CASES SUMMARY (PART 2)

III. Formation and Organization

Campos, Chapter III, pages 50-136

A. Who may form – Sec. 10

B. Steps in formation

1) Promotion

2) Articles of Incorporation

Sec. 14 – Contents

Sec. 15 – Form

a) Name
Sec. 14(1), Code; Sec. 18, Code
Red Line Transit v Rural Transit, GR 41570, 6 Sept 1934, 60 Phil 549
Rural applied for certificate of public convenience, but it turned out to be for Bachrach.
Commission allowed the use of Rural as trade name and granted the application.

The name of a corporation is therefore essential to its existence; it cannot change its
name except in the manner provided by the statute. By that name alone is it authorized
to transact business.

A corporation has no express or implied authority to assume another name that is

unappropriated, much less that of another corporation, which is expressly set apart for it
and protected by law.
Universal Mills v Universal Textile Mills, GR L-28351, 28 July 1977; 78 SCRA 62
The corporate names are so similar that under the test of “reasonable care and
observance as the public generally are capable of using and may be expected to exercise”,
the Court believes that confusion would still arise especially that the amendment of
Universal Mills included as its primary purpose the manufacturing, dyeing, finishing and
selling of fabric of all kinds in which Universal Textile has been engaged for more than a
decade ahead of the petitioner.
Philips Export v CA, G.R. 96161, 21 Feb 1992, 206 SCRA 457
Under Sec. 18 of the Corpo Code, 2 requisites must be proven to sue under its name:
(1) corp has a prior right over the use of the name, or;
(2) proposed name is either identical or deceptively/confusingly similar, or it is patently
deceptive, confusing or contrary to existing law.
The right to exclusive use of corporate name is determined by priority of adoption.

The test is w/n the similarity is such as to mislead a person using ordinary care and
discrimination.

Because Philips is a trademark or trade name registered as far back as 1922, they have
the exclusive right to use the name free from infringement by similarity.
Lyceum of Phil v CA, G.R. 101897, 5 March 1993, 219 SCRA 610

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 Lyceum is not entitled to a legally enforceable exclusive right to use the word Lyceum in
its corporate name. Confusion and deception are precluded by the appending of the
geographic name after Lyceum.

Lyceum the word is as generic in character as the word university. But Lyceum of RP’s use
of the word Lyceum in its corporate name has not been attended with the exclusivity
essential for applicability of the doctrine of secondary meaning. In fact Western Lyceum
used the word 17 years before Lyceum of RP.
First Phil. Insurance v Hartigan, L-26370, 31 July 1970, 74 SCRA 252
A corporation may change its name by merely amending its charter in the manner
prescribed by law. An authorized change in the name has no more effect upon its identity
as a corporation than a change of name of a natural person has upon his identity. It does
not affect the rights of a corporation or lessen or add to its obligations. After a
corporation has effected a change in its name, it should sue and be sued in its new name.
PC Javier & Sons v CA, GR 129552, 29 June 2005, 46 SCRA 36
A change in the corporate name does not make a new corporation, whether effected by a
special act or under a general law. It has no effect on the identity of the corporation, or
on its property, rights, or liabilities.
b) Purpose clause; primary purpose, secondary purpose
Sec. 14(2), Code; Sec. 17(2), Code
Sec. 88, Code (non-stock)
c) Principal office
Sec. 14, Code
SEC Memo Circulars No. 3, 16 Feb 2006; No. 6, 20 February 2014; and No. 16, 13 August
2014
Clavecilla Radio v Antillon, L-22238, 18 Feb 1967, 19 SCRA 379
Settled is the principle in corporation law that the residence of a corporation is the place
where its principal office is established. Since it is not disputed that Clavecilla Radio
System has its principal office in Manila, it follows that the suit against it may be filed in
the City of Manila. The fact that it maintains branch offices in some parts of the country
does not mean that it can be sued in any of these places. To allow an action to be instituted
in any place where a corporate entity has its branch offices would create confusion and
work untold inconvenience to the corporation.
Hyatt Elevators v Goldstar, GR 161026, 24 Oct 2005,473 SCRA 705
Residence is the permanent home – the place to which, whenever absent for business or
pleasure, one intends to return. Residence is vital when dealing with venue. A corporation,
however, has no residence in the same sense in which this term is applied to a natural
person. In Young Auto Supply v. CA, it was held that for practical purposed, a corporation
is in a metaphysical sense a resident of the place where its principal office is located as
stated in its articles of incorporation. It has long been held, even before the
aforementioned case, that residence is the place where the principal office is established.

