CORPORATE LAW

I. HISTORICAL BACKGROUND
1. Philippine Corporate Law: Sort of Codification of American Corporate Law
Under American sovereignty, attention was drawn to the fact that there was no entity in Spanish law
exactly corresponding to the notion "corporation" in English and American law; the Philippine
Commission enacted the Corporation Law (Act No. 1459), to introduce the American corporation into the
Philippines as the standard commercial entity and to hasten the day when the sociedad anónima of the
Spanish law would be obsolete. The statute is a sort of codification of American Corporate Law. Harden
v. Benguet Consolidated Mining, 58 Phil. 141 (1933).

2. The Corporation Law

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

3. The Corporation Code

The Corporation Code (Batas Pambansa Blg. 68) took effect on 1 May 1980. It adopted various
corporate doctrines enunciated by the Supreme Court under the old Corporation Law. It clarified the
obligations of corporate directors and officers, expressed in statutory language established principles
and doctrines, and provided for a chapter on close corporations.

4. Proper Treatment of Philippine Corporate Law

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

II. CONCEPTS
1. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code)
Sec. 2 Corporation defined – A corporation is an artificial being created by operation of law, having the
rights of succession and the powers attributes and properties, expressly authorized by law or incident to
its existence.
 Art. 44(3) The following are juridical persons – Corporations, partnerships and associations for
private interest or purpose to which the law grants a juridical personality, separate and distinct
from that of each shareholder, partner or member.
 Art. 45 Juridical persons mentioned in Nos.1 and 2 of the preceding article are governed by laws
creating or recognizing them.
 Private corporations are regulated by laws of general application on the subject.
 Partnerships and associations for private interest or purpose are governed by the provisions of
this Code concerning partnerships.
 Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and regulations of their
organization.
 Art. 1775 Association and societies, whose articles are kept secret among the members, and
wherein any pone of the members may contract in his own name with third persons, shall have
no juridical personality, and shall be governed by the provisions relating to co-ownership

Corporation is an artificial being created by operation of law. It has a personality separate and distinct
from the persons composing it, as well as from any other legal entity to which it may be related.
- “an artificial being” - a person created by law or by state; legal fiction
- “created by law” – its existence is dependent upon the onsent or grant of the state EXCEPT
corporation by estoppel and de facto corporation
- the definition of a corporation is merely a guide and does not really provide for the basis of a
corporation

Q. Why is it important to know that the corporation is a juridical person?

A. To be able to know that the corporation is able to contract with others.

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Q. Why does the definition of a corporation involve a statement “creature of the law”?
A. To reiterate the fact that the corporation can only do acts given to it by the law. It is of limited existence,
outside its powers, it does not exist.

2. Tri-Level Existence of the Corporation

1. AGGREGATION OF ASSETS AND RESOURCES – physical assets of the corporation; the tangibles
(ex. in a grocery, the goods being sold)
2. BUSINESS ENTERPRISE OR ECONOMIC UNIT – the commercial venture; this includes not only the
tangible assets but also the intangibles like goodwill created by the business
3. JURIDICAL ENTITY – juridical existence as a person; the primary franchise granted by the state

Q. Why is the distinction between the three levels important?

A. Each is important in its own way as there are consequences for each. The distinctions become important
and come into play when it comes to dealing with corporation law What are you selling or buying (and their
worth) will depend upon the particular level you choose.
EXAMPLE: If you merely want to purchase the assets and not the business, a simple deed of sale would
suffice and you will not be liable for contingent liabilities. It will be different if you buy the business as an
economic concept. SEC Regulations or Bulk sales Law may be applied.

3. Relationships Involved in a Corporate Setting

1. JURIDICAL ENTITY LEVEL, which views the State-corporation relationship
- the state cannot destroy a corporation without observing due process of law
2. INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a contractual
relationship on four (4) levels:
• Between the corporation and its agents or representatives to act in the real world, such as its
directors and its officers, which is governed also by the Law on Agency
• Between the corporation and its shareholders or members
• Between and among the shareholders in a common venture
3. EXTRA-CORPORATE LEVEL, which views the relationship between the corporation and third-parties
or “outsiders”, essentially governed by Contract Law and Labor Law.
- most imporatant level, highest form of law in this level is contract law.

4. Theories on the Formation of Corporation:

- the SC has looked upon the corp. not merely as an artificial being but more as an AGGRUPATION OF
PERSONS DOING BUSINESS or AN UNDERLYING ECONOMIC UNIT.
- The corp. is emerging as an enterprise bounded by economics rather than an artificial personality
bounded by forms of words in a charter, minute books & books of accounts.
- The proposition that a corp. has an existence separate and distinct from its membership has its
limitations. (Separate existence is for a particular purpose.) There can be no corp. existence w/o
persons to compose it & there can be no association w/o associates.

(a) Theory of Concession

- corporation – creature of the state
- limited – no other privilege may be exercised beyond grant
 To organize a corporation that could claim a juridical personality of its own and transact business as
such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms
as the State may deem necessary to impose.
 “It is a basic postulate that before a corporation may acquire juridical personality, the State must give
its consent either in the form of a special law or a general enabling act,” and the procedure and
conditions provided under the law for the acquisition of such juridical personality must be complied
with. Although the statutory grant to an association of the powers to purchase, sell, lease and
encumber property can only be construed the grant of a juridical personality to such an association .
. . nevertheless, the failure to comply with the statutory procedure and conditions does not warrant a
finding that such association acquired a separate juridical personality, even when it adopts sets of
constitution and by-laws.
 Since all corporations, big or small, must abide by the provisions of the Corporation Code, then even
a simple family corporation cannot claim an exemption nor can it have rules and practices other than
those established by law.

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FACTS:
- Idonah Slade Perkins died in 1960 with County Trust & Co. of New York as her domiciliary administrator
& left, among others, 2 stock certificates covering 33, 002 shares of stock of appellant Benguet
Consolidated, Inc.
- Renato Tayag, as ancilliary administrator in the Philippines, requested County Trust to surrender to
ancilliary administrator the stock certificates to satisfy the legitimate claims of local creditors. However,
County Trust refused.
- The lower court then presided by Judge Santos ruled that :
1. stock certificates are considered lost for all purposes of admin. & liquidation of the Philippine estate
of Perkins
2. said certificates are cancelled
3. directs said corp. To issue new certificates in lieu thereof, the same to be delivered by aid corp. to
either Tayag or the Probate division of this court.
- An appeal was taken not by County Trust, as domiciliary admin., but by Benguet on the ground that the
certificates of stock are existing and in possession of County Trust. They also assert that there was a
failure to observe certain requirements of its by-laws before new stock certificates could be issued.

ISSUE: Whether or not Benguet properly pursued the appeal?

HELD: The Court held that the appeal cannot prosper. Judgment affirmed. Benguet bound by order.
- the challenged order represents a response & express a policy arsing out of a specific problem,
addressed to the attainent of specific ends by the use of specific remedies, w/ full & ample support
from legal doctrines of weight and significance.
- Corporation is an artificial being created by operation of law. It owes it life to the state its birth being
purely dependent on its will.
- Flether: “A corp. is not in fact and in reality a person, but the law treats it as though it were a person
by process of fiction, or by regarding it as an artificial person distinct and separate from its individual
stockholders.
- There is thus a rejection of Gierke’s genossenchaft theory. A corp as known to Phil. Jurisprudence
is a creature w/o any existence until it has received the imprimatur of the state acting according to
law. It is logically inconceivable therefore that it will have rights and privileges of a higher priority than
that of its creator. More than that it cannot legitimately refuse to yield obedience to acts of its state
organs, certainly not excluding the judiciary, whenever called upon to do so.
- Corporate by-laws must yield to judicial order
- As a matter of fact, a corp. once it comes into being comes more often w/n the ken of the judiciary
than the other two coordinate branches. It institutes the appropriate court action to enforce its right.
Correlatively, it is not immune from judicial control in those instances, where a duty under the law as
ascertained in an appropriate legal proceeding is cast upon it.

b) Theory of Enterprise Entity

- juridical personality
- contractual relation between 5 or more individuals
- recognize existence of an aggregation of individuals (enterprise entity)
 A corporation is but an association of individuals, allowed to transact under an assumed corporate
name, and with a distinct legal personality. In organizing itself as a collective body, it waives no
constitutional immunities and perquisites appropriate to such a body.
 Corporations are composed of natural persons and the legal fiction of a separate corporate personality
is not a shield for the commission of injustice and inequity, such as to avoid the execution of the
property of a sister company.

5. Four Corporate Attributes Based on Section 2:

A) A CORPORATION IS AN ARTIFICIAL BEING (“Ability to Contract and Transact”)
- a person created by law or by state; a legal fiction
B) CREATED BY OPERATION OF LAW (“Creature of the Law”)
- its existence is dependent upon the consent or grant of the state EXCEPT corporation by
estoppel and de facto corporation
C) WITH RIGHT OF SUCCESSION (“Strong Juridical Personality”)
- the corporation exist despite the death of its members as a corporation has a personality
separate and distinct from that of its individual stockholders. The separate personality remains
even if there has been a change in the members and stockholders of the corporation.

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 D) HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR
INCIDENT TO ITS EXISTENCE (“Creature of Limited Powers”)

6. Advantages and Disadvantages of Corporate Form:

(a) Four Basic Advantageous Characteristics of Corporate Organization:
(i) STRONG LEGAL PERSONALITY
 “A corporation is an entity separate and distinct from its stockholders. While not in fact and
in reality a person, the law treats the corporation as though it were a person by process of
fiction or by regarding it as an artificial person distinct and separate from its individual
stockholders.”
 The transfer of the corporate assets to the stockholder is not in the nature of a partition but
is a conveyance from one party to another. a Stockholders of F.

STOCKHOLDERS OF F. GUANZON & SONS Inc. v REGISTER OF DEEDS

Facts: In 1960, five stockholders of F. Guanzon & Sons, Inc. executed a certificate of liquidation of the assets
of the corporation which provided that due to the resolution of the stockholders dissolving the corporation,
they have distributed among themselves in proportion to their shareholdings, as liquidating dividends, the
assets of said corporation including real properties located in Manila. The certificate of liquidation was denied
registration by the Register of Deeds and one of the grounds is that the judgment of the corporation in
approving dissolution and directing opposition of assets of the corporation need to be presented aside from
the following: (1) the number of parcels which were not certified in the acknowledgement (2) P430.50
registration fees have to be paid (3) P90.45 docustamps need to be attached. Stockholders contend that it
was not conveyance but a mere distribution of corporate assets after the corporation ceased to exist upon
dissolution.

Issue: WON the certificate merely involves a distribution of the corporate assets or should be considered a
transfer or conveyance.

Held: The Supreme Court agrees with the Register of Deeds and the Land Registration Commission. A
corporation is a juridical person distinct from the members composing it. Properties registered in the name
of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock
constitute personal property, they do not represent property of the corporation. The corporation has property
of its own which consist mainly of real estates. A share of stock only typifies an aliquot part of the corporation’s
property or the right to share in the proceeds to that extent when distributed according to law and equity. But
its holder is not the owner of any part of the capital nor is he entitled to the possession of any definite portion
of its property or assets. The stockholder is not a co-owner or tenant in common of the corporate property.
Thus, the act of liquidation made by the stockholders of the corporation’s assets cannot be considered as a
partition of the community property but rather a transference or conveyance of the title of its assets to the
individual stockholders in proportion to their stockholdings. Therefore, said transfer cannot be effected without
the corresponding deed of conveyance from the corporation to the stockholders.

(ii) CENTRALIZED MANAGEMENT

 As can be gleaned from Sec. 23 of Corporation Code “It is the board of directors or trustees which
exercises almost all the corporate powers in a corporation.”
 The exercise of the corporate powers of the corporation rest in the Board of Directors save in those
instances where the Corporation Code requires stockholders’ approval for certain specific acts.

(iii) LIMITED LIABILITY TO INVESTORS AND OFFICERS

 One of the advantages of the corporation is the limitation of an investor’s liability to the amount of
investment, which flows from the legal theory that a corporate entity is separate and distinct from its
stockholders.
 It is hornbook law that corporate personality is a shield against personal liability of its officers—a
corporate officer and his spouse cannot be made personally liable under a trust receipt where he
entered into and signed the contract clearly in his official capacity.
 Obligations incurred by the corporation acting through its directors, officers and employees, are its
sole liabilities.

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(iv) FREE TRANSFERABILITY OF UNITS OF OWNERSHIP FOR INVESTORS
1. Authority granted to corporations to regulate the transfer of its stock does not empower the corporation
to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of
regulations as to the formalities and procedure to be followed in effecting transfer.

(b) Disadvantages:
1. Abuse of corporate management
2. Abuse of limited liability feature
3. High cost of maintenance
4. Double taxation

Advantages and Disadvantages of Corporate Form:

Four Basic Advantageous Characteristics of Corporate Disadvantages
Organization
(i) Strong Legal Personality (i) Abuse of corporate
- entity attributable powers; management
- continuity of existence; - there is severance of control
- having the right of succession, the death of an individual and ownership. Control will be
stockholder does not affect corporate existence vested with the BoD, thus
- not a natural occurrence, exists mainly because the investors have no say over the
law provides for it. This is what distinguishes the separate use of their investment and
juridical personality of a corporation from a partnership. little voice in the conduct
The legal personality of a corp is strong because the law of the business
provides for the right of succession, surviving even w/o
those who incorporated it while in a partnership the (ii) Abuse of limited liability feature
separate juridical personality is extinguished upon the - this feature had been
death of a partner abused and may hurt innocent
- no delectus personarum creditors.

(ii) Limited Liability of Investors (provided for by jurisprudence (iii) Cost of maintenance
only) - the formation and
- the liability of an investor is limited their investments and incorporation of a corp. entails
investors cannot be held accountable for more than what a lot of difficulties and costs,
they invested. particularly the requirements
- CLV: However there are a lot of ways to circumvent the made by the law so as to
law and make the shareholders liable for more than his qualify for incorporation.
actual investment (ex. A creditor requiring the chairmn or
president of the company as a joint debtor of the loan) (iv) Double Taxation
- A trade-off to the abdication made by the investor of his - Dividends received by
right to manage the property he had invested in the individuals from domestic
company. Under property law, a person exercises full corporations are subject to
ownership over his property but when he invests it in a final 10% tax for income
corporation, the owner abdicated the six “jus” of earned on or after 1 January
ownership 1998
- Inter-corporate dividends
(iii) Free Transferability of shares between domestic
- A legal relationship is created which is more stable for corporations, however, are not
there are laws which govern, and the corp. and the subject to any income tax
stockholders are bound by the law. - In addition, there is re-
imposition of the 10%
(iv) Centralized Management “improperly accumulated
- One of the advantages of a corp. is the limitation of an earnings tax” for holding
investor’s liability, this flows from the legal theory that a companies
corp. entity is separate and distinct from its stockholders

Q. Is a corp. in our jurisdiction given the feature of limited liability?

A. No. The feature of limited liability is given to the stockholder and not to the corporation.

Q. Is limited liability a normal run of things?

A. No. It is only there because in this case, it comes with the separate juridical personality.

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Q. If limited liability as shown in a corporation setting good for the investors, does it mean that delectus
personarum is a bad thing?
A. No. It is good in one way, since persons are bound by the contracts they enter into.

7. COMPARED WITH OTHER BUSINESS MEDIA

4 Distribution of Risk, Profit and Control

1. Sole Proprietorships
Sole Proprietorship Corporation
Free from many requirements and regulations in Heavily regulated; a lot of requirements imposed
its operation for registration and incorporation
Owner has full control of his business Control of business is done by the BoD
Owner stands to lose more than what he puts Investors have limited liability
into the venture

2. Partnerships and Other Associations

- Art. 1768 The partnership has a juridical capacity separate and distinct from that of each of the
partners, even in case of failure to comply with requirements of Art. 1772 first paragraph.
- Art. 1775 Association and societies, whose articles are kept secret among the members, and
wherein any pone of the members may contract in his own name with third persons, shall have
no juridical personality, and shall be governed by the provisions relating to co- ownership
Corporation Partnership
Separate legal personality Separate legal personality
Investors limited liability Contractual limited liability ( when a
limited partnership is created)
Free transfer of shares Transfer with consent of partner
Centralized management Every partner is agent

Q. How does the contractual management of a corp. compare with the management of a partnership?
A. Every partner, in the absence of a stipulation in the articles of partnership, binds the partnership
as every partner is an agent of the others (delectus personarum). In a corporation, only the BoD
and not the stockholders can bind the corporation.

Q. What are the 2 types of partnerships?

A. Regular and Joint venture

Q. Can a corporation be a partner in a regular partnership?

A. No. Because a partner must be a natural person. It is against public policy for corporation to be a
partner in a regular partnership.

Q. If limited liability is something that can be contracted in a partnership, why did the legislature put
such limited liability as an attribute of a corporation? If the feature of limited liability cots money
then why not take it out? Why not eave it up to the investors who can decide if they want limited
liability or not?
A. Even though limited liability will cost a lot of money, borrowing makes a lot more sense. If I have
P100M, it would be foolish to put all my eggs in one basket (if the basket falls, all eggs break).
So, I merely put P10M in one corporation and then borrow the P90M while the rest of my money
I pt somewhere else. If the corporation fails, I do not lose all my P100M, I lose only my P10M. But
if the corp. succeeds and I get to pay my creditor, I retain the P10M plus the profits acquired
from the P90M paid up loan. This is the concept of LEVERAGING, using other people’s money
to make a profit for yourself. This is why borrowing is an integral part of corporate life and it is up
to the creditors to make a diligent appraisal of the credit standing of the corp.

Q. What is the main distinction between a corporation and a partnership?

A. A corp. is an intermingling of corporation law and contract law. On the other hand, a partnership is
purely a contractual relationship and so every time a partner dies, the contract is actually
extinguished.

Q. What is Corporation Law all about?

A. It is all about jurisprudence actually built around the 4 attributes of a corporation

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 Q. Can a defective attempt to form a corporation result at least in a partnership?
A. Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989); Lim Tong Lim v. Philippine Fishing
Gear Industries, Inc., 317 SCRA 728 (1999).
Facts:
- In 1965, Jacob S. Lim was engaged in the airline business as owner of Southern Airlines, a single
proprietorship.
- On May 17, 1965, he bought from Japan Domestic Airlines for the sale of 2 aircrafts and one set
f necessary spare parts for the total price of $109,00. Both arrived in Manila
- On May, 22 1965, Pioneer Insurance Corp, as surety executed and issued its surety bond in
behalf of Lim, principal, for the balance price for the aircrafts and spare parts.
- Border Machinery and Heavy Equipment (BORMAHECO), the Cervanteses and Constancia
Maglana contributed some funds in the purchase of the above aircrafts and spare parts. The
funds were supposed to be their contributions to anew corporation proposed by Lim to expand
his airline business. They executed indemnity agreements in favor of Pioneer, one signed by
Maglana and the other jointly signed SAL, BORMAHECO and Cervantes: where they principally
agree and bind themselves jointly and severally to indemnify pioneer.
- On June 10, 1965 Lim for SAL executed in favor of Pioneer a deed of chattel mortgage as security
for the suretyship in favor of Pioneer. The deed was duly registered with the Manila RoD and with
the Civil Aeronautics Administration.
- Lim defaulted on his subsequent installments prompting JDA to request payment from the surety.
Pioneer paid about P298,000
- Pioneer filed for an extra-judicial foreclosure of the mortgage but the Cervanteses and Maglana
filed a third party complaint claiming that they are co-owners of the aircraft. Pioneer later filed a
petition for judicial foreclosure and an application for a writ of preliminary attachment against Lim,
the Cervanteses, BORMAHECO and Maglana.
- In their answer, the Cervanteses, BORMAHECO and Maglana alleged they were not privy to the
contracts signed by Lim.
- The RTC ruled in favor of Pioneer, holding Lim liable but dismissing the case as to the other
defendants. On appeal, the CA affirmed.

Issue: whether or not the Cervanteses, BORMAHECO and Maglana are entitled to reimbursement of
amounts given by Lim?

Held: Lim’s assertions: The failure of respondents to incorporate, a de facto partnership among them was
created, and that as a consequence of such relationship all must share in the losses and/or gains of the
venture in proportion to their contribution.

PRINCIPLES: Persons who attempt, but fail, to form a corporation and who carry on business under the
corporate name occupy the position of PARTNERS INTER SE. Thus, where persons associate themselves
together under articles to purchase property to carry on a business, and their organization is so defective as
to come short of creating a corp. w/n the statute, they become in legal effect partners inter se, and their rights
as members of the company to the property acquired by the company will be recognized.
- However, such a relationship does not exist, for ordinary persons cannot be made to assume the
relation of partners, as between themselves, when their purpose is that no partnership shall exist and
should be implied only when necessary to do justice between the parties: thus, one who takes no
part except to subscribe for stock in a proposed corporation which is never legally formed does not
become a partner with other subscribers who engage in business under the name of the pretended
corp., so as to be liable as such in an action for settlement of the alleged partnership and contribution.
- the records show that Lim received the amount of P151,000 representing the participation of
BORMAHECO and Maglana
- it was clear that Lim never intended to form a corp with them but they were duped into giving their
money
- no de facto corp. was created

Q. In cases where there is a defective attempt to form a corp. which is the prevailing rule, a partnership inter
se is created or a corporation by estoppel?
A. It depends wholly on the extent of the participation of the party on who a claim is being mind. In the case
at bar, there was no intent on the other parties to enter into a partnership but a corporation. As to the
Cervanteses & BORMAHECO, they cannot be considered to have entered even into a partnership inter
se, since there was no intention to do so and to be held liable as such.

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 But if it were the Cervanteses or BORMAHECO, who entered into the contracts using the corporate
name and actively participated in the activities of the corporation, then they are to be held liable as
partners.

Q. Why are we taking up Pioneer? Why were they not liable?

A. Because Pioneer shows us that for a person to be liable as a partner, he should have actively participated
in the conduct of the business, the SC held in this case that to be able to be held liable the person should
possess powers of management.

Q. What is the difference between Pioneer and Lim Tong Lim?

A. In the case of Pioneer, the SC stopped when it declared that to be liable, you have to possess powers of
management. In Lim tong Lim, it continues its pronouncement, by saying that if you have beneficial
ownership over the business, then you are also liable as a partner.

LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES

Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. entered into a contract with Phil.
Fishing Gear Industries Inc. for the purchase of fishing nets and floats. They claimed that they were a
fishing venture with Lim Tong Lim who was however not a signatory to the contract. They failed to pay
and so PFGI filed a collection case with a prayed for a writ of preliminary attachment. The case was filed
against Chua, Yao and Lim because it was found that Ocean Quest was a non- existent corporation as
shown by the certification from SEC. Chua admitted liability and Yao waived his right to cross-examine
and present evidence because he failed to appear while Lim filed a counterclaim and a cross-claim.
Court granted the writ of attachment and ordered the Auction Sale of the F/B Lourdes which was
previously attached. Trial court ruled that PFGI was entitled to the Writ and Chua, Yao and Lim were
jointly liable as general partners.
Held:
1.) Lim was contesting that the CA ruled that there was a partnership in the Compromise Agreement and
alleges that he had no direct participation in the negotiations and was merely leasing F/B Lourdes to
Chua and Yao à Facts found by the TC and CA showed that there was a partnership formed by the three
of them. They initially purchased two boats through a loan from Lim’s brother and as security, was placed
in the name of Lim Tong Lim. The repairs and supplies were shouldered by Chua and Yao. A civil case
was filed by Chua and Yao against Lim for nullity of commercial documents, reformation of contracts and
declaration of ownership of fishing boats…which was settled amicably. In the Compromise Agreement,
it was revealed that they intended to pay the loan from Jesus Lim by selling the boats and to divide
among them the excess or loss. Therefore it was clear that a partnership existed which was not solely
based on the agreement. It was merely an embodiment of the relationship among parties.
2.) Lim alleges that he was merely a LESSOR by showing the Contract of Lease and registration papers of
the boats, including F/B Lourdes where the nets were found à As found by the lower courts, the boats
were registered to Lim only as security for the loan that was granted to the partnership by the brother of
Lim, which was not an uncommon practice. Aside from the fact that it was absurd for Lim to sell the boats
to pay the debt he did not incur, if needed he was merely leasing the boats to Chua and Yao.
3.) Lim contests his liability by saying that only those who dealt in the name of the ostensible corporation
should be held liable. His name was not in any of the contracts and never dealt with PFGI à Sec. 21 –
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 debts, liabilities and damages incurred or arising as a result thereof; Provided
however that when any such ostensible corporation is sued, on any transaction entered by it as a
corporation or ant tort committed by it as such, it shall not be allowed to use as a defense its lack of
corporate personality. Even if the ostensible corporate entity is proven to be non-existent, a party may
be estopped from denying its corporate existence because an unincorporated association has no
personality and would be incompetent to act and appropriate for itself the power and attributes of a
corporation as provided by law. It cannot create agents or confer authority on another to act on its behalf.
Thus, those who act or purport to act as its representatives do so without authority and at their own risk.
Clearly, Lim benefited from the use of the nets found inside F/B Lourdes which was proved to be an
asset of the partnership. He in fact questioned the attachment because it has effectively interfered with
the use of the vessel. Though technically, he did not directly act on behalf of the corporation, however,
by reaping the benefits of the contract entered into by persons he previously had an existing relationship
with, he is deemed part of said association and is covered by the doctrine of corporation by estoppel.

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CLV: Pioneer case à actors who knew of corporation’s non-existence are liable as general partners while
actors who did not know are liable as limited partners, passive investors are not liable; Lim teaches us
that even passive investors should be held liable provided they benefited from such transactions.

(c) Joint Ventures

Joint venture is an association of persons or companies jointly undertaking some commercial enterprise;
generally all contribute assets and share risks. It requires a community of interest in the performance of
the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may
be altered by agreement to share both in profit and losses.

Q. What is the difference between a joint venture and a partnership?

A. A joint venture is by law a partnership because it follows the same definition as having two or more persons
binding themselves together under a common fund with the intention of dividing the profits between
themselves. Therefore, every joint venture is a partnership. The distinction between the two is that a joint
venture is for a limited purpose only while a partnership involves an arrangement or an on-going concern.

