CORPORATE CONTRACT LAW I. Pre- Incorporation Contracts 1. Who are promoters?

The Securities Regulation Code defines a promoter as "a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor." He is an agent of the, as of yet, non-existent corporation, which is in the process of being incorporated. 2. Nature of Pre-Incorporation Agreements Promoter's contracts are types of contracts entered into in behalf of a corporation which is in the process of being organized and incorporated. Promoter's contracts, wherein it is essentially an agent enters into the contract in the name of a principal who does not yet exist, are governed by the Law on Agency. i. Application of Agencies Principles: 1 Applying Article 1897, 1898 and 1901 to promoter's contracts, it is clear that every promoter of a corporation in the process of incorporation binds himself to ensure that the corporation, once formed, will ratify the contract entered into in its name, becomes personally liable for such contract in the event that the corporation does not so ratify it once it comes into existence.

3. Theories on Liabilities for Promoter's Contracts (Jurisprudence) a. RATIFICATION IS KEY TO VALIDITY AND ENFORCEABLITY In Cagayan Fishing v. Teodoro Sandiko, four parcels of land were sold to a corporation in the process of incorporation, under specific terms whereby the outstanding mortgage loan on the properties would have to be fully paid by the corporation. Later, the corporation was incorporated, but the mortgage loan was not paid. However, the parcels of land were sold in the name of the corporation to Sandiko with the condition that the latter should shoulder the mortgage debts. Sandiko failed to comply with his obligation, thus the corporation filed a recovery suit. The trial court dismissed the case, saying that the contract should be void since the contract was entered into with a corporation that had no corporate existence at the time the properties were transferred to it. The Supreme Court upheld the dismissal. It ruled: That a corporation should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business, would seem to be self evident. . . . A corporation, until organized, has no being, franchises or faculties. Nor do those engaged in bringing it into being have any power to bind it by contract, unless so authorized by the charter there is not a corporation

1 Art. 1897: The agent who acts as such is not personally liable to the party with whom he contracts, unless
he expressly binds himself or exceeds the limits of his authority without giving such party sufficient notice of his powers. Art. 1898: If the agent contracts in the name of the principal, exceeding the scope of his authority, and the principal does not ratify the contract, it shall be void if the party with whom the agent contracted is aware of the limits of the powers granted by the principal. In this case, however, the agent is liable if he undertook to secure the principal's ratification. Art. 1901: A third person cannot set up the fact that the agent has exceeded his powers, if the principal has ratified, or has signified his willingness to ratify the agent's acts.

nor does it possess franchise or faculties for it or others to exercise, until it acquires a complete existence. Furthermore, the Court declined to apply the doctrine of ratification, saying that it would result in the commission of fraud to the candid and unwary. It rule in this wise: Boiled down to its naked reality, the contract here was entered into not between Manuel Tabora and a non-existent corporation but between the Manuel Tabora as owner of the four parcels of lands on the one hand and the same Manuel Tabora, his wife and others, as mere promoters of a corporations on the other hand. For reasons that are selfevident, these promoters could not have acted as agent for a projected corporation since that which no legal existence could have no agent. A corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa mere. Therefore, under Cagayan, RATIFICATION IS THE KEY ELEMENT IN WHICH THE A PROMOTER'S CONTRACT CAN BE HELD VALID AND ENFORCEABLE. Without ratification by a corporation after its due incorporation, a contract entered into on behalf of a corporation yet to be organized or still in the process of incorporation is void as against the corporation. The Court found significant that the transactions involving the properties were not treated as corporate assets but rather as personal assets of the Taboras, supported by the fact that the titles to the parces were not even registered in the name of the corporation. Sandiko always thought of Tabora as the owner, and the former dealt with the latter directly. Philippine National Bank, who is the mortgagee, treated Tabora as the owner. These all pointed to a lack of bona fide ratification of the deed of sale of the properties in favor of the corporation. b. THE EVENTUAL INCORPORATION OF THE CORPORATION AND ITS ACCEPTANCE OF THE CONTRACT PERFECTED AND CURED THE DEFICENCY In Rizal Light and Ice Co. v. Municipality of Morong, Rizal, a franchise which was previously awarded to a corporation was sought to be annulled on the ground that at the time of the filing of the application the corporation was only in the process of being filed. The Supreme Court dismissed the action, stating that although a franchise may be treated as a contract, the eventual incorporation of the applicant corporation after the grant of the franchise and its acceptance of the franchise not only perfected the contract between the municipality and Morong Electric, but cured the deficiency, as pointed out in the application of Morong Electric. The ruling in Rizal Light emphasized that a company is not completely incorporated at the time a secondary franchise or license is given, does not affect the validity of the grant, but what is essential is that at the time of the grant, the corporation "is organized," or that the company's "organization is complete." This emphasizes the principle under the business enterprise doctrine that what is essential for the commencement of a corporation is the existence of the business corporation upon which a license or grant is pursued.