To insist that the proper venue is the actual principal office and not that stated it its
articles would create confusion and would work untold inconvenience. Enterprise litigants
may, out of some ulterior motives, easily circumvent the rules on venue by the simple
expedient of closing old officer and opening new ones in another place that they may find
well to suit their needs.
d) Term – Sec. 11
e) Incorporators - Sec. 5, Code; Sec. 10, Code; Sec. 14[5]
f) Number of directors; incorporating directors

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 Sec. 14[6] and 14[7], Code
g) Capital stock
Sec. 12, Code – minimum
Sec. 13, 14[8]; Sec. 15 [7th, 8th, 9th] – authorized, subscribed, paid-up
Non-stock – Sec. 14[9]
Treasurer-in-trust (Sec. 15[10th])
Outstanding shares – Sec. 137
h) Other matters
(i) Compliance with nationality requirement – Sec. 15[11th], Code
(ii) Other matters not inconsistent with law – Sec. 14(10)

3) Articles of close corporations – Sec. 97, Code

4) Articles of special corporations – Sec. 106; 107; 108; 109, Code

5) Form of Articles – Sec. 15, Code

6) Accompanying documents

a) Treasurer’s Affidavit - Sec. 15, Code

b) Recommendation of government agency (required for corporations engaged in certain activities)

- Sec. 17, last paragraph, Code

c) SEC Rules on Documentary Requirements for Registration of Corporations and Partnerships (as
of 30 June 2013) – available on SEC website (under Guide to Registration)

7) Filing of Articles and payment of fees

8) Examination by SEC; grounds for rejection or disapproval - Sec. 17

9) Certificate of Registration; beginning of corporate existence - Sec. 19

10) De facto corporations – Sec. 20, Code

Municipality of Malabang v Benito, L-28113, 28 March 1969, 27 SCRA 533

Balabagan is neither a de facto nor a de jure corporation. The true basis for denying to a
corporation de facto status is the absence of any legislative act giving life to its creation. An
unconstitutional act is not a law; it confers no rights, it imposes no duties, it affords no protection,
it creates no office. EO 386 thus created no office, although acts done by the office are not
exactly a nullity.

Bergeron v Hobbs – see Campos, pages 94-98

Are the partners liable? No.

Every element to make it a de facto corporation appears clearly by record. They supposed they
had corporate existence by reason of the recording of their articles of organization (even if by
mistake they did not leave the papers as the law requires). They assumed to act as a corporation
and exercised corporate powers for considerable amount of time in utmost good faith.

Under the circumstances, such corporation was a de facto corporate body, that as between the
parties, the relations are the same in all respects as thought the corporation had a de jure
existence.

Harill v Davis – see Campos, pages 98-103

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Parties who associate themselves and actively engage in business for profit under any name are
liable as partners for the debts they incur under the name. The defendants cannot escape
individual liability for the ground that the Coweta Cotton & Milling Company was a corporation de
facto when that portion of the plaintiff’s claim was incurred because it then had no color or
incorporation, and they knew it and yet actively used its name to incur the obligation.

Hall v Piccio, GR L-2598, 29 June 1950

(1) the rule on de facto corps are not applicable to the case. Not having obtained the certificate
of incorporation, Far Eastern Lumber and even it stockholders cannot claim in GF to be a
corporation. It is the issuance of the certificate of incorporation that calls a corporation into
being.

(2) Far Eastern not being a de facto corp, the principle of corporation by estoppel doesn’t also
apply. The complaining partners have not represented themselves that they were incorporated.

11) Corporation by estoppel – Sec. 21, Code

Empire Manufacturing Company v Stuart – see Campos, pages 108-109

The corporation was dissolved (and issued a promissory note), and a new corporation was formed
under a different name

The company was one that could have been legally organized under laws existing at the time of its
formation. The business for which it was organized was one authorized, and having attempted in
good faith and having given negotiable instrument in its corporate name, it could not afterwards
repudiate the transaction or evade responsibility when sued thereon by selling up its own mistake
affecting the original organization.

The dissolution would not deprive the creditors of still following and looking to the old organization
for payment. The State’s statute allow 3 years after dissolution, for certain purposes, in winding
up the affairs. Therefore, the company is still liable.

Lowell-Woodward Hardware Company v Woods, et al – Campos, pp 109-112

Respondents may not escape liability by assailing the corporate capacity of Lowell since it had
already bound itself to the promissory note stating Lowell as the payee on the grounds of estoppel
regardless if the word “Company” was used in lieu of “Corporation”. SLC may not attack the
regularity of the plaintiff’s organization or take advantage of the fact that it has no legal standing
as a corporation.

Asia Banking v Standard Products, GR 22106, 11 Sept 1924, 46 Phil 145

GR: In the absence of fraud, a person who has contracted or otherwise dealt with an association
in such a way as to recognize and in effect admit its legal existence as a corporate body is thereby
ESTOPPED to deny its corporate existence in any action leading out of or involving such contract
or dealing.

Defendant having recognized the corporate existence of the plaintiff by making a promissory
note in its favor and making partial payments on the same is therefore ESTOPPED to deny said
plaintiff’s corporate existence.

Salvatierra v Garlitos, et al, GR L-11442, 23 May 1958, 103 Phil 757

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GR: A person who 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
dealing.

EXC.: This doctrine may not be held to be applicable where fraud takes a part in the transaction.

A stockholder cannot be held liable for any financial obligation by 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. This is
because such unincorporated association is incompetent to act and appropriate for itself the
powers and attributes of a corporation and cannot create agents or confer authority.

