporationsho%ld ha5e &een dil%ted. Buan v. Alcantara% 62 SC7A !" (#!$.

When a corporation transferred all its assets to another corporation “to settle its o&ligations” that wo%ldnot amo%nt to a fra%d%lent transfer, and does not a%thorie application of the piercing doctrine to ma1e thetransferee lia&le for la&or claims against the transferor. Mc*eod v. N*+C , "6 SC7A 666 (6++2$.

Settled now is the r%le that where one corporation sells or otherwise transfers all its assets to another corporation for 5al%e, the latter is not, &y that fact alone, lia&le for the de&ts and lia&ilities of the transferor.Pantranco Em"loyees Association :PEA)P-6?; v. N*+C , " SC7A "# (6++#$.

!6-ayag v. Benguet Consolidated% nc., 63 SC7A 6!6 (#3$/ cf. Per/ins v. (i'on, 3# Phil. 3 (#)#$.

!)Phili""ines National Ban/ v. Andrada Electric & Engineering Co. , ) SC7A 6!! (6++6$/ Mc*eod v. N*+C , "6 SC7A 666 (6++2$/ 5iao

v. N*+C , 32+ SC7A ! (6+6$.

!!?romeca *um#er Co. v. SSS% ! SC7A (#36$/ San -eodoro (ev. v. SSS, SC7A #3 (#3)$.

!#



An e5al%ation of o%r contract and corporation laws 5alidates that the Nell octrine is f%lly s%pported&y Philippine stat%tes. 'he general r%le e-pressed &y the doctrine reflects the principle of relati5ity %nder

Article ) to )! of the Ci5il Code. Contracts, incl%ding the rights and o&ligations arising therefrom, are5alid and &inding only &etween the contracting parties and their s%ccessors9in9interest. 'h%s, despite thesale of all corporate assets, the transferee corporation cannot &e pre*%diced as it is not in pri5ity with thecontracts &etween the transferor corporation and its creditors. F%rispr%dence has held that in a&%siness9enterprise transfer, the transferee is lia&le for the de&ts and lia&ilities of his transferor arisingfrom the &%siness enterprise con5eyed. <any of the application of the &%siness9enterprise transfer ha5e

&een related &y the Co%rt to the application of the piercing doctrine.

<-( Leisure "his. (nc. v. <u ,G.R. N(. 20161, 0? S'%+'') 2015, citing K8LLAN=0KA, PH8L8PP8N0 CD7PD7A'0 L AW, 6++ ed., pp.33, 3293#.

.E#+8 T)*&7')7'he disposition &y the controlling shareholder of all of its e:%ity in the corporation warrants the

application of the alter ego piercing doctrine since it shows that the transferor had complete control of thecorporation. ($"/('(3!C v. Court of Appeas, 1?1 SCRA 66> =1>>0@.

" &#"!& 3#CT&(%! : 'he mere fact that a stoc1holder sells his shares of stoc1 in the corporation d%ring thependency of a collection case against the corporation, does not ma1e s%ch stoc1holder personally lia&le for the corporate de&t, since the disposing stoc1holder has no personal o&ligation to the creditor, and it is theinherent right of the stoc1holder to dispose of his shares of stoc1 anytime he so desires. +emo% 5r. v. AC ,26 SC7A !+" (##$.!"

.MERGER AND CONSOLIDATIONS

1. C(&3'%+7 A consolidation is the %nion of two or more e-isting entities to form a new entity called the consolidated

corporation. A merger, on the other hand, is a %nion where&y one or more e-isting corporations area&sor&ed &y another corporation that s%r5i5es and contin%es the com&ined &%siness. Since a merger or consolidation in5ol5es f%ndamental changes in the corporation, as well as in the rights of stoc1holders andcreditors, there m%st &e an e-press pro5ision of law a%thoriing them. PNB v. Andrada Electric &Engineering Co.% ) SC7A 6!! (6++6$.!3

<erger is a re9organiation of two or more corporations that res%lts in their consolidating into a singlecorporation, which is one of the constit%ent corporations, one disappearing or dissol5ing and the other s%r5i5ing. 'o p%t it another way, merger is the a&sorption of one or more corporations &y another e-isting

corporation, which retains its identity and ta1es o5er the rights, pri5ileges, franchises, properties, claims,lia&ilities and o&ligations of the a&sor&ed corporation(s$. 'he a&sor&ing corporation contin%es its e-istencewhile the life or li5es of the other corporation(s$ is or are terminated. Ban/ of Commerce v. +adioPhili""ines Net$or/% nc.% 266 SC7A "6# (6+!$.

2.P)(3'/)'

*. P$*& ( M')4') () C(&7($#/*+#(& (S'3. 6$

. S+(3"($/')7 () M'')7 A%%)(<*$7 (S'3. $

3. A)+#3$'7 ( M')4') () C(&7($#/*+#(& (S'3. ?$

/. Su,mission of inancia Statements &e?uirements: Ior applications of merger, the a%dited financialstatements of the constit%ent corporations (s%r5i5ing and a&sor&ed$ as of the date not earlier than 6+days prior to the date of filing of the application and the long9form a%dit report for a&sor&ed

corporation(s$ are always re:%ired. Long form a%dit report for the s%r5i5ing corporation is re:%ired if it isinsol5ent. (S0C Dpinion !, s. of 6++6, " No5em&er 6++6$.

'. A%%)(<*$ 8 SEC (S'3. >$

When the proced%re for merger>consolidation prescri&ed %nder the Corporation Code are not followed,there can &e no merger or consolidation, corporate separateness &etween the constit%ent corporationsremains, and the lia&ilities of one entity cannot &e enforced against another entity. PNB v. Andrada Electric & Engineering Co.% ) SC7A 6!! (6++6$.

'he iss%ance &y the S0C of the certificate of merger is cr%cial &eca%se not only does it &ear o%t S0Csappro5al &%t also mar1s the moment where%pon the conse:%ences of a merger ta1e place. ;y operation of law, %pon the effecti5ity of the merger, the a&sor&ed corporation ceases to e-ist &%t its rights, andproperties as well as lia&ilities shall &e ta1en and deemed transferred to and 5ested in the s%r5i5ingcorporation. Poliand ndustrial *td. 9. N(C , !32 SC7A "++ (6++"$.!2

.E'3+7 ( M')4') () C(&7($#/*+#(& (S'3. ?0$8t is settled that in the merger of two e-isting corporations, one of the corporations s%r5i5es and

contin%es the &%siness, while the other is dissol5ed and all its rights, properties and lia&ilities are ac:%ired&y the s%r5i5ing corporation. 'he s%r5i5ing corporation therefore has a right to instit%te a collection s%it onacco%nts of one of one of the constit%ent corporations. Ba#st v. CA, )"+ SC7A )! (6++$.

Glo&al is &o%nd &y the terms of the contract entered into &y its predecessor9in9interest, Asian ;an1.%e to Glo&als merger with Asian ;an1 and &eca%se it is the s%r5i5ing corporation, it is as if it was the one

!"PNB v. +itratto 6rou"% nc., )36 SC7A 63 (6++$.

!3Mc*eod v. N*+C , "6 SC7A 666 (6++2$.

!2 Associated Ban/ v. CA% 6# SC7A " (##$/ Mindanao Savings and *oan Asso. 9. ill/om, 3)! SC7A 6# (6++$.

"+



which entered into contract with S%recomp. 8n the same way, Glo&al also has the right to e-ercise alldefenses, rights, pri5ileges, and co%nter9claims of e5ery 1ind and nat%re which Asian ;an1 may ha5e or in5o1e %nder the law. 6lo#al Business Holdings nc. v. Surecom"soft$are% B.9., 3)) SC7A #! (6++$.

C. EFFECTS ON EMPLOYEES OF CORPORATION

1. A77'+7 O&$8 T)*&7')7“'here is no law re:%iring that the p%rchaser of <88s assets sho%ld a&sor& its employees . . . the most

that the NL7C co%ld do, for reasons of p%&lic policy and social *%stice, was to direct @the &%yerB to gi5epreference to the :%alified separated employees of <88 in the filling %p of 5acancies in the facilities. M( Su"ervisors & Confidential Em"loyees Asso. v. Pres. Assistance on *egal Affairs, 2# SC7A !+ (#22$.

=nless e-pressly ass%med, employment contracts and C;As are not enforcea&le against a transfereeof an enterprise, la&or contracts &eing in "ersonam, th%s &inding only &etween the parties. A la&or contractmerely creates an action in "ersonam and does not create any real right which sho%ld &e respected &ythird parties.Sundowner 3ev. Corp. v. 3rion 1?0 SCRA 1 =1>?>@.

2. 7#&'77-E&+')%)#7' T)*&7')7

'here is no law re:%iring that the p%rchaser sho%ld a&sor& the employees of the selling company. Well9esta&lished is the principle “that it is within the employers legitimate sphere of management control of the&%siness to adopt economic policies to ma1e some changes or ad*%stments in their organiation or operations that wo%ld ins%re profit to itself or protect the in5estments of its stoc1holders. As in the e-erciseof s%ch management prerogati5e, the employer may merge or consolidate its &%siness with another, or sellor dispose all or s%&stantially all of its assets and properties which may &ring a&o%t the dismissal or termination of its employees in the processCentra A8ucarera de 3anao v. CA, 1 SCRA 2>5 =1>?5@.