Q. Is it possible for a joint venture not to be a partnership?

A. Yes. When the joint venture forms a corporation, it then becomes a joint venture corporation.

Q. Does the requirement of registration needed in a partnership also required in a joint venture?
A. No. Only in a partnership is registration required (Art. 1772, Civil Code)

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

A cooperative is a duly registered association of persons, with a common bond of interest, who have
voluntarily joined together to achieve a lawful common social or economic end, making equitable
contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking
in accordance with universally accepted cooperative principles.
- Cooperatives are established to provide a strong social and economic organization to ensure that
the tenant-farmers will enjoy on a lasting basis the benefits of agrarian reforms.

Cooperative
Separate Juridical Personality
Governed by principles of democratic control where
the members have equal voting rights on a one-
member-one vote principle
BoD manage the affairs of the coop. But it is the GA
of full membership that exercises all the rights
and performs all of the obligations of the coop.
Under the supervision of the coop. Development
Authority
Organized for the purpose of providing goods and
services to its members and thus to enable them to
attain increased income and saving, etc.
Corporation
Separate Juridical Personality
SH vote their percentage share of
the stocks subscribed by them
BoD is the repository of all powers EXCEPT for acts
where the Corp. Code requires concurrence or
ratification by the SH
Under the Supervision of the SEC
Stock Corp. for profit; Non-Stock
Corp eleemosynary (charitable, philantrophic)
purpose

e) Business Trusts (Article 1442, Civil Code) Art. 1442

Q. What is the difference between a business trust and a corporation?

A. The relationship in a business trust is essentially a trust relationship. The business trust does not have
a personality which is apart from the trustor or the trustee/beneficiary. The concept of a separate juridical
personality is absent from a business trust.

(f) Sociedades Anónimas

- A sociedad anónima was considered a commercial partnership “where upon the execution of the
public instrument in which its articles of agreement appear, and the contribution of funds and personal
property, becomes a juridical person—an artificial being, invisible, intangible, and existing only in
contemplation of law—with power to hold, buy, and sell property, and to sue and be sued—a
corporation—not a general copartnership nor a limited copartnership . . . The inscribing of its articles

9
 of agreement in the commercial register was not necessary to make it a juridical person—a
corporation. Such inscription only operated to show that it partook of the form of a commercial
corporation.”
- The sociedades anónimas were introduced in Philippine jurisdiction on 1 December 1888 with the
extension to Philippine territorial application of Articles 151 to 159 of the Spanish Code of Commerce.
Those articles contained the features of limited liability and centralized management granted to a
juridical entity. But they were more similar to the English joint stock companies than the modern
commercial corporations.
- Our Corporation Law recognizes the difference between sociedades anónimas and corporations and
will not apply legal provisions pertaining to the latter to the former.

(g) Cuentas En Participacion

- A cuentas en participacion as a sort of an accidental partnership constituted in such a manner that
its existence was only known to those who had an interest in the same, there being no mutual
agreement between the partners, and without a corporate name indicating to the public in some way
that there were other people besides the one who ostensibly managed and conducted the business,
governed under Article 239 of the Code of Commerce.
- Those who contract with the person under whose name the business of such partnership of cuentas
en participacion is conducted, shall have only a right of action against such person and not against
the other persons interested, and the latter, on the other hand, shall have no right of action against
third person who contracted with the manager unless such manager formally transfers his right to
them

III. NATURE AND ATTRIBUTES OF A CORPORATION

1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitution)
- The Congress shall not except by general law, provide for the formation, organization or regulation
of private corporations, Government-owned or controlled corporations may be created or established
by special charters in the interest of the common good and subject to the test of economic viability.
- P.D. 1717, which created New Agrix, Inc. violates the Constitution which prohibits the formation of a
private corporation by special legislative act which is neither owned nor controlled by the government,
since NDC was merely required to extend a loan to the new corporation, and the new stocks of the
corporation were to be issued to the old investors and stockholders of the insolvent Agrix upon proof
of their claims against the abolished corporation.
- Congress cannot enact a law creating a private corporation with a special charter, and it follows that
Congress can create corporations with special charters only if such corporations are government-
owned or controlled.

Q: What distinguishes a public corporation from a private corporation owned by the government?
A: It is not ownership which distinguishes a public corporation from a private corporation. It is the civil service
eligibility of its employees and if the financial records are subject to the examination of the Commission
on Audit. A public corporation is created by its charter whereas a private corporation is created under
the Corporation Code.

2. CORPORATION AS A PERSON:
1. Entitled to Due Process: The due process clause is universal in its application to all persons without
regard to any differences of race, color, or nationality. Private corporations, likewise, are “persons”
within the scope of the guaranty insofar as their property is concerned.
2. Equal Protection Clause
3. Unreasonable Searches and Seizure: A corporation is protected by the constitutional guarantee
against unreasonable searches and seizures, but its officers have no cause of action to assail the
legality of the seizures, regardless of the amount of shares of stock or of the interest of each of them
in said corporation, and whatever the offices they hold therein may be, because the corporation has
a personality distinct and separate from those of said officers.
- A corporation is but an association of individuals under an assumed name and with a distinct legal
entity. In organizing itself as a collective body it waives no constitutional immunities appropriate for
such body. Its property cannot be taken without compensation; can only be proceeded against by
due process of law; and is protected against unlawful discrimination.

10
Q: Why is a corporation entitled to the rights of due process and equal protection?
CLV: A corporation enjoys constitutional rights. In that manner, it enjoys the same protection the law grants
to an individual. A corporation is entitled to due process and equal protection by virtue of the juridical
personality given by the State through the primary franchise of the corporation. The constitution did not
distinguish whether the term “person” in Sec. 1 Art. III of the Constitution refers to an individual or a
juridical entity, which therefore extends to private corporations within the scope of the guaranty.

Q: Why is the corporation entitled to the protection against unreasonable searches and seizures?
A: The corporation being entitled to due process and equal protection is the consequence of the State’s grant
of a primary franchise to a corporation. It emanates from the Theory of Concession, whereby the
government recognizes not only the separate juridical personality of the corporation but also grants unto
it all the rights and protections that a natural individual would possess which includes the right to due
process and equal protection.
However, a corporation is also entitled to protection against unreasonable searches and seizures.
This right however does not emanate from the grant of the State by way of primary franchise but is
sourced through the Theory of Enterprise Entity which recognizes that regardless of Section 2 of the
Corporation Code, a corporation is still for all intents and purposes an association of individuals under
an assumed name and with a distinct legal personality. In organizing itself as a collective body, it waives
no constitutional immunities for such body. (1) Its properties cannot be taken without just compensation
(2) it can only be proceeded against by due process of law (3) it is protected against unlawful
discrimination.
In the same line of reasoning, although a corporation is a legal fiction, a search and seizure involves
physical intrusion into the premises of the corporation, and therefore also intrudes into the personal and
business privacy of the stockholders or members who compose it. It can be seen that the right of the
individual against unreasonable searches and seizures is extended to corporations upon whom they are
members.

(d) But Not Entitled to Privilege Against Self incrimination

- “It is elementary that the right against self-incrimination has no application to juridical persons.”
- While an individual may lawfully refuse to answer incriminating questions unless protected by an
immunity statute, it does not follow that a corporation, vested with special privileges and franchises,
may refuse to show its hand when charged with an abuse of such privilege.

Q: Why is a corporation entitled to equal protection but not the right against self- incrimination?
A: Any individual is entitled to equal protection whether they be juridical or natural. The corporation being in
the same class should be treated equally. However, the right to self-incrimation is not extended to
corporation because:
1. The right is meant to prevent individuals from having to lie under oath in order to protect his interest.
It is to protect the individual from having to commit perjury just to keep himself from going to jail.
However, if a corporation lies under oath, who would you bring to jail when in fact, a corporation is
just a legal fiction.
2. The corporation is subject to the reportorial requirements of the law. The corporation being a mere
creature of the State is subject to the whims of its Creator. The corporation powers are limited by
law.
CLV: Beats me! Perhaps such right is attributable to the moral dimension of an individual, and since the
corporation is of an amoral personality, such right may not be attributable to it.

3. Practice of Profession
- Corporations cannot engage in the practice of a profession since they lack the moral and technical
competence required by the PRC.
- A corporation engaged in the selling of eyeglasses and which hires optometrists is not engaged in
the practice of optometry.

4. Liability for Torts

- A corporation is civilly liable in the same manner as natural persons for torts, because the rules
governing the liability of a principal or master for a tort committed by an agent or servant are the
same whether the principal or master be a natural person or a corporation, and whether the servant
or agent be a natural or artificial person. That a principal or master is liable for every tort which he
expressly directs or authorizes, is just as true of a corporation as a natural person.

11
PNB v COURT OF APPEALS
Facts: Rita Gueco Tapnio had an export sugar quota of 1,000 piculs for the agricultural year 1956- 1957.
Since, she did not need it, she agreed to allow Mr. Jacobo Tuazon to use the said quota for consideration of
2,500. Her sugar cannot be exported without sugar quota allotments. Sometimes, however a planter harvests
less sugar than her quota so her excess quota is used by her mother who pays for it. This is her arrangement
with Mr. Tuazon. At the time of the agreement, she was indebted to PNB of San Fernando, Pampanga. Her
indebtedness was known as a crop loan and was secured by her sugar crop, and since her quota was
mortgaged to PNB, her arrangement with Mr. Tuazon had to be approved by the bank. Upon presentment of
the lease arrangement, the PNB branch manager revised it by increasing the lease amount to P2.80 per picul
for a total of P2,800. Such increase was agreed to by both Rita and Jacobo. However, when it was presented
to the Board of Directors for approval, they further increased the amount to P3.00 per picul. Jacobo asked
for the reconsideration but he was denied the same. The matter stood as it was until Jacobo informed Rita
and PNB that he had lost interest in pursuing the deal. In the meantime, the debt of Rita with the PNB
matured. Since she had a surety agreement with the Philippine American General Insurance Co. Inc.
(Philamgen), the latter paid her outstanding debt. Philamgen in turn demanded from Rita the amount which
they paid the bank. Instead of paying the bank, Rita claimed that she told Philamgen that she did not consider
herself indebted to the bank since she had an agreement with Jacobo Tuazon. When such was discontinued,
she failed to realized the income with which she could have paid her creditors. Philamgen filed a complaint
for the collection of sum of money against Rita. Rita implicated PNB as a third party defendant claiming that
her failure to pay was due to the fault or negligence of PNB.

Issue: WON PNB is liable for the damage caused to Rita. Held:
- There is no question that Rita’s failure to utilize her sugar quota was due to the disapproval of the lease
by the Board of Directors of the petitioner, thus PNB should be held liable.
- The Board justified the increase to P 3.00 per picul by saying that it was the prevalent rate at that time.
However, there was no proof that any other person was willing to lease the sugar quota allotment of Rita
for a price higher than P2.80 per picul. Just because there are isolated transactions where the lease
price was P3.00 per picul does not mean that there are always ready takers.
- While PNB had the ultimate authority of approving or disapproving the proposed lease since the quota
was mortgaged to the bank, the latter certainly cannot escape its responsibility of observing precaution
and vigilance which the circumstances of the case justly demanded in approving or disapproving the
lease of said sugar quota.
- According to Art. 19 of the Civil Code, “[e]very person must in the exercise of his rights and the
performance of his duties, act with justice, give everyone his due and observe honesty and good faith.”
This the petitioner failed to do. As a consequence, Art. 21 states, [a]ny person who willfully causes loss
or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate
the latter for the damage.
- On the liability of the corporation, the court ruled that, “[a] corporation is civilly liable in the same manner
as natural persons for torts, because generally speaking, the rules governing the liability of a principal or
master for a tort committed by an agent or servant are the same whether the principal or master be a
natural person or artificial person. All of the authorities agree that a principal or master is liable for every
tort which he expressly directs or authorizes, and this is just as true of a corporation as of a natural
person. A corporation, is liable therefore, whenever a tortuous act is committed by an officer or agent
under express direction or authority from the stockholders or members acting as a body, or generally,
from the directors as the governing body.

NOTE: CLV tells us that it is clear from the ruling of the Court in this case that not every tortuous act committed
by an officer can be ascribed to the corporation as its liability, for it is reasonable to presume that in the
granting of authority by the corporation to its agent, such a grant did not include a direction to commit tortuous
acts against third parties. Only when the corporation has expressly directed the commission of such tortuous
act, would the damages resulting therefrom be ascribable to the corporation. And such a direction by the
corporation, is manifested either by its board adopting a resolution to such effect, as in this case, or having
taken advantage of such a tortuous act the corporation, through its board, expressly or impliedly ratifies such
an act or is estopped from impugning such an act.
- Our jurisprudence is wanting as to the definite scope of “corporate tort.” Essentially, “tort” consists in
the violation of a right given or the omission of a duty imposed by law; a breach of a legal duty. The
failure of the corporate employer to comply with the law-imposed duty under the Labor Code to grant
separation pay to employees in case of cessation of operations constitutes tort and its stockholder
who was actively engaged in the management or operation of the business should be held personally
liable.

12
Q: When is a corporation liable for tort?
A: A corporation is liable for tort when: (a) the act is committed by an officer or agent (2) under express
direction of authority from the stockholders or members acting as a body or through the Board of
Directors.

Q: How can authority given to the agent of the corporation be determined?

A: Either by: (a) such direction by the corporation is manifested, by its board adopting a resolution to such
effect (b) by having takien advantage of such a tortious act, the corporation through its board, has
expressly or impliedly ratified such an act or estopped from impugning the same.

Q: What is a derivative suit?

A: Since, the act of the board is essentially that of the corporation and therefore corporate assets cannot
escape enforcement of the award of damage to the tort victim. As a remedy, the stockholders may
institute a derivative suit against the responsible board members and officers for the damages suffered
by the corporation as a result of the tort suit.

5. Corporate Criminal Liability (a West Coast Life Ins. Co. v. Hurd, 27 Phil. 401 (1914); (People v.
Tan Boon Kong, 54 Phil. 607 [1930]; (Sia v. Court of Appeals, 121 SCRA 655 [1983]; Articles 102 and 103,
Revised Penal Code).

WEST COAST LIFE INS. CO. v HURD

Facts: The petitioner (West Coast) is a life-insurance corporation, organized under the laws of California,
doing business regularly and legally in the Philippines. An information was filed against the plaintiff
corporation as well as John Northcott and Manue Grey charging the said corporation and said individuals
with the crime of libel. The controversy started when Northcott, as general manager for the Philippines of said
company and John Grey who was an agent and employee of the company, conspired to release certain
circulars containing foul statements against Insular Life Company claiming that the Insular Life was then and
there in a dangerous financial condition on the point of going into insolvency, to the detriment of the policy
holders of the said company, and of those with whom said company have and had business transactions.
The plaintiffs then filed a motion to quash summons sent by the Judge, on the ground that the court had no
jurisdiction over said company, there being no authority in court for the issuance of the processes. Moreover,
plaintiffs alleged that under the laws of the Philippines, the court has no power or authority to proceed against
a corporation, criminally, to bring it into court for the purpose of making it amenable to criminal laws.

Issue: WON corporations can be held criminally liable.

Held: No. While the courts have inherent powers which usually go with courts of general jurisdiction, it was
held that under circumstances of their creation, they have only such authority in criminal matters as is
expressly conferred upon them by statute or which is necessary to imply from such authority in order to carry
out fully and adequately the express authority conferred. The SC did not feel that Courts have authority to
created new procedure and new processes of criminal law. Although, there are various penal laws in the
Philippines which the corporation may violate, still the SC does not believe that the courts are authorized to
go to the extent of creating special procedure and processes for the purpose of carrying out the penal
statutes, when the legislative itself has neglected to do so. This is true since the courts are creatures of the
statute and have only powers conferred upon them by statute. Philippines courts have no common law
jurisdiction or powers.

Facts: During 1924, in Iloilo, Tan Boon Kong as manager of the Visayan General Supply Co. engaged in the
purchase and sale of sugar, bayon, copra, and other native products and as such must pay internal revenue
taxes upon is sales. However, he only declared 2.3 million in sales but in actuality the sales amounted to 2.5
million, therefore failing to declare for the purpose of taxation about 200,000, not having paid the government
2,000 in taxes. Upon filing by the defendant of a demurrer, the lower court judge sustained said motion on
the ground that the offense charged must be regarded as committed by the corporation and not its officials.

Issue: WON the defendant as manager may be held criminally liable.

Held: Ruling reversed. Case remanded. The court held that the judge erred in sustaining the motion because
it is contrary to a great weight of authority. The court pointed out that, a corporation can act only through its
officers and agents where the business itself involves a violation law, the correct rule is that all who participate
in it are criminally liable. In the present case, Tan Boon Kong allegedly made a false return for purposes of

13
taxation of the total amount of sales for year 1924. As such, the filing of false returns constitutes a violation
of law. Him being the author of the illegal act must be held liable.

SIA v PEOPLE
Facts: The facts reveal that in 1963, the accused Jose Sia was the general manager of Metal Manufacturing
Company of the Philippines engaged in the manufacturing of steel office equipment. When the company was
in need of raw materials to be imported from abroad, Sia applied for a letter of credit to import steel sheets
from Tokyo, Japan, the application being directed to Continental Bank and was opened in the amount of
$18,300. According to the Continental Bank, the delivery of the steel sheets was only permitted upon the
execution of the trust receipt. While according to Sia, the steel sheets were already delivered and were even
converted to equipment before the trust receipt was signed by him. However, there is no question that when
the bill of exchange became due, neither the accused nor his company made payments, despite demands
of the bank. On appeal, Sia contends that he should not be held liable.

Issue: WON petitioner Sia may be liable for the crime charged, having acted only for and in behalf of his
company.

Held: NO. The Court disputed the reliance of the lower court and the CA on the general principle that for a
crime committed by a corporation, the responsible officers thereof would personally bear the criminal liability,
as enunciated in Tan Boon Kong. The latter provides that: “[t]he corporation was directly required by law to
do an act in a given manner and the same law makes the person who fails to perform the act in the prescribed
manner expressly liable criminally. The performance of an act is an obligation directly imposed by the law on
the corporation. Since it is a responsible officer or officers of the corporations who actually perform the act
for the corporation, they must of necessity be the ones to assume the criminal liability; otherwise this liability
as created by the law would be illusory, and the deterrent effect of the law, negated.
The Court concluded that the cited case does not fall squarely with the circumstances surrounding
Sia since the act alleged to be a crime is not in the performance of an act directly ordained by law to be
performed by the corporation. The act is imposed by the agreement of the parties in pursuit of the business.
The intention of the parties is therefore a factor determinant of whether a crime or a civil obligation alone is
committed. The absence of a provision of the law even in the RPC making Sia criminally liable as the
president of his company created a doubt that must be ruled in his favor according to the maxim, that all
doubts must be resolved in favor of the accused.

CONTRASTING THE THREE CASES

- In the case of West, the court in effect enunciated that for a person to proceed criminally against a
corporation, it was necessary that express provisions of law be enacted, specifically providing that a
corporation may be proceeded against criminally and brought to court.
- But since a corporation is a legal fiction that cannot be handcuffed and brought to court, the case of Tan
Boon Kong provided that since a corporation acts through its officers and agents, any violation of law by
any of the actors of the corporation in the conduct of its business involves a violation of law, the correct
rule is that all who participate in it are liable. In making actors liable, the court here said attaching criminal
liability to the fiction cannot be done since: (1) a corporation is only an artificial person (2) there is a lack
of intent imputable to a being since it lacks its own mind.
- To apply the doctrine of separate juridical personality would allow criminals to use the corporation as a
shield or cloak to hide their criminal activities behind such.
- However, the liability of officers were delineated in case of Sia where the court held that the responsible
officer is personally liable is personally liable for crimes committed by the corporation only in a situation
where the corporation was directly required by law to do an act in a given manner, and the same law
makes the person who fails to perform the act in the prescribed manner expressly liable criminally.
- NOTE: While the law only defines individuals as offenders of criminal acts or as criminal actors, the law
is currently undergoing changes such that juridical persons are also defined as offenders of criminal acts,
as with the case of the Anti-Money Laundering Act.
- Art. 102 of the RPC: Subsidiary civil liability of innkeepers, tavern-keepers and proprietors of
establishments – In default of the persons criminally liable, innkeepers, tavern-keepers and any other
person or corporations shall be civilly liable for crimes committed in their establishments, in all cases
where a violation of municipal ordinances or some general or special police regulation shall have been
committed by them or their employees. Innkeepers are also subsidiarily liable for the restitution of goods
taken by robbery or theft within their houses from guests lodging therein, or for the payment of the value
therefore, provided that such guests shall have notified in advance the innkeeper himself, or the person
representing him, of the deposit of such goods within the inn; and shall furthermore have followed the

14
 directions which such innkeeper or his representative may have given them with respect to the care of
and vigilance over such goods. No liability shall attach in case of robbery with violence against or
intimidation of persons unless committed by the innkeeper’s employees.
- Art. 103 of the RPC: Subsidiary civil liability of other persons – The subsidiary liability established in the
next preceding article shall also apply to employers, teachers, persons and corporations engaged in any
kind of industry for felonies committed by their servants, pupils, workmen, apprentices, or employees in
the discharge of duties.
- No criminal suit can lie against an accused who is a corporation.
- When a criminal statute forbids the corporation itself from doing an act, the prohibition extends to the
board of directors, and to each director separately and individually.
- While it is true that a criminal case can only be filed against the officers and not against the corporation
itself, it does not follow that the corporation cannot be a real-party-in-interest for the purpose of bringing
a civil action for malicious prosecution for the damages incurred by the corporation for the criminal
proceedings brought against its officer.

Q: Why can the corporation be held liable for tortuous acts done by its agent but not for criminal acts done
outside its authority?
A: Crime is not within the corporate contemplation while negligence is. Negligence could be part of every
transaction. It is an integral part of corporate transactions. For as long as people comprise the corporation,
it is within the contemplation of every corporate act.

6. Recovery of Moral and Other Damages

- A corporation, being an artificial person, cannot experience physical sufferings, mental anguish,
fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis for moral
damages under Art. 2217 of the Civil Code. However, a corporation may have a good reputation
which, if besmirched, may be a ground for the award of moral damages.
- A corporation, being an artificial person and having existence only in legal contemplation, has no
feelings, emotions nor senses; therefore, it cannot experience physical suffering and mental anguish.
Mental suffering can be experienced only by one having a nervous system and it flows from real
ills, sorrows, and griefs of life—all of which cannot be suffered by an artificial person.
- The statement in People v. Manero and Mambulao Lumber Co. v. PNB, that a corporation may
recover moral damages if it “has a good reputation that is debased, resulting in social humiliation” is
an obiter dictum. Recovery of a corporation would be under Articles 19, 20 and 21 of the Civil Code,
but which requires a clear proof of malice or bad faith.

7. CORPORATE NATIONALITY: UNDER WHOSE LAWS INCORPORATED (Sec. 123)

- Section 123: Definition and rights of foreign corporations – For the purposes of this Code, a foreign
corporation is one formed, organized or existing under any laws other than those of the Philippines
and whose laws allow Filipino citizens and corporations to do business in the Philippines after it shall
have obtained a license to transact business in this country in accordance with this Code and a
certificate of authority from the appropriate government agency.

There are three tests to determine the nationality of the corporation, namely:
1.) Place of incorporation – that a corporation is of the nationality of the country under whose laws it has
been organized and registered, embodied in Sec. 123 of the Corporation Code.
2.) Control test – nationality determined by the nationality of the majority stockholders, wherein control is
vested.

- Situation #1: 51% Filipino 49% Japanese à Under the control test, the nationality cannot be
determined because for a group of stockholders to exercise control over a corporation it is required
by the Corporation Code that they at least control 60% of the corporation. à Why 60%? Because
under the Corporation Code for a group of persons to incorporate a corporation, at least 5 persons
are required by law. A majority of the 5 is 3 and converting it into percent, one gets 60%. We can say
that in fact 51% is majority but in a group of 5 people 51% is 2 & 1/5, there really is no 1/5 of a person.

- Situation #2: 60% Filipino 40% Japanese à Under the control test, this is considered a Filipino
corporation.

15
3.) Principal place of business – applied to determine whether a State has jurisdiction over the existence
and legal character of a corporation, its capacity or powers, internal organizations, capital structure, rights
and liabilities of directors.

Q: Do all three tests apply in the Philippines?

A: Yes. The first test is considered the primary test, the second one is used to determine whether a
corporation can engage in nationalized activities in the country, and the third one is used to determine
the jurisdiction of the State to enforce for instance taxation laws.

Q: What is the importance of determining the nationality of the corporation?

A: It is necessary so as to determine whether or not a corporation can enter into various transactions or
engage in different industries. And also, the legal fiction supporting a corporation is valid only within
Philippine territory.

Q: It was said that the place of incorporation is the primary test to determine the nationality of the corporation,
why then are there other tests used?
A: There are certain aspects of the Philippine economy that require that the controlling test in corporations
engaging in said type of business be that of Filipinos. The nationalized economic sectors are primarily
focused at making Filipino interests benefit directly from the bounties of this country. The place of
incorporation test need not have been expressly provided by the Constitution since it is an integral part
of our law specifically the power of Congress to grant primary franchise to corporations. The place of
incorporation test is deemed the primary test. It is a true test of nationality. Being a creature of law of the
place where it was incorporated, the corporation cannot escape said law. By providing for the control
test, the Constitution is providing for a secondary test to determine which corporations are entitled to
entry in nationalized sectors.

Q: What is the implication of having a primary test and a secondary test?

A: Simply put, if a corporation does not pass the first test, which the place of incorporation test, automatically
it is deemed to be a foreign corporation. However, having passed the first test, the nationality of the
corporation may have been established but this does not mean that the corporation is entitled to enter
every single economic sector of the Philippines. The control test determines now whether the corporation
fulfills the equity requirements of the Constitution. In doing this, the other tests are made such as: war-
time test, investment test and grandfather rule.