To contrast this case with Cagayan Fishing, the facts of the latter case show the juridical entity had not been formally organized into a business enterprise. Even Sandiko was well aware that the parcles of land were not yet registered in the name of the corporate entity. c. PROMOTER PERSONALLY LIABLE IN THE EVENT THE CORPORATION IS NOT DULY INCORPORATED In Caram v. Court of Appeals, Spouses Caram was ordered by the CA to pay the plaintiff jointly and severally the amount of P50,000.00 for the preparation of the project study and his technical services that led to the organization of the corporation. Their position is that as mere subsequent investors in the corporation that was later created, they should not be held solidarily liable with the Filipinas Orient Airways, which is a separate juridical entity and with Barretto and Garcia, their co-defendants in the lower court, who were the ones who requested the said services from them. On the onset the Supreme Court stated that for the purposes of resolving this case before us, it is not necessary to determine whether it is the promoters of the proposed corporation, or the corporation itself after its organization, that shall be responsible for the expenses incurred in connection with such organization. Nevertheless, it ruled that investors who were not behind the "moving spirit" of the organization of the corporation, but who are merely convinced to invest in the proposed corporate venture on the basis of the feasibility study undertaken are not liable personally with the corporation for the cost of the feasibility study. It can be said that they benefitted from the service, but that is not a justification to hold them personally liable. To do so would make all other stockholders of the corporation, including those who came later and regardless of the amount of their shareholdings, would be equally and personally libale with the petitioners for the claims of private respondents. The Court pointed out that the majority investing incorporators were not included in the definition of "promoter" by saying: The above finding bolsters the conclusion that the petitioners were not involved in the initial stages of the organization of the airline, which were being directed by Barretto as the main promoter. It was he who was putting all the pieces together, so to speak. The petitioners were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the strength of the project study, to invest in the proposed airline. Furthermore, the Court, in finding that there was no representation that the corporation was fictitious, concluded that there was no justification to hold the stockholders personally liable. This doctrine has a similar effect to the doctrine of corporation of estoppel, thus: Significantly, there was no showing that the Filipinas Orient Airways was a fictitious corporation and did not have a separate juridical personality, to justify making the petitioners, as principal stockholders thereof, responsible for its obligations. As a bona fide corporation, the Filipinas Orient Airways should alone be liable for its corporate acts as duly authorized by its officers and directors.

II.

De Facto Corporation 1. Elements of a De Facto Corporation In American jurisprudence, for the de facto corporation doctrine to apply, the following requisites must concur: i. ii. iii. The existence of a valid law under which the corporation may be incorporated An attempt in good faith to incorporate, or existence of a "colorable compliance" with the provisions on incorporation; and The assumption by the enterprise of corporate powers.

In Arnold Hall v. Piccio, a corporation was organized from an unregistered partnership among several individuals. Immediately after the execution of the articles of incorporation, but before its approval, the corporation proceeded to do business with the adoption of by-laws and the election of its officers. The articles of incorporation were sent forward to the SEC for registration. Before the issuance of the corresponding certificate of incorporation, some of the incorporators filed an action in court to have the unregistered partnership dissolved and included as defendants some of the officers of the partnership. The Court held that since the certificate of incorporation had not been issued by the SEC, then the de facto corporation doctrine DID NOT APPLY. None of the incorporation directors could claim, in good faith, to be a corporation, being fully aware that the certificate of incorporation was not yet issued. Furthermore, since the suit was not one where the corporation was made a party, but was merely a litigation between stockholders of the alleged corporation for the purpose of obtaining its dissolution. Essentially, Piccio ruled that in the absence of the formal issuance by the SEC of the certificate of incorporation, any other "colorable attempt in good faith to incorporate" would not qualify the application of the de facto corporation doctrine, and that any party may raise the lack of juridical personality to avoid the enforcement of a contract entered into the name of the corporation. BUT in spite of the ruling, Piccio cannot be taken to have changed the parameters of the de facto corporation doctrine. The real value of the ruling would be that the de facto doctrine and the corporation by estoppel doctrine has no application to issues and controversies that deal on the level of those that fall within the intra-corporate level, for in both cases the essential element of good faith does not exist. Secondly, since good faith is the underlying element of the de facto doctrine, Piccio actually made it the essential test of the existence of such good faith, that the parties to a corporate entity, the incorporators, must have been aware of the issuance of the certificate of incorporation by the SEC for such good faith to exist. Since ignorance of the law excuses no one from compliance therewith and since Section 11 of the Corporation law specifically states that the corporate existence only begins when the SEC certificate is issued, there can be no instance wherein incorporators and the public dealing with corporations can pretend to be in good faith. III. Corporation by Estoppel Doctrine 1. Definition The corporation by estoppel doctrine presents a clear exception to the general treatment of unregistered associations. The application of the doctrine seeks to enforce a contract where the element of consent is lacking because a purported corporation does not in fact exist at the time of perfection.