Considering that Refuerzo was the moving spirit behind the consummation of the lease agreement
by acting as the representative of PFP, his liability cannot be limited or restricted to that imposed
upon corporate shareholders. In acting in behalf of a corporation he knew to be unregistered, he
assumed the risk of reaping the consequential damages or resultant rights if any arising out of
the transaction.

Albert v University Publishing, GR L-19118, 30 Jan 1965, 13 SCRA 84

Aruego, acting as representative of such non-existent principal, was the real party to the contract
sued upon. Thus, he assumed such privileges and obligations and became personally liable for the
contract entered into or for other acts performed as such agent. 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.

Chiang Kai Shek School v CA, GR L-58028 18 April 1989, 172 SCRA 389

Although in existence since 1932, it had never made any attempt to incorporate, and thus cannot
invoke its own noncompliance with the law to immunize it from Oh’s complaint. Having contracted
with Oh for 32 years while representing itself as possessed of juridical personality, the school is
now estopped from denying such personality.

International Express Travel v CA, GR 119002, 19 Oct 2000, 243 SCRA 674

Although the Federation derives its existence from RA 3135 or the Charter of the Phil Amatuer
Athletic Assoc and PD 604 which recognized the juridical existence of national sports
associations, such corporate status does not automatically take effect by the mere passage of
the laws. This is because before the corporation may acquire juridical personality, the State must
give its consent either in a special law or a general enabling act.

The bylaws presented by Kahn does not prove that the Federation has indeed been recognized
and accredited. Thus, Kahn, falling under a person acting or purporting to act in behalf of the
corporation which has no valid existence assumes such privileges and obligations and becomes
personally liable for contracts entered into as its agent.

It also does not fall under a corporation by estoppel, which was mistakenly applied by Kahn. It
applies only to a third party when he tries to escape liability on a contract from which he had
benefited on the irrelevant ground of defective incorporation.

Georg Grotjhan GMBH v CA, GR 109272, 10 Aug 1994, 235 SCRA 216

Petitioner does not engage in commercial dealings in the Philippines because it is precluded by P.D.
No. 218. It has, however, been continuously acting as a supervision, communications and
coordination center for its home office’s affiliates in Singapore and has employed Philippine

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nationals. Form this uninterrupted performance pursuant to its primary purpose of establishing a
regional headquarter, the petitioner is clearly doing business in the country.

Private respondent is also estopped from assailing the personality of the petitioner.

 A party is estopped to challenge the personality of a corporation after having

acknowledged the same by entering into a contract with it.
 The doctrine of estoppel to deny corporate existence applies to foreign as well as to
domestic corporations.
 One who has dealt with a corporation of foreign origin as a corporate entity is estopped
to deny its corporate existence and capacity.

12) Non-use of corporate charter; continuous inoperation – Sec. 22, Code

C. Internal organization of corporation

1) By-Laws

a) Adoption – Sec. 36(5), Sec. 46, Code

b) Contents – Sec. 47, Code

c) Amendment; delegation of power to amend – Sec. 48, Code

d) SEC approval – Sec. 46, Code

Fleischer v Botica Nolasco, GR L-23241, 14 March 1925, 47 Phil 583

When no restriction is placed by law on the transfer of corporate stock, a purchaser is not
affected by any contractual restriction of which he had no notice or wasn’t aware. A by-law of a
corporation which provides that transfer of stock shall not be valid unless approved by the board
for instance, or any other restriction imposed, while it may be enforced as a reasonable regulation
for the protection of the corporation against worthless stockholders, cannot be made available
to defeat the rights of third persons.

Government v El Hogar Filipino, GR L-26649, 13 July 1927, 50 Phil 1927

The by-law provision is an absolute nullity, since it is in direct conflict with the Code which
declares that the board shall not have the power to force the surrender and withdrawal of
unmatured stock except in case of liquidation of the corporation or forfeiture of stock. While it
is a nullity, it is insufficient to necessitate the involuntary dissolution of the corporation through
a quo warranto proceeding. It cannot be enforced even if the directors were to attempt to do so.

Loyola Grand Villas v CA, GR 117188, 7 Aug 1997, 276 SCRA 681

By-laws may be necessary to govern the corporation, but they are subordination to the articles
of incorporation and the Corporation Code. They are INDISPENSABLE to corporations, but
failure to file then within the prescribed period DOES NOT EQUATE TO AUTOMATIC
DISSOLUTION of a corporation.

The Corporation Code does not expressly provide for the effects of non-filing of By-laws. Under
Sec. 6 of PD 902-A, SEC shall possess the power to suspend or revoke after notice and hearing
the franchise or the certificate of registration upon failure to file by-laws with the required
period. Even assuming the existence of a ground, the penalty is not necessarily revocation but
may be only suspension.

Sawadjaan v CA, GR 141735, 8 June 2005, 459 SCRA 516

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The bank still exists. A corporation which has failed to file its by-laws with the prescribed period
does not ipso facto lose its power as such. At the very least, it may be considered a de facto
corporation which right to exercise corporate powers may not be inquired into collaterally in any
private suit to which such corporation may be a party.

2) Election of directors – Sec. 24, Code

3) Election of officers – Sec. 25, Code

4) Report of election of directors, trustees, officers – Sec. 26, Code