Where a corporation is closed for alleged losses and its e:%ipment are transferred to another companywhich engaged in the same operations, the separate *%ridical personality of the latter can &e pierced toma1e it lia&le for the la&or claims of the employees of the closed company. National ,ederation of *a#or 7nion v. ?"le, !) SC7A 6! (#3$.

Altho%gh a corporation may ha5e ceased &%siness operations and an entirely new company has &eenorganied to ta1e o5er the same type of operations, it does not necessarily follow that no one may now &eheld lia&le for illegal acts committed &y the earlier firm. "epsi-Coa Botting Co. v. %L&C , 210 SCRA2 =1>>2@.!

=nder the principle of a&sorption, a #ona fide &%yer or transferee of all, or s%&stantially all, theproperties of the seller or transferor is not o&liged to a&sor& the latters employees. 'he most that the

p%rchasing company may do, for reasons of p%&lic policy and social *%stice, is to gi5e preference of reemployment to the selling companys :%alified separated employees, who in its *%dgment are necessaryto the contin%ed operation of the &%siness esta&lishment. 8n the case of a transfer of all or s%&stantially allof the assets of a corporation (i.e., &%siness enterprise transfers$, the lia&ilities of the pre5io%s owners to itsemployees are not enforcea&le against the &%yer or transferee, %nless (a$ the latter %ne:%i5ocally ass%mesthem/ or (&$ the sale or transfer was made in &ad faith. Barayoga v. AP- , !2) SC7A 3#+ (6++"$. !#

Where the change of ownership is done in &ad faith, or is %sed to defeat the rights of la&or, thes%ccessor9employer is deemed to ha5e a&sor&ed the employees and is held lia&le for the transgressions of his or her predecessor. PeGafrancia -ours and -ravel -rans"ort v. Sarmiento, 3)! SC7A 62# (6++$.

.E#+8 T)*&7')7

Where s%ch transfer of ownership is in good faith, the transferee is %nder no legal d%ty to a&sor& thetransferors employees as there is no law compelling s%ch a&sorption. 'he most that the transferee may

do, for reasons of p%&lic policy and social *%stice, is to gi5e preference to the :%alified separatedemployees in the filling of 5acancies in the facilities of the p%rchaser . 7animos v. %L&C , 22 SCRA15 =1>>5@."+

.M')4')7 *&/ C(&7($#/*+#(&7

8n the case of merger or consolidation of two or more corporations, the employees ha5e a right to their retirement &enefits comp%ted from the time wor1ed with the predecessor9constit%ent corporations, sayingthere was no &rea1 in the employer9employee relationship. iipinas "ort Services v. %L&C 200SCRA =1>>[email protected]

C #%T&A : the employees of a predecessor9constit%ent corporation cannot a5ail of their pre5io%s ten%rewhen determining their termination &enefits with the s%r5i5ing corporation in the merger. iipinas "ort Services (nc. v. %L&C , 1 SCRA20 =1>?>@.

8t is more in 1eeping with the dictates of social *%stice of according f%ll protection to la&or to deem

employment contracts as a%tomatically ass%med &y the s%r5i5ing corporation in a merger, e5en in thea&sence of an e-press stip%lation in the articles of merger or the merger plan. 'his r%ling strengthens

*%dicial protection of the right to sec%rity of ten%re of employees affected &y a merger and a5oids conf%sionregarding the stat%s of their 5ario%s &enefits. BP. v. BP Em"loyees 7nion% 3" SC7A 6 (6+$.

!Pe"si Cola (istri#utors v. N*+C , 6!2 SC7A )3 (##"$

!#Sunio v. N*+C , 62 SC7A )#+ (#!$/ San ,eli"e Neri School of Mandaluyong% nc. v. N*+C , 6+ SC7A !2 (##$/ u v. N*+C% 6!"

SC7A )! (##"$/ Com"le Electronics Em"loyees Assn. v. N*+C% )+ SC7A !+) (###$.

"++o#ledo v. N*+C , 6) SC7A "6 (##!$/ Pe"si)Cola Bottling Co. v. N*+C , 6+ SC7A 622 (##6$/ (BP v. N*+C , 3 SC7A !

(##+$/ Coral v. N*+C , 6" SC7A 2+! (##3$/ Avon (ale 6arments% nc. v. N*+C , 6!3 SC7A 2)) (##"$.

"Same ruling in National 7nion Ban/ Em"loyees v. *a'aro, "3 SC7A 6) (#$. +eiterated in ,irst 6en. Mar/eting Cor". v. N*+C ,

66) SC7A ))2 (##)$/ Pharmacia and 7"!ohn% nc. v. Al#ayda, 36 SC7A "!! (6++$.

"



*.3e acto 7ergers

8n his &oo1, Philippine Corporate Law, 6+ ean Cesar Killan%e5a e-plained that %nder the CorporationCode, “a de facto merger can &e p%rs%ed &y one corporation ac:%iring all or s%&stantially all of theproperties of another corporation in e-change of shares of stoc1 of the ac:%iring corporation. 'he ac:%iringcorporation wo%ld end %p with the &%siness enterprise of the target corporation/ whereas, the targetcorporation wo%ld end %p with &asically its only remaining assets &eing the shares of stoc1 of the ac:%iringcorporation.” No de facto merger too1 place in the present case simply &eca%se the '7; owners did notget in e-change for the &an1s assets and lia&ilities an e:%i5alent 5al%e in ;ancommerce shares of stoc1.

;ancommerce and '7; agreed with ;SP appro5al to e-cl%de from the sale the '7;Qs contingent *%diciallia&ilities, incl%ding those owing to 7PN. Ban6 of Commerce v. &adio "hiippines %etwor6 (nc. 22SCRA 520 =201@.

5. S%#&-O7

Where a spin9off &y the corporation of a di5ision into another corporation is done for 5alid &%sinessreasons and in good faith, the employees in the sp%n9off %nit no longer &elong to the &argaining %nitof the mother company, and that the employees in the new corporations constit%te new &argaining%nit. SMC Em"loyees 7nion)P-6? v. Confessor , 636 SC7A (##3$.

:IV. x R EHAILITATION AND INSOLVENCY

:V. C ORPORATE D ISSOLUTION AND L IUIDATION

1. N( V'7+'/ R#4"+7 +( C()%()*+' F#3+#(& No person who has a claim against a *%ridical entity can claimany constit%tional right to the perpet%al e-istence of s%ch entity. 6on'ales v. S+A% 2! SC7A )22 (##$.

2. V($&+*)8 D#77($+#(& (S'3. 11$

*. W"'& T"')' A)' N( C)'/#+()7 A'3+'/ (S'3. 11?$

. W"'& T"')' A)' C)'/#+()7 A'3+'/ (S'37. 11> *&/ 122$.

3. S"()+'&#&4 ( C()%()*+' T') (S'3. 120$

A &oard resol%tion to dissol5e the corporation does not operate to so dissol5e the *%ridical entity, sinceto &e effecti5e “@tBhe re:%irements mandated &y the Corporation Code sho%ld ha5e &een strictly compliedwith.” 9esagas v. Court of A""eals% )2 SC7A "+# (6++6$.

When a corporation is contemplating dissol%tion, it m%st s%&mit ta- ret%rn on the income earned &y itfrom the &eginning of the year %p to the date of its dissol%tion and pay the corresponding ta- d%e. BP v.Court of A""eals, )3) SC7A !+ (6++$.

. I&<($&+*)8 D#77($+#(& (S'3. 121B S'3. 6=$@, P.D. >02-AB S'3. 2, R$' 66, R$'7 ( C()+$

*. 9uo arranto

issol%tion is a serio%s remedy granted &y the co%rts only in e-treme cases and only to ens%re thatthere is an a5oidance of pre*%dice to the p%&lic. 05en when the pre*%dice were p%&lic in nat%re, the remedyis to en*oin or correct the mista1e/ and only when it cannot &e remedied that dissol%tion is imposed.+e"u#lic v. Bisaya *and -rans., SC7A # (#2$/ 6overnment v. El Hogar ,ili"ino, "+ Phil. )## (#62$.

'h%s, in +e"u#lic v. Security Credit & Acce"tance Cor"., # SC7A " (#32$, dissol%tion was imposedon a corporation that was engaging in &an1ing acti5ities witho%t a license from the Central ;an1, and

ris1ing the sa5ings of the p%&lic.Corporate dissol%tion d%e to mismanagement of ma*ority stoc1holder is too drastic a remedy, especially

when the sit%ation can &e remedied s%ch as gi5ing minority stoc1holders a 5eto power to any decision.Chase v. Buencamino% )3 SC7A )3" (#"$.