The doctrine is an exemption to the principle embodied in Section 2 of the Corporation Code, that a "corporation is a creature of the state," and cannot come into existence by mere agreement of the parties to contract. 2. Important Cases a. Salvatierra v. Garlitos Salvatierra owned a piece of land. He entered into a contract of lease with Philippine Fibers Co. Inc., a corporation allegedly "duly organized and existing under the laws of the Philippines," represented by its president, Segundino Refuerzo. When the obligations imposed under the contract of lease on the corporate lessee were not complied with, Salvatierra brought an action for accounting, rescission and damages. Judgment was rendered against the corporation. However, when a writ of execution was sought to be enforced, no properties in the name of the corporation could be located and consequently, properties registered in the name of the president were levied upon. Due to the facts proven during the course of the trial, the Court held the Refuerzo personally responsible for the contract entered into in behalf of the chosen corporation. The Court, in resolving Salvatierra, refused to apply the Corporation by Estoppel Doctrine, their reason being: While as a general rule a person who has contracted or dealt with an association in such a way as to recognize its existence as a corporate body is estopped from denying the same in an action arising out of such transaction or dealing, yet this doctrine may not be held to be applicable where fraud takes a part in the said transaction. In the instant case, on plaintiff's charge that she was unaware of the fact that the Philippine Fibers Producers Co., Inc., had no juridical personality, defendant Refuerzo gave no confirmation or denial and the circumstances surrounding the execution of the contract lead to the inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra was really made to believe that such corporation was duly organized in accordance with law. Salvatierra recognized the logical consequences of the application of the estoppel doctrine: once a non-existent corporation is recognized to exist as a corporate entity capable of executing a valid and binding contract, then it has a separate personality and its obligations under the contract cannot be ascribed to its agents. Thus: There can be no question that a corporation with registered has a juridical personality separate and distinct from its component members or stockholders and officers such that a corporation cannot be held liable for the personal indebtedness of a stockholder even if he should be its president and conversely, a stockholder or member cannot be held personally liable for any financial obligation be, the corporation in excess of his unpaid subscription. But this rule is understood to refer merely to registered corporations and cannot be made applicable to the liability of members of an unincorporated association. The reason behind this doctrine is obvious-since an organization which before the law is non-existent has no personality and would

be incompetent to act and appropriate for itself the powers and attribute of a corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the rights and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and comes personally liable for contracts entered into or for other acts performed as such, agent Essentially the Court, having problems with the logical repercussions of the corporation by estoppel doctrine as it stood at the time, refused to apply it. It relied, instead, on a principle of Agency Law: that an agent who enters into a contract outside of his authority or for a nonexistent principal is deemed to be the principal in the said contract, and shall be personally liable therefor. By applying this principle, Salvatierra was able to prevent the frustration of enforcement of a contract on the mere ground that one contracting party is missing. b. Albert v. University Publishing Co. Inc. Albert sued the University Publishing Co. Inc. for his share in the publication of a book entered into by the parties, with the corporation being represented in the contract by its president, Jose M. Aruego. Judgment was rendered in favor of Albert against the corporation, and when the it was sought to be enforced against University, it was discovered that it had never been registered with the SEC. Then the judgment was sought to be enforced Aruego in his personal capacity. Aruego raised the point that the contract was not a personal contract, but one entered into with a juridical entity. The Court ruled: Precisely however, on account of the non-registration it cannot be considered as a corporation, not even a corporation de facto. It therefore has no personality separate from Jose M. Arugeo; it cannot be sued independently. However, the Court rejected the application of the corporation by estoppel doctrine to resolve the issue. Thus: The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is inapplicable here. Aruego represented a non-existent entity and induced not only the plaintiff but even the court to believe in such representation. He signed the contract as "President" of "University Publishing Co., Inc.," stating that this was 'a corporation duly organized and existing under the laws of the Philippines,' and obviously misled plaintiff (Mariano A. Albert) into believing the same. One who has induced another to act upon his wilful misrepresentation that a corporation was duly organized and existing under the law, cannot thereafter set up against his victim the principle of corporation by estoppel However the Court discussed how the "then" version of the corporation by estoppel doctrine can be applied to hold the actors behind the purported corporation to be personally liabel for the contract, at the same time that corporate liability was upheld.