EXCEPTIONS: TEST OF CONTROLLING OWNERSHIP also applies in:

(a) Exploitation of Natural Resources
- Sec. 140 Stock ownership in certain corporations – Pursuant to the duties specified by Article XIV of
the Constitution, the National Economic Development Authority shall, from time to time, make a
determination of whether the corporate vehicle has been used by any corporation of by business or
industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang
Pambansa, whenever deemed necessary, a report of its findings, including recommendations for
their prevention or correction.
o Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations
declared by it to be vested with a public interest pursuant to the provisions of this section,
belonging to the individuals or groups of individuals related to each other by consanguinity or
affinity or by close business interests, or whenever it is necessary to achieve national
objectives, prevent illegal monopolies or combinations in restrain or trade, to implement
national economic policies declared in laws, rules and regulations designed to promote the
general welfare and foster economic development.
o In recommending to the Batasang Pambansa corporations, business or industries to be
declared vested with a public interest and in formulating proposals for limitations on stock
ownership, the National Economic and Development Authority shall consider the type and
nature of the industry, the size of the enterprise, the economies of scale, the geographic
location, the extent of Filipino ownership, the labor intensity of the activity, the export potential,
as well as the other factors which are germane to the realization and promotion of business
and industry.
- Sec. 2 Art. XII
o All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all
forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna and other natural
resources are owned by the State. With the exception of agricultural lands, all other national

16
 resources shall under the full control and supervision of the State. The State may directly
undertake such activities or it may enter into co- production, joint venture, or production-
sharing agreements with Filipino citizens, or corporations or associations at least sixty
percentum of whose capital is owned by such citizens. Such agreements may be for a period
not exceeding twenty-five years, renewable for not more than twenty-five years, and under
such terms and conditions as may be provided by law. In cases of water rights for irrigation,
water supply, fisheries, or industrial uses other than the development of water power,
beneficial use may be the measure and limit of the grant.
o The State shall protect the nation’s marine wealth in its archipelagic waters, territorial sea, and
exclusive economic zone, and reserve its use and enjoyment exclusively to Filipino citizens.
o The Congress may, by law, allow small-scale utilization of natural resources by Filipino
citizens, as well as cooperative fish farming, with priority to subsistence fishermen and
fishworkers in rivers, lakes, bays and lagoons
o The President may enter into agreements with foreign-owned corporations involving either
technical or financial assistance for large-scale exploration, development and utilization of
minerals, petroleum and other mineral oils according to the general terms and conditions
provided by law, based on real contributions to the economic growth and general welfare of
the country. In such agreements, the State shall promote the development and use of local
scientific and technical resources.
o The President shall notify the Congress of every contract entered into in accordance with this
provision within thirty days from its execution.

ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO v THE LRC

Facts: Mateo Rodis, a Filipino citizen and resident of Davao, executed a deed of sale of a parcel of land
located in the same city in favor of the Roman Catholic Administrator of Davao, a “corporation sole” organized
and existing in accordance with Philippine laws. The incumbent administrator is Msgr. Clovis Thibault, a
Canadian citizen. When the deed was presented to the Register of Deeds for registration, it required them to
submit an affidavit stating that the ownership of the corporation is 60% Filipino citizens as required under the
Constitution. Roman Catholic stated that it was a corporation sole (meaning only one incorporator) and that
the totality of the Catholic population in Davao would become the owner of the property. Register of Deeds
doubted this and submitted the case for en consulta in the Land Registration Commission. LRC ruled that
the requirement of the Constitution must be followed and since the 60% cannot be complied with, the
registration should be denied. Hence, this appeal.

Issue: WON the Roman Catholic Apostolic Church, being a corporation sole, can lawfully acquire lands in
the Philippines.
Held: YES.
- Corporation sole – a special form of corporation usually associated with the clergy designed to facilitate
the exercise of the functions of ownership of the church which was registered as property owner. It is
created not only to administer the temporalities of the church or religious society where the corporator
belongs, but also to hold and transmit the same to his successor in said officer.
- The incumbent administrator is not the actual owner of the land but the constituents or those that make
up the church, thus it is their nationality that has to be taken into consideration. The corporation sole only
holds the property in trust for the benefit of the Roman Catholic faithful.
- Dissenting opinion by Justice JBL Reyes à In requiring corporations or association to have 60% of their
capital owned by Filipino citizens, the constitution manifestly disregarded the corporate fiction i.e. the
juridical personality of such corporation or associations. It went behind the corporate entity and looked
at the natural persons that composed it, and demanded that a clear majority in interest (60%) should be
Filipino. Since under the rules governing corporation sole, the members of the religious association
cannot overrule or override the decisions of the sole corporator, then it would be wrong to conclude that
the control of the corporation sole would be in the members of the religious association.

NOTE: The Roman Catholic Church is a corporation by prescription, with acknowledged juridical personality
inasmuch as it is an institution which antedated almost a thousand years any other personality in Europe,
and which existed when Grecian eloquence still flourished in Antioch and when idiots were still worshipped
in the temple of Mecca. Since it is a corporation by prescription, it has no nationality, and hence, the nationality
test does not apply. (But refer to below.)

17
Q: Why is this case relevant to us?
A: It is relevant because while it tells us that a corporation sole is not subject to the nationality test, it must
be further qualified to mean that this is the case only insofar as the control test is concerned. Nationality is
irrelevant insofar as this test is concerned. However, it becomes relevant when the place of incorporation
comes into play since the case never sought to touch the place of incorporation test.
- The registration of the donation of land to an unincorporated religious organization, whose trustees are
foreigners, would violate constitutional prohibition and the refusal would not be in violation of the
freedom of religion clause. The fact that the religious association “has no capital stock does not suffice to
escape the constitutional inhibition, since it is admitted that its members are of foreign nationality. . . and
the spirit of the Constitution demands that in the absence of capital stock, the controlling membership
should be composed of Filipino citizens.”

(b) Public Utilities (Sec. 11, Art. XII, Constitution; aPeople v. Quasha, 93 Phil. 333)
- Sec. 11 Art. XII
o No franchise, certificate or any other form of authorization for the operation of public utility shall be
granted except to citizens of the Philippines or to corporations or associations organized under the
laws of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall
such franchise, certificate or authorization be exclusive in character or for a longer period than fifty
years. Neither shall any such franchise or right be granted except under the condition that it shall be
subject to amendment, alteration or repeal by the Congress when the common good so requires. The
State shall encourage equity participation in public utilities by the general public. The participation of
foreign investors in the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers of such corporation or
association must be citizens of the Philippines.

NOTE: Stock ownership must at least be 60% Filipino but management must be 100% Filipino for such
corporation to operate in industries concerning public utilities.

PEOPLE v QUASHA
Facts: William Quasha, a member of the Philippine Bar was charged with falsification of public and
commercial documents in the CFI. He was entrusted with the preparation and registration of the articles of
incorporation of Pacific Airways Corporation but he caused it to appear that Arsenio Baylon, a Filipino had
subscribed to and was the owner of 60% of subscribed capital stock. Such was not case because the real
owners of said portions were really American citizens. The purpose of such false statement was to circumvent
the Constitutional mandate that no corporation shall be authorized to operate as a public utility in the
Philippines unless 60% of its capital is owned by Filipinos.
Held: The falsification imputed to Quasha consists in not disclosing in the Articles of Incorporation that Baylon
was a mere trustee of the Americans, thus giving the impression that Baylon subscribed to 60% of the capital
stock. But contrary to the lower court’s assumption, the Constitution does not prohibit the mere formation of
a public utility corporation without the required proportion of Filipino capital. What it does prohibit is the
granting of a franchise or other form of authorization for the operation of a public utility to a corporation already
in existence but without the requisite proportion of Filipino capital. From the language of the text, the terms
“franchise”, “certificate”, and “other form of authorization” are qualified by the phrase “for the operation of
public utility.” As such, these terms cannot and do not refer to the corporation’s primary franchise, which vests
a body of men with corporate existence, but to its secondary franchise, or the privilege to operate as public
utility after the corporation has already gone into being.
Primary franchise refers to that franchise which invests a body of men with corporate existence, while
the secondary franchise is the privilege to operate as a public utility after the corporation has already come
into being.
For the mere formation of the corporation, such revelation was not essential and the corporation law
does not require it. Therefore, Quasha was under no obligation to make it. In the absence of such obligation
and of the alleged wrongful intent, Quasha cannot be legally convicted of the crime with which he is charged.
A corporation formed with capital that is entirely alien may subsequently change the nationality of its capital
through transfer of shares to Filipino citizens. The converse may also happen. Thus for a corporation to be
entitled to operate a public utility, it is not necessary that it be organized with 60% of its capital owned by
Filipinos from the start. Said condition, may at any time be attained through the necessary transfer of stocks.
The moment for determining whether a corporation is entitled to operate as public utility is when it applies for
a franchise, certificate or any other form of authorization for that purpose and that can only be done after the
corporation has already come into being not while being formed.

18
Q: Why are we studying Quasha?
A: This case makes a distinction with the grant by the government of primary and secondary franchise. As
far as doctrinal pronouncements are concerned, any and all type of corporations may be incorporated,
so long as the requirements for incorporation are fulfilled and that its purpose is lawful and not contrary
to law or public policy. The violation of equity requirements with regard to entry into nationalized sectors
as provided by the Constitution come only into play when the secondary franchise is granted. In granting
the secondary franchise considerations of equity are now made.
CLV: Note that while Quasha makes such doctrinal pronouncements, in practice, this is not the case. SEC
will refuse to register the Articles of Incorporation if it is not 60% owned by Filipinos. In fact, Quasha lied
in order to have the articles registered.

2. The primary franchise, that is, the right to exist as such, is vested in the individuals who compose the
corporation and not in the corporation itself and cannot be conveyed in the absence of a legislative
authority so to do. The special or secondary franchises are vested in the corporation and may
ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its
property, except such special or secondary franchises as are charged with a public use.
3. The Constitution requires a franchise for the operation of a public utility; however, it does not require
a franchise before one can own the facilities needed to operate a public utility so long as it does not
operate them to serve the public. There is a clear distinction between “operation” of a public utility and
the ownership of the facilities and equipment used to serve the public.

TATAD v GARCIA
Facts: In 1989, DOTC planned to construct a light railway transit along EDSA. Initially, Eli Levin Enterprise
Inc. was supposed to construct the LRT III on a Build-Operate-Transfer (BOT) basis. Subsequently, RA 6957
was enacted which provides for two schemes for the financing, construction and operation of government
projects through private initiative and investment: Build-Operate-Transfer (BOT) or Build-Transfer (BT).
DOTC issued a Department Orders creating the Pre-qualification Bids and Awards Committee. EDSA LRT
Consortium composed of 10 foreign and domestic corporations, was one of the five groups who responded
to the invitation. And being the sole complying bidder, it was awarded the contract. DOTC and EDSA LRT
Corp., Ltd. in substitution of the EDSA LRT Consortium entered into an “Agreement to Build, Lease and
Transfer an LRT system for EDSA” under the terms of the BOT Law. Agreement was subsequently revised
and another “Supplemental Agreement” was also contracted.
According to the agreements, the EDSA LRT III (MRT) will use light rail vehicles from abroad (Czech
and Slovak Federal Republics) and will have a maximum carrying capacity of 450,000 passengers a day. It
will have its own power facility and will have 13 passenger stations. The private respondent will finance the
entire project required for a complete operational LRT system. Upon full or partial completion and viability,
private respondent shall deliver the use and possession of the completed portion to DOTC which shall
operate the same. DOTC shall pay respondent monthly rentals, which is to be determined by an
independent and internationally accredited inspection firm. As agreed upon, private respondent’s capital
shall be recovered from the rentals to be paid by DOTC, which in turn, shall come from the earnings of
the MRT. After 25 years and after the DOTC shall have completed payment of the rentals, ownership of the
project shall be transferred to the latter.
Petitioners argue that the Agreements, insofar as it grants EDSA LRT Corp. Ltd., a foreign corporation
the ownership of MRT, a public utility, violate the Constitution. They claim that since the MRT is a public
utility, its ownership and operation is limited by the Constitution to Filipino citizens and domestic corporation,
not foreign corporations, like private respondent.
DOTC Secretary and private respondent on the other hand, contend that the nationality requirement
for public utilities mandated by the Constitution does not apply to private respondent. Also, these Agreements
were already approved by President Ramos.

Issue: WON the Agreements violated the Constitution (re: ownership/operation of a public utility by a foreign
corporation).

Held: No. It is to be noted that what the private respondents own are the rail tracks, rolling stocks like the
coaches, rail stations, terminals and power plant, which do not fall under “public utility”. While a franchise is
needed to operate these facilities to serve the public, they do not by themselves constitute a public utility.
What constitutes a public utility is not their ownership but their use to the public. While the Constitution
requires a franchise for the operation of public utility, it does not however require a franchise before one can
own the facilities needed to operate a public utility so long as it does not operate them to serve the public.
There must be a clear distinction between the “operation” of a public utility and the ownership of the facilities

19
and equipments used to serve the public. The right to operate a public utility may exist independently and
separately from the ownership of the facilities without operating them as a public utility, or conversely, one
may operate a public utility without owning the facilities used to serve the public.
In the case, while private respondent is the owner of the facilities necessary to operate the MRT, it
admits that it is not enfranchised to operate a public utility. In view of the incapacity, private respondent EDSA
Corp. and DOTC agreed that on completion date, private respondent will deliver possession of the LRT
system by way of lease of 25 years, during which period DOTC shall operate the same as common carrier
and private respondent shall provide the technical maintenance and repair services to DOTC.
In sum, private respondent will not run the light rail vehicles and collect fees from the riding public. It
will have no dealings with the public and the public will have no right to demand any services from it. A mere
owner and lessor of the facilities used by a public utility is not a public utility. Even the mere formation of a
public utility corporation does not ipso facto characterize the corporation as one operating a public utility. The
moment for determining the requisite Filipino nationality is when the entity applies for a franchise certificate
or any other form of authorization for that purpose.

Q: How does the case of Quasha differ from the case of Tatad?
A: Quasha tells us that we have to look at the secondary franchise, i.e. to whom such is given while Tatad
tells us that it does not matter to whom the franchise is given but what matters is who actually operates
the utility. The latter case tells us that restrictions are not on the assets of the corporations but on the
enterprise itself, thus control determines nationality and not the beneficiaries. CLV: The Constitution
restricts the juridical person as it controls the enterprise. Note, that assets are different from the juridical
person and from the business enterprise itself.

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

- Sec. 11(1) Art. XVI
o The ownership and management of mass media shall be limited to citizens of the Philippines, or to
corporations, cooperatives or associations, wholly-owned and managed by such citizens. The
Congress shall regulate or prohibit monopolies in commercial mass media when the public interest
so requires. No combination in restraint of trade or unfair competition shall be allowed.
- Mass media includes the gathering, transmission of news, information, messages, signals and forms of
written, oral and all visual communication and shall embrace the print medium, radio, television, films,
movies, advertising in all its phases and their business managerial. It does not include commercial
telecommunications because such is a public utility.
- The Constitutional requirements are much stricter for it requires that socks are 100% Filipino owned and
managed.

Cable Industry: “Cable TV operations shall be governed by E.O. No. 205, s. 1987. If CATV operators offer
public telecommunications services, they shall be treated just like a public telecommunications entity.” (NTC
Memo Circular No. 8-9-95)
- Cable TV as “a form of mass media which must, therefore, be owned and managed by Filipino citizens,
or corporations, cooperatives or associations, wholly-owned and managed by Filipino citizens pursuant to
the mandate of the Constitution.”
- The National Telecommunications Commission which regulates and supervises the cable television
industry in the Philippines under Sec. 2 of EO 436 series of 1997 has provided under the NTC
Memorandum Circular No. 8-9-95 under item 920(a) thereof provides that “[c]able TV operations shall be
governed by E.L. No. 205 series of 1987. If CATV operators offer public telecommunications services,
they shall be treated just like public telecommunications industry.”
- Under DOJ opinion No. 95 series of 1999, the Secretary of Justice taking its cue from Allied Broadcasting
Inc. v. Federal Communications Commission 435 F.2d 70
considered CATV as “a form of mass media, which must therefore be owned and managed by Filipinos, or
corporations, cooperatives or associations, wholly-owned and managed by Filipino citizens pursuant to the
mandate of the Constitution.”

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

- Sec. 11(2) Art. XVI
o The advertising industry is impressed with public interest and shall be regulated by law for the
protection of consumers and promotion of the general welfare.
o Only Filipino citizens or corporations or associations at least seventy percentum of the capital of which
is owned by such citizens shall be allowed to engage in the advertising industry.

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 o The participation of foreign investors in the governing body of entities in such industry shall be limited
to their proportionate share in the capital thereof, and all the executive and managing officers of such
entities must be citizens of the Philippines.
- Only Filipino citizens or corporations or associations at least seventy percent of the capital shall be
allowed to engage in the advertising industry. It also provides that the participation of foreign investors
in the governing body shall be limited to their proportionate share in the capital thereof, and all the
executive and managing officers of such entities must be citizens of the Philippines.

(e) War-Time Test (Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., 89 Phil. 54 [1951];
Davis Winship v. Philippine Trust Co., 90 Phil. 744 [1952]; Haw Pia v. China Banking Corp., 80 Phil. 604
[1948]).
- In Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., the Court held that in times of war,
the nationality of a private corporation is determined by the character or citizenship of its controlling
stockholders The court considered the juridical entity as an enemy based on the fact that the “majority
of the stockholders of the respondent corporation were German subjects.” It ruled that the control test
was applicable only in war-time. It refused the sole application of the place of incorporation test during
the war- time to determine the nationality of an enemy corporation.

(f) Investment Test as to “Philippine Nationals” (Sec. 3(a) & (b), R.A. 7042, Foreign Investments Act of
1991)
- Under Sec. 3a of the FIA of 1991, the term “Philippine national” as it refers to a corporate entity shall
mean a corporation organized under the laws of the Philippines of which at least 60% percent of the
capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines. NOTE: In
this aspect, FIA is more liberal than the Constitution which did not specify as to what type of share the
60% Filipino-ownership requirement pertained to. FIA, in this aspect, only referred to voting shares.
- However, it provides that were a corporation and its non-Filipino stockholders own stocks in a SEC-
registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by citizens of the Philippines and at least 60% of the members of
the Board of Directors of both corporations must be citizens of the Philippines, in order that a corporation
shall be considered a Philippine national. The law therefore limits the test to voting shares, but however
makes it more stringent when it comes to actual control by making a double 60% rule requirement as to
both holding and held company, as well as their Board of Directors.

Q: Why should not we infer that the 60% Filipino ownership requirement of the Constitution as pertaining to
voting shares?
A: Elementary rule of Statutory Construction that when the law does not distinguish, neither should we.
Moreover, the right to vote is not the only right granted to stockholders, as the right to file suits against
the Board of Directors is granted to them.

Q: Given these facts: ABC Company is comprised of 60% Filipino and 20% Foreign investors with respect to
voting stocks and 40% Foreign investors with respect to non-voting stocks, under the FIA, is it a
Philippine national?
A: Yes, since FIA limits its scope to voting stocks.

Q: Given these facts: ABC Company with 20 voting stocks is comprised of 80% Filipino (16) and 20% Foreign
(4), is it a Philippine national? Can it therefore own land under the Constitution?
A: Yes, under FIA, it is a Philippine national but it cannot own land. As to the aspects that FIA runs contrary
to the Constitution, which is the supreme law of the land, the former shall not apply.

(g) Grandfather Rule (Opinion of DOJ No. 18, s. 1989, 19 January 1989; SEC Opinion, 6 November 1989,
XXIV SEC QUARTERLY BULLETIN (No. 1- March 1990); SEC Opinion, 14 December 1989, XXIV SEC
QUARTERLY BULLETIN (No. 2 -June 1990)
- Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares corresponding to such percentage
shall be counted as of Philippine nationality. Example: partnership between ABC and X companies. ABC
owns 60% with 40% foreign and 60% Filipino-owned shares while X companie own 40% with 100%
Filipino-owned shares. Under the SEC DOJ Rule, such partnership is Filipino-owned. Moreover, under
this rule once the 60% requirement is reached, there is no more need for tierring.

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- It must be stressed however that the aforequoted SEC rule applies only for purposes of resolving issues
on investments. The SEC was quick to add: “[h]owever, while a corporation with 60% Filipino and 40%
foreign equity ownership is considered a Philippine national for purposes of investment, it is not qualified
to invest in or enter into a joint venture agreement with corporations or partnerships, the capital or
ownership of which under the constitution of other special laws are limited to Filipino citizens only. A joint
venture arrangement would mean that such corporation has become a partner and is deemed then to
be acting or involving itself in the operations of a nationalized activity by the acts of the local partners by
virtue of the principle of mutual agency applicable to partnerships.
- There seems to be a conflict as to the applicability of the SEC Rule and to that of the Foreign Investments
Act but each in itself has advantages and disadvantages, since both require stringent requisites for a
corporation to avail of its privileges. But under the present scenario, the FIA is believed to be the default
rule having been enacted more recently that the SEC Rule.

GRANDFATHER RULE – a method by which the percentage of Filipino equity in corporations engaged in
nationalized or partly nationalized areas of activity provided for under the Constitution and other national laws
is accurately computed, in cases where corporate shareholders are part of the ownership structure by
considering the nationality of the second or even subsequent tier of ownership to determine the nationality of
the corporate shareholder.
Q: When is the GFR applied?
A: The GFR is applied in cases where the corporation has corporate stockholders with alien stockholdings,
otherwise, if the rule is not applied, the presence of such corporate srockholders could diminish the
effective control of Filipinos.

4. SITUATION #1 – Silahis International Hotel, the capital stock of which is 69% owned by another
corporation Hotel Properties Inc. and 31% owned by Filipinos. Hotel Properties in turn is 53% alien-
owned and 47% Filipino-owned. The SEC through the GFR stated that Silahis International Hotel can
engage in partly nationalized business because the Filipino equity in said corporation is 63.43% while
the foreign equity in said corporation is 36.57%.

SILAHIS INTERNATIONAL HOTEL

Hotel Properties Inc. 69% 1.) 53% Foreign
47% Filipino
Filipino stockholdings 31%
47/100 (Hotel Properties) x 69 = 32.43 + 31 (remaining Filipino stockholdings in Silahis)
TOTAL: 63.43%

5. SITUATION #2 –Whether or not there may be an investment made by Pinoy Inc. in Mass Media which
requires 100% Filipino ownership. Pinoy Inc. is 40% owned by Pedro, a Filipino, while 60% is owned
by ABC, Inc. ABC on the other hand, is a corporation registered in the Philippines 60% of which is
owned by Maria, a Filipino, while 40% is owned by George, a German.

Q: Can Pinoy, Inc. enter into the operation of a television station?

A: In this situation, is the GFR is applied straight; Pinoy, Inc. would be disqualified since 24% of Pinoy is
owned by George. But under the present investment regime of the Philippines, the FIA provides that
corporations which are 60% owned by Filipino citizens shall be considered of Philippine nationality. It is
defined under said law that for the purposes of investment such a corporation of 60% Filipino and 40%
foreign equity is allowed to invest in a corporation engaged in a nationalized sector.

Q: Does this not contradict the very provisions of the Constitution?

A: It does not because the main purpose of such provision of the law is to spur investments into the Philippine
economy. What it specifically prohibits is for a corporation with a foreign equity to engage in nationalized
industries. Note the difference in the use of terms, namely “to engage” as opposed to “to invest.”
Engaging in nationalized industries involve direct participation in the exploitation or use of natural
resources or entry into protected industries vested with public interest. This is what is prohibited from
being entered into by non- nationals.

Q: When should the GFR be applied?

22
A: It should be applied when two requisites are met: (1) when there is involved a nationalized or partly
nationalized sector of Philippine economy and (2) when there is tierring, meaning the corporation is
partly-owned by another corporation.

Up to what level do you apply the grandfather rule?

PALTING v. SAN JOSE PETROLEUM
Facts: San Jose Petroleum filed with the SEC a sworn registration statement for the registration and licensing
for sale in he Philippine voting trust certificate representing 2 million shares of its capital stock of a par
value of $0.35/share at P1/share. It was alleged that the proceeds thereof will be used to finance the
operations of San Jose Oil Co. which has 14 petroleum exploration concessions in various provinces. It
was expressly conditioned that instead of stock certificates, registered or bearer-voting trust certificates
from voting trustees (Americans) will be given. San Jose Petroleum amended the application from P2M
to P5M at reduced offering at P0.70/share.
Palting, et.al filed with the SEC an opposition to said registration on the following grounds: (1) the tie-
up between SJP, a Panamanian corporation and SJO, a domestic corporation violates the Constitution,
the Corp. Law and the Petroleum Act of 1949 (2) the issuer is not licensed to transact business in the
Philippines (3) the sale of shares is fraudulent (4) the issuer is based on unsound business principles
(sic).
SJP claimed that it was a “business enterprise” enjoying parity rights, with respect to mineral
resources in the Philippines, which may be exercised pursuant to the Laurel-Langley Agreement, through
a medium, the SJO. It contends that giving SJO financial assistance did constitute transaction of
business in the Philippines.
SJO is a domestic corporation 90% of which is owned by SJP, a Panamanian Corp. the majority
interest of which is owned by Oil Investments, Inc. another Panamanian Corp. The latter is in turn owned
by Pantepec Oil Co. & PanCoastal Petroleum, both organized and existing under the laws of Venezuela.
Under the Constitution, the exploitation of natural resources shall be limited to citizens of the
Philippines or to corporations or associations at least 60% of the capital of which is owned by such
citizens. However, this right was earlier extended to US citizens by virtue of the Parity Agreement. Said
US citizens can either directly or indirectly own or control the business enterprise.

Held: San Jose Petroleum is not entitled to Parity Rights: (1) It is not owned or controlled directly by US
citizens because it is owned and controlled by Panamanian corporation; (2) Neither can it be said that it
is indirectly owned and controlled by US citizens because the controlling corporation is in turn owned by
two Venezuelan corporations; (3) Although the two Venezuelan corporations claim to be owned by
stockholders residing in the US, there is no showing that said stockholders were US citizens; (4) Even
granting that these stockholders are US citizens, it is still necessary to establish that their different states
allow Filipino corporations and citizens to engage in the exploitation of natural resources. However, there
is no such proof to this; (5) The word indirectly should not be unduly stretched in application.

Q: Why are we studying Palting?

A: It is because Palting enunciated the doctrine that for a corporation to comply to the nationalization
requirements of the Constitution, the equity requirements establishing the nationality of the controlling
interest in the corporation should not be stretched to absurdity. The application of the GFR to determine
the nationality of the ultimate controller of a subject corporation cannot go beyond the level of what is
reasonable.