. N(&-U7') ( C"*)+') *&/ C(&+#&(7 I&-O%')*+#(& (Sec. 66$

'o “organi'e” in5ol5es the election of officers, pro5iding for the s%&scription and payment of the capitalstoc1, the adoption of &y9laws, and s%ch other steps as are necessary to endow the legal entity with thecapacity to transact the legitimate &%siness for which the corporation was created. “ ?rgani'ation” relatesmerely to the systematiation and orderly arrangement of the internal and managerial affairs of thecorporation. Benguet Consolidated Mining Co. v. Pineda% # Phil. 2 (#"3$.

'he fail%re to file the &y9laws does not a%tomatically operate to dissol5e a corporation &%t is nowconsidered only a gro%nd for s%ch dissol%tion. Chung 8a Bio v. AC% 3) SC7A ")! (#$.

3. E%#)*+#(& ( T')Where the corporate life of a corporation as stated in its articles of incorporation e-pired, witho%t a 5alid

e-tension ha5ing &een effected, it was deemed dissol5ed &y s%ch e-piration witho%t need of f%rther actionon the part of the corporation. Ma!ority Stoc/holders of +u#y ndustrial Cor". v. *im, 3"+ SC7A !3 (6+$,citing K8LLAN=0KA, PH8L8PP8N0 CD7PD7A'0 L AW (6++ ed.$, p. !.

. L'4*$ E'3+7 ( D#77($+#(& A corporation that has reached the stage of dissol%tion is no longer :%alified to recei5e a secondary

franchise. Buenaflor v. Camarines ndustry , + Phil. !26 (#3+$.

"6



A corporation cannot e-tend its life &y amendment of its articles of incorporation effected d%ring thethree9year stat%tory period for li:%idation when its original term of e-istence had already e-pired, as thesame wo%ld constit%te new &%siness. Alham#ra Cigar & Cigarette Mfg. Co. v. SEC , 6! SC7A 63# (#3$.

When the period of corporate life e-pires, the corporation ceases to &e a &ody corporate for the p%rposeof contin%ing the &%siness for which it was organied. PNB v. Court of ,irst nstance of +i'al% 6+# SC7A6#! (##6$.

'he dissol%tion of a *%ridical entity does not &y itself ca%se the e-tinction or dimin%tion of the rights andlia&ility of s%ch entity, since it is allowed to contin%e as a *%ridical entity for ) years for the p%rpose of

prosec%ting and defending s%its &y or against it and ena&ling it to settle and close its affairs, to dispose of and con5ey its property, and to distri&%te its assets. +e"u#lic v. -ancinco, )#! SC7A )3 (6++6$.

A corporations &oard of directors is not rendered functus officio &y its dissol%tion, since Section 66prohi&its a dissol5ed corporation from contin%ing its &%siness, &%t allows it to contin%e with a limitedpersonality in order to settle and close it affairs, incl%ding its complete li:%idation. Necessarily there m%st&e a &oard that will contin%e acting for and on &ehalf of the dissol5ed corporation for that p%rpose. Aguirre v. ,3BJL% nc., 3 SC7A 6!6 (6+)$.

'he e-ec%ted releases, wai5ers and :%itclaims in5ol5ing la&or claims are 5alid and &indingnotwithstanding that they were e-ec%ted si- (3$ years after the re5ocation of the corporations certificate of incorporation4the re5ocation does not res%lt in the termination of its lia&ilities. Sections 66 and !"pro5ide for a three9year winding %p period for a corporation whose charter is ann%lled &y forfeit%re or otherwise to contin%e as a &ody corporate for the p%rpose, among others, of settling and closing its affairs.'igia v. "hiippine Coege of Criminoogy (nc., 6>? SCRA 2 =201@.

5. M'*&#&4 ( 9Li?uidation;Li:%idation, in corporation law, connotes a winding %p or settling with creditors and de&tors. 8t is the

winding %p of a corporation so that assets are distri&%ted to those entitled to recei5e them. 8t is the processof red%cing assets to cash, discharging lia&ilities and di5iding s%rpl%s or loss. P9B Em"loyees 7nion)N.7.B.E. v. 9ega% )3+ SC7A )) (6++$.

A deri5ati5e s%it is f%ndamentally distinct and independent from li:%idation proceedings4they areneither part of each other nor the necessary conse:%ence of the other. 'here is therefore no &asis fromone action to res%lt in the other. Iollowing the dissol%tion of a corporation, li:%idation or the settlement of its affairs consists of ad*%sting the de&ts and claims, i.e.% collecting all that is d%e to the corporation, thesettlement and ad*%stment of claims against it and the payment of its *%st de&ts. u v. u/ayguan, "#SC7A " (6++#$."6

6.M'+"(/7 ( L##/*+#(& (S'3. 122@*. T"' (*)/ ( D#)'3+()7KT)7+''7 P)7#&4 L##/*+#(&B S'3+ +( +"' -8'*) P')#(/

Since the old Corporation Law did not contain any pro5ision that allowed any action after the )9year period for li:%idation, then all actions for or against the corporation as a&ated after the e-piration thereof.National A#aca Cor". v. Pore, 6 SC7A ## (#3$.

After the e-piration of the )9year period, corporate creditors can still p%rs%e their claims againstcorporate assets against the officers or stoc1holders who ha5e ta1en o5er the properties of the corporation.-an -iong Bio v. Commissioner , ++ Phil. 3 (#"3$.")

Altho%gh a corporate officer is not lia&le for corporate o&ligations, s%ch as claims for wages, howe5er,when s%ch corporate officer ta1es corporate property to apply to his own claims against the corporation, heshall &e lia&le to the e-tent thereof to corporate lia&ilities, since 1nowing f%lly well that certain creditors hadsimilarly 5alid claims, he too1 ad5antage of his position as general manager and applied the corporationQs

assets in payment e-cl%si5ely to his own claims. (e 6u'man v. N*+C , 6 SC7A 26) (##6$.“8t immaterial that the present action was filed after the e-piration of the three years . . . for at the 5ery

least, and ass%ming that *%dicial enforcement of ta-es may not &e initiated after said three years despitethe fact that act%al li:%idation has not terminated and the one in charge thereof is still holding the assets of the corporation, o&5io%sly for the &enefit of all the creditors thereof, the assessment aforementioned, madewithin the three years, definitely esta&lished the Go5ernment as a creditor of the corporation for whom theli:%idator is s%pposed to hold assets of the corporation.” +e"u#lic v. Marsman (ev. Co.% !! SC7A !(#26$. +eiterated under the Cor"oration Code in Paramount nsurance Cor". v. A.C. ?rdone' Cor". , "3SC7A )62 (6++$.

.L##/*+#(& P)7'/ T") * C()+-A%%(#&+'/ R'3'#<') 'here can &e no do%&t that %nder the Corporation Law, the Legislat%re intended to let the shareholders

ha5e the control of the assets of the corporation %pon dissol%tion in winding %p its affairs, &y ha5ing the

directors and e-ec%ti5e officers to ha5e charge of the winding %p operations, tho%gh there is the alternati5emethod of assigning the property of the corporation to the tr%stees for the &enefit of its creditors andshareholders. “While the appointment of a recei5er rests within the so%nd *%dicial discretion of the co%rt,s%ch discretion m%st, howe5er, always &e e-ercised with ca%tion and go5erned &y legal and e:%ita&leprinciples, the 5iolation of which will amo%nt to its a&%se, and in ma1ing s%ch appointment the co%rt sho%ldta1e into consideration all the facts and weigh the relati5e ad5antages and disad5antages of appointing arecei5er to wind %p the corporate &%siness.” China Ban/ing Cor". v. M. Michelin & Cie, " Phil. 63 (#))$.

"6Ma!ority Stoc/holders of +u#y ndustrial Cor". v. *im, 3"+ SC7A !3 (6+$.

")+eiterated in +e"u#lic v. Marsman (ev. Co.% !! SC7A ! (#26$.

")



When the li:%idation of a dissol5ed corporation has &een placed in the hands of a recei5er or assignee,the )9year period prescri&ed &y law for li:%idation cannot &e made to apply, and that the recei5er or tr%steemay instit%te all actions leading to the li:%idation of the assets of the corporation e5en after the e-pirationof said period. Sumera v. 9alencia, 32 Phil. 26 (#)#$.

3. L##/*+#(& P)7'/ T")(4" * T)7+''

When %pon dissol%tion the affairs of the corporation were placed in a ;oard of Li:%idators, they wered%ly constit%ted as tr%stees for the li:%idation of the corporate affairs, and there &eing no term placed on

the ;oard, their power to p%rs%e li:%idation did not terminate %pon the e-piration of the )9year period.Board of *i4uidators v. 8ala$ , 6+ SC7A #2 (#32$

Ior p%rposes of dissol%tion and li:%idation of a corporation, the term “tr%stee” sho%ld incl%de co%nsel of record who may &e deem to ha5e a%thority to p%rs%e pending litigation after the e-piration of the )9year li:%idation period.2eano v. Court of Appeas, 10 SCRA >0 =1>?1@.

8f the )9year e-tended life has e-pired witho%t a tr%stee or recei5er ha5ing &een designated, the ;oardof irectors itself, following the rationale of the decision in 6elano, may &e permitted to so contin%e as“tr%stees” to complete li:%idation/ and in the a&sence of a ;oard, those ha5ing pec%niary interest in theassets, incl%ding the shareholders and the creditors of the corporation, acting for and in its &ehalf, mightma1e proper representations with the appropriate &ody for wor1ing o%t a final settlement of the corporateconcerns. Clemente v. Court of A""eals, 6!6 SC7A 22 (##"$."!

A tr%stee appointed for p%rposes of li:%idation does not &ecome personally lia&le for the o%tstandingo&ligations of the corporation. +e"u#lic v. -ancinco, )#! SC7A )3 (6++)$.

'here is no time limit within which the tr%stees m%st complete a li:%idation placed in their hands. Whatis pro5ided in Section 66 is that the con5eyance to the tr%stees m%st &e made within the three9year period. ;%t it may &e fo%nd impossi&le to complete the wor1 of li:%idation within the three9year period or tored%ce disp%ted claims to *%dgment. I%rthermore, Section !" clearly pro5ides that “no right or remedy infa5or of or against any corporation, its stoc1holders, mem&ers, directors, tr%stees, or officers, nor anylia&ility inc%rred &y any s%ch corporation, stoc1holders, mem&ers, directors, tr%stees, or officers, shall &eremo5ed or impaired either &y the s%&se:%ent dissol%tion of said corporation.” 'igia v. "hiippineCoege of Criminoogy (nc., 6>? SCRA 2 =201@.

'he tr%stee of a corporation may contin%e to prosec%te a case commenced &y the corporation withinthree years from its dissol%tion %ntil rendition of the final *%dgment, e5en if s%ch *%dgment is rendered&eyond the three9year period allowed &y Section 66. Howe5er, there is nothing in the said cases whichallows an already def%nct corporation to initiate a suit after the lapse of the said three9year period. 'oallow petitioner to initiate the s%&*ect complaint and p%rs%e it %ntil final *%dgment, on the gro%nd that s%chcomplaint was filed for the sole p%rpose of li:%idating its assets, wo%ld &e to circ%m5ent the pro5isions of Section 66 of the Corporation Code. Aa,ang 3ev. Corp. v. Aa,ang /is 'iage Assn. 2 SCRA21 =201@.

.REINCORPORATION 'he proced%res on the sale of all or s%&stantially all of the assets of the corporation,allows stoc1holders to transfer the assets and &%siness enterprise of the dissol5ed corporation to a newlyregistered entity &earing the same corporate name. Chung 0a Bio v. (AC , 16 SCRA 5 =1>??@.

:VI. C LOSE C ORPORATIONS

1. D'#&#+#(& (S'3. >6$

'he concept of a close corporation organied for the p%rpose of r%nning a family &%siness or managingfamily property has formed the &ac1&one of Philippine commerce and ind%stry. 'hro%gh this de5ice, Iilipinofamilies ha5e &een a&le to t%rn their h%m&le, hard9earned life sa5ings into going concerns capa&le of pro5iding them and their families with a modic%m of material comfort and financial sec%rity as a reward for years of hard wor1. A family corporation sho%ld ser5e as a reward for years of hard wor14 as a rallyingpoint for family %nity and prosperity, not as a flashpoint for familial strife. 8t is hoped that people reac:%aintthemsel5es with the concepts of m%t%al aid and sec%rity that are the original dri5ing forces &ehind theformation of family corporations and %se these tenets in order to facilitate more ci5il, if not more amica&le,settlements of family corporate disp%tes. 6ala v. Ellice Agro)ndustrial Cor"., ! SC7A !) (6++)$.

*. 3e 1ure C$(7' C()%()*+#(&7 A)+#3$'7 ( I&3()%()*+#(& R'#)''&+7 (S'3. >$

=#@ R'7+)#3+#(& (& T)*&7') ( S"*)'7 (S'37. >? *&/ >>$

=##@ P)'-E%+#<' R#4"+7 (S'3. 102$

=###@ A'&/'&+ (S'3. 10$

. 3e acto Cose Corporation:

'he Co%rt cannot lose sight of the fact that the <an%el 7. %lay 0nterprises, 8nc. is a closed familycorporation where the incorporators and directors &elong to one single family. 8t cannot &e concealed that<an%el 7. %lay as president, treas%rer and general manager almost had a&sol%te control of thecorporation. 'he nomenclat%re, if imprecise, howe5er, fairly reflects the cohesi5eness of a gro%p and theparochial instincts of the indi5id%al mem&ers of s%ch an aggr%pation of which <an%el 7. %lay 0nterprises,

"!+eiterated in +e#uriano v. Court of A""eals% )+ SC7A )!6 (###$/ 8necht v. 7nited Cigarette Cor"., )! SC7A ! (6++6$/ Pe"si)

Cola Products Phils.% nc. v. Court of A""eals , !!) SC7A "2 (6++!$.

"!



8nc. is typical? fo%r9fifths of its incorporators &eing close relati5es namely, three ()$ children and their father whose name identifies their corporation. 7anue &. 3uay !nterprises v. CA, 225 SCRA 6? =1>>@.

<oreo5er, petitioners also conceded that &oth CI'8 and Nag%iat 0nterprises were “close familycorporations” owned &y the Nag%iat family. Section ++, paragraph ", (%nder 'itle J88 on CloseCorporations$ of the Corporation Code, states? . . . “("$ 'o the e-tent that the stoc1holders are acti5elyengage(d$ in the management or operation of the &%siness and affairs of a close corporation, thestoc1holders shall &e held to strict fid%ciary d%ties to each other and among themsel5es. Said stoc1holdersshall &e "ersonally lia#le for cor"orate torts %nless the corporation has o&tained reasona&ly ade:%ate

lia&ility ins%rance.Sergio . %aguiat v. %L&C 26> SCRA 56 =1>>@.B$T S !! 'he articles of incorporation of <otorich Sales Corp. does not contain any pro5ision re:%ired

%nder Section #3 of Corporation Code, and therefore from its 5ery articles of incorporation, it is not a closecorporation. <otorich does not &ecome one either, *%st &eca%se Spo%ses 7eynaldo and Nenita Gr%en&ergowned ##.33E of its s%&scri&ed capital stoc1. 'he “@mBere ownership &y a single stoc1holder or &yanother corporation of all or nearly all of the capital stoc1 of a corporation is not of itself s%fficient gro%nd for disregarding the separate corporate personalities.”San 1uan Structura v. Court of Appeas, 2>6SCRA 61 =1>>?@.

2. #&/#&4 A4)'''&+7 8 S+(3"($/')7 (S'3. 100$

. N( N'3'77#+8 ( (*)/ (S'3. 101$

. D'*/$(37 (S'3. 10$. M SSE( ?PP?+-7N- @ #ng <ong v. Tiu , 01 SCRA 1 =200@.

5. W#+"/)**$ *&/ D#77($+#(& (S'3. 105$

05en prior to the passage of Corporation Code formally recogniing close corporations, the S%premeCo%rt had on limited instances recognied the common law rights of minority stoc1holders to see1dissol%tion of the corporation. ,inancing Cor". of the Phil. v. -eodoro, #) Phil. !+! (#")$.

:VII. N ON-STOC! C ORPORATIONS AND F OUNDATIONS

1. T"'()8 (& N(&-S+(3 C()%()*+#(& (S'37. 1=2@, , ?, ?? *&/ >5@

8t is not inconsistent with the nat%re of a non9stoc1 corporation for it to incidentally earn "rofits in "ursuing its eleemosynary "ur"ose. What is prohi&ited is to operate the company for profit and>or distri&%teany profits so earned to its officers and mem&ers. Collector of nternal +evenue v. 7niversity of 9isayas, SC7A 33# (#3$.

'he inc%rring of profit or losses does not determine whether an acti5ity is for profit or non9profit, and theco%rts will consider whether di5idends ha5e &een declared or its mem&ers or that is property, effects or profit was e5er %sed for personal or indi5id%al gain, and not for the p%rpose of carrying o%t the o&*ecti5es of the enterprise. Manila Sanitarium and Hos"ital v. 6a#uco, 2 SC7A ! (#3)$.

A non9stoc1 corporation may only &e formed or organied for charita&le, religio%s, ed%cational,professional, c%lt%ral, fraternal, literary, scientific, social, ci5ic or other similar p%rposes. 8t may not engagein %nderta1ings s%ch as the in5estment &%siness where profit is the main or %nderlying p%rpose. Altho%ghthe non9stoc1 corporation may o&tain profits as an incident to its operation, s%ch profits are not to &edistri&%ted among its mem&ers &%t m%st &e %sed for the f%rtherance of its p%rposes. Peo"le v. Menil , )!+SC7A 6" (6+++$.

8n a m%t%al life ins%rance company organied as a non9stoc1 non9profit corporation, the so9called“di5idends” recei5ed &y mem&ers9policyholders are not a portion of profits set aside for distri&%tion to the

stoc1holders in proportion to their s%&scription to the capital stoc1 of a corporation. ?ne% a m%t%al companyhas no capital stoc1 to which s%&scription is necessary/ there are no stoc1holders to spea1 of, &%t onlymem&ers. -$o, the amo%nt they recei5e does not parta1e of the nat%re of a profit or income, s%chdistri&%tion represents o5erpayment, a &enefit to which the mem&er9policyholder is e:%ita&ly entitled.+e"u#lic v. Sunlife Assurance Com"any , !2) SC7A 6# (6++"$.