Even with regard to corporations duly organized and existing under the law, we have in many a case pierced the veil of corporate fiction to administer the ends of justice. And in Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent" The implication is clear: even with the old version of the estoppel doctrine, we could uphold the validity and enforceability of a contract by upholding the fiction of the contracting corporation's existence, even though in fact it does not exist, but nonetheless we can pierce the veil and make the actors personally liable for the obligations arising from the contract. 3. The Nature of the Doctrine The Supreme Court, in Lozano v. De Los Santos, comments that the doctrine is founded on principles of equity and designed to prevent injustice and unfairness. It applies when persons seem to come together to form a corporation and exercise corporate functions and enter into business relations with third persons. When there are no third persons involved in the conflict, there can be no corporation by estoppel. A failed consolidation therefore cannot result in a consolidated corporation by estoppel. In Ohta Dev. Co. v. Steamship Pompey, it was held that a party cannot challenge the personality of the plaintiff as a duly organized corporation after having acknowledged the same when entering into the contract with the plaint iff as such corporation for the transportation of its merchandise. In Lim Tong Lim v. Philippine Fishing Gear, under the law on estoppel, including Section 21 of the Corporation Code, those acting in behalf of an ostensible corporation, and those benefitted by it, knowing it to be without valid existence, are held liable as general partners. In this situation, the parties in a venture merely used a business name when in fact there was no intention among the co-venturers to incorporate a juridical entity. There can be no doubt that what was really intended by their meeting of the minds was to form a partnership. In this case, the parties agreed: "to engage in a fishing business which they started by buying boats worth 3.35phpIn their Compromise Agreement they subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats and to divide equally among themselves the excess or the lossThese boats, the purchase and repair of which were financed with borrowed money, fell under the term 'common fund' under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible, like credit or industry. That the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had indeed formed a partnership." Essentially what was agreed was to form a common fund with a clear indication to divide the profits among themselves. The only complication in Lim Tong Lim is that the transaction upon which the personal liabilities of the co-venturers being pursued was on behalf of "Ocean Quest Fishing Corporation," although no such corporation existed, nor was there any attempt to incorporate such entity. As a consequence, the unlimited liability principle under Partnership Law and the corporation by estoppel doctrine in Corporate Law were applied to determine the personal liabilities

of each of the partners in the business venture, which resulted in legal incongruency. The court held that "the doctrine of corporation by estoppel may apply to the alleged corporation and to a third partya third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged corporation. In such a case, all those who benefitted from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to, or took advantage of." 4. Two Levels (i) With "Fraud" and (ii) Without "Fraud" In the case of People v. Pineda it was held that when the incorporators represent themselves to be officers of the corporation which was never duly registered with the SEC, and engage in the name of the purported corporation in illegal recruitment, they are estopped from claiming that they are not liable as corporate officers under Sec. 25 of the Corporation Code, which provides that all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all the debts, liabilities and damages incurred or arising as a result thereof. IV. Trust Fund Doctrine a. Commercial/Common Law Premise: EQUITY VERSUS DEBTS Art. 2236. The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to the exemptions provided by law. (1911a) When there is equity, the party shall share in the profits and the losses. If there is a loss, there is no way to regain the loss. In a debt situation, however, the creditor can still hold the debtor liable for the fulfillment of the obligation: he has a remedy. b. Nature of the Trust Fund Doctrine Under the trust fund doctrine, it would be a violation of the rights of the creditors of the corporation to allow the return to the stockholders the return of their capital, or to declared dividends outside of the unrestricted retained earnings. Likewise, upon insolvency of the corporation, the Board of Directors of a corporation are duty bound to hold the assets of the corporation primarily first for the payment of the corporation's liabilities. i. Illustrative Cases 1. NTC v. Court of Appeals Sometime in 1988, the National Telecommunications Commission (NTC) served on the Philippine Long Distance Telephone Company (PLDT) assessment notices and demands for payment with regard to expenses for supervision, regulation and authorization on public services. PLDT challenged the assessments, stating that the same were used to raise revenues and that the valuation should be based on the par value of the stock The "trust fund" doctrine considers the subscribed capital stock as a trust fund for the payment of debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital stock may be turned over or released to the stockholder, except in the redemption of the redeemable shares. Thus, dividends must never impair the subscribed capital stock; subscription commitments cannot be condoned or remitted; nor can the