(h) Special Classifications (Sec. 140)

- Sec. 140 Stock ownership in certain corporations – Pursuant to the duties specified by Article XIV of
the Constitution, the National Economic Development Authority shall, from time to time, make a
determination of whether the corporate vehicle has been used by any corporation of by business or
industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang
Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their
prevention or correction.
- Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by
it to be vested with a public interest pursuant to the provisions of this section, belonging to the
individuals or groups of individuals related to each other by consanguinity or affinity or by close
business interests, or whenever it is necessary to achieve national objectives, prevent illegal
monopolies or combinations in restrain or trade, to implement national economic policies declared in
laws, rules and regulations designed to promote the general welfare and foster economic
development.

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 - In recommending to the Batasang Pambansa corporations, business or industries to be declared
vested with a public interest and in formulating proposals for limitations on stock ownership, the
National Economic and Development Authority shall consider the type and nature of the industry, the
size of the enterprise, the economies of scale, the geographic location, the extent of Filipino
ownership, the labor intensity of the activity, the export potential, as well as the other factors which
are germane to the realization and promotion of business and industry.

IV. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF

CORPORATE FICTION

A. MAIN DOCTRINE: A CORPORATION HAS A PERSONALITY SEPARATE AND DISTINCT FROM ITS
STOCKHOLDERS OR MEMBERS
1. Sources: Sec. 2; Article 44, Civil Code
 Sec. 2 Corporation defined – A corporation is an artificial being created by operation of law, having
the right of succession, and the powers, attributes, and properties expressly authorized by law or
incident to its existence.
 Article 44 The following are juridical persons:
(2) other corporations, institutions and entities for public interest or purpose, created by law, their
personality begins as soon as they have been constituted according to law;
(3) corporations, partnerships and associations for private interest or purpose to which the law grants
a juridical personality, separate and distinct from that of each shareholder, partner or member.

2. Importance of Protecting Main Doctrine:

 The separate juridical personality includes the right of succession, limited liability, centralized
management, and generally free transferability of shares of stock. Therefore, an undermining of the
separate juridical personality of the corporation such as the application of the piercing doctrine,
necessarily dilutes any or all of those attributes.
 FROM WHICH ATTRIBUTE OF THE CORPORATION DOES THE DOCTRINE OF PIERCING THE
VEIL OF CORPORATE FICTION FOCUS ON?

1) Centralized management – Centralized management is not a natural occurrence. It is a creation of

statute under Sec. 23 of the Corporation Code Compared to partnerships, partnerships have mutual
agency under delectus personarum. Mutual agency is more of a natural occurrence since here the partner
is a co-owner of the assets of the partnership, maintaining his control over his property. In property law,
there is what is called the seven juses of ownership. In partnership however, a partner retains all this
seven juses, albeit as a co-owner, through mutual agency. However, in a corporation, a stockholder
abdicates his jus dispossidendi, jus abutendi, etc. as to the property he is placing inside a corporation
retaining only to himself his jus fruendi, as to the dividends of his stocks. This is unnatural since a person
is entitled to full use, enjoyment or dispossession of his property. But since under the Corporation Code,
centralized management is provided therefore it is the means by which a corporation acts and conducts
it business. As such, the piercing doctrine is not directed at the attribute of centralized management,
because in most instances, investors in a corporation hand the management of the business of the
corporation to professionals. To do away with the central management would place the investors who
had taken no active part in the conduct of the corporation to be liable as partners with mutual agency.
2) Free transferability of assets – Shares of stock represent (1) right to profits/dividends (2) voting right
(3) contingent right which recognizes a proprietary right of a mere aliquot share in the proceeds after
dissolution and distribution of corporate assets. Therefore a stockholder is neither owner nor co-owner of
assets of a corporation. The assets of a stockholder are distinct from the assets of a corporation. The
stockholders have no control in the dispossession or acquisition of assets (only as to their voting capacity
in the management of the corporation). The stockholders however have the right to freely dispose of his
shares of stock to any and all person who may purchase it. There the corporation has no control. Applying
the piercing doctrine as to the free transferability of his assets cannot be done since jurisprudence points
out that the piercing doctrine is a remedy of last resort. If a third party claimant has a claim as to the
assets to be disposed of or acquired by a corporation can be afforded in other remedies whether it be
intra or inter corporate.
3) Limited Liability and Separate Legal Personality – Therefore it can be concluded that the piercing
doctrine is directed at the limited liability attribute of the corporation (in consonance with the separate
juridical personality attribute).The piercing doctrine in a way undermines the separate juridical personality
of a corporation allowing a party to look behind the veil of corporate fiction to remedy a claim or fraud. In
looking behind the veil, a plaintiff seeks to make somebody liable for a claim either based on tort, breach

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 of contract, etc. Since a corporation can only act through its agents; it is the same agents that are to be
held liable. Therefore the attribute of limited liability cannot be availed of in a piercing case since it is this
attribute that is undermined so as a wrong can be remedied.

CLV: In viewing the main doctrine of separate juridical personality as to the piercing doctrine, the main
doctrine actually pertains to equity. Equity refers to the part of the rights or interest an individual has in a
corporation. Equity is comprised of two main parts which is (1) enterprise and (2) assets. It is the enterprise
or the conduct of the business which in effect undermines equity. Assets are those brought in by the
stockholders during the formation of the corporation or may have been acquired during its existence. They
are inanimate objects that require human intervention to move or be used. Thus, it can be said that it is not
the assets that undermine equity which bring about piercing. When an enterprise is conducted in fraud or in
perpetuation of a wrong the equity of the corporation is undermined. Since, a corporation must act through
its agents, so the corporation being the principal, commissions these agents to act under that special
commission. If an agent acts beyond the commission of the principal (as provided under its by-laws) it is the
actor that should be held liable not the corporation, since the corporation for all of its juridical existence is still
abstract and a corporeal actor acts for it. Also a corporation cannot undermine equity, only the actors. So
when these actors undermine equity, they lose limited liability and may be held liable. Therefore, the basis of
piercing is on the enterprise not on equity or its assets. Piercing regulates the enterprise of the corporation.

 A corporation, upon coming into existence, is invested by law with a personality separate and distinct
from those persons composing it as well as from any other legal entity to which it may be related. This
separate and distinct personality is, however, merely a fiction created by law for conveyance and to
promote the ends of justice.
 One of the advantages of a corporate form of business organization is the limitation of an investor’s
liability to the amount of the investment. This feature flows from the legal theory that a corporate entity is
separate and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil
may be used only for legitimate purposes. On equitable considerations, the veil can be disregarded when
it is utilized as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate
issues; or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or
adjunct of another corporation.

SAN JUAN STRUCTURAL AND STEEL FABRICATORS v. CA

Facts: San Juan entered into an agreement with Motorich for the transfer of a parcel of land. San Juan paid
a downpayment of 100,000, balance to be paid on or before March 2, 1989. San Juan requested for the
recomputation of the balance, Motorich’s broker Linda Aduca wrote the computation. San Juan and Motorich
were supposed to meet in the office of San Juan but Motorich treasurer Mrs. Gruenberg did not appear.
Despite repeated demands and in utter disregard of its commitments had refused toe execute the Transfer
of Rights/Deed of Assignment which is necessary to transfer the certificate of title (title was transferred to
spouses Gruenberg from ACL Corporation) Defendants, president and chairman of Motorich did not sign the
agreement. Mrs. Gruenberg’s signature as treasurer is insufficient. San Juan knew of this infirmity that is why
it did not pay on time. The RTC and CA held that Mrs. Gruenberg did not have the authority as she did not
obtain the signatures of president and chairman, as such it was not ratified by the corporation.

Issue: WON the doctrine of piercing the corporate veil may be applied.

Held: The Court finds no reason to pierce the corporate veil of Respondent Motorich. Petitioner utterly failed
to establish that said corporation was formed, or that it is operated, for the purpose of shielding any alleged
fraudulent or illegal activities of its officers or stockholders, or that the said veil was used to conceal fraud,
illegality or inequity at the expense of third persons like petitioner. Veil can only be disregarded when it is
utilized as a shield to commit fraud, illegality or inequity, defeat public convenience, confuse legitimate issues
or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of
another corporation.
In Dulay, the sale of real property was contracted by the President of a close corporation with the
knowledge and acquiescence of its board of directors. In the present case, Motorich is not a close corporation
as previously discussed and the agreement was entered into by the corporate treasurer without the
knowledge of the Board of Directors. The Court is not unaware that there are exceptional cases where an
action by a director who singly is the controlling stockholder, may be considered a binding corporate act and
a board action is nothing more than a mere formality. The present case is not of them. Granting arguendo
that the corporate veil of Motorich may be pierced, said parcel of land would then be treated as conjugal

25
property of the spouses Gruenberg, because the same was acquired during the marriage. There being no
indication that said spouses who appear to have been married before the effectivity of the Family Code have
agreed to different property regime, their property relations would be governed by a conjugal partnership of
gains. Neither spouse can alienate in favor of another his interest in the partnership or in any property
belonging to it; neither spouse can ask for a partition of the properties before the partnership has been legally
dissolved.

3. Applications:
(a) Majority Equity Ownership and Interlocking Directorship: Ownership of a majority of capital stock
and the fact that majority of directors of a corporation are the directors of another corporation creates
no employer-employee relationship with the latter's employees.

DBP v NLRC
Facts: Philippine Smelter Corporation obtained a loan in 1983 from DBP to finance its iron smelting and steel
manufacturing business. To secure the loan, PSC mortgaged to DBP real properties and chattels with its
President Marcelo as co-obligor Because of this DBP became the majority stockholder of PSC with
stockholdings of P 31M out of P 60 M subscribed and paid up capital stock and took over PSC’s management.
PSC failed to pay and DBP foreclosed on the mortgaged realties and chattels. 40 alleged unpaid employees
filed a petition for involuntary insolvency in the RTC against PSC and DBP. Said employees were employed
by Olecram Mining Corp., Jose Panganiban Ice Plant and Cold Storage, Inc. all impleaded as co- respondent.
They filed another complaint with the DOLE against PSC for non-payment of salaries, 13th month pay,
incentive leave and separation pay. DBP was impleaded because the employees considered DBP as the
parent company of PSC. Since the DBP was the biggest creditor of PSC, it held majority of stock and involved
in management through Board of Directors, DBP was considered to be by the employees as their employer.
DBP was invoked absence of E-E relationship in its Answer. The labor arbiter held DBP as liable for unpaid
wages due to PSC’s foreclosure which it caused as foreclosing creditor. NLRC sustained this, hence, this
petition.

Held: DBP as foreclosing creditor could not be held liable for unpaid wages, etc. of the employees of PSC.
The fact that DBP is a majority stockholder of PSC and PSC are from DBP does not sufficiently indicate the
existence of an E-E relationship between the terminated employees of PSC and DBP. Said workers have no
cause of action against DBP and the labor arbiter does not have jurisdiction to take cognizance of said case.
Hence, ownership of a majority of capital stock and the fact the majority of directors of a corporation
are the directors of another corporation creates no E-E relationship with the latter’s employees.
- Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground for disregarding the separate corporate
personality.
- Mere substantial identity of incorporators of two corporations does not necessarily imply fraud, nor
warrant the piercing of the veil of corporate fiction. In the absence of clear and convincing evidence
to show that the corporate personalities were used to perpetuate fraud, or circumvent the law, the
corporations are to be rightly treated as distinct and separate from each other.
- Having interlocking directors, corporate officers and shareholders is not enough justification to pierce
the veil of corporate fiction in the absence of fraud or other public policy considerations.

(b) Being Corporate Officer: Being an officer or stockholder of a corporation does not by itself make one's
property also of the corporation, and vice-versa, for they are separate entities, and that shareholders are in
no legal sense the owners of corporate

property which is owned by the corporation as a distinct legal person.

- The mere fact that one is president of the corporation does not render the property he owns or
possesses the property of the corporation, since that president, as an individual, and the corporation
are separate entities.
- It is hornbook law that corporate personality is a shield against personal liability of its officers—a
corporate officer and his spouse cannot be made personally liable under a trust receipt where he
entered into and signed the contract clearly in his official capacity.

(c) Dealings Between Corporation and Stockholders:

- The fact that the majority stockholder had used his own money to pay part of the loan of the
corporation cannot be used as the basis to pierce. “It is understandable that a shareholder would want
to help his corporation and in the process, assure that his stakes in the said corporation are secured.”

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 - Use of a controlling stockholder’s initials in the corporate name is not sufficient reason to pierce the
corporate veil, since by that practice alone does it mean that the said corporation is merely a dummy
of the individual stockholder. A corporation may assume any name provided it is lawful, and there is
nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its
shareholders.
- The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a
collection case against the corporation, does not make such stockholder personally liable for the
corporate debt, since the disposing stockholder has no personal obligation to the creditor, and it is
the inherent right of the stockholder to dispose of his shares of stock anytime he so desires.
- Just because two foreign companies came from the same country and closely worked together on
certain projects would the conclusion arise that one was the conduit of the other, thus piercing the veil
of corporate fiction.
- The creation by DBP as the mother company of the three mining corporations to manage and operate
the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose their value,
does not indicate fraud or wrongdoing and will not constitute application of the piercing doctrine.
- The facts that two corporations may be sister companies, and that they may be sharing personnel
and resources, without more, is insufficient to prove that their separate corporate personalities are
being used to defeat public convenience, justify wrong, protect fraud, or defend crime. Padilla v. Court
of Appeals, 370 SCRA 208 (2001). [CLV: In past decisions, such situation would generally warrant
alter-ego piercing.]

(d) On Privileges Enjoyed: The tax exemption clause in the charter of a corporation cannot be extended to
nor enjoyed by even its controlling stockholders.

(e) Obligations and Debts: Corporate debt or credit is not the debt or credit of the stockholder nor is the
stockholder's debt or credit that of the corporation.
- A corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its
members in their individual capacity, even when the corporation is organized for the benefit of the
members.
- Stockholders have no personality to intervene in a collection case covering the loans of the
corporation since the interest of shareholders in corporate property is purely inchoate.
- The majority stockholder cannot be held personality liable for the attorney’s fees charged by a lawyer
for representing the corporation.
- Even when the foreclosure on the corporate assets was wrongful done, stockholders have no standing
to recover for themselves moral damages; otherwise, it would amount to the appropriation by, and
the distribution to, such stockholders of part of the corporation’s assets before the dissolution of the
corporation and the liquidation of its debts and liabilities.
- The obligations of a stockholder in one corporation cannot be offset from the obligation of the
stockholder in a second corporation, since the corporation has a separate juridical personality.

B. PIERCING THE VEIL OF CORPORATE FICTION:

1. Source of Incantation: The notion of corporate entity will be pierced or disregarded and the individuals
composing it will be treated as identical if the corporate entity is being used as a cloak or cover for
fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit
for the sole benefit of the stockholders.
2. Nature of Doctrine

TRADERS ROYAL BANK v COURT OF APPEALS

Facts: Filriters Guaranty Assurance Corporation (Filriters) is the registered owner of Central Bank Certificate
of Indebtedness (CBCI) with a face value of 500,000. Such was then transferred to Philippine Underwriters
Finance Corporation (Philfinance) under a Detached Assignment. Philfinance entered into a repurchase
agreement with Traders Royal Bank over the CBCI whereby TRB buys the CBCI and Philfinance will
repurchase it on April 27, 1981 for 519,361.11 Upon the default of Philfinance TRB sought to register the
CBCI in its name. CB refused to register and transfer the CBCI due to the adverse claim of Filriters. (Filriters
interjected the defense that Alfredo Banaria Senior VP of Filriters without any board resolution, knowledge or
consent of the board of directors executed the detached assignment in favor of Philfinance. Subsequently,
Alberto Fabella, Senior VP Comptroller and Pilar Jacobe Senior VP Treasury, of Filriters and of Philfinance
executed similar forms transferring the CBCI to TRB. As such the transfers were null and void.)
TRB then went to the RTC of Manila and filed for mandamus to compel CB to register. Petitioner
argued that the CBCI was a negotiable instrument and that it was a holder in due course. It also contended

27
that Philfinance owned 90% of Filriter’s equity and the two corporations have identical officers, this
demanding the application of the doctrine of piecing the veil of corporate fiction as to give validity to the
transfer of the CBCI.

Issue: WON the doctrine of piercing the veil of corporate fiction applicable in this case.
Held: The CBCI is not a negotiable instrument because it lacks the words of negotiability. It is payable only
to Filriters and the transfer by a non-owner i.e. Philfinance, to TRB should have put the latter on guard as to
the title of Philfinance to dispose of the CBCI. Also the assignment of Filriters toPhilfinance was fictitious as
the same is without consideration and was contrary to the rules of CB Circular 70 which provides that any
assignment shall not be valid unless made by the registered owner in person or by a duly authorized
representative in writing. Philfinance merely borrowed the CBCI from Filriters a sister corporation to
guarantee financing corporations.
The doctrine of piecing the corporate veil is an equitable remedy which may only be awarded in cases
when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime
or where a corporation is a mere alter ego or business conduit of a person. It requires the court to see through
the protective shroud which exempts its stockholders from liabilities that ordinarily, they could be subject to
or distinguishes one corporation from a seemingly separate one, were it not for the existing corporate fiction.
The court must be sure that the corporate fiction was misused.. It is the protection of innocent 3rd parties
dealing with corporate entity that the law seeks to protect by this doctrine. In this case, other than the
allegation that Filriters is 90% owned by Philfinance and the identity of one shall be maintained as to the
other, there is nothing else which could lead the court under the circumstances to disregard their separate
corporate personalities. There is no showing that TRB was defrauded at all when it acquired the subject
certificate of indebtedness from Philfinance.
The fact that Philfinance owns a majority share in Filriters is not by itself a ground to disregard their
independent corporate entities. In Liddel & Co. Inc. v. CIR mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a corporation is not itself a sufficient reason to
disregard the fiction of separate corporate personalities.
TRB being a commercial bank which deals with corporate entities with circumstances showing that
the agents are acting in excess of corporate authority may not hold the corporation liable. This is only fair as
everyone must in the exercise of his rights and in the performance of his duties, act with justice, give everyone
his due and observe honesty and good faith.
When the legal fiction of separate corporate personality is abused, such as when the same is used
for fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate veil.
Piercing the veil of corporation fiction is warranted only in cases when the separate legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend crime, such that in the case of two
corporations, the law will regard the corporation as merged into one.
The legal fiction of separate corporate existence is not at all times invincible and the same may be
pierced when employed as a means to perpetrate a fraud, confuse legitimate issues, or used as a vehicle to
promote unfair objectives or to shield an otherwise blatant violation of the prohibition against forum-shopping.
While it is settled that the piercing of the corporate veil has to be done with caution, this corporate fiction may
be disregarded when necessary in the interest of justice.
The nature of the piercing doctrine is to disregard the separate juridical personality of a corporation
and to hold the actors or the stockholders of the corporation liable for a wrong committed or a liability avoided.
In our lessons in corporation law, we distinguish the cause of the piercing because it would explain of piercing
is properly done. The Supreme Court does not go into an explanation or direct attribution as to cause of the
piercing which at times cause confusion, so to clarify matters we classify the piercing case into three namely:
(1) fraud (2) alter ego and (3) remedy.
In the cases of fraud, the piercing is done because there is a wrong committed. Therefore, a person
behind the wrong must be held liable which in a corporation are the directors, since the corporation acts
through them. A piercing of the corporate veil in fraud cases is for the purpose of making the directors directly
liable. In fraud cases, the SC looks into the circumstances of the case searching for elements of malice or
evil motive. An absence of such an evil motive, the courts will not allow piercing. An example would be the
case of TRB v. CA where the Court did not allow piercing because there was no injury caused. Also in the
Umali case, the court did not allow piercing because the main intent was to annul a real estate mortgage
under an allegation of fraud and not to hold the Directors liable. In both cases, piecing was not the proper
remedy, even if fraud was actually alleged because the fraud committed was not attributed directly to the acts
of the agents of the corporation.
In alter ego cases, the allegation does not go into fraud or malicious intent but a disrespect for the
corporate fiction. Here, the corporation is being used as a conduit or front for the activities of a person,
whether natural or juridical, in order to avoid liability or gain advantage over another without really employing

28
fraud. Here, if piercing is allowed then the corporate existence of the conduit corporation is disregarded and
the person or corporation behind the corporation shall be considered as one and the liability of one is the
liability of the other. The main intent here is not to make the board of directors of the conduit corporation liable
but to make the corporation behind the existence of the conduit liable. It is the objective of the Corporation
Code to foster public convenience in sanctioning the creation of a corporation not as a means or private
convenience where it is to be used by other corporations or individuals as a means to circumvent liability or
cause a disruption of normal business practice in dealing with corporations.
Equity subdivision is the catch-all subdivision. If not fraud or alter ego, the court may grant piercing
as an equitable remedy, but such is usually resorted to as a reason in consonance with fraud or alter ego
cases. As such it is of purely judicial discretion.
The three cases may appear together in one application:

FRAUD – to prevent wrong

PIERCING DOCTRINE ALTER EGO – disrespect for the corporate fiction and to defeat public
convenience

EQUITY – to do justice
The application of the doctrine to a particular case does not deny the corporation of legal personality
for any and all purposes, but only for the particular transaction or instance for which such doctrine was
applied.
(a) Equitable Remedy: The doctrine of piercing the corporate veil is an equitable doctrine developed to
address situations where the separate corporate personality of a corporation is abused or used for
wrongful purposes.

(b) Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not available when
other remedies are still available.

UMALI v. COURT OF APPEALS

Facts: The Castillo family is the owner of a parcel of land which was given as security for a loan from the
DBP. For failure to pay the amortization, foreclosure of the property was initiated. This was made known to
Santiago Rivera, the nephew of plaintiff Mauricia Meer vda. De Castillo and president of Slobec Realty Dev.
Corp. Rivera proposed to them the conversion into a subdivision lot of the four parcels of land adjacent to the
mortgaged property to raise the money. The Castillos agreed so a MOA was executed between Slobec
represented by Rivera and the Castillos. Rivera obliged himself to pay the Castillos P70T after the execution
of the contract and P400T after the property had been converted into a subdivision. Rivera armed with the
agreement approached Cervantes, president of Bormaheco and bought a Caterpillar Tractor with P50T down
payment and the balance of P180T payable in installments. Slobec through Rivera executed in favor of
Bormaheco a chattel mortgage over the said equipment as security for the unpaid balance. As further
security, Slobec obtained through the Insurance Corporation of the Philippines a Surety Bond in favor of
Counter-Guaranty with REM executed by Rivera as president of Slobec and the Castillos as mortgagors and
ICP as mortgagee. The Caterpillar Tractorwas delivered to Slobec.
Meanwhile for violation of the terms and the conditions of the Counter-Guaranty Agreement, the
properties of the Castillos was foreclosed by ICP. As the highest bidder, a Certificate of Sale was issued in
its favor and TCTs over the parcels of land were issued by the Register of Deeds in favor of ICP. The
mortgagors had one year from the registration of the sale to redeem the property but they failed to do so. ICP
consolidated its ownership over the parcels of land. Later on ICP sold to Philippine Machinery Parts Mfg. Co.
the parcels of land and by virtue of said sale, PM transferred unto itself the title of the lots. PM parts through
its President, Cervantes sent a letter to the Castillos to vacate the property. The Castillos refused to do so.
Subsequently, Umali the administratix of the properties of Castillos filed an action for annulment of titles.
They countered that all the transaction starting from the Agreement of Counter-Guaranty with REM are void
for being entered into in fraud. They seek to pierce the veil of corporate entity of Bormaheco, ICP and PM
Parts alleging that these corporations employed fraud in causing the foreclosure and subsequent sale of their
land. The lower court ruled in favor of Umali. This was reversed by the CA.

Held: The SC is not convinced that the contract entered into by the parties are fraudulent.
Under the doctrine of piecing the veil of corporate entity, when valid ground exists , the following
effects would be produced: (1) legal fiction that a corporation is an entity with a juridical personality separate
and distinct from its members or stockholders may be disregarded (2) in such cases, the corporation will be
considered as a mere association of person (3) the members or stockholders of the corporation will be

29
considered as the corporation, making them liable directly. It is only applicable when corporate fiction is: (1)
used to defeat public convenience, justify wrong, protect fraud, or defend crime (2) made as a shield to
confuse legitimate issued (3) where a corporation is the mere alter ego or business conduit of a person (4)
where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality., agency , conduit or adjunct of another corporation.
The SC is of the opinion that piecing the veil is not the proper remedy in order that the foreclosure
proceedings may be declared a nullity under the circumstances in the case at bar. Petitioners are merely
seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained without having to
disregard the aforesaid corporate fiction attaching to the respondent corporations. Petitioners also fail to
establish by clear and convincing evidence that private respondents were purposely formed and operated,
with the sole intention of defrauding the latter. The facts showed that the surety of ICP is good only for 12
months therefore the surety had already expired. The failure of ICP to give notice renders ICP to have no
right to foreclosure. In this case, piercing need not be resorted to.

Q: Why is Umali seeking to pierce the corporate entity?

A: Umali is seeking to have the veil pierced because it would have shown that the contracts entered into
were fictitious and simulated, there being a fraudulent intent on the part of Bormaheco, ICP & PM parts
to acquire the property of Umali through the foreclosure of the mortgage by ICP. However, the court
belied such allegation because the mere fact that the business of two or more corporations are
interrelated is not a justification for disregarding their separate personalities, absent a sufficient showing
that the corporate entity was purposely used as a shield to defraud creditors and third persons of their
rights.

Q: Why are we studying Umali?

A: The allegations made by Umali were based on fraud and yet the main objective of the suit was to annul
the foreclosure of the mortgage. The Court found no reason to pierce since the main objective was not in
consonance with the remedy of piercing in a fraud case would do, which was to hold the Board of Directors
liable. Piercing is not allowed unless the remedy sought is to make the officer or another corporation
pecuniary liable for corporate debts.

Q: What if it was based on alter ego?

A: The probative factor show that no alter ego existed since there was no disrespect of the corporate fiction,
the corporations each having its own way of conducting business. Even if it may be that they compliment
one another in their business conduct, it does not form enough basis for their circumvention of any liability.

(c) Purpose of Piercing: Piercing is not allowed unless the remedy sought is to make the officer or
another corporation pecuniarily liable for corporate debts (?).

INDOPHIL TEXTILE MILL WORKERS UNION v CALICA

Facts: Indophil Union is a legitimate labor organization duly registered with the DOLE and the exclusive
bargaining unit of all rank and file employees of Indophil Textile Mills. On April 1987, the Union and Indophil
excecuted a CBA effective April 1, 1987 to March 31, 1990. On November 1987, Indophil Acrylic was formed
and registered with the SEC. In 1998, Acrylic became international and hired workers according to its criteria
and standards. Sometime in July 1989, the workers of Acrylic unionize and a duly certified CBA was executed.
In 1990, the Union claimed that the plant facilities built and set up by Acyrlic should be considered as an
extension or expansion of Indophil pursuant to Sec. 1(c) of Art.1 of the CBA to wit: This agreement shall apply
to all companies, facilities, and installations and to any extension and expansion thereat. The union sough
that Acrylic be considered part of the bargaining unit.
Their contention is that the articles of incorporation of the two corporation establish that the two entities are
engaged in the same kind of business, which is the manufacture and sale of yarns of various counts and
kinds and of other materials of kindred character or nature. Furthermore, they emphasize that the two
corporations have practically the same incorporators, directors and officers. Also the two corporation have
their facilities in the same compound. That many of Indophil’s own machineries such as dyeing machines,
reeler, broiler, were transferred to and are now being used by the Acrylic plant. That services of a number of
units, departments or sections of private respondents are provided by Acrylic and that the employees of
Indophil are the same persons manning and servicing the units of Acrylic. Both parties submitted the issue
to LA Calica. Calica ruled for Indophil and stated that Acrylic is not extension of Indophil an hence their CBA
does not extend to the employees of Acrylic.

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Issue: WON Acrylic is a separate and distinct entity from Indophil for purposes of union representation. WON
the operations in Acrylic are an extension or expansion of Indophil.

Held: Acrylic is not an alter ego or an adjunct or a business conduit of Indophil because it has a separate
legitimate business purpose. Indophil engages in the manufacture of yarns while Acrylic is to manufacture,
buy, sell at wholesale basis, barter, import, export and otherwise deal in various kinds of yarns. Two
corporations cannot be treated as single bargaining unit just because they have related businesses.
The Union seeks to pierce the veil of Acrylic alleging that the corporation is a device to evade the
application of the CBA. However the CA held that said doctrine is only used on the existence of valid grounds.
In the case at bar, the fact that the business of Indophil and Acrylic are related that sometimes the employees
of Indophil are the same persons manning and providing for auxiliary services to the units of Acrylic, and that
the physical plants, offices, and facilities are situated in the same compound. It is the SC’s considered opinion
that these facts are not sufficient to justify the piercing of the corporation veil of Acrylic. Furthermore, the legal
entity is disregarded only if sought to hold the officers and stockholders liable. In the instant case, the Union
does not seek relief from Indophil.

LA CAMPANA COFFEE FACTORY v KAISAHAN NG MANGGAGAWA

Facts: Tan Tong since 1932 has been engaged in the buying and selling gawgaw under the trade name La
Campana Gawgaw Packing. In 1950, Tan Tong and members of his family organized the family corporation.
La Campana Coffee Factory with its principal office located in Gawgaw Packing. Prior to said information,
Tan Tong entered into a CBA with the labor union of La Campana Gawgaw. Later on, his employees formed
Kaisahan ng mga Manggagawa ng La Campana with an authorization from the DOLE to become an affiliate
of the larger union.
Kaisahan with 66 members presented a demand for higher wages and more privileges to La Campana
Starch and Coffee Factory. The demand was not granted and the DOLE certified the issue to the CIR. La
Campana filed a motion to dismiss alleging that the action was directed against two different entities with
distinct personalities. This was denied, hence this petition.

Held: La Compana Gawgaw and La Campana Factory are operating under one single management or as
one business though with two trade names. The coffee factory is a corporation and by legal fiction, an entity
separate and apart from the persons composing it namely, Tan Tong and his family. However, the concept
of separate corporate personality cannot be extended to a point beyond reason and policy when invoked in
support of an end subversive of this policy and will be disregarded by the courts.
A subsidiary company which is created merely as an agent for the latter may sometimes be regarded
as identical with the parent corporation especially if the stockholders or officers of the two corporations are
substantially the same or their systems of operation unified. The facts showed that they had one
management, one payroll prepared by the same person, laborers were interchangeable, there is only one
entity as shown by the signboard ad in trucks, packages and delivery forms and the same place of business.
The attempt to make the two factories appear as two separate businesses when in reality they are
but one, is but a device to defeat the ends of the law and should not be permitted to prevail.

WHY PIERCE? So that La Campana cannot evade the jurisdiction of CIR since La Campana Gawgaw has
only 14 employees and only 5 are members of Kaisahan.

CONTRASTING THE TWO CASES

Q: Why did the court not also pierce Indophil Acrylic and declare that it is a mere alter ego of Indophil when
in fact the same circumstances in La Campana exist?
A: It may seem that the facts and circumstances are nearly the same between the two cases but the remedies
are different. La Campana sought the protection of separate juridical personality so as it may not fall
under the jurisdiction of the CIR, there being a clear intent to be excused from the coverage of Labor
Laws which conferred the CIR’s jurisdiction over the issue at hand. Although there was no intent to
defraud, the creation of La Campana Coffee Factory was meant to excuse itself from CIR jurisdiction.
However, in Indophil the facts of the case show that there was no clear showing that Indophil meant to
use Acrylic as a means of circumventing Labor Laws. Altough the CBA between Indophil and its union
provides that any expansion of Indophil’s operations would also be covered by the CBA, Acrylic is an
altogether different business. What showed that there was no intent by Indophil or Acrylic to circumvent
labor laws is when Acrylic entered into a CBA with its own employees. There was clear independence of

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 action between the relation of Indophil and Acrylic as to their respective employees, each constituting its
own bargaining unit.

Q: Could Indophil be considered as have superseded La Campana?

A: CLV pointed out that were no mention of La Campana in the ruling in Indophil whether in support or in
contravention of this doctrine. It can be seen that actually there are no points where Indophil had
substantially changed the ruling in La Campana. La Campana, in fact is being cited in cases decided by
the SC after Indophil, in the same way that Indophil continues to be cited. The criteria that when it is
established that between two corporations which have one set of managers or board of directors; that
there is a common stock ownership of both corporations; similarity of keeping corporate books and in
conducting their businesses are mere probative factors that are to be considered when the corporate
mask may be lifted and the corporate veil pierced. It does not mean that if these factors exist, piercing is
automatically required. There is for one no hard and fast rule that can be laid down. So that in La
Campana, the factors weighed heavily for piercing and in Indophil, against piercing.
Piercing is not available when personal obligations of an individual are to be enforced against the
corporation (?)
“The rationale behind piercing a corporation’s identity in a given case is to remove the barrier
between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of
those who use the corporate personality as a shield for undertaking certain proscribed activities. However,
in the case at bar, instead of holding certain individuals or person responsible for an alleged corporate
act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer
for the personal liability of certain individual directors, officers and incorporators concerned. Hence, it
appears to us that the doctrine has been turned upside down because of its erroneous invocation.”
Piercing doctrine is meant to prevent fraud, and cannot be employed when the net result would
be to perpetrate fraud or a wrong.
The theory of corporate entity was not meant to promote unfair objectives or otherwise, nor to
shield them.

(d) Basis Must Be Clear Evidence: To disregard the separate juridical personality of a corporation, it is
elementary that the wrongdoing cannot be presumed and must be clearly and convincingly established. The
organization of the corporation at the time when the relationship between the landowner and the developer
were still cordial cannot be used as a basis to hold the corporation liable later on for the obligations of the
landowner to the developer under the mere allegation that the corporation is being used to evade the
performance of obligation by one of its major stockholders.
The mere assertion by a Filipino litigant against the existence of a “tandem” between two Japanese
corporations cannot be the basis for piercing, which can only be applied by showing wrongdoing by clear and
convincing evidence.
To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and
convincingly established. It cannot be presumed. In this case, the Court finds that the Remington failed to
discharge its burden of proving bad faith on the part of Marinduque Mining and its transferees in the mortgage
and foreclosure of the subject properties to justify the piercing of the corporate veil.
The party seeking for the piercing of the corporate veil has the burden of presenting clear and
convincing evidence to justify the setting aside of the separate corporate personality rule.
Application of the doctrine of piercing the corporate veil should be done with caution. A court should
be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to
such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The
wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that
was never unintended may result from an erroneous application.

(e) Not Applicable to Theorizing: Piercing of the veil of corporate fiction is not allowed when it is resorted
under a theory of co-ownership to justify continued use and possession by stockholders of corporate
properties.
- The piercing doctrine is an equitable remedy available only to persons outside the corporation. It cannot
be availed of stockholders within the corporation forming part of the corporation. In comparison, CLV uses
the Story of the Wall. This wall is the main doctrine, designed both to protect the stockholders by virtue
of the attribute of limited liability and to hide from prying eyes the inner workings of the corporation.
Stockholders are inside these walls. Piercing the veil of corporate fiction is like a battering ram that creates
a hole through this wall to allow third persons to look into the corporation to see if there is a wrong
committed inside those walls. A stockholder being inside the fort are afforded other remedies, they have
intra-corporate remedies to avail of.

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- The piercing doctrine cannot be availed of to dislodge from SEC’s jurisdiction a petition for suspension of
payments filed under P.D. 902-A, on the ground that the petitioning individuals should be treated as the
real petitioners to the exclusion of the petitioning corporate debtor. “The doctrine of piercing the veil of
corporate fiction heavily relied upon by the petitioner is entirely misplaced, as said doctrine only applies
when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend
crime.”

(f) Applicable to “Third-Parties”:

- That respondents are not stockholders of the sister corporations does not make them non-parties to
this case, since it is alleged that the sister corporations are mere alter egos of the directors-petitioners,
and that the sister corporations acquired the properties sought to be reconveyed to FGSRC in
violation of directors-petitioners’ fiduciary duty to FGSRC. The notion of corporate entity will be
pierced and the individuals composing it will be treated as identical if the corporate entity is being
used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an
adjunct, or a business conduit for the sole benefit of the stockholders. a Gochan v. Young, 354 SCRA
207 (2001).

(g) Piercing is a power belonging to the court and cannot be assumed improvidently by a sheriff
(?).

3. Consequences and Types of Piercing Cases:

(a) Application of the doctrine to a particular case does not deny the corporation of legal personality for
any and all purposes, but only for the particular transaction or instance, or the particular obligation for
which the doctrine was applied.

(b) Classification of Piercing Cases:

- Rundown on Piercing Application: This Court pierced the corporate veil to ward off a judgment
credit, to avoid inclusion of corporate assets as part of the estate of the decedent, to escape
liability arising for a debt, or to perpetuate fraud and/or confuse legitimate issues either to promote
or to shield unfair objectives to cover up an otherwise blatant violation of the prohibition against
forum shopping. Only is these and similar instances may the veil be pierced and disregarded.
(i) Fraud Piercing: When corporate entity used to commit fraud or do a wrong
(ii) Alter-ego Piercing: When corporate entity merely a farce since the corporation is merely the
alter ego, business conduit, or instrumentality of a person or another entity
(iii) Equity Cases: When piercing the corporate fiction is necessary to achieve justice or equity.
- The three cases may appear together in one application.

4. Fraud Cases:
- When the legal fiction of the separate corporate personality is abused, such as when the same is
used for fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate veil.
- In accordance with the foregoing rule, this Court has disregarded the separate
- personality of the corporation were the corporate entity was used to escape liability to third parties. In
this case, however, we do not find any fraud on the part of the Marinduque Mining and its transferees
to warrant the piercing of the corporate veil.

a) Acts by Controlling Shareholder: Where a stockholder, who has absolute control over the business
and affairs of the corporation, entered into a contract with another corporation through fraud and false
representations, such stockholder shall be liable soidarily with co-defendant corporation even when
the contract sued upon was entered into on behalf of the corporation.
- CLV: As a general rule, an agent acting within the scope of his authority cannot be held liable for
acts done in behalf of the principal. However, when a wrong done by a corporation is through a
person in its behalf, piercing makes both of them liable. In fact, an agents who commits a crime
or fraud can be held liable despite the agency relation.
- Where the corporation is used as a means to appropriate a property by fraud which property was
later resold to the controlling stockholders, then piercing should be allowed.

(b) Avoidance of Taxes: The plea to pierce the veil of corporate fiction on the allegation that the corporations
true purpose is to avoid payment by the incorporating spouses of the estate taxes on the properties
transferred to the corporations: “With regard to their claim that Ellice and Margo were meant to be used
as mere tools for the avoidance of estate taxes, suffice it to say that the legal right of a taxpayer to reduce

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 the amount of what otherwise could be his taxes or altogether avoid them, by means which the law
permits, cannot be doubted.”

(c) Avoidance of Contractual or Civil Liabilities: One cannot evade civil liability by incorporating properties
or the business.

Q: Why should a case be classified as a fraud case, an alter ego case, etc.?
A: In fraud cases, it is necessary that the petitioners seek to enforce the claim against the stockholders or
corporate officers. Since, in fraud cases only one act of fraud is necessary to hold them liable whereas in
an alter ego case, a series of transaction has to proven before they may be held liable.
When used to avoid a contractual commitment against non-competition.

(e) Avoiding Legal Restrictions: The corporate veil cannot be used to shield an otherwise blatant violation of
the prohibition against forum-shopping. Shareholders, whether suing as the majority in direct actions or as
the minority in a derivative suit, cannot be allowed to trifle with court processes, particularly where the
corporation itself has not been remiss in vigorously prosecuting or defending corporate causes and in using
and applying remedies available to it.

(d) Parent-Subsidiary Relations; Affiliates:

Q: Why is there an inordinate showing of the alter ego elements?

A: In cases of parent-subsidiary relations, it is necessary that the factual circumstances be considered in
order to distinguish between a case of fraud or alter ego. There may be an inordinate showing of alter ego
elements but that does not necessarily make it an alter ego case. Therefore, alter ego in fraud cases must
be distinguished from pure alter ego. In fraud cases, the alter ego concept pertains to employing the
corporation even for a single transaction to do evil while in pure alter ego cases, the courts go into systematic
findings of utter disregard and disrespect of the separate juridical personality of the corporation.

(e) Guiding Principles in Fraud Cases:

Why is there inordinate showing of alter-ego elements?

• There must have been fraud or an evil motive in the affected transaction, and the mere proof of control
of the corporation by itself would not authorize piercing; and
• The main action should seek for the enforcement of pecuniary claims pertaining to the corporation
against corporate officers or stockholders.

5. Alter-Ego Cases:

(a) Factual Basis: The question of whether a corporation is a mere alter ego is a purely one of fact, and the
burden is on the party who alleges it.

(b) Using Corporation as Conduit or Alter Ego:

 Where the capital stock is owned by one person and it functions only for the benefit of such individual
owner, the corporation and the individual should be deemed the same.
 When corporation is merely an adjunct, business conduit or alter ego of another corporation, the fiction
of separate and distinct corporation entities should be disregarded.
 Where a debtor registers his residence to a family corporation in exchange of shares of stock and
continues to live therein, then the separate juridical personality may be disregarded.
 Neither has it been alleged or proven that Merryland is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency conduit or adjunct of Cardale. Even
assuming that the businesses of Cardale and Merryland are interrelated, this alone is not justification
for disregarding their separate personalities, absent any showing that Merryland was purposely used
as a shield to defraud creditors and third persons of their rights.
 Use of nominees to man the corporation for the benefit of the controlling stockholder.

(c) Mixing-up Operations; Disrespect to the Corporate Entity:

 Employment of same workers; single place of business, etc., may indicate alter ego situation.
 Where two business enterprises are owned, conducted, and controlled by the same parties, both law
and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that
two corporations are distinct entities and treat them as identical.

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  Where corporate fiction was used to perpetrate social injustice or as a vehicle to evade obligations or
confuse the legitimate issues (as in this case where the actions of management of the two
corporations created confusion as to the proper employer of claimants), it would be discarded and the
two corporations would be merged as one.
 Mixing of personal accounts with corporate bank deposit accounts.

(d) Avoidance of taxes:

YUTIVO & SONS INC. v CTA

Facts: Yutivo is a domestic corporation engaged in the importation and sale of hardware supplies and
equipment. It bought a number of cars and trucks from General Motors Overseas Corporation. GM paid sales
tax on original sales on the basis of its selling price to Yutivo. Yutivo paid no further tax on its sales to the
public. Southern Motors was then organized to engage in the business of selling cars, trucks, and spare parts
with capital stock of 10,000 shares, 2,500 of which were subscribed in equal proportion by the children of
Yutivo’s incorporators. Under this set-up, Yutivo would purchase the cars and tucks from GM then sell the
same to SM which in turn sold them to the general public. Then GM withdrew its operations from the
Philippines. Yutivo took over the importation of trucks and cars. It likewise continued to have the previous
arrangement of selling exclusively to SM which in turn paid no such sales tax on its sales to the general
public. The CIR made an assessment upon Yutivo and demanded a sum representing deficiency sales tax
plus surcharges claiming that the taxable sales were the retail sales should be between SM to the general
public and not the sale at wholesale made by Yutivo to SM since the two were one and the same corporation,
SM being a mere subsidiary of Yutivo. CTA affirmed such a ruling and further stated that there was no
legitimate purpose in the organization of SM – apparently organized to evade the payment of taxes – and
that it was owned and controlled by Yutivo and is a mere branch, adjunct, conduit, instrumentality or alter
ego of Yutivo.

Issue: WON SM is a mere alter ego of Yutivo meant to defraud government of lawful tax revenues?

Held: SM was not organized for the purpose of defrauding the government of lawful tax revenues because:
(1) The intention to minimize taxes as in tax evasion when used in the context of fraud, must be proven to
exist by clear and convincing evidence amounting to more than the mere preponderance of evidence.
The evidence of the collector falls short of such standard.
(2) SM was organized at a time when there was not yet tax to evade, when GM was still the importer and
was the one paying the sales tax.
(3) The transactions between Yutivo and SM were and have always been in the open, embodied in private
and public documents, constantly subject to inspection by tax authorities.
(4) A taxpayer has the legal right to decrease the amount of what otherwise would be his taxes altogether
avoid them by means which the law permits.
(5) However, SM was actually owned and controlled by Yutivo to make it a mere subsidiary or branch of the
latter. SM was organized by the leading stockholders of Yutivo. Yutivo was at all times in control if the
majority stock of SM. The principal officers of both corporations are identical. Thus, the business, financial
and management policies of both corporations could be directed towards common ends. The funds of
SM are directly remitted to Yutivo and subject to withdrawal only of Yutivo, SM’s resources being under
Yutivo’s control. The accounting system maintained by Yutivo shows that it maintained a high degree of
control over SM accounts. All transactions between Yutivo and SM are recorded and effected by mere
debit or credit entries against the reciprocal account maintained in their respective books of accounts and
indicate the dependency of SM as a branch of Yutivo
(6) Thus, SM being a mere instrumentality of Yutivo, the CTA correctly disregarded the technical defense of
separate corporate entity in order to arrive at the true liability of Yutivo.

Q: Can tax avoidance not be considered as a crime thus perpetuated in fraud rather than an alter ego case?

A: The Court had in this case ruled as to the legitimacy of a corporation to act as to seek means to decrease
its tax liability. The difference between Yutivo and Tan Boon Kong is that in the latter, the court found evidence
that Tan Boon Kong acted beyond the scope of his authority. In the former, evidence was seen to be
insufficient as to establish a willful desire to evade taxes.

(e) Thinly-capitalized corporations:

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 - The fact that a corporation has no adequate capital enough basis for piercing. Such pronouncement
limits the advantage of creating a corporation. For example, in cases where leveraging is undertaken
which is considered as a legitimate business practice.

(f) Parent-subsidiary; Affiliated Companies:

- The person who invokes the doctrine must always be the injured party.
- Absence of proof that control over a corporation is being used by a mother company to commit
fraud or wrong, there would be no basis to disregard their separate juridical personalities.
- If used to perform legitimate functions, a subsidiary’s separate existence shall be respected, and the
liability of the parent corporation as well as the subsidiary will be confined to those arising in their
respective businesses. Even when the parent corporation agreed to the terms to support a standby
credit agreement in favor of the subsidiary, does not mean that its personality has merged with that
of the subsidiary.

(g) Summary of Probative Factors:

CONCEPT BUILDERS Inc. v NLRC

Facts: Concept Builders is engaged in the construction business. Private respondents are employed by the
company as laborers, carpenters and riggers. In November of 1981, private respondents were served
individual notices of termination by the company. It stated that their contract had already expired. The NLRC
discovered that the project for which they were hired was not yet even finished. In addition to this, Concept
had to hire subcontractors whose works are the same as private respondents. A writ of execution was issued
which was partially satisfied through the garnishment of money from MWSS which is a debtor of Concept
and the balance was to be collected from Concept directly. But the sheriff reported that when the writ was to
be served the guard on duty refused it on the ground that Concept no longer owned the premises and was
now occupied by Hydro Pipes, which had the same Board of Directors as Concept.

Held: The veil may be pierced when it its just the alter ego of a person of another corporation.
The conditions under which the juridical entity may be disregarded vary according to the peculiar facts
and circumstances of each case. No hard and fast rule can be laid down, but there are some probative factors
of identity that will justify the application of the doctrine.

Summary probative factors:

1. stock membership by one ore common ownership of both
2. identity of directors and officers (management)
3. manner of keeping corporate books and records (management)
4. methods of conducting business (management).

- While petitioners claimed that it ceased operations in 1986, it filed an Information Sheet with the SEC in
1987 stating that its office address is their old address. Both information sheets were filed by Virgilio
Casino, the same corporate secretary. They had the same President, Board of Directors and substantially
the same subscribers.

(h) Guiding Principles in Alter-Ego Cases:

• Doctrine applies even in the absence of evil intent, because of the direct violation of a central
corporate law principle of separating ownership from management;
- Doctrine in such cased is based on estoppel: if stockholders do not respect the separate entity, others
cannot also be expected to be bound by the separate juridical entity;
• Piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced
against the stockholders or officers of the corporation.

(i) Distinction Between Fraud Piercing and Alter-ego Piercing:

6. Equity Cases:
(a) When used to confuse legitimate issues.
(b) When used to raise technicalities.

7. Due Process Clause

(a) Need to bring a new case against the officer.

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  A suit against individual shareholders in a corporation is not a suit against the corporation. Failure to
implead the corporations as defendants and merely annexing a list of such corporations to the
complaints is a violation of due process for it would in effect be disregarding their distinct and separate
personality without a hearing.
 Although both lower courts found sufficient basis for the conclusion that PKA and Phoenix Omega
were one and the same, and the former is merely a conduit of the other the Supreme Court held void
the application of a writ of execution on a judgment held only against PKA, since the RTC obtained
no jurisdiction over the person of Phoenix Omega which was never summoned as formal party to the
case. The general principle is that no person shall be affected by any proceedings to which he is a
stranger, and strangers to a case are not bound by the judgment rendered by the court.

(b) When corporate officers are sued in their official capacity when the corporation was not made a party,
the corporation is not denied due process.
(c) Provided that evidential basis has been adduced during trial to apply the piercing doctrine.

V. CLASSIFICATIONS OF CORPORATIONS
1. In Relation to the State:
a) Public Corporation (Sec. 3, Act No. 1459).
- one formed or organized for the government or a portion of the state
- its purpose is for general good and welfare
b) Quasi-public Corporation.
- marriage of both a public and a private corp.
- it is granted the same powers as a private corp. but they have no incorporators, SH’s or
members
- example: A water district, although established as a corporation, it was established for the
greater good and with no stockholders. They are also placed under the jurisdiction of the
LWUA not the SEC
c) Private Corporation (Sec. 3, Act 1459).
- one formed for some private purpose, benefit or end.

 Government’s majority shares does not make an entity a public corporation.

 A corporation is created by operation of law under the Corporation Code while a government
corporation is normally created by special law referred to often as a charter.
 The test to determine whether a corporation is government owned or controlled, or private in nature
is simple. Is it created by its own charter for the exercise of a public function, or by incorporation under
the general corporation law? Those with special charters are government corporations subject to its
provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are
compulsory members of the GSIS.
 While public benefit and public welfare may be attributable to the operation of the Bases Conversion
and Development Authority (BCDA), yet it is certain that the functions it performs are basically
proprietary in nature—the promotion of economic and social development of Central Luzon,
particularly, and the country’s goal for enhancement. Therefore, the rule that prescription does not
run against the State will not apply to BCDA, it being said that when title of the Republic has been
divested, its grantees, although artificial bodies of its own creation, are in the same category as
ordinary persons.
 Although Boy Scouts of the Philippines does not receive any monetary or financial subsidy from the
Government, and its funds and assets are not considered government in nature and not subject to
audit by the COA, the fact that it received a special charter from the government, that its governing
board are appointed by the Government, and that its purpose are of public character, for they pertain
to the educational, civic and social development of the youth which constitute a very substantial and
important part of the nation, it is not a public corporation in the same sense that municipal corporation
or local governments are public corporation since its does not govern a portion of the state, but it also
does not have proprietary functions in the same sense that the functions or activities of government-
owned or controlled corporations, is may still be considered as such, or under the 1987 Administrative
Code as an instrumentality of the Government, and it employees are subject to the Civil Service Law.
 But being a GOCC makes it liable for laws and provisions applicable to the Government or its entities
and subject to the control of the Government.
 Beyond cavil, a GOCC has a personality of its own, distinct and separate from that of the government,
and the intervention in a transaction of the Office of the President through the Executive Secretary

37
 does not change the independent existence of a government entity as it deals with another
government entity.
 The doctrine that employees of GOCCs, whether created by special law or formed as subsidiaries
under the general corporation law are governed by the Civil Service Law and not by the Labor Code,
has been supplanted by the 1987 Constitution. The present doctrine in determining whether a GOCC
is subject to the Civil Service Law is the manner of its creation, such that government corporations
created by special charter are subject the Civil Service Law, while those incorporated under the
general corporation law are governed by the Labor Code.
 Section 31 of Corporation Code (Liability of Directors and Officers) is applicable to corporations which
have been organized by special charters since Sec. 4 of Corporation Code renders the provisions
supplementarily applicable to all corporations, including those with special or individual charters, such
as cooperatives organized under P.D. 269, so long as those provisions are not inconsistent with such
charters.
 Water districts can validly exists as corporate entities under PD 198, and provided they are
government-owned or controlled, and their board of directors and other personnel are government
employees subject to civil service laws and anti-graft laws.

2. As to Place of Incorporation:
(a) Domestic Corporation - incorporated in the Philippines
(b) Foreign Corporation (Sec. 123)
- Sec. 123 Definition and rights of foreign corporations – For the purposes of this Code, a foreign
corporation is one formed, organized or existing under any laws other than those of the Philippines
and whose laws allow Filipino citizens and corporations to do business in its own country or state.
It shall have the right to do business in its own country or state. It shall have the right to transact
business in the Philippines after it shall have obtained a license to transact business in this country
in accordance with this Code and a certificate of authority from the appropriate government
authority.
- incorporated in another country and that country grants the same rights to Filipinos in terms of
doing business there; it shall have the right to transact business in the Philippines after it shall
have obtained a license to transact business in this country in accordance with this code & a
certificate of authority from the appropriate government agency (SEC license after obtaining BOI
certificate )

3. As to Purpose of Incorporation:
(a) Municipal Corporation – LGU’s
- can sue be sued without their consent ( as provided for by the LGC)
- in certain instances considered as an adjunct to the national government but has been recognized to
have a personality separate and distinct from the national government.

(b) Religious Corporation (Secs. 109 and 116)

- Section 109. Classes of religious corporations. - Religious corporations may be incorporated by one
or more persons. Such corporations may be classified into corporations sole and religious societies.

- Religious corporations shall be governed by this Chapter and by the general provisions on non-stock
corporations insofar as they may be applicable.
- Section 116. Religious societies. - Any religious society or religious order, or any diocese, synod, or
district organization of any religious denomination, sect or church, unless forbidden by the
constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it
is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a
meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the
administration of its temporalities or for the management of its affairs, properties and estate by filing
with the Securities and Exchange Commission, articles of incorporation verified by the affidavit of the
presiding elder, secretary, or clerk or other member of such religious society or religious order, or
diocese, synod, or district organization of the religious denomination, sect or church, setting forth the
following:
1. That the religious society or religious order, or diocese, synod, or district organization is a religious
organization of a religious denomination, sect or church;
2. That at least two-thirds (2/3) of its membership have given their written consent or have voted to
incorporate, at a duly convened meeting of the body;

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 3. That the incorporation of the religious society or religious order, or diocese, synod, or district
organization desiring to incorporate is not forbidden by competent authority or by the constitution,
rules, regulations or discipline of the religious denomination, sect, or church of which it forms a
part;
4. That the religious society or religious order, or diocese, synod, or district organization desires to
incorporate for the administration of its affairs, properties and estate;
5. The place where the principal office of the corporation is to be established and located, which
place must be within the Philippines; and
6. The names, nationalities, and residences of the trustees elected by the religious society or
religious order, or the diocese, synod, or district organization to serve for the first year or such
other period as may be prescribed by the laws of the religious society or religious order, or of the
diocese, synod, or district organization, the board of trustees to be not less than five (5) nor more
than fifteen (15).

- Since in matters purely ecclesiastical the decisions of the proper church tribunals are conclusive upon
the civil tribunals, then a church member who is expelled from the membership by the church authorities,
or a priest or minister who is by them deprived of his sacred office, is without remedy in the civil courts.

(c) Educational Corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)
- Section 106. Incorporation. - Educational corporations shall be governed by special laws and by the
general provisions of this Code.
- Section 107. Pre-requisites to incorporation. - Except upon favorable recommendation of the Ministry
of Education and Culture, the Securities and Exchange Commission shall not accept or approve the
articles of incorporation and by-laws of any educational institution.
- Section 108. Board of trustees. - Trustees of educational institutions organized as non-stock
corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the
number of trustees shall be in multiples of 5.

- Unless otherwise provided in the articles of incorporation on the by- laws, the board of trustees of
incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify
themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office
only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term
shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the
transaction of business. The powers and authority of trustees shall be defined in the by-laws.
- For institutions organized as stock corporations, the number and term of directors shall be governed
by the provisions on stock corporations. (169a)

(d) Charitable, Scientific or Vocational Corporations

(e) Business Corporation

4. As to Number of Members:
(a) Aggregate Corporation
(b) Corporation Sole

Section 110. Corporation sole. - For the purpose of administering and managing, as trustee, the affairs,
property and temporalities of any religious denomination, sect or church, a corporation sole may be formed
by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination,
sect or church.

Section 111. Articles of incorporation. - In order to become a corporation sole, the chief archbishop,
bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file with
the Securities and Exchange Commission articles of incorporation setting forth the following:
1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious
denomination, sect or church and that he desires to become a corporation sole;
2. That the rules, regulations and discipline of his religious denomination, sect or church are not
inconsistent with his becoming a corporation sole and do not forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with
the administration of the temporalities and the management of the affairs, estate and properties

39
 of his religious denomination, sect or church within his territorial jurisdiction, describing such
territorial jurisdiction;
4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest,
minister, rabbi of presiding elder is required to be filled, according to the rules, regulations or
discipline of the religious denomination, sect or church to which he belongs; and
5. The place where the principal office of the corporation sole is to be established and located, which
place must be within the Philippines.

- The articles of incorporation may include any other provision not contrary to law for the regulation of
the affairs of the corporation. (n)

Section 112. Submission of the articles of incorporation. - The articles of incorporation must be verified,
before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding
elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of
appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be
correct by any notary public.
From and after the filing with the Securities and Exchange Commission of the said articles of
incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the
preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become a
corporation sole and all temporalities, estate and properties of the religious denomination, sect or church
theretofore administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi or
presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit
of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums,
parsonages and cemeteries thereof. (n)

Section 113. Acquisition and alienation of property. - Any corporation sole may purchase and hold real
estate and personal property for its church, charitable, benevolent or educational purposes, and may receive
bequests or gifts for such purposes. Such corporation may sell or mortgage real property held by it by
obtaining an order for that purpose from the Court of First Instance of the province where the property is
situated upon proof made to the satisfaction of the court that notice of the application for leave to sell or
mortgage has been given by publication or otherwise in such manner and for such time as said court may
have directed, and that it is to the interest of the corporation that leave to sell or mortgage should be granted.
The application for leave to sell or mortgage must be made by petition, duly verified, by the chief archbishop,
bishop, priest, minister, rabbi or presiding elder acting as corporation sole, and may be opposed by any
member of the religious denomination, sect or church represented by the corporation sole: Provided, That in
cases where the rules, regulations and discipline of the religious denomination, sect or church, religious
society or order concerned represented by such corporation sole regulate the method of acquiring, holding,
selling and mortgaging real estate and personal property, such rules, regulations and discipline shall control,
and the intervention of the courts shall not be necessary. (159a)

Section 114. Filling of vacancies. - The successors in office of any chief archbishop, bishop, priest, minister,
rabbi or presiding elder in a corporation sole shall become the corporation sole on their accession to office
and shall be permitted to transact business as such on the filing with the Securities and Exchange
Commission of a copy of their commission, certificate of election, or letters of appointment, duly certified by
any notary public.
During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder
of any religious denomination, sect or church incorporated as a corporation sole, the person or persons
authorized and empowered by the rules, regulations or discipline of the religious denomination, sect or church
represented by the corporation sole to administer the temporalities and manage the affairs, estate and
properties of the corporation sole during the vacancy shall exercise all the powers and authority of the
corporation sole during such vacancy. (158a)
Section 115. Dissolution. - A corporation sole may be dissolved and its affairs settled voluntarily by submitting
to the Securities and Exchange Commission a verified declaration of dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation by the particular religious denomination,
sect or church;
4. The names and addresses of the persons who are to supervise the winding up of the affairs of
the corporation.

40
 Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the
corporation shall cease to carry on its operations except for the purpose of winding up its affairs.

- The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982) and Republic v. Iglesia ni Cristo, 127 SCRA
687 (1984), that a corporation sole is disqualified to acquire/hold alienable lands of the public domain,
because of the constitutional prohibition qualifying only individuals to acquire land and the provision under
the Public Land Act which applied only to Filipino citizens or natural persons, has been expressly
overturned in Director of Land v. IAC, 146 SCRA 509 (1986).3
5. As to Legal Status:
(a) De Jure Corporation
(b) De Facto Corporation (Sec. 20)

Section 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be
a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally
in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor
General in a quo warranto proceeding.

(c) Corporation by Estoppel (Sec. 21)

Section 21. Corporation by estoppel. - 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 debts, liabilities and damages incurred or
arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any
transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use
as a defense its lack of corporate personality.
On who assumes an obligation to an ostensible corporation as such, cannot resist performance
thereof on the ground that there was in fact no corporation.

Q. Why is there piercing in a de facto corporation?

A. Piercing is allowed because the intention of the law is to protect the contracts entered into by the
corporation.

6. As to Existence of Shares (Secs. 3 and 5):

Sec. 3 Classes of Corporation – Corporations formed or organized under this Code may be stock or non-
stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute
to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held
are stock corporations. All other corporations are non-stock corporations.

Sec. 5 Corporations and incorporators, stockholders and members – Corporators are those who
compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or
members mentioned in the articles of incorporation as originally forming and composing the corporation and
who are signatories thereof.
Corporators in a non-stock corporation are called stockholders or shareholders. Corporators in a non-
stock corporation are called members.

(a) Stock Corporation

(b) Non-Stock Corporation

VI. CORPORATE CONTRACT LAW

INTRODUCTION: Corporate Contract Law à contracts shaped by corporate law.

- Form v. substance à substance prevails
- In the levels of the legal relationship, corporate contract law is used to resolve issues between the different
levels – between the juridical entity level, the contract relationship level and the business entity level.

Q: Why is there a need to distinguish corporate contract law from contract law? A: There is a need to
distinguish between the two because there are certain instances where an application of corporate

41
 contract law principles are in direct conflict with contract law principles. An example would be in the
situation where a corporation is being incorporated, the corporation code in certain instances recognize
the binding effect of contracts entered into in the pre-incorporation stage. But if contract law was strictly
applied such a contract would be void since it lacks one vital element which is consent of the contracting
parties. How does a corporation that does not exist yet give consent? This is where corporate contract
law find its relevance. The conflict between the juridical entity level is reconciled with the contractual
relationship level. (DOCTRINE: to validate the contract entered into by the supposed corporation)

PROMOTER’S CONTRACT à C. BY ESTOPPEL à DE FACTO or DE JURE à DISSOLUTION

Q: In order to reach the level of corporation by estoppel, what is the essential ingredient of such doctrine?
A: When there is a representation that a corporation exists when in fact there is none and at least one party
thought that there was a corporation.

Q: Distinguish promoter’s contract principles from the corporation by estoppel doctrine?

A: In both the corporation does not exist. But in promoter’s contracts there is no misrepresentation that the
corporation does not yet exist. When the contracts are entered into by persons who in behalf of the
corporation, acknowledging that the corporation does not yet exist and is still in the process of
incorporation, you do not apply the doctrine of corporation by estoppel. It is still what one may call as the
promoter’s contract. (The moment there is no corporation and contracts are entered into under the
representation that the corporation does exist then that is the only time you apply the doctrine of
corporation by estoppel.)

1. Pre-Incorporation Contracts
(a) Who Are Promoters?

“Promoter” is 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. (Sec. 3.10, Securities Regulation
Code [R.A. 8799])

CLV: The definition of promoter is important to determine the liability for promoter’s contract. Before you can
make a promoter liable, you must be able to determine who is the promoter. He must be the one who takes
initiative on the founding and organization of the business venture which eventually ends up as the
corporation being organized.

Q: At the promoter’s stage there is no juridical personality until the SEC issues the certificate of incorporation.
Until the certificate is issued, the stage of the de facto corporation has not yet been reached. Prior to the
de facto corporation stage what then is the status of the contract entered into by a promoter for and in
behalf of the person or agent who had undertaken the transaction?
A: Unenforceable. It is not binding upon the corporation because it has not given consent to the authority of
the person or agent who had undertaken the transaction.

Q: How can ratification be done?

A: Ratification can be done in two ways: (1) express ratification – a mere board resolution making the
corporation liable by accepting the contract and (2) implied ratification – by accepting of benefits

(b) Nature of Pre-incorporation Agreements (Secs. 60 and 61).

- Sec. 60 Subscription contract – Any contract for the acquisition of unissued stocks in an existing
corporation or a corporation still to be formed shall be deemed as subscription within the meaning of this
Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract.
- Sec. 61 Pre-incorporation subscription – A subscription f or shares of stock of a corporation still to be
formed shall be irrevocable for a period of at least six months from the date of subscription unless all the
other subscribers consent to the revocation, or unless the incorporation of said corporation fails to
materialize within said period or within a longer period as may be stipulated in the contract of subscription:
Provided, that no pre- incorporation subscription may be revoked after the submission of the articles of
incorporation to the SEC.

CLV: Sec. 61 of the Corp. Code governs a pre-incorporation subscription agreement. Sec. 61 says that a
pre-incorporation subscription agreement is irrevocable. The only manner by which you can revoke it is if
ALL of the other subscribing stockholders consent to the revocation. Sec. 61 is a clear demonstration of the
fact that a promoter’s contract can be valid and even irrevocable. In the case of a pre-incorporation

42
subscription agreement that contract is valid because there are in fact two parties. The party subscribed and
all of the other parties who have subscribed to the other incorporators and all of them bind themselves
together to form the corporation. That is why it is irrevocable unless the other party which is all of the other
subscribers, agree.

(c) Theories on Liabilities for Promoter's Contracts

CAGAYAN FISHING DEVELOPMENT CO. INC. v. TEODORO SANDIKO

Facts: Manuel Tabora , as owner of four parcels of land in Cagayan mortgaged the said properties to secure
his loan – 1st mortgage to PNB: P8000; 2nd mortgage to PNB: P7000; and 3rd mortgage to Bauzon: P2900
which was registered and annotated on the titles of the property. In 1930 Tabora sold said parcels to Cagayan
Fishing Development Co., said to be under process of incorporation, subject to the mortgages and with the
condition that title will not be transferred until the corporation has paid Tabora’s indebtedness. Cagayan
Fishing filed its Articles of Incorporation with the Bureau of Commerce. The Board of Directors adopted a
resolution authorizing its President Ventura to sell the four parcels of land to Sandiko with the condition that
he would shoulder the mortgage debts. Sandiko issued promissory notes to that effect. When Sandiko failed
to comply with the obligation, the corporation filed a recovery suit. The lower court held that the contract is
void since it was entered into with a corporation that has no corporate existence at the time the properties
were transferred to it.

Issue: WON Sandiko can be held liable for the mortgage debt?

Held: The SC affirmed the decision of the TC. The fact of the matter is Sandiko cannot be held liable for the
mortgage debt since there was no valid sale of the property, since at the time when Cagayan supposedly
acquired the property, it still had no juridical personality to acquire property. There was no transfer of lots
from Tabora to Cagayan since Cagayan was only incorporated five months after the sale.
1.) A corporation should have full and complete organization and existence as an entity before it can enter
into any kind of contract or transact any business. A corporation until organized has no being, franchises
or faculties nor do those engaged in bringing it into being have no power to bind it by contract, unless so
authorized by the charter.
2.) The contract entered into was not between Tabora and the corporation instead it was between Tabora,
as owner and Tabora, wife, plus others, as promoters of a corporation, since the corporation was still
non-existent. These promoters could not have acted as agents for a projected corporation since that
which had no legal existence could have no agent. Although a corporation has no life until organized, it
does not mean that under no circumstances may the act of promoters of a corporation be ratified by the
corporation if and when subsequently organized. But said doctrine of ratification is not applicable here.
3.) Cagayan could not have and did not acquire the four parcels of land. It follows that it did not possess any
reluctant right to dispose of them by sale to Sandiko. It was not even a de facto corporation at the time of
transfer so that it does not have the personality to enter into contracts.
4.) Some peculiar circumstances: (a) Tabora formed a corporation by himself, wife and others but subscribed
to P45,000 of P48,700 (capital stock subscribed); (b) the lands remained in Tabora’s name despite the
sale to the corporation and Sandiko regarded Tabora as the owner; (c) Ventura signed the contract in
behalf of Tabora; (d) P/N issued by Sandiko was payable to the corporation to avoid being attached by
Tabora’s creditors.

Q: Why are we studying Cagayan?

A: This case espouses the element of contract law which is the lack of the element of consent; there being
one party, the corporation, lacking a juridical personality; the contract was thus declared void. Cagayan
and Rizal provides us the doctrine that promoter’s contract must be adopted and ratified by the
corporation. If the act of the promoter’s is ratified then that act is binding on the corporation.

CLV: The court here dismissed the action against Sandiko on the basis that at the time the properties were
sold to the corporation, it had no legal existence, therefore, it could not purchase anything.
Having bought nothing when it sold the said properties to Sandiko, it had in fact nothing to sell –
therefore there was no valid assumption of loans and neither were there promissory notes supported by valid
consideration.

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Q: What if Sandiko was aware at the time that the contract was entered that the corporation did not exist?
What if the corporation invokes the doctrine of the corporation by estoppel so that Sandiko could not raise
the defense that at the time the fraud was committed, the corporation has no juridical personality?
A: Remember that the doctrine of corporation by estoppel is only applicable if at least one of the parties knew
that a corporation existed when in fact it did not. In this case, the doctrine cannot apply because nobody
was in the belief that it existed at the time when fraud was being committed. Even Tabora himself knew
from the start that at the time of the transfer, the corporation did not exist.

RIZAL LIGHT & ICE CO. INC. v. MUNICIPALITY OF MORONG

Facts: Rizal Light and Ice Co. Inc. is a domestic corporation granted by the Public Service Commission, a
certificate of public convenience for the installation, operation and management of an electric light, heat, and
power service in Morong, Rizal. PSC required Rizal light to show cause why it should not be penalized for
violation of the conditions of its CPC and for failure to comply with directions to raise its service voltage, etc.
Rizal failed to comply so the PSC ordered the cancellation and revocation of Rizal’s CPC and forfeiture of its
franchise. The order of revocation was set aside when it was known that the company representative failed
to appear due to illness.
The municipality of Rizal formally asked the PSC to revoke Rizal’s CPC and forfeiture of its franchise.
PSC found that Rizal failed to comply with its directive and violated the conditions of the CPC. PSC ordered
the cancellation and revocation of Rizal’s CPC and the forfeiture of its franchise.
Later, Morong Electric, having been granted a franchise by the Municipality of Morong, filed with the
PSC an application for CPC. It later brought up the issue that Morong Electric had no legal personality
because its certificate of incorporation was issued only on October 17, 1962, while the application was filed
on September 10,1962. The motion to dismiss was denied on the ground that Morong Electric is a de facto
corporation. Thus, the PSC granted Morong Electric a CPC. Thus, this petition.

Held: Decision affirmed.

Under the law, before any CPC may be granted, three requisites must be present: (1) citizen of the
Philippines or the US or a corporation, co-partnership, association or joint-stock co. constituted and organized
under the laws of the Philippines, 60% at least of the stock or paid up capital of which belongs entirely to
citizens of the Philippines or the US; (2) financially capable of undertaking the service; (3) prove that the
operation of the public service proposed will promote public interest.
Petitioner contend that until a corporation has come into being, by the issuance of a certificate of
incorporation by the SEC, it cannot enter into any contract as a corporation and that its application was null
and void for being done prior to said issuance.
Its contention that Morong Electric, at the moment of application and grant of franchise did not yet
have a legal personality is correct. The legal existence of Morong Electric began upon issuance of the
certificate of incorporation before said time, the incorporators cannot be considered as de facto corporation.
But the fact that Morong Electric at the moment of the application and grant of franchise was granted
does not render the franchise invalid because Morong later obtained its certificate of incorporation and
accepted the franchise in accordance with the terms and conditions thereof. While a franchise cannot take
effect until the grantee corporation is organized, the franchise, may, nevertheless be applied for before the
company is fully organized.
The incorporation of Morong and its acceptance of the franchise as shown by its action in prosecuting
the application filed with the PSC for the approval of said franchise, not only perfected a contract between
the Municipality of Morong and Morong Electric.

CLV: The theory used here by the SC to validate the contract is the continuing offer theory. A grant of the
franchise according to the SC, prior to the time that the corporation actually existed is like a conditional grant
that will be effective upon the corporation’s becoming a legal entity. Prior to that, it is merely a continuing
offer (on the part of the government).

CARAM Jr. v CA
Facts: Baretto and Garcia contracted the services of plaintiff Arellano to prepare a project study for the
organization of Filipinas Orient Airways. For failure to pay such services, Arellano sued the corporation,
Baretto and Garcia and petitioner Fermin and Rosa Caram as stockholders. They were held solidarily liable
with their co-defendants. Hence, this petition.

44
 Peitioner Canson claims that said decision finds no support because they were mere investors in the
corporation later created. They should not be held solidarily liable with the corporation, who has a separate
juridical personality.

Held: Petition granted.

The services were acquired by virtue of the request of Baretto and Garcia so that a report can be
represented to financiers. Petitioners are not really involved in the initial steps that finally led to the
incorporation of Filipinas Orient Airways which were being directed by Baretto. Petitioners were merely
among the financiers whose interest was to be invited and who were persuaded to invest in the airline.
There was no showing that Filipinas was a fictitious corporation and did not have a separate juridical
personality to justify making the petitioner, as principal stockholders, responsible for its obligations. As a bona
fide corporation, Filipinas should alone be liable for its corporate acts as duly authorized by its officers and
directors. Thus, petitioner could not have been personally liable for the compensation claimed by Arellano.

CLV: The case tried to distinguish participation of a promoter from that of a promotee, in a venture that
actually becomes a corporation late on. Not every person, who participates in a venture that will later become
a corporation is a promoter.

Q: How do you distinguish a participation of a promoter from that of a promotee who acts together to form a
corporation?
A: The promotees are merely passive investors. A plan is given to them and if they like it, they invest.
Promoters are the active participants. They found and they organize the corporation.
According to Caram only the promoters should be liable. The SC held that a mere promotee (those
who merely subscribe to the shares of stock) should not be held liable for a promoter’s contract (just as
an ordinary stockholder after a corporation has already been incorporated cannot be held liable for more
that beyond his investment).

CLV: Remember that once a corporation is formed, it usually follows that all promoter’s contracts get ratified
because the corporation actually arises out of these contracts. The corporation usually has no choice. It rarely
rejects the contracts for such would be commercial suicide. Once the corporation is formed, the promoter’s
contract of the corporation (if the latter accepts) and not the promoter’s. This is why the promoter, once the
corporation accepts, escapes liability. Remember that a promoter in a promoter’s contract signs not in his
own name but always for and in behalf of the corporation.

Q: What are the three theories in pre-incorporation contracts?

Theory #1 – Therefore, since a promoter’s contract is really the promoter’s own, the only reason why the
corporation, once it is organized becomes liable is when the corporation adopts it as its own. The
promoter’s real contract theory is one of the three theories by which to validate a contract prior to
incorporation.
Theory #2 – The 2nd theory as adopted by Jurisprudence is what is termed as a continuing offer. The
continuing offer that exists as to the time of the issuance of the certificate of incorporation. And if it is
accepted, then the offer means the acceptance, and there arises a contract.
Theory #3 – Once the promoter enters into a contract for and in behalf of a non-existent principal, the
promoter becomes personally liable like an agent who acts without authority from the principal. The
contract entered into then is valid unless the agent acted without authority. But it is possible for the
contract to be adopted by the principal by accepting it.
- In all three instances, there is deemed to be a valid contract of a valid offer. That is the basis of the
promoter’s contract – so that the people will be willing to risk without much fear, investing their money
into a venture prior to the incorporation of a company or a corporation.

Q: Promoter v. Agent
A: The promoters are not the corporation itself, and although they may be regarded, for certain purposes as
sustaining to the corporation a relationship similar to that of an agent, strictly speaking they cannot be
regarded as such, there being at that time no existing principal.

Q: Promoter v. Trustee
A: A promoter is also sometimes likened to a trustee. But a trustee is supposed to be entirely disinterested,
while persons engaged in promotion expect to receive and seek to obtain a liberal award or profit for their
initiative.

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3. De Facto Corporation (Sec. 20)

Sec. 20 De Facto Corporations – The due incorporation of any corporation claiming in good faith to be a
corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally
in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor
General in a quo warranto proceeding.
- Every corporation is deemed de jure until proven otherwise.
- De Jure Corporation – formed in accordance with law; perfectly incorporated; consequences: separate
juridical personality and perfect liability.
- De Facto Corporation – formed also in accordance with law but falls short of the requirements provided
by law. Such is awarded a separate juridical personality, it may thus enter into contracts, it may sue and
be sued (note: third parties may sue the corporation, incorporators may sue but the corporation cannot
sue). Note also that such has imperfect liability à only the actors will be held liable. In proceeding against
such, compliance with due process must be had.
- The doctrine of de facto corporation applies as to the first level relationship (as between the State and
corporations) and also to the third level of relationship (as between third persons and corporations). If it
primarily concerns the first level, why does it draw its vitality from the third level? Because without such,
transactions shall have no effect but with such, despite the defects, the contracts are valid and
enforceable. But because of its primary relation to the first level, third persons cannot question the legal
personality of such de facto corporation.

Only the State through a quo warranto proceeding may do such.

- Not all corporations which lack elements are de facto corporations.
- Elements for Existence of De Facto Corporation:
1) Valid law under which it is incorporated: The Corporation Code
2) Attempt in good faith to incorporate – colorable compliance: The corporation must have filed its
Articles of Incorporation and the SEC duly issued a Certificate of Incorporation. The minimum
requirement for this requisite is the issuance of a certificate such that even if you honestly believed
that you incorporated (and all the other requisites are present), it is still not a de facto corporation.
- The above is need to prove reliance in good faith.
- If any of the above element is absent can the principle be invoked by third persons? No, but
they may have a remedy under the principle of corporation by estoppel. Can such be used in
all instances? No, when both parties knew that no corporation existed, such may not be
invoked.
- Issuance of certificate of incorporation – minimum requirement under this number.
3) Assumption of corporate powers: Minimum requirement: election of the Board of Directors.

Q: Why must there be an election of the BoD?

A: The basic principle is a de facto corporation is a mutual going about of the transaction in good faith. Since
the corporation has a juridical personality, the only way by which it can be said that there was good faith
in entering a transaction is that there must be a BoD by which a corporation can act. If there is no BoD
there is no good faith on the part of the corporation because it knows that it can only act through the BoD
not on the part of the parties dealing with the corporation because it knows that there must be BoD for
the corporation to bind itself. This is also important because this is by which the corporation manifests
itself. (Remember: notion of a ghost – A ghost manifest itself through signs, in the same manner, a
corporation manifests its existence through the existence of the BoD).

(a) Elements:

ARNOLD HALL v. PICCIO

Facts: Petitioner Arnold Hall and Bradley Hall and respondent Fred Brown, Emma Brown, Hipolita Chapman
and Ceferino Abella signed and acknowledged the Articles of Incorporation of the Far Eastern Lumber and
Commercial Co., Inc. a general lumber business. 23,428 shares of stock were subscribed and fully paid for
and certain properties were transferred to the corporation.
The Articles of Incorporation were filed with the SEC for the issuance of the corresponding certificates
of incorporation. The corporation proceeded to do business.
Pending the issuance of the certificates by SEC, the respondents Brown et. al. filed before the CFI of
Leyte a civil case entitled “Fred Brown v. Arnold Hall” alleging among others, that the Far Eastern Lumber
and Commercial Co. was an unregistered partnership; that they wish to have it dissolved because of a bitter
dissension among the members, mismanagement and fraud by the managers and heavy financial losses.

46
Hall, et. al. filed a motion to dismiss alleging the lack of jurisdiction by the court. Judge Piccio ordered the
dissolution of the company.

Held: The SEC had not issued the corresponding certificate of incorporation. All of them know or ought to
know that the personality of a corporation begins to exist only from the moment such certificate is issued, not
before. Here, the complaining associate have not represented to the others that they were incorporated any
more than the defendant had made similar representations. Since nobody was led to believe anything to his
prejudice and damage, the principle of estoppel does not apply.
The section on de facto corporations does not apply in this case: (1) First, Far Eastern Lumber, even its
stockholders, may not probably claim in “good faith” to be a corporation not having obtained the certificate of
incorporation. Thus the immunity of collateral attack granted to corporations claiming in good faith to be a
corporation does not apply here. (2) Second, this suit is not one in which the corporation is a party. This is a
litigation between stockholders of the alleged corporation for the purpose of obtaining its dissolution. Even
the existence of a de jure corporation may be terminated in a private suit for its dissolution between
stockholders, without intervention of the State.

CLV: The de facto doctrine was formulated to safeguard the security of commercial transactions whenever
they involve the corporation. Parties dealing with said corporation are secured by the fact that the transactions
entered into with said corporations may be sued upon and they can recover. That is why aside from the other
two requisites there must be a set of officers (i.e. assumption of corporate powers) or directors because of
the principle that a corporation can only act through its officers.
- Effect as to both parties: (1) cannot deny its existence (2) liable as general partners.
- Not applicable to intra-corporate disputes, why? (1) it is a third level doctrine (2) public is not expected to
know, while the above are expected to know.
- If the other party knows of the non-existence of the corporation à there is no estoppel.

3. Corporation by Estoppel

Sec. 21 Corporation by estoppel – All persons who assume to act as a corporation knowing it to be without
authority to do shall be liable as general partners for all debts, liabilities and damages incurred or arising as
a result thereof: Provided, however, that when any such ostensible corporation is sued on any transaction
entered by it as a corporation or any tort committed by it as such, it shall not be allowed to use as a defense
its lack of corporate personality.

SALVATIERRA v. GARLITOS
Facts: Salvatierra owned a parcel of land in Leyte. She entered into a contract of lease with Philippine Fibers
Producers Co., Inc. allegedly a corporation duly organized and existing under the Philippine laws, as
represented by its President Refuerzo. The land will be leased for ten years and the lessor would be entitled
to 30% of the net income accruing from the harvest of any crop.
The alleged corporation did not comply with said obligation. Salvatierra filed with the CFI a complaint
against PFPC for accounting, rescission and damages. The corporation defaulted and the court rendered
judgment in favor of Salvatierra. The court issued a writ of execution and the three parcels of land under the
name of Refuerzo were attached because no property of PFPC was found available.
Refuerzo filed a motion claiming that the decision was null and void since there was no allegation of
his personal liability. The court granted the motion and released his land from attachment. Hence, this petition
by Salvatierra.

Held: The failure of Salvatierra to specify Refuerzo’s personal liability was due to the fact that Salvatierra
was under the impression that PFPC, represented by Refuerzo was a duly registered corporation, but
subsequently, inquiry with the SEC yielded otherwise. 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 is inapplicable
where fraud takes a part in said transaction. Here Refuerzo gave no confirmation of denial as to PFPC’s
juridical personality and Salvatierra was made to believe that the corporation was duly organized.
The grant of separate juridical personality to corporations refer merely to registered corporations and
cannot be made applicable to the liability of members of an unincorporated association. Since an organization
which, before the law, is non-existent and has no personality and would be incompetent to act and appropriate
for itself the power and attributes of a corporation, it cannot create agents or confer authority on another to
ct 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.

47
 A person acting or purporting to act in 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.
Here, Refuerzo as president of the unregistered corporation was the spirit behind the consummation
of the lease contract, thus, his liability cannot be limited or restricted to that imposed upon corporate SH’s. In
acting on behalf of a corporation, which he knew to be unregistered, he assumes the risk of reaping the
consequential damages or resultant rights, if any arising from the transaction.

ALBERT v. UNIVERSITY PUBLISHING CO.

Facts: The University Publishing Co. Inc. through its President Jose Aruego entered into a contract with
Mariano Albert whereby the corporation agreed to pay a certain sum in installments for the exclusive right to
publish his revised commentaries in the RPC and for his share in the previous sale of the book’s first edit
edition. The corporation failed to pay the second installment thereby making the whole amount due and
demandable (i.e. there was an acceleration clause). Albert then sued the corporation.
The lower court rendered judgment in favor of Albert and a writ of execution was issued against the
corporation. Albert however, petitioned for a writ of execution against Aruego, as the real defendant, stating
that there is no such entity as University Publishing Co. Inc. Albert annexed to his petition a certification from
the SEC saying that their records contain no such registered corporation.
The corporation countered by saying that Aruego is not a party to this case and that, therefore, Albert’s
petition should be denied. The corporation countered by saying that Aruego is not a party to this case, and
that therefore, Albert’s petition should be denied. The corporation, actually did not want Aruego to be declared
a party to the present case is because there would be no need to institute a separate action against Aruego
to be declared a party to the present case is because there would then be a need to institute a separate
action against Aruego; and if this is done, Aruego can set up the defense of prescription under the Statute of
Limitations.

Held:
1.) The corporation cannot invoke the doctrine of estoppel. The fact of non-registration of the corporation has
not been disputed because the corporation only raised the point that it and not Aruego is the party
defendant thereby assuming that the corporation is an existing corporation with an independent juridical
personality. HOWEVER, precisely on account of non- registration, it cannot be considered a corporation
not even a corporation de facto. It has therefore no personality separate from Aruego; it cannot be sued
independently. The estoppel doctrine has not been invoked and even if it had been, it is not applicable to
the case at bar:
(a) Aruego had represented a non-existing entity and induced not only Albert but also the court to believe
in such representation
(b) He signed the contract as president of the corporation stating that this was a corporation duly
organized and existing under the laws of the Philippines. One who induced another to act upon his
willful 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.
2.) Aruego is the real defendant as he had control over the proceedings. Had Aruego been named as party
defendant instead of or together with the corporation, there would be no room for debate as to his personal
liability. Since he was not so named, matters of due process have arisen. Parties to a suit are persons
who have a right to control the proceedings, to make defense, to adduce and cross-examine witnesses
and to appeal from a decision. In the case at bar, Aruego, was and in reality, the one who answered and
litigated through his own firm as counsel. He was in fact, if not on name, the defendant. Clearly then
Aruego had his day in court as the real defendant and due process of law has been substantially
observed.
3.) Aruego is the real party in interest because he reaped the benefits from the contract.
(a) Nature of Doctrine
- Founded on principles of equity and designed to prevent injustice and unfairness, the doctrine applies
when persons assume to form a corporation and exercise corporate functions and enter into business
relations with third persons. Where no third person is involved in the conflict, there is no corporation
by estoppel. A failed consolidation therefore cannot result in a consolidated corporation by estoppel.
- A party cannot challenge the personality of the plaintiff as a duly organized corporation after having
acknowledged same when entering into the contract with the plaintiff as such corporation for the
transportation of its merchandise.
- A person who accepts employment in an unincorporated charitable association is estopped from
alleging its lack of juridical personality.

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 - One who deals with an organization which is not duly incorporated is not estopped to deny its
corporate existence when his purpose is not to avoid liability.

INTERNATIONAL EXPRESS TRAVEL v. CA

Facts: Philippine Football Federation got tickets from petitioner travel agency for the SEA games and trips
to China and Brisbane. Two partial payments were made. Petitioners wrote to Kahn (president of the
federation) demanding the completion of the payment. Federation, through Project Gintong Alay paid the
amount of P 31,000. Then Kahn issued a personal check for P 50,000. After that, no further payments were
made.
Petitioner then sued Kahn in his personal capacity and as president of the federation for the unpaid
balance for the purchased tickets as Kahn allegedly guaranteed the said obligation. Kahn maintained that he
did not guarantee the payment but merely acted as an agent of the Federation which has a separate and
distinct juridical personality.
RTC: Kahn is personally liable because neither the travel agency nor Kahn adduce any evidence
proving the corporate existence of the federation. Being the president, its corporate existence is within the
knowledge of Kahn and could have easily denied specifically the assertions of petitioner that it is a mere
sports association. Voluntary unincorporated associations have no power to enter into, or to ratify, a contract.
The contract entered into by its officers or agents in behalf of the association is not binding or enforceable
against it. Agents and officers personally liable. CA: reversed.

Held: RA 3135 and PD 604 recognized the juridical existence of national sports associations. The power to
adopt a constitution, raise funds, acquire property, etc. indicate that the associations may acquire juridical
personality. However, such does not automatically take place by the passage of the laws. Before a
corporation may acquire juridical personality, the state must give its consent either in the form of a special
law or a general enabling act. Nowhere can it be found in the 2 above mentioned laws any provision creating
the Philippine Football Federation.
Before an entity may be considered as a national sports association, such entity must be recognized
by the accrediting organizations – Philippine Amateur Athletic Federation (RA 3135) and Dept. of Youth and
Sports Development (PD 604). Although a copy of the constitution of the federation was presented in court,
thye same does not prove that it had been recognized. Therefore, the federation is not a national sports
association within the purview of the laws and that Kahn is personally responsible for the obligation.
Under the law on estoppel including that under Sec. 21 of Corporation Code, those acting on behalf
of an ostensible corporation and those benefited by it, knowing it to be without valid existence, are held liable
as general partners. a Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999).

LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES

- The same principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil. 1 [1911] but that case
pertained to a commercial partnership which required registration in the registry under the terms of the
Code of Commerce).

Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. entered into a contract with Phil.
Fishing Gear Industries Inc. for the purchase of fishing nets and floats. They claimed that they were a fishing
venture with Lim Tong Lim who was however not a signatory to the contract. They failed to pay and so PFGI
filed a collection case with a prayed for a writ of preliminary attachment. The case was filed against Chua,
Yao and Lim because it was found that Ocean Quest was a non- existent corporation as shown by the
certification from SEC. Chua admitted liability and Yao waived his right to cross-examine and present
evidence because he failed to appear while Lim filed a counterclaim and a cross-claim. Court granted the
writ of attachment and ordered the Auction Sale of the F/B Lourdes which was previously attached. Trial court
ruled that PFGI was entitled to the Writ and Chua, Yao and Lim were jointly liable as general partners.

Held:
- Lim was contesting that the CA ruled that there was a partnership in the Compromise Agreement and
alleges that he had no direct participation in the negotiations and was merely leasing F/B Lourdes to
Chua and Yao à Facts found by the TC and CA showed that there was a partnership formed by the three
of them. They initially purchased two boats through a loan from Lim’s brother and as security, was placed
in the name of Lim Tong Lim. The repairs and supplies were shouldered by Chua and Yao. A civil case
was filed by Chua and Yao against Lim for nullity of commercial documents, reformation of contracts and
declaration of ownership of fishing boats…which was settled amicably. In the Compromise Agreement, it
was revealed that they intended to pay the loan from Jesus Lim by selling the boats and to divide among

49
 them the excess or loss. Therefore it was clear that a partnership existed which was not solely based on
the agreement. It was merely an embodiment of the relationship among parties.
- Lim alleges that he was merely a LESSOR by showing the Contract of Lease and registration papers of
the boats, including F/B Lourdes where the nets were found à As found by the lower courts, the boats
were registered to Lim only as security for the loan that was granted to the partnership by the brother of
Lim, which was not an uncommon practice. Aside from the fact that it was absurd for Lim to sell the boats
to pay the debt he did not incur, if needed he was merely leasing the boats to Chua and Yao.
- Lim contests his liability by saying that only those who dealt in the name of the ostensible corporation
should be held liable. His name was not in any of the contracts and never dealt with PFGI à Sec. 21 – 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 debts, liabilities and damages incurred or arising as a result thereof; Provided
however that when any such ostensible corporation is sued, on any transaction entered by it as a
corporation or ant tort committed by it as such, it shall not be allowed to use as a defense its lack of
corporate personality. Even if the ostensible corporate entity is proven to be non-existent, a party may be
estopped from denying its corporate existence because an unincorporated association has no personality
and would be incompetent to act and appropriate for itself the power and attributes of a corporation as
provided by law. It cannot create agents or confer authority on another to act on its behalf. Thus, those
who act or purport to act as its representatives do so without authority and at their own risk. Clearly, Lim
benefited from the use of the nets found inside F/B Lourdes which was proved to be an asset of the
partnership. He in fact questioned the attachment because it has effectively interfered with the use of the
vessel. Though technically, he did not directly act on behalf of the corporation, however, by reaping the
benefits of the contract entered into by persons he previously had an existing relationship with, he is
deemed part of said association and is covered by the doctrine of corporation by estoppel.

CLV: Pioneer case à actors who knew of corporation’s non-existence are liable as general partners while
actors who did not know are liable as limited partners, passive investors are not liable; Lim
teaches us that even passive investors should be held liable provided they benefited from such transactions.

(b) Two Levels: (i) With “Fraud;” and (ii) Without “Fraud”
- 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
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.

4. TRUST FUND DOCTRINE

- The capital stock of the corporation especially its unpaid subscriptions is a trust fund for the benefit of the
general creditors of the corporation.
a) Commercial/Common Law Premise: Equity versus Debts (Art. 2236, Civil Code)
- Art. 2236 The debtor is liable with all his property, present and future, for the fulfillment of his
obligations, subject to the exceptions provided by law.
b) Nature of Doctrine:

ONG YONG v. TIU

Facts: In 1994, the construction of the Masagana Citimall in Pasay City by First Landlink Asia Development
Corporation (FLADC) owned by the Tiu family was threatened by the foreclosure by the PNB for 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 pre-subscription 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 P 1B) and the CA affirmed
the decision with slight modifications.

Held:

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- Is rescission the proper remedy for an intra-corporate dispute à 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 Corp. Code.
- Granting rescission is a proper remedy, does it violate the TFD à Yes it will violate the TFD and the
procedures for valid distribution of assets and property under the Corp. Code. The TFD provides that
subscription to the capital stock of a corporation constitute a fund to which the creditors have a right to
look for the satisfaction of their claims. The doctrine is the underlying principle in the procedure for the
distribution of capital assets, in the Corp. Code which allows the distribution of corporate capital only in
three instances: (1) amendments of the Articles of Incorporation to reduce the authorized capital stock
(requires Board Resolution and stockholders’s meeting) (2) purchase of redeemable shares by the
corporation, regardless of the existence of unrestricted retained earnings and (3) dissolution and eventual
liquidation of the corporation. In the instant case, the rescission of the pre-subscription agreement will
effectively result in the unauthorized distribution of the capital assets and property of the corporation,
thereby violation the TFD and the Corp. Code, since the rescission of a subscription agreement is not
one of the instances when distribution of capital assets and property of the corporation is allowed.
- Under the trust fund doctrine, the capital stock, property and other assets of the corporation are regarded
as equity in trust for the payment of the corporate creditors.
- The “trust fund” doctrine considers the subscribed capital stock as a trust fund for the payment of the
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) without violating this principle. 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.
- The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine
which means that the capital stock, property and other assets of a corporation are regarded as equtiy in
trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred
over the stockholders in the distribution of corporate assets. There can be no distribution of assets among
the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the
prejudice of creditors is null and void.

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 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 shared sold during said sale; and
3. to pay dissenting or withdrawing stockholders entitled to the payment for their shares under the
provisions of this Code.

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 stocks 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

51
representing not less than two-thirds of the outstanding capital stock at a regular or special meeting duly
called for that purpose.
Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) per
cent 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
his/her 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.

Sec. 122 Corporate Liquidation – Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any
other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it
would have been dissolved, for the purpose of prosecuting and defending suits by or against it and enabling
it to settle and close it affairs, to dispose of and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and empowered to convey all of
its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest.
From and after any such conveyance by the corporation of its property in trust for the benefit of its
stockholders, members, creditors and others in interest, all interest which the corporation had in the property
terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members,
creditors or other persons in interest.
Upon the winding up of corporate affairs, any asset distributable to any creditor or stockholder or
member who is unknown or cannot be found shall be escheated to the city or municipality where such assets
are located.
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.

(d) Rescission of Subscription Agreement Based on Breach

- The violation of terms embodied in a subscription agreement, with are personal commitments, do not
constitute legal ground to rescind the subscription agreement since such would violate the Trust Fund
Doctrine and the procedures for the valid distribution of assets and property under the Corporation Code.
“In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and property of the corporation, thereby violating the Trust
Fund Doctrine and the Corporation Code, since the rescission of a subscription agreement is not one of
the instances when distribution of capital assets and property of the corporation is allowed.”

(e) Distribution of Corporate Assets

- “The distribution of corporate assets and property cannot be made to depend on the whims and caprices
of the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire
of the court a quo ‘to prevent further squabbles and future litigations’ unless the indispensable conditions
and procedures for the protection of the corporate creditors are followed. Otherwise, the ‘corporate peace’
laudably hoped for by the court will remain nothing but a dream because this time, it will be the creditors’
turn to engage in ‘squabbles and litigations’ should the court order an unlawful distribution in blatant
disregard of the Trust Fund Doctrine.” Ong Yong v. Tiu, 401 SCRA 1 (2003).
- The trust fund doctrine applies in the following cases:
1. where the corporation has distributed its capital among the stockholders without providing for the
payment of creditors
2. where it had released subscribers to capital stock from their subscription receivables
3. where it had transferred corporate property in fraud of its creditors and
4. where the corporation is insolvent.

- Statutory references: (1) Sec. 122 of the Corp. Code governing dissolution of corporations and their
liquidation when it provides that “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.” (2) SEC Rules governing Redeemable and Treasury Shares
expressly adopts the doctrine as follows, “the outstanding capital stock of a corporation, including unpaid
subscriptions, shall constitute a trust fund for the benefit of its creditors which shall not be returned to the

52
 stockholders by repurchase of shares or otherwise, except in the manner as provided for under the
Corporation Code and this rules.

Coverage of Trust Fund Doctrine – adopted the two precursors of the trust fund doctrine which is the
a.) capital impairment rule and the
b.) profit rule.
- A fixed capital must be preserved for protecting the claims of creditors so that dividend distributions
to stockholders should be limited to profits earned or accumulated by the corporation. In a solvent
corporation, the trust fund doctrine encompasses only the capital stock.

1.) Coverage of capital stocks – covers “capital stock;” the protection by the doctrine upon corporation
not in a state of insolvency but only up to the extent of the “capital stock” of the corporation.
2.) Retained earnings – although part of the stockholder’s equity, do not constitute part of the “capital
stock.” It is not covered by the doctrine. The corporation is at liberty to declare and pay out dividends
from its assets.
3.) Outstanding capital stock – total shares of stock issued to subscribers or stockholders whether or not
fully or partially paid (as long as there is a binding subscription agreement) except treasury shares
(Sec. 137).
4.) Par value stock – capital stock represented by aggregate par value of all shares issued and
subscribed. If par value shares are sold at premium, excess is not treated as legal capital/capital stock
but can be declared as stock dividends. This stock dividends fall within the ambit of the Trust Fund
doctrine.
5.) No par value stock – legal capital = total consideration received for the shares of stock. Entire
consideration for no par value stock treated as capital and not available for distribution as dividends.

Funds received by a corporation – to cover subscription payment on increase in authorized capital stock
prior to approval thereof of the SEC would not be covered by the TFD. As a TF, this money is still withdrawable
by any of the subscribers at any time before issuance of the corresponding shares of stock, unless there is a
pre-subscription to the contrary.

VII. ARTICLES OF INCORPORATION

The article of incorporation is:

1.) A CONTRACT – an agreement that gives rise to obligations:
a.) Between the corporation and the state (because it is under the AI by which the state grants the primary
franchise.) à state manifests its consent through the SEC while the corporation manifests its consent
by the filing of the AI, through the incorporators and eventually through the Board of Directors.
b.) Between the state and stockholders
c.) Between the corporation and stockholders à the stockholders manifest their consent through their
subscription of stocks and through voting à as against the corporation, the stockholders do not have
individual standing but only standing as a group.
d.) Among stockholders à in this situation they now have individual standing. e.) Between the stockholders
and the Board of Directors
f.) Between the corporation and the public (since the AI is a public document.)

2.) A PUBLIC DOCUMENT – because it is registered with the SEC. Such works with the doctrine of public
notice that when the public deals with the corporation, the contents of AI binds them whether they in fact
have seen the AI or not. When a person enters into a contract or any transaction with a corporation
whether or not he has checked with the SEC the terms and conditions of the AI, he will be bound by it.
He cannot claim ignorance of the charter of the corporation.

1. Nature of Charter: The charter is in the nature of a contract between the corporation and the
government.

GOVERNMENT OF P.I. v. MANILA RAILROAD CO.

Facts: The GPI filed a petition for mandamus in the SC to compel the Manila Railroad and Jose Paez, its
manager to provide and equip the telegraph poles of the company in Tarlac and La Union with crosspieces

53
for 6 telegraph wires belonging to the government which, it alleged, are necessary for public service between
certain municipalities. Petitioner relies on Sec. 84 of Act No. 1459 which provides that the railroad company
shall establish a telegraph line for the use of the railroad and that such posts may be used for government
wires and shall be sufficient for crosspieces to carry the number of wires which the government may consider
necessary for public service. Petitioner contends that since 6 crosspieces are now necessary for public
service, the company should provide sufficient crosspieces. Respondent answers by saying that the Charter
of Manila Railroad (Act No. 1510) repealed Sec. 84 of Act 1459 and contended that the Government is entitled
to only 4 wires.

Held: Petition denied. Inasmuch as Act No. 1510 is the charter of the Manila Railroad Co. constitutes a
contract between the corporation and the government, it would seem that the corporation is governed by its
contract and not by the provisions of the general law. But from a reading of the charter it will be seen that
there is no indication that the government intended to impose upon said company any other conditions or
obligations not expressly found in the said contract or charter. Section 84 of the Corp. Law was intended to
apply to all railways in the Philippines which did not have a special charter or contract. Act No. 1510 applies
only to Manila Railroad and being a special charter, its adoption had the effect of superseding the provisions
of the corporation law which are applicable to railroads in general.
The charter of a corporation is a contract between three parties: (1) it is a contract between the state
and the corporation to which the charter is granted (2) it is a contract between stockholders and the state (3)
it is a contract between the corporation and its stockholders. A special charter constitutes a contract between
the corporation and the government and as such are both equally bound by its provisions. For the State to
impose an obligation or a duty upon the respondent corporation, not expressly provided in the charter would
amount to a violation of said contract. The provisions of Act 1459 relate to the number of wires which the
government may place upon poles of the company are different and more onerous than the provisions of the
charter.

NOTE: Articles of Incorporation cannot prevail over statutory provisions. Such cannot overcome the law.
However in the case of GPI, its special charter overruled the Gen. Law on the ground that the former is both
a contract and a law. Thus, its charter as a law creates an amendment to all other laws. In the same manner,
if the former were a mere contract then the case would have been decided differently.

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

Sec. 14 Contents of the Articles of Incorporation – All corporations organized under this code shall file
with the SEC articles of incorporation in any of the official languages duly signed and acknowledged by all of
the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code
or by special law.
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation
has more than one stated purpose, the articles of incorporation shall state which is the primary
purpose and which is/are the secondary purpose or purposes: Provided, that a non-stock corporation
may not include a purpose which would change or contradict its nature as such;
3. The place where the principal office of the corporation is to be located, which must be within the
Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors and trustees which shall not be less than five nor more than fifteen;
7. The names, nationalities and residences of persons who shall act as directors or trustees until the
first regular directors or trustees are duly elected and qualified in accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines,
the number of shares to which it is divided, and in case the share are par value shares, the par value
of each, the names, nationalities and residences of the original subscribers, and the amount
subscribed and paid by each on his subscription, and if some or all of the shares are without par
value, such fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of
the contributors and the amount contributed by each; and
10. Such other matters as are not inconsistent with law and which the incorporators may deem
necessary and convenient.

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 The SEC shall not accept the articles of incorporation of any stock corporation unless accompanied
by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five percent
(25%) of the authorized capital stock of the corporation has been subscribed and at least twenty-five percent
(25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation
of which is equal to at least twenty- five percent (25%) of said subscription, such paid-up capital being not
less than P5,000.

Sec. 15 Forms of Articles of Incorporation – Unless otherwise prescribed by special law, articles of
incorporation of all domestic corporations shall comply substantially with the following form: …

NOTE: The form goes into the validity and enforceability of the Articles of Incorporation.

a) As to Number and Residency of Incorporators (Sec. 10);

- Sec. 10 Number and Qualifications of Incorporators – Any number of natural person not less than five but
not more than fifteen, all of legal age and a majority of whom are residents of the Philippines, may form
a private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation
must own or be a subcriber to at least one share of the capital stock of the corporation.

NOTE: Incorporators must be warm-blooded individuals for purposes of accountability. They must not be
more than fifteen for pragmatic reasons, and they must be less than five because two and four create a
deadlock, while three is not as efficient as five. (Institution of the Board of Directors is a clear embodiment of
the corporation’s centralized management.)

b) Corporate Name

Sec. 18 Corporate Name – No corporate name may be allowed by the SEC if the proposed name is identical
or deceptively confusing or similar to that of any existing corporation or to any other name already protected
by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name
is approved, the Commission shall issue an amended certificate of incorporation under the amended name.

Sec. 42 Power to invest corporate funds in another corporation or business or for any other purpose
– Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation
or business or for any other purpose other than the primary purpose for which it was organized when
approved by a majority of the board of directors or trustees and ratified by the stockholders representing 2/3
of the outstanding capital stock or at least 2/3 of the members in case of non-stock corporations, at a
stockholders’ or members meeting duly called for the purpose. Written notice of the proposed investment and
the time and place of the meeting shall be addressed to each stockholder or member at his place of residence
as shown on the books of the corporation and deposited to the addresse in the post office with postage
prepaid, or served personally: Provided: That any dissenting stockholder shall have appraisal right as
provided in this Code: Provided, however, That where the investment by the corporation is reasonably
necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the
stockholders or members shall not be necessary.

- Parties organizing a corporation must choose a name at their peril; and the use of a name similar to one
adopted by another corporation, whether a business or a nonprofit organization, if misleading or likely to
injure the exercise of its corporate functions, regardless of intent, may be prevented by the corporation
having a prior right.
- Similarity in corporate names between two corporations would cause confusion to the public especially
when the purposes stated in their charter are also the same type of business.
- Section 18 of Corporation Code expressly prohibits the use of a corporate name which is “identical or
deceptively or confusingly similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing laws.” The policy behind the
foregoing prohibition is to avoid fraud upon the public that will occasion to deal with the entity concerned,
the evasion of legal obligations and duties, and the reduction of difficulties of administration and
supervision over corporations.
- A corporation has no right to intervene in a suit using a name, not even its acronym, other than its
registered name, as the law requires and not another name which it had not registered.
- There would be no denial of due process when a corporation is sued and judgment is rendered against it
under its unregistered trade name, holding that “[a] corporation may be sued under the name by which it
makes itself known to its workers.”

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- A corporation may change its name by the amendment of its articles of incorporation, but the same is not
effective until approved by the SEC.
- A change in the corporate name does not make a new corporation, and has no effect on the identity of
the corporation, or on its property, rights, or liabilities.

- The name of a corporation is very important, the incorporators constituting as body politic and corporate
under the name stated in the articles of incorporation for the period of time mentioned therein. Such name
is fatal in commercial transactions. The public may only know the corporation through its name.
- The name of a corporation is (1) essential to its existence (2) it cannot change its name except in the
manner provided by the statute (3) by that name alone is it authorized to transact business and (4) it is
through its name that a corporation can sue and be sued and perform all other legal acts.
- SEC reserves the right to order a corporation to change name when it appears that there is an identical
name.

Guidelines on Corporate Names:

1.) Name must contain “Corp.” or “Inc.”
2.) Name must not tend to mislead or confuse the public and must not contain such descriptive words as
“excellent” “fair” “good”, etc.
3.) Name must not be similar to a name already used by another partnership or corporation.
4.) If proposed name contains a word similar to a word already used as a part of the firm name of a
registered corporation, proposed name must contain two other words different from the name of the
company already registered.
5.) If name or surname used as part of corporate name, the incorporators must have a basis for such
surname; it being one of the incorporators: Otherwise, consent of the person whose name is being
used must be submitted.
6.) If it contains initials, it must contain an explanation of the meaning and relevance or reason thereof.
7.) The use of the words “State” “Maharlika” and “Baranggay” are prohibited and reserved for the
government.

- The following words when used must at least relate to the line of business namely: Financing and
Investment. The following words are prohibited from being used namely: National, Engineer, Architect.

c) Purpose Clause

Sec. 42 Power to invest corporate funds in another corporation or business or for any other purpose
– Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation
or business or for any other purpose other than the primary purpose for which it was organized when
approved by a majority of the board of directors or trustees and ratified by the stockholders representing 2/3
of the outstanding capital stock or at least 2/3 of the members in case of non-stock corporations, at a
stockholders’ or members meeting duly called for the purpose. Written notice of the proposed investment and
the time and place of the meeting shall be addressed to each stockholder or member at his place of residence
as shown on the books of the corporation and deposited to the addresse in the post office with postage
prepaid, or served personally: Provided: That any dissenting stockholder shall have appraisal right as
provided in this Code: Provided, however, That where the investment by the corporation is reasonably
necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the
stockholders or members shall not be necessary.
“The best proof of the purpose of a corporation is its articles of incorporation and by- laws. The articles
of incorporation must state the primary and secondary purposes of the corporation, while the by-laws outline
the administrative organization of the corporation, which, in turn, is supposed to insure or facilitate the
accomplishment of said purpose.” Therefore, the Court brushed aside the contention that the corporations
were organized to illegally avoid the provisions on land reform and to avoid the payment of estate taxes, as
being prohibited collateral attack.

- Significance: It confers as well as limits the powers which a corporation may exercise. Other reasons: (1)
prospective investors shall know the kind of business the corporation deals with (2) management shall
know the limits of its action (3) a third party can know whether his dealing with the corporation is within
the corporate functions and powers (4) also, for the administrative supervision and monitoring of the
State, to determine which particular agency shall have jurisdiction over the operations of the corporation.
- The purpose must be lawful, having only one primary purpose and many secondary purposes.

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d) Corporate Term (Sec. 11)

Sec. 11 Corporate Term – A corporation shall exist for a period not exceeding fifty years (50) from the date
of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally
stated in the articles of incorporation may be extended for periods not exceeding fifty years (50) in any single
instance by an amendment of the articles of incorporation in accordance with this Code; Provided, that no
extension can be made earlier than five years (5) prior to the original or subsequent expiry dates unless there
are justifiable reasons for an earlier extension as may be determined by the SEC.

- The purpose of the limit emphasizes the contractual nature of the corporation – the extension must be
approved by the State.
- No extension of term can be effected once dissolution stage has been reached, as it constitutes new
business.

e) Principal Place of Business (Sec. 51)

Sec. 51 Place and time of meetings of stockholders or members – Stockholders’ or members’ meetings,
whether regular or special, shall be held in the city or municipality where the principal office of the corporation
is located and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for
purposes of this section, be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof stated therein.
All proceedings had and any business transacted at any meeting of the stockholders or members, if
within the powers or authority of the corporation shall be valid even if the meeting be improperly held or
called, provided all the stockholders or members of the corporation are present or duly represented at the
meeting.

IMPORTANCE: For jurisdictional purposes. The corporation cannot be allowed to file an action in a place
other than that place or in the place of residence of the defendant.
Place of residence of the corporation is the place of its principal office.
- The residence of its president is not the residence of the corporation because a corporation has a
personality separate and distinct from that of its officers and stockholders.

f) Minimum Capitalization (Sec. 12)

Sec. 12 Minimum capital stock required of stock corporation – Stock corporations incorporated under
this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically
provided for by special law, and subject to the provisions of the following section.

Sec. 13 Amount of capital stock to be subscribed and paid for the purposes of incorporation – At least
twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be
subscribed at the time of incorporation and at least twenty-five percent (25%) of the total subscription must
be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription
without need of call, or in the absence of a fixed date or dates, upon call for payment by the Board of Directors:
Provided however, that in no case shall the paid-up capital be less than five thousand pesos (P5,000).

Q: Does the Corp. Code expressly provide for a minimum requirement of the authorized capital stock?
A: Under Sec. 12 there is no minimum requirement but the Code says that “in no case shall the paid up
capital be less than P5,000 (Sec. 13). Thus it turns out that P5,000 is the minimum.

Q: Why is the maximum capitalization required to be indicated?

A:
(1) To protect the stockholders and also it limits the issuance of capital stock and the extent of the voting
power or capacity of a stockholder
(2) Because of accountability. Whether a corporation is going to do good or bad will depend upon the assets
its holds. The only way by which the State can look at the accountability of a corporation in terms of assets it
receives is to get a maximum so that if the corporation wants to go beyond that, it has to go back to the State.

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

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Sec. 13 Amount of capital stock to be subscribed and paid for the purposes of incorporation – At least
twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be
subscribed at the time of incorporation and at least twenty-five percent (25%) of the total subscription must
be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription
without need of call, or in the absence of a fixed date or dates, upon call for payment by the Board of Directors:
Provided however, that in no case shall the paid-up capital be less than five thousand pesos (P5,000).

Q: What is the 25%-25% rule?

A: It means that of the authorized capital stock applied for, 25% thereof must be subscribed.
Of the 25% subscribed thereof must be paid up. Example, a corporation is by 5 individuals and they
ask for an authorized capital stock of P2M, how much must each subscribe to? P125,000.
RATIONALE: The purpose of such a requisition is that the State may be assured of the successful
prosecution of the work and that creditors of the company may have to the extent, at least, of the required
subscription, the means of obtaining satisfaction for their claims.

Q: Must each subscribe equally?

A: No.

NOTES:
1.) Capital Stock – the amount fixed in the AI procured to be subscribed and paid up. It is settled that
shares issued in excess of the authorized capital stock are void.
2.) Capital – the actual property or estate of the corporation whether in money or property. It may be
higher or lower than the capital stock.
3.) Subscribed Capital Stock – the portion of the capital stock subscribed (procured to be paid) whether
or not fully paid.
4.) Subscription – the mutual agreement of the corporation and the subscriber to take and pay for the
stock of the corporation.
5.) Pre-incorporation – the stage in which each incorporator or stockholder agrees to contribute to a
proposed corporation.
6.) Par value share – one in the certificate of stock of which appears an amount in pesos as the nominal
value of shares; must be stated in the AI and par value share cannot be issued at less than such par
value, which may only be changed by amendment.
7.) No par value share – stated in the AI that it would be issued by the corporation and its consideration
cannot be less than the issued value, which cannot be less than five pesos (P5). Value may be fixed
in any of the three ways: (1) by the articles of incorporation (2) by the board of directors when so
authorized by said articles or by the by-laws (3) by the stockholders representing at least a majority
of the controlling stockholders.

h) Steps and Documents Required in SEC: In addition to the AI, documents required are:
1. Treasurer’s Affidavit – accompanied by a sworn statement of the Treasurer that at least 25% of the
capital stock authorized is subscribed and at least 25% of such have been fully paid in cash or property
– fair valuation of which is equal at least to 25% of the said subscription, such paid-up capital not
being less than P5,000.
2. Certificate of deposit
3. Letter of authority for the SEC authorizing it to examine the bank deposit, books of account and
supporting records as to the existence and utilization of the paid-up capital stock
4. Written undertaking to change their partnership or corporate name in case there is another person,
firm, entity wit a prior right to use of the said income or one similar to it.

Grounds for Disapproval (Sec. 17)

Sec. 17 Grounds when articles of incorporation or amendment may be rejected or disapproved – The
SEC may reject the articles of incorporation or disapprove any amendment thereto if the same is not in
compliance with the requirements of this Code: Provided, that the Commission shall give the incorporators a
reasonable time within which to correct or modify the objectionable portions of the articles or amendment.
The following are grounds for such rejection or approval”
1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the
form prescribed herein;

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 2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral or
contrary to government rules and regulations;
3. That the Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false.
4. That the percentage of ownership of the capital stock to be owned by the citizens of the Philippines
has not been complied with as required by existing laws or the Constitution.

- No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-

banking institutions, building and loan associations, trust companies and other financial intermediaries,
insurance companies, public utilities, educational institutions and other corporations governed by special
laws shall be accepted or approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect that such articles or amendment is
in accordance with law.
- When the proposed articles show that the object is to organize a barrio into a separate corporation for
the purpose of taking possession and having control of all municipal property within the incorporated
barrio and administer it exclusively for the benefit of the residents, the object is unlawful and the articles
can be denied registration.
- It is well to note that, if a corporation’s purpose, as stated in the Articles of Incorporation, is lawful, then
the SEC has no authority to inquire whether the corporation has purposes other than those stated, and
mandamus will lie to compel it to issue the certificate of incorporation.”

SEC’s duty is not merely ministerial – It has been granted by PD 902-A the powers to examine and approve
or disapprove the articles of incorporation and registration of a corporation.

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

Sec. 16 Amendment of Articles of Incorporation – Unless otherwise prescribed by this Code or by special
law and for legitimate purposes, any provision or matter stated in the articles of incorporation may be
amended by a majority vote of the board of directors or trustees and the vote or written assent of the
stockholders representing at least 2/3 of the outstanding capital stock, without prejudice to the appraisal right
of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at
least 2/3 of the members if it be a non-stock corporation.
 The original and amended articles together shall contain all provisions required by law to set out in
the articles of incorporation. Such articles, as amended shall be indicated by underscoring the change
or changes made, and a copy thereof duly certified under oath by the corporate secretary and a
majority of the directors or trustees stating the fact that said amendment or amendments have been
duly approved by the required vote of the stockholders or members shall be submitted to the SEC
 The amendments shall take effect upon their approval by the SEC or from the date of the filing with
the said Commission if not acted upon within six (6) months from the date of filing for a cause not
attributable to the corporation.

NOTES: The matter to be amended, even if it does not concern the Board, must always be concurred with
by the Board. More importantly, the impetus to amend must always come from the Board. The stockholders
merely ratify such amendment. Such is the case because the Board constitutes the centralized management.
The impetus of the Board comprises the obligatory force of the contracts entered into.
 2/3 votes are needed in AI while a majority is needed in amending by laws à Such is the case to make
it easier to amend by-laws.

5. Commencement of Corporate Existence (Sec. 19).

Sec. 19 Commencement of corporate existence – A private corporation formed or organized under this
Code commences to have corporate existence and juridical personality and is deemed incorporated from the
date the SEC issues a certificate of incorporation under its official seal and thereupon the incorporators,
stockholders/members and their successors shall constitute a body politic and corporate under the name
stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended
or the corporation is sooner dissolved in accordance with law.

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VIII. BY-LAWS

1. Nature and Functions (a Gokongwei v. SEC, 89 SCRA 337 [1979]; a Peña v. CA, 193 SCRA 717 [1991])

FACTS: In 1972, Universal Robina Corp acquired 622,987 share in San Miguel Corp. In 1972 also,
Consolidated Foods Corp. acquired SMC shares amounting to P543,959. John Gokongwei, the presidne
tand controlling stockholder of URC & CFC purchased 5,000 SMC shares. Gokongwei tried to get a seat in
the SMC BoD but was rejected by the SH’s n the grounds that he was engaged in a competitive business
and his securing a seat in the BoD would subject SMC to great disadvantages.
On September 18, 1976 repondent SH’s amended the by-laws of SMC, Gokongwei contends that:
1. the BoD acted without authority & in usurpation of the power of the SH’s since the computation of 2/3
vote was based on the authorized capital stock as of 1961 & not as of 1976
2. The authority granted in 1961 was also extended in 1962 & 1963 when said authority was supposed
to cease to exist
3. Prior to said amendment, petitioner had all the qualifications as Director & that as a substitute SH he
has the right to vote & be voted as director & that in amending the by- laws, the corp. purposely
provided for Gokongwei’s disqualification& deprived him of his vested right.
4. Gokongwei further alleges that the corp. has no inherent power to disqualify a SH & that provision
allowing the BoD to consider such factors as business & family relations is unreasonable &
oppressive, thus void.

Gokongwei prays that the amended by laws be declared null & void. He also wanted to inspect and get
a copy of certain documents pertaining to the corp. The SEC allowed him to see the minutes of the meeting
only. So he filed an MR & a petition with the SC due to the alleged deliberate inability of the SCE to action
on his petition.
The SEC had earlier ruled in denying the MR, allowing Gokongwei to run as director but he should not sit as
such if elected until there is a decision on the validity of the by-laws.
The SMC answered by saying that he is engaged in a business antagonistic to SMC & that in allowing
him to sit in the BoD, he would have access to SMC trade secrets and plans. It says that the amended by
laws were adopted to preserve & protect SMC from danger which was based in its right for self-preservation.
ISSUE: Whether or not the amended by-laws of SMC disqualifying a competitor from nomination or election
to the BoD of SMC are valid and reasonable?

HELD:
 Every corp. has the inherent right to adopt by-laws for its internal government & to regulate the conduct
& prescribe the rights and duties of its members towards itself & among themselves in reference to the
management of its affairs. This is expressly recognized by Sec. 21 of the Corp. Code & has been
enunciated in Gov’t vs. El Hogar.
 Any person who buys stocks in a corp. does so with the knowledge that its affairs are dominated by a
majority of the stockholders & that he impliedly contracts that the will of the majority shall govern in all
matters within the limits of the AoI & By-laws. A stockholder is said to have parted with his right to regulate
the disposition of his property which he invested in the corporation. Thus, no contract between the SHs
and corp. was infringed.
 Pursuant to Sec. 18 of the Corp. Law, any corp. may amend its AoI by a vote or written assent of the Sh’s
representing at least t 2/3 of the subscribed capital stock. If it changes, diminishes or restricts the rights
of SHs, the dissenting minority has only the right to object in writing & demand payment of their share.
Petitioner has no vested right to be elected director.
 A director stands in a fiduciary relation to the corp. & its SHs. He has control & guidance of corporate
affairs & property & hence, of the property interests of SHs. Equity recognizes that SHs are properties of
corporate interest & are ultimately the only beneficiaries thereof. Thus, he cannot serve 2 adverse masters
without detriment to one of them He cannot utilize his inside information & strategic position to his own
preferment.
 An amendment to the by-laws which renders a SH ineligible to be a director, if he be also a director in a
competitor corp. has been sustained valid. This is based on the principle that where the director is
employed in the service of a rival corp he cannot serve both but must betray one or the other. Such an

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 enactment merely advances the benefit of the corp & for its own good. Corporate officers are not permitted
to use their position of trust & confidence to further their private interests.
 DOCTRINE OF CORPORATE OPORTUNITY – rests on the unfairness of an officer or director taking
advantage of an opportunity for his own personal profit where the interest of the corporation calls for
protection. Here BoD members have access to marketing strategies, pricing structure, budget for
expansion, R&D sources of funding, availability of personnel, mergers & tie-ups, etc. The questioned
amendment of the y-laws was done to prevent the creation or an oppositor for an officer or director of
SMC, also an officer of a competing corp. from taking advantage of the information which he as director
to promote his individual corporate interests to the detriment of SMC, it would be hard to avoid any
possibility of Gokongwei’s taking advantage of his position as SMC director.
 The SC grants the petition regarding Gokongwei’s petition to examine the book and records of SMC
 However, it sustained the validity of the amendment to the by-laws without prejudice to the question of
actual disqualification of Gokongwei to run if elected to sit as SMC director being decided, after proper
hearing by the SMC BoD, whose decisions shall be appealable to the SEC & to the SC, unless
disqualified, the prohibiton in the said by-laws will not apply to Gokongwei.

FACTS: PAMBUSCO original owners of the lots in question, mortgaged the same to DBP in consideration
of P935,000. This mortgage was foreclosed and said properties were awarded to Rosita Peña as highest
bidder in the foreclosure sale. The Board of PAMBUSCO, through three of its members resolved to assign
its to one of its members, Atty. Joaquin Briones, to execute and sign a deed of assignment for and in behalf
of PAMBUSCO in favor of any interested party. Thus, Briones executed a deed of Assignment of
PAMBUSCO’s redemption right over the subject lots in favor of Marelino Enriquez. The latter then redeemed
the said properties and a certificate of redemption dated Aug. 15, 1975 was issued. Enriquez executed a
deed of absolute sale of the subject properties in favor of plaintiff-appellants, the spouses Rising T. Yap and
Catalina Lugue.
Peña wrote the sheriff notifying him that the redemption was not valid as it was made under a void
deed of assignment. She then requested the recall of the said redemption and a restraint on any registration
or transaction regarding the lots. Defendant Peña through counsel wrote the sheriff asking for execution of a
deed of final sale in her favor on the ground that the one year period of redemption has long elapsed without
any valid redemption having been exercised. Plaintiff Yap wrote defendant Peña asking for payment for back
rentals in the amount of P42,750.00 for the use and occupancy of the land and house. Later, the spouses
Yap were prompted to file the instant case on the ground that being registered owners, they have the right to
enforce their right to possession against defendant who has been allegedly in unlawful possession thereof.
It was contended that plaintiffs could not have acquired ownership over the subject properties under
a deed of absolute sale executed in their favor by one Marcelino Enriquez who likewise could not have
become the owner of the properties in question by redeeming the same under a void deed of assignment.
The defense was that since the deed of assignment executed by PAMBUSCO in favor of Enriquez was void
ab initio for being an ultra vires act of its board of directors and for being without any valuable consideration,
it could not have had any legal effect. TC found for petitioner. CA reversed.

HELD: In order that the SEC can take cognizance of a case, the controversy must pertain to any of the
following relationships:
a. between corp., partnership or assoc. and the public
b. between the corp. and its SH, members, officers
c. between corp. and the state in so far as its franchise, permit or license to operate is concerned
d. among the stockholders, partners or associates themselves.
Neither petitioner nor respondents Yap spouses are stockholders or officers of PAMBUSCO.
Consequently, the issue of the validity of the series of transactions may be resolved only by the regular courts.
The by-laws of a corporation are its own private laws which substantially have the same effect as the
laws of the corporation. They are in effect written into the charter. In this sense, they become art of the
fundamental law of the corporation which the corporation and its directors and officers must comply with.
Only three out of five directors of PAMBUSCO convened on November 19, 1974 by virtue of a prior notice of
a special meeting. There was no quorum to validly transact business since, under Section 4 of the amended
by-laws herein above reproduced, at least 4 members must be present to constitute a quorum in a special
meeting of the BoD. The AoI or by-laws of the corp. may fix a greater number than the majority than the
majority of the number of board members to constitute the quorum necessary for the valid transaction f
business. Being a dormant corp. for several years, it was highly irregular, if not anomalous, for a group of
three individuals representing themselves to be the directors of respondent PAMBUSCO to pass a resolution
disposing of the only remaining asset of the corporation in favor of a former corporate officer. The latest list
of SH of respondent PAMBUSCO on file with the SEC does not show that the said alleged directors were

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among the SHs of respondent PAMBUSCO. Since the disposition of said redemption right of PAMBUSCO
by virtue of the questions ed resolution was not approved by the required number of SHs under the law, the
said resolution, as well as the subsequent assignment executed assigning to respondent Enriquez the said
right of redemption should be struck down as null and void.
As the “rules and regulations or private laws enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and its stockholders or members and directors and officers with
relation thereto and among themselves in their relation to it,” by- laws are indispensable to corporations.
These may not be essential to corporate birth but certainly, these are required by law for an orderly
governance and management of corporations.

Q. Distinguish by-laws from AoI

A. The AoI is not an internal document that binds the parties to a corporate setting. It is also a document that
binds the State. The BL is an intramural document, its supposed to bind the inner workings of a corp.

Q. Are the AoI and BL public documents?

A. Yes, both are public documents because they are not valid and binding without the approval of the SEC

Q. Does the BL have to be approved by the SEC?

A. Yes, prior to the approval of the SEC, the by-laws are not binding since the code expressly requires the
approval of the SEC to be binding upon the SHs and members. Absent the codal provision, it is binding
because of a corp.’s inherent power to adopt its own by-laws.

Q. Do BL bind the public?

A. As a general rule, BL provisions do not bind the public, except if the third person has knowledge of the
BL provision.

(a) Common Law Limitations on By-Laws

(i) By-Laws Cannot Be Contrary to Law and Charter
 A by-law provision granting to a stockholder permanent seat in the Board of Directors is contrary to
the provision in Corporation Code requiring all members of the Board to be elected by the
stockholders. Even when the members of the association may have formally adopted the provision,
their action would be of no avail because no provision of the by-laws can be adopted if it is contrary
to law.
(ii) By-Law Provisions Cannot Be Unreasonable or Be Contrary to the Nature of By-laws.
 Authority granted to a corporation to regulate the transfer of its stock does not empower the
corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the
adoption of regulations as to the formalities and procedure to be followed in effecting transfer.
 By-laws are intended merely for the protection of the corporation, and prescribe regulation, not
restriction; they are always subject to the charter of the corporation.

(iii) By-Law provisions cannot discriminate

(b) Binding Effects on By-laws:

China Banking Corp. v. Court of Appeals

FACTS: Calapatia, a stockholder of PR Valley Golf and Country Club pledged his Stock Certificate to
petitioner China Banking. Petitioner wrote VGCCI requesting that the aforementioned pledge agreement be
recorded in its books. Later, Calapatia obtained a loan of P20,000 from petitioner, payment of which was
secured by the aforestated pledge agreement still existing between Calapatia and petitioner. Due to
Calapatia’s failure to pay his obligation, petitioner filed a petition for extra-judicial foreclosure. Petitioner
informed VGCCI of the above- mentioned foreclosure proceedings and requested that the pledged stock be
transferred to its name. However, VGCCI wrote petitioner expressing its inability to accede to petitioner’s
request due to Calapatia’s unsettled accounts with the club.
Despite the foregoing, Notary Public de Vera held a public auction and petitioner emerged as the
highest bidder, VGCCI sent Calapatia a notice demanding full payment of his overdue account in the amount
of P18,783.24. VGCCI caused to be published in the newspaper Daily Express a notice of auction sale by
VGCCI of its subject share of stock and thereafter filed a case with the RTC of Makati for the nullification.
The RTC dismissed the case for lack of jurisdiction over the subject matter on the theory that it involves an
intra-corporate dispute.

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 Petitioner filed a complaint with the SEC. The Commission en banc believed that appellant- petitioner
had a prior right over the pledged share and because of pledgor’s failure to pay the principal debt upon
maturity, appellant-petitioner could proceed with the foreclosure sale of the pledged share. The auction sale
conducted by appellee-respondent Club was declared null and void. The CA rendered its decision nullifying
and setting aside the orders of the SEC and its hearing officers on the ground of lack of jurisdiction over the
subject. The CA declared that the controversy between CBC and VGCCI is not intra-corporate.

HELD: VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art. VIII of its by- laws
which provides that after