2.N(&-A%%$#3*#$#+8 ( +"' N*+#(&*$#*+#(& L*7 +( N(&-S+(3 C()%()*+#(&7

A foreigner may &ecome a mem&er or an officer of a non9stoc1 corporation. Sa5e for the position of theSecretary, who m%st &e a Iilipino citien and a resident of the Philippines, the prohi&ition of foreign citiens&ecoming officers in corporations engaged in &%siness does not apply to the acti5ities of a non9stoc1corporation which do not fall within the co5erage of a nationalied ind%stry or area of &%siness reser5ed &ylaw e-cl%si5ely to Iilipino citiens. SEC ?"inion No. =% = Novem#er == .

. D'$#&'&38 ( M'')7"#% D'7

Sec. 3# of the Corporation Code refers specifically to %npaid s%&scriptions to capital stoc1, the sale of which is go5erned &y Sec. 3, and %tterly inapplica&le to non9stoc1 corporations. 8n s%ch reco5ery claims,

Article !+ of the Ci5il Code go5erns and pro5ides that an action to reco5er mo5a&les shall prescri&e in years. Calatagan 6olf Clu#% nc. v. Clemente% 5r.% "" SC7A )++ (6++#$.

A non9stoc1 corporation may seie and dispose of the mem&ership share of a f%lly9paid mem&er onacco%nt of his %npaid monthly d%es, when s%ch corporation is a%thoried to do so %nder the &y9laws, e5enwhen no pro5ision on the matter appears in the articles of incorporation, and in spite of the fact that Sec.32 of Corporation Code on delin:%ency sale pertains to payment of shares s%&scription. Section # of Corporation Code pro5ides that mem&ership shall &e terminated in the manner and for ca%ses pro5ided in

+eiterated in Collector of nternal +evenue v. Clu# ,ili"ino nc. de Ce#u, " SC7A )6 (#36$.

""



the articles of incorporation or the &y9laws of a non9stoc1 corporation, then the right of a non9stoc1corporation to e-pel a mem&er thro%gh the forfeit%re of s%ch mem&ers share may &e esta&lished in the&y9laws alone, and need not &e em&odied in the articles of incorporation. 'ae 2of > Country Cu, v.'da. 3e Caram, 5?5 SCRA 21? =200>@.

. (*)/ ( T)7+''7 *&/ C()%()*+' O#3')7

Section + of Corporation Code, altho%gh setting the term of the mem&ers of the ;oard of 'r%stees at" years, contains a pro5iso e-pressly s%&*ecting the d%ration to what is otherwise pro5ided in the articles of

incorporation or &y9laws of the ed%cational corporation4that contrary pro5ision control on the term of office. A tr%stee occ%pying his office in a hold9o5er capacity co%ld &e remo5ed at any time, witho%t ca%se, %ponthe election or appointment of his s%ccessor. Barayuga v. Advestist 7niversity of the Phili""ines, 3"" SC7A3!+ (6+$.

'he stip%lation in the ;y9Laws @which allows the election of mem&ers of the ;oard of 'r%steesdistri&%ted to two per districtB is not contrary to the Corporation Code @which %nder Section 6! re:%ires thatin the election of tr%stees of a non9stoc1 corporation it is necessary that at least “a ma*ority of the mem&ersentitled to 5ote” m%st &e presentB. Section # pertaining to non9stoc1 corporations pro5ides that “(t$he rightof the mem&ers of any class or classes (of a non9stoc1 corporation$ to 5ote may &e limited, &roadened or denied to the e-tent specified in the articles of incorporation or the &y9laws.” 'his is an e-ception to Section3 where it is pro5ided that “no share may &e depri5ed of 5oting rights e-cept those classified and iss%ed asOpreferred or Oredeema&le shares, %nless otherwise pro5ided in this Code.”. Ao)as v. Court of A""eals, !#SC7A ))# (6++3$.

5. C(&<')7#(& ( N(&-S+(3 C()%()*+#(& +( S+(3 C()%()*+#(&'he con5ersion of a non9stoc1 ed%cational instit%tion into a stoc1 corporation is not legally feasi&le, as it

5iolates Sec. 2 of Corporation Code that no part of the income of a non9stoc1 corporation may &edistri&%ta&le as di5idends to its mem&ers, tr%stees or officers. “'h%s, the Commission has pre5io%sly r%ledthat a non9stoc1 corporation cannot &e con5erted into a stoc1 corporation &y a mere amendment of the

Articles of 8ncorporation. Ior p%rposes of transformation, it is f%ndamental that the non9stoc1 corporation&e dissol5ed first %nder any of the methods specified 'itle J8K of the Corporation Code. 'hereafter, themem&ers may organie as a stoc1 corporation directed to &ring profits or pec%niary gains to themsel5es.”SEC ?"inion dated (ecem#er =I SEC ?"inion dated => ,e#ruary =D.

6. C(&<')7#(& ( C()%()*+#(& S($' +( A44)'4*+' R'$#4#(7 C()%()*+#(&

;y 5irt%e of the pro5ision %nder Section +# of the Corporation Code allows the application to religio%scorporations of the general pro5isions go5erning non9stoc1 corporations, a corporation sole may con5ert

itself into a religio%s aggregate corporation, &y formally amending its articles of incorporation, &y appro5alof its sole corporator and ratified &y at least two9thirds of its general mem&ership, and witho%t needlesslygoing thro%gh the process of dissol%tion. nglesia Evangelica Metodista en las slas ,ili"ino :EME*,;:Cor"oration Sole;% nc. v. *a'aro, 36! SC7A 66! (6++$.

. T* C(&7#/')*+#(&7 () N(&-S+(3 C()%()*+#(&7

*. hat (s a 9oundation5 (S'37. 0 *&/ =H@, NIRC ( 1>>B S'3. 2, R'<. R'4. N(. 2B IR-NEDAR'4$*+#(&7 N(. 1-?1, *7 *'&/'/$

Iormal re:%irements of 7e5. 7eg. No. 6 are not mandatory and an entity may, in the a&sence of compliance with s%ch re:%irements, still show that it falls %nder the pro5isions of N87C as a ta-9e-emptcorporation. Collector v. 9.6. Sinco Educational Cor"., ++ Phil. 62 (#"3$.

. I&3('-T* E'%+#(& ( C')+*#& N(&-S+(3 C()%()*+#(&7 =S'3. 0, NIRC@

“Non)"rofit ” does not necessarily mean “charita#le.” Collector of nternal +evenue v. Clu# ,ili"ino nc.de Ce#u considered a sports cl%& organied for recreation and entertainment of its stoc1holders andmem&ers and primarily f%nded &y mem&ership fees and d%e, as &eing non9profit &eca%se of its p%rposeand there was no e5idence that it was engaged in a profit9ma1ing enterprise. ;%t that did not ma1e it“charita#le”, which term has &een defined in *ung Center of the Phili""ines v. 3ue'on City% !)) SC7A #(6++!$, as “a gift, to &e applied consistently with e-isting laws, for the &enefit of an indefinite n%m&er of persons, either &y &ringing their minds and hearts %nder the infl%ence of ed%cation or religion, &y assistingthem to esta&lish themsel5es in life or @&yB otherwise lessening the &%rden of go5ernment.” As organiationmay &e considered as non9profit if it does not distri&%te any part of its income to stoc1holders or mem&ers/howe5er, despite its &eing a ta- e-empt instit%tion, any income s%ch instit%tion earns from acti5itiescond%cted for profit is ta-a&le, as e-pressly pro5ided in Section )+ of the N87C . Commissioner of nternal +evenue v. St. *u/e2s Medical Center% 36 SC7A 33 (6+6$.

. R#4"+ ( M'')7 +( P)(%()+#(&*+' S"*)' ( R'*#&#&4 A77'+7 U%(& D#77($+#(&(S'37. > *&/ >5B S'3. =H@=2@=3@, 1>> NIRC$.

As pro5ided for %nder Secs. #! and #" of Corporation Code, in the e5ent of dissol%tion of a non9stoc1corporation, its assets shall &e distri&%ted in accordance with the r%les. =nless, it is so pro5ided in the

Articles of 8ncorporation or ;y9Laws, the mem&ers are not entitled to any &eneficial or 5ested interest o5er the assets of the non9stoc1 corporation. 8n other words, non9stoc1, non9profit corporations hold their f%ndsin tr%st for the carrying o%t of the o&*ecti5es and p%rposes e-pressed in its charter. SEC ?"inion dated =>,e#ruary =DI SEC ?"inion dated D May =.

"3



:VIII. F OREIGN C ORPORATIONS

1. D'#&#+#(& (S'3. 12$

A foreign corporation is one which owes its e-istence to the laws of another state, and generally, has nolegal e-istence within the State in which it is foreign. A foreign corporation illegally doing &%siness here&eca%se of its ref%sal or neglect to o&tain the re:%ired license may not %nfairly plead s%ch lac1 to a5oidser5ice and there&y imp%gn the *%risdiction of the local co%rts. S%ch danger does not e-ist among foreigncorporations that are ind%&ita&ly not doing &%siness in the Philippines? there wo%ld &e no reason for it to &e

s%&*ect to the States reg%lation/ for in so far as the State is concerned, s%ch foreign corporation has nolegal e-istence. 'herefore, to s%&*ect s%ch foreign corporation to the local co%rts *%risdiction wo%ld 5iolatethe essence of so5ereignty of the creating state. Avon (nsurance "LC v. CA 2? SCRA 12 =1>>@.

2. L#3'&7' +( D( 7#&'77 #& +"' P"#$#%%#&'7

*. A%%$#3*+#(& () L#3'&7' (S'37. 12 *&/ 125B A)+. ?, O&#7 I&<'7+'&+ C(/'$

. R*+#(&*$' () R'#)#&4 L#3'&7' Sec. 3# of old Corporation Law was intended to s%&*ect the foreign corporation doing &%siness in the

Philippines to the *%risdiction of o%r co%rts, not to pre5ent the foreign corporation from performing singleacts, &%t to pre5ent it from ac:%iring domicile for the p%rpose of &%siness witho%t ta1ing the necessarysteps to render it amena&le to s%it in the local co%rts. 7arsha-es v. !ser , 6 P"#$. 1 =1>2@.

3. A%%(#&+'&+ ( * R'7#/'&+ A4'&+ (S'3. 12 *&/ 12?$

/. I77*&3' ( L#3'&7' (S'3. 126B A)+. >, O&#7 I&<'7+'&+ C(/'$

A d%ly9licensed foreign corporation sho%ld &e s%&*ected to no harsher r%les that is re:%ired of domesticcorporations4it sho%ld not &e s%&*ect to attachment on the pretense that s%ch foreign corporation is notresiding in the Philippines. Claude Neon *ights v. Phil. Advertising Cor"., "2 Phil. 3+2 (#)6$.

'. E'3+7 ( F*#$)' +( O+*#& L#3'&7' =S'37. 1 *&/ 1@'he contract itself is 5alid, &%t it is the standing to s%e of the foreign corporation that is missing, which

can &e remedied with the s%&se:%ent o&taining of the license to do &%siness. /ome (nsurance Co. v.!astern Shipping Lines, 12 SCRA 2 =1>?@.

=nder Sec. 6), a foreign corporation m%st first o&tain a license from the appropriate go5ernmentagency &efore it can transact &%siness in the Philippines. Where a foreign corporation does &%siness in thePhilippines witho%t the proper license, it cannot maintain any action or proceeding &efore Philippine co%rts

as pro5ided in Section )) of the Corporation Code. Cargill% nc. v. ntra Strata Assurance Cor". , 3" SC7A)+! (6++$.

Summary of +ulings on (oing Business 'he principles regarding the right of a foreign corporation to&ring s%it in Philippine co%rts may th%s &e condensed in fo%r statements? ($ if a foreign corporation does&%siness in the Philippines witho%t a license, it cannot s%e &efore Philippine co%rts/ (6$ if a foreigncorporation is not doing &%siness in the Philippines, it needs no license to s%e &efore Philippine co%rts onan isolated transaction or on a ca%se of action entirely independent of any &%siness transaction/ ()$ if aforeign corporation does &%siness in the Philippines witho%t a license, a Philippine citien or entity whichhas contracted with said corporation may &e estopped from challenging the foreign corporations corporatepersonality in a s%it &ro%ght &efore the Philippine co%rts/ and (!$ if a foreign corporation does &%siness inthe Philippines with the re:%ired license, it can s%e &efore Philippine co%rts on any transaction. M+.Holdings% *td. 9. Ba!ar% )+ SC7A 32 (6++6$.6

.A'&/'&+ ( L#3'&7' (S'3. 11$

4. R'<(3*+#(& ( L#3'&7' (S'37. 1 *&/ 15/ A)+. 50, O&#7 I&<'7+'&+ C(/'$

. CONCEPTS OF 93#(%2 B$S(%!SS (% T/! " /(L(""(%!S ;

*. S+*++()8 C(&3'%+ ( D(#&4 7#&'77 (R.A. N(. 02, F()'#4& I&<'7+'&+ A3+ ( 1>>1$.

'he Ioreign 8n5estments Act of ## (I8A #$ repealed Articles !!9"3 of ;oo1 88 of the Dmni&%s8n5estments Code of #2, en%merated in Sec. )(d$ not only the acts or acti5ities which constit%te “doing&%siness” &%t also those acti5ities which are not deemed “doing &%siness”. Cargill% nc. v. ntra Strata

Assurance Cor"., 3" SC7A )+! (6++$.

=nder Sec. )(d$ of I8A O#, as s%pplemented &y 7%le 8, Sec. (f$ of its 8mplementing 7%les and7eg%lations, the appointment of a distri&%tor in the Philippines is not s%fficient to constit%te “doing&%siness” %nless it is %nder the f%ll control of the foreign corporation. 8n the same manner, if the distri&%tor

is an independent entity which &%ys and distri&%tes prod%cts, other than those of the foreign corporation,for its own name and its own acco%nt, the latter cannot &e considered to &e doing &%siness in thePhilippines. Steelcase% nc. v. (esign nternational Selections% nc., 32+ SC7A 3! (6+6$.

. J)#7%)/'&+#*$ C(&3'%+7 ( 93oing Business; 8t implies a contin%ity of commercial dealings andarrangements and the performance of acts or wor1s or the e-ercise of some of the f%nctions normallyincident to the p%rpose or o&*ect of a foreign corporations organiation. 7enthoatum v.7angaiman, 2 P"#$. 525 =1>1@.

6 Agilent -echnologies Singa"ore :P-E; *td. v. ntegrated Silicon -echnology Phil. Cor"., !62 SC7A "#) (6++!$.

"2



=#@ “Territoriaity &ue”

oing &%siness in the Philippines re:%ires that the contract m%st &e perfected or cons%mmated inPhilippine soil. A “C8I, West Coast” arrangement ma1es deli5ery o%tside of the Philippines, and is notdoing &%siness in the Philippines. "acific 'egeta,e #i Corp. v. Singson, A/<*&3'/ D'3#7#(&S%)'' C()+, A%)#$ 1>55 V($., %. 100-A.

'o &e “transaction &%siness in the Philippines” for p%rposes of Section )), the foreign corporationm%st act%ally transact &%siness in the Philippines, that is, perform specific &%siness transactions withinthe Philippine territory on a contin%ing &asis in its own name and for its own acco%nt. B. 9an Fuiden

Bros.% *td v. 6-9* Manufacturing ndustries% nc. , "6) SC7A 6)) (6++2$, citing K8LLAN=0KA, PH8L8PP8N0

CD7PD7A'0 L AW ) (6++$.

! C!"T(#% : Solicitation of &%siness contracts constit%tes doing &%siness in the Philippines. 7aru,eni %ederand B.'. v. Tensuan, 1>0 SCRA 105 =1>>0@.

=##@ 4Transactions See6ing "rofit &ue0

Altho%gh each case m%st &e *%dged in light of its attendant circ%mstances, *%rispr%dence has e5ol5ed

se5eral g%iding principles for the application of these tests. “;y and large, to constit%te Odoing &%siness,

the acti5ity to &e %nderta1en in the Philippines is one that is for profit9ma1ing.” Agient Technoogies

Singapore )"T!+ Ltd. v. (ntegrated Siicon Technoogy "hi. Corp. , 2 SCRA 5> =200@, citing

K8LLAN=0KA, PH8L8PP8N0 CD7PD7A'0 L AW "#3 et se:. (## ed.$/ Cargill% nc. v. ntra Strata Assurance

Cor"., 3" SC7A )+! (6++$, citing K8LLAN=0KA, PH8L8PP8N0 CD7PD7A'0 L AW +9+6 (6++$.

!xampes:

• (nsurance Business A foreign corporation with a Philippine settling agent which iss%es twel5e

marine policies co5ering different shipments to the Philippines is doing &%siness here. 6eneral Cor".of the Phil. v. 7nion nsurance Society of Canton% *td.% 2 Phil. )) (#"+$.

A foreign corporation which had &een collecting premi%ms on o%tstanding policies is doing

&%siness in the Philippines. Manufacturing *ife ns. v. Meer , # Phil. )" (#"$.

Ioreign ins%rance companies who %nderta1e on a reg%lar &asis the filing of collection s%its with

Philippine co%rts arising from ins%rance contracts entered into and premi%ms paid a&road are not

doing &%siness in the Philippines. Aetna Casualty & Surety Co. v. Pacific Star *ine, + SC7A 3)"

(#22$.)

• Air Carriers Dff9line air carriers ha5ing general sales agents in the Philippines are engaged in

&%siness in the Philippines and that their income from sales of passage here (i.e., %plifts of passengers and cargo occ%r to or from the Philippines$ is income from within the Philippines. South

African Air$ays v. Commissioner of nternal +evenue, 36 SC7A 33" (6++$.

! C!"T(#% : Transactions with Agents and Bro6ers Q When it is shown that the foreign corporatione-ercised control o5er the &%siness of its &ro1ers, then it is deemed doing &%siness in theco%ntry. 2ranger Associates v. 7icrowave Systems (nc., 1?> SCRA 61 =1>>0@.!

3.S%'3#*$ C*7'7 (& I&)#&4''&+ ( 7#&'77 N*'7 *&/ T)*/'*)7

'he right to corporate name and trade name of a foreign corporation is a property right, a right in rem,which it may assert and protect in any of the co%rts of the world e5en in co%ntries where it does notpersonally transact any &%siness.estern !?uipment > Suppy Co. v. &eyes, 51 P"#$. 115 =1>2@.

8nfringement of trade name may &e p%rs%ed in local co%rts separate from the iss%e of whether there isthe proper license to do &%siness in the Philippines. 6eneral 6arments Cor". v. (irector of Patens, !SC7A "+ (#2$/ 7niversal +u##er Products% nc. v. Court of A""eals, )+ SC7A +! (#$.

/. D(3+)#&' (& U&)'$*+'/ () I7($*+'/ T)*&7*3+#(&7Single or isolated acts, contracts, or transactions of foreign corporations are not regarded as carrying on

of &%siness. 'ypical e-amples of these are the ma1ing of a single contract, sale with the ta1ing of a noteand mortgage in the state to sec%re payment thereof, p%rchase, or note, or the mere commission of a tort.M+. Holdings% *td. 9. Ba!ar , )+ SC7A 32 (6++6$.

A foreign corporation needs no license to s%e &efore Philippine co%rts on an isolated transaction. 05ena series of transactions which are occasional, incidental and cas%al4not of a character to indicate ap%rpose to engage in &%siness4do not constit%te the doing or engaging in &%siness as contemplated &ylaw. *oren'o Shi""ing v. Chu## and Sons% nc., !) SC7A 633 (6++!$.

'he performance of ser5ices a%-iliary to an e-isting isolated contract of sale which are not on acontin%ing &asis do not constit%te “doing &%siness in the Philippines.” Antam Consoidated v. CA, 1SCRA 2?? =1>?6@."

=#@ Case-Law !xampes of (soated Transactions:

)7niversal Shi""ing *ines% nc. v. AC , SC7A 2+ (##+$.

!*a Chemise *acoste% S.A. v. ,ernande' , 6# SC7A )2) (#!$/ Schmid & ?#erly v. +5*, 33 SC7A !#) (#$/ ang *a#oratories%

nc. v. Mendo'a, "3 SC7A !! (#2!$.

"East#oard Navigation% *td. v. 5uan smael and Co.% nc., +6 Phil. (#"2$.

"



• 7eco5ery on the collision of two 5essels at the <anila Har&or. (am"fschieffs +hederei

7nion v. *a Cam"aGia -ransatlantica, Phil. 233 (#+2$.

• Loss of goods &o%nd for Hong1ong &%t erroneo%sly discharged in <anila. -he

S$edish East Asia Co.% *td. v. Manila Port Service, 6" SC7A 3)) (#3$.

• 7eco5ery of damages s%stained &y cargo shipped to the Philippines. Bula/hidas v.

Navarro, !6 SC7A (#3$.

• Sale of constr%ction e:%ipment to the Go5ernment with no intent of contin%ity of

transaction. 6on'ales v. +a4ui'a, + SC7A 6"! (##$.

• 7eco5ery on a Hong1ong *%dgment against a <anila resident. Hang *ung Ban/ v.

Saulog , 6+ SC7A )2 (##$.

• Appointment of local lawyer &y foreign mo5ie companies who ha5e registered

intellect%al property rights o5er their mo5ies in the Philippines, to protect s%ch rights for piracy? “We fail tosee how e-ercising oneQs legal and property rights and ta1ing steps for the 5igilant protection of said rights,partic%larly the appointment of an attorney9in9fact, can &e deemed &y and of themsel5es to &e doing&%siness here.” Colum#ia Pictures nc. v. Court of A""eals% 63 SC7A !! (##3$.

=##@ Case Law !xampes hen Singe Transactions Constitute 3oing Business

• Where a single act or transaction, howe5er, is not merely incidental or cas%al &%t indicates the foreign

corporationQs intention to do other &%siness in the Philippines, said single act or transaction constit%tes doing&%siness. ,ar East ntl. v. Nan/ai 8ogyo, 3 SC7A 26" (#36$.

• 8t is not really the fact that there is only a single act done that is material for determining whether a

corporation is engaged in &%siness in the Philippines, since other circ%mstances m%st &e considered. Wherea single act or transaction is not merely incidental or cas%al &%t is of s%ch character as distinctly to indicate ap%rpose on the part of the foreign corporation to do other &%siness in the state, s%ch act will &e consideredas constit%ting &%siness. *itton Mills% nc. v. Court of A""eals, 6"3 SC7A 3#3 (##3$.

• Participating in a &idding process constit%tes “doing &%siness” &eca%se it shows the foreign corporations

intention to engage in &%siness in the Philippines. 8n this regard, it is the performance &y a foreigncorporation of the acts for which it was created, regardless of 5ol%me of &%siness, that determines whether aforeign corporation needs a license or not. Euro"ean +esources and -echnologies% nc. v. ngenieu#uroBir/hanh J Nolte, !)" SC7A 6!3 (6++!$.

.S#+7 ROUGHT Y F()'#4& C()%()*+#(&7

*. %eed to Aege Capacity to Sue: 'he fact that a foreign corporation is not doing &%siness in thePhilippines m%st &e alleged if a foreign corporation desires to s%e in Philippines co%rts %nder the“isolated transactions r%le.” Atantic 7utua (nc. v. Ce,u Stevedoring Co., 1 SCRA 10 =1>[email protected]

'he filing of an action &y a foreign corporation &efore Philippine co%rts wo%ld mean that &y 5ol%ntaryappearance, the local co%rts ha5e act%ally o&tained *%risdiction o5er the “person” of the foreigncorporation.Communication 7aterias v. Court of Appeas 260 SCRA 6 =1>>6$.

.%eed to Aege &esident Agent: A complaint filed &y a foreign corporation is fatally defecti5e for failingto allege its d%ly a%thoried representati5e or resident agent in Philippine *%risdiction. Ne$ or/ MarineManagers% nv. c. Court of A""eals% 6!# SC7A !3 (##"$.

3. Certificate of %on-orum Shopping: A resident agent of a foreign corporation is not "er se a%thoriedto e-ec%te the re:%isite certification against for%m shopping4while a resident agent may &e aware of actions filed against his principal, he may not &e aware of actions initiated &y its principal, whether in thePhilippines or a&road. E"ertravel & -ours% nc. v. Court of A""eals, !"# SC7A !2 (6++"$.

/. 3iscredited "ari 3eicto D(3+)#&' 'he local party to a contract with a foreign corporation that does&%siness in the Philippines witho%t license cannot maintain s%it against the foreign corporation *%st asthe foreign corporation cannot maintain s%it, %nder the principle of "ari delicto. Top-ed 7fg. v.!C!3, 11> SCRA 11? =1>?5@.

'. ! ST#""!L 3#CT&(%! =nder the principle of estoppel, a foreign corporation doing &%siness in thePhilippines may s%e in Philippine co%rts e5en witho%t license to do &%siness against a Philippine citienwho had contracted with and &een &enefited &y said corporation and 1new it to &e witho%t thenecessary license to do &%siness. 7erri Lynch utures (nc. v. CA, 211 SCRA ?2 =1>>[email protected]

" &#"!& 3#CT&(%! Ioreign corporations which cond%ct reg%lar &%siness sho%ld &e denied any accessto co%rts %ntil they sec%re a license so as to ens%re that they will a&ide &y the decisions of o%r co%rts,e5en if ad5erse to it. ismissal of the petition wo%ld &e witho%t pre*%dice to the foreign corporations%&se:%ently re9filing the case when it has o&tained the re:%isite license. !ri6s Ltd. v. Court of

Appeas 26 SCRA 56 =1>>@.

3'his o5ert%rned the pre5io%s doctrine in Marshall)ells (as well as in n re *i4uidation of the Mercantile Ban/ of China% etc., 3" Phil. )"

(#)$, that the lac1 of a%thority of foreign corporation to s%e in Philippine co%rts for fail%re to o&tain the license is a matter of affirmati5edefense. Also Commissioner of Customs v. 8.M.8. 6ani , 6 SC7A "# (##+$.

26eorg 6rot!ahn 6MBH & C. v. snani , 6)" SC7A 63 (##!$/ Communications Material and (esign% nc. v. Court of A""eals, 63+ SC7A

32) (##3$/ Agilent -echnologies Singa"ore :P-E; *td. v. ntegrated Silicon -echnology Phil. Cor"., !62 SC7A "#) (6++!$/ Euro"ean+esources and -echnologies% nc. v. ngenieu#uro Bir/hanhJNolte, !)" SC7A 6!3 (6++!$/ +im#unan Hi!au 6rou" of Com"anies v.?riental ood Processing Cor"., !2+ SC7A 3"+ (6++"$/ 6lo#al Business Holdings% nc. v. Surecom" Soft$are% B.9. , 3)) SC7A !2+(6++$/ Steelcase% nc. v. (esign nternational Selections% nc. , 32+ SC7A 3! (6+6$.

"#



.#n (soated Transactions: A foreign corporation not licensed to do &%siness in the Philippines is nota&sol%tely incapacitated from filing a s%it in local co%rt. A#oiti' Shi""ing Cor". v. nsurance Com"any of North America% "3 SC7A 636 (6++$.

5. S#+7 AGAINST F()'#4& C()%()*+#(&7 A f%ndamental r%le of international law on state *%risdiction is thatno state can &y its laws, and no co%rt which is only a creat%re of the state, can &y its *%dgments anddecrees, directly &ind or affect property or persons &eyond the limits of that state. -imes% nc. v. +eyes, )#SC7A )+) (#2$.

*. J)#7/#3+#(& O<') F()'#4& C()%()*+#(&7 (S'3. 1, R$' 1, R$'7 ( C()+@Ior p%rposes of 5en%e in5ol5ing a foreign corporation, its “residence” incl%des the co%ntry where it

e-ercises corporate f%nctions or the place where its &%siness is done. State nvestment House v. Citi#an/ ,6+) SC7A # (##$/ North$est ?rient Airlines v. Court of A"""eals% 6! SC7A #6 (##"$.

Ior p%rpose ser5ing s%mmons a foreign corporation in accordance with 7%le !, Section !, it iss%fficient that it &e alleged in the complaint that it is doing &%siness in the Philippines. Hahn v. Court of

A""eals% 633 SC7A ")2 (##2$.

When a foreign corporation has designated a person to recei5e ser5ice of s%mmon p%rs%ant to theCorporation Code, the designation is e-cl%si5e and ser5ice of s%mmons on any other person isinefficacio%s. H.B. Fachry Com"any nt2l v. CA, 6)6 SC7A )6# (##!$.

When it is shown that a foreign corporation is doing &%siness in the Philippines, s%mmons may &eser5ed on (a$ its resident agent designated in accordance with law/ (&$ if there is no resident agent, the

go5ernment official designated &y law to that effect/ or (c$ any of its officers or agent within the Philippines.'he mere allegation in the complaint that a local company is the agent of the foreign corporation is nots%fficient to allow proper ser5ice to s%ch alleged agent/ it is necessary that there m%st &e specificallegations that esta&lishes the connection &etween the principal foreign corporation and its alleged agentwith respect to the transaction in :%estion. ,rench ?il Mills Machinery Co.v. CA% 6#" SC7A !36 (##$.

Participation of a foreign corporations co%nsel in the trial process, e.g.% cross9e-amination of witnesses,agreement and o&*ection to doc%mentary e5idence, and the introd%ction of witnesses and doc%mentarye5idence wo%ld pre5ent the plea of lac1 of *%risdiction o5er the person of s%ch foreign corporation.2enera Corp. of the "hi. v. $nion (nsurance Society of Canton Ltd., ? P"#$. 1 =1>50@.

.O'3+#(& +( J)#7/#3+#(& Appearance of a foreign corporation to a s%it precisely to :%estion thetri&%nals *%risdiction o5er its person is not e:%i5alent to ser5ice of s%mmons, nor does it constit%te anac:%iescence to the co%rts *%risdiction. Avon (nsurance "LC v. CA 2? SCRA 12 =1>>@.

3. ODD DOCTRINE “8ndeed, if a foreign corporation, not engaged in &%siness in the Philippines, is not &arred from see1ing

redress from the co%rts in the Philippines, a fortiori% that same corporation cannot claim e-emption from&eing s%ed in Philippine co%rts for acts done against a person or persons in the Philippines.” aciities7anagement Corp. v. 3e a #sa, ?> SCRA 11 =1>>@.#

C #%T&A 'he sine 4ua non re:%irement for ser5ice of s%mmons and other legal processes or any s%chagent or representati5e is that the foreign corporation is doing &%siness in the Philippines. Hyo"sung Maritime Co.% *td. v. CA, 3" SC7A 6" (#$/ Signetics Corp. v. CA, 225 SCRA =1>>@.

" &!S!%T & $L! : 'here is no reason to s%&*ect to Philippine *%risdiction foreign corporations not doing&%siness here/ insofar as the State is concerned, s%ch foreign corporation has no legal e-istence, and tos%&*ect foreign corporations not doing &%siness to the co%rts *%risdiction wo%ld 5iolate the essence of so5ereignty. 'he Co%rt is not pers%aded &y the position ta1en in5o1ing the r%ling in ,acilities Management.

Avon (nsurance "LC v. Court of Appeas 2? SCRA 12 =1>>@./.STIPULATION ON VENUE When the contract s%ed %pon has a 5en%e cla%se within the Philippines, it is

deemed a confirmation &y the foreign corporation, e5en tho%gh not doing &%siness in the Philippines, to&e s%ed in local co%rts. Linger > isher 27B/ v. (AC , 125 SCRA 522 =1>?@.

6. L*7 A%%$#3*$' +( F()'#4& C()%()*+#(&7 (S'3. 12>$

'he pro5ision in the New Mor1 law which allowed only stoc1holders with a minim%m n%m&er of shareholdings ()E$ to &e entitled to e-ercise the right of inspection is 5alid in the case of a foreigncorporation licensed to do &%siness in the Philippines which in its internal relationship was &o%nd &y theNew Mor1 law. 6rey v. nsular *um#er Co., 32 Phil. )# (#)$.

. A'&/'&+ ( A)+#3$'7 ( I&3()%()*+#(& (S'3. 10$

?. M')4') *&/ C(&7($#/*+#(& (S'3. 12B A)+. 51, O&#7 C(/'$

>. W#+"/)**$ ( F()'#4& C()%()*+#(& (S'3. 16$

:I:. PENALTY PROVISIONS OF THE CODE

1. P'&*$+8 C$*7' () V#($*+#(&7 ( +"' P)(<#7#(&7 ( +"' C(/' (S'3. 1$

5ohnlo -rading Co.% v. ,lores% Phil. 2! (#"$/ 5ohnlo -rading Co. v. Fulueta, Phil. 2"+ (#"$/ Pacific Micronisian *ine% nc. v. (el

+osario, #3 Phil. 6) (#"!$/ ,ar East nt2l m"ort and E"ort Cor". v. Nan/ai 8ogyo Co.% *td., 3 SC7A 26" (#36$.

#,BA Aircraft v. Fosa, + SC7A (#$/ +oyal Cro$n nt2l v. N*+C , 2 SC7A "3# (##$/ ang *a#oratories% nc. v. Mendo'a , "3

SC7A !! (#2$.

3+



2. C)(77-)'')'&3' (S'3. 2$.

. S%'3##3 *%%$#3*+#(& (S'3. $.

. S+)#3+ P)#&3#%$'7 #& C)##&*$ L*B +"' #77' ( 9*$#3';.

5. H#7+()#3*$ *34)(&/ ( S'3. 1 =S'3. 1>0 1K ( +"' C()%()*+#(& L*@Sec. #+ was not intended to ma1e e5ery cas%al 5iolation of one of the Corporation Law pro5isions

gro%nd for in5ol%ntary dissol%tion of the corporation and that the co%rt was entitled to e-ercise discretion ins%ch matters. 6overnment of P.. v. El Hogar ,ili"ino, "+ Phil. )## (#62$.

Penalties imposed in Sec. #+(A$ for the 5iolation of the prohi&ition in :%estion are of s%ch nat%re thatthey can &e enforced only &y a criminal prosec%tion or &y an action of 4uo $arranto. But these "roceedingscan #e maintained only #y the Solicitor 6eneral in re"resentation of the 6overnment. Harden v. Benguet Consolidated Mining Co.% " Phil. ! (#))$.

6. V#($*+#(& ( S'3. 1 8 F()'#4& C()%()*+#(&7Section )), %nli1e its co%nterpart Sec. 3# in the old Corporation Law which specifically pro5ided for

penal sanctions for foreign corporations engaging in &%siness in the Philippines witho%t o&taining there:%isite license, sho%ld &e deemed to ha5e a penal sanction &y 5irt%e of Sec. !! of the CorporationCode. Home nsurance Co. v. Eastern Shi""ing *ines, 6) SC7A !6! (#)$.

::. MISCELLANEOUS

1. SEC P(') *&/ S%')<#7#(& (S'37. 10? *&/ 1B PD >02-A$2. S%'3#*$ C()%()*+#(&7 (S'3. $

. N' R'#)''&+7 (& E#7+#&4 C()%()*+#(&7 (S'3. 1?$.

. A%%$#3*#$#+8 ( O+"') P)(<#7#(& ( ($/ C()%()*+#(& L* (S'37. 15 *&/ 16$.

(O(

0? JANUARY 2016 SCRA 5

word file 2016 corporate law outline

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