corporation buy its own shares using the subscribed capital as the consideration therefore. 2. Halley v. Printwell Respondent Printwell, Inc. sued Business Media Philippines, Inc. (BMPI) for collection of defaulted debt payments, and impleaded BMPIs original stockholders and incorporators, including petitioner Donnina C. Halley, to recover on their unpaid subscriptions. All defendants, including Halley, argued that they should not be made personally liable for the corporate debt and that they have already paid their subscriptions in full. The Regional Trial Court (RTC) ruled that BMPIs stockholders are liable pro rata for the amount of the debt, which decision was affirmed by the Court of Appeals. Halley appealed to the 2 Supreme Court. Essentially, Halley disputes the Court of Appeals' application of the Trust Fund Doctrine. Halley states that she had no participation in the transaction between BMPI and Printwell. BMPI acted on its own and she had no hand in persuading BMPI to renege on its obligation to pay. Therefore, she is not be personally liable. The Supreme Court would find Halley liable for a portion of BMPI's debt. Although a corporation has a personality separate and distinct from those of its stockholders, directors, or officers, such separate and distinct personality is merely a fiction created by law for the sake of convenience and to promote the ends of justice. The corporate personality may be disregarded, and the individuals composing the corporation will be treated as individuals, if the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. In Printwell's amended complaint, Halley was not alleged to be key in persuading BMPI to renege on its obligation to pay; Nor was there any indication that she induced Printwell to extend the credit accommodation by misrepresenting the solvency of BMPI to Printwell. Nevertheless, the CA found her and her codefendants personally liable as they appear to be in charge of the operations of BMPI at the time the unpaid obligation was transacted and incurred. Now, can BMPI satisfy the outstanding obligation from the unpaid subscriptions? The RTC and the CA applied the trust fund doctrine, and the Supreme Court affirmed such application. The trust fund doctrine enunciates a rule that the property of a corporation is a trust fund for the payment of creditors, but such property can be called a trust fund `only by way of analogy or metaphor.' As between the corporation itself and its creditors it is a simple debtor, and as between its creditors and stockholders its assets are in equity a fund for the payment of its debts. In this case, the Court made a clarification: the trust fund doctrine is not limited to reaching the stockholders' unpaid subscriptions.
2 The entire paragraph is taken from: http://www.ey.com/Publication/vwLUAssets/Tax_Bulletin__June_2011/$FILE/TB%20June2011%20elec.p df

The scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but also other property and assets generally regarded in equity as a trust fund for the payment of corporate debts. All assets and property belonging to the corporation held in trust for the benefit of creditors that were distributed or in the possession of the stockholders, regardless of full payment of their subscriptions may be reached by the creditors in the satisfaction of his claim. c. To Purchase Own Shares Sec. 8 Redeemable shares. - Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares. Sec. 41 Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (n) Sec. 43 Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (n) Sec. 122 (last par.) Corporate liquidation. - Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. (77a, 89a, 16a)

d. Rescission of Subscription Agreement Based on Breach In the case of Ong Yong v. Tiu, sometime in, 1994, the construction of the Masagana Citimall in Pasay City by First Landlink AsiaDevelopment Corporation (FLADC) owned by the Tiu family was threatened by the foreclosure by the PNB of their P 190 M debt. In order to stave off the threat the Tiu family, together with the Ong family, agreed to restructure FLADC and created a pre-subscription agreement and each were to maintain equal shareholdings. The Ong family invested a total sum of P 190 M to the corporation while the Tiu family included several real estate properties as added capital for the restructured corporation. The Ong and Tiu families now owned 1,000,000 shares each of FLADC. After all the debts were paid, the peace between Ong and Tiu did not last. Tiu claimed rescission based on substantial breach by Ong upon the presubscription agreement. Ong, on the other hand maintained that it was Tiu who committed the breach because one of the properties that they were supposed to include in the agreement was in fact already in the real estate owned by FLADC. The SEC approved the rescission (both parties were return to status quo, P 190 M to the Ong family and all the remaining FLADC assets to the Tiu family, which included the now finished mall valued at more than P1B) and the CA affirmed the decision with slight modifications Now, the relevant question is phrased thus: is rescission the proper remedy for an intra-corporate dispute? No. The Corporation Code, SEC rules and even the Rules of Court provide for appropriate and adequate intra-corporate remedies, other than rescission, in situations like this. Rescission is certainly not one of them, specially if the party asking for it has no legal personality to do so (because it is a corporation, Tiu family is not the corporation) and the requirements of the law therefore have not been met. A contrary doctrine will tread on extremely dangerous ground because it will allow just any stockholder, for just about any real or imagined offense, to demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without complying with the requirements of the Corporation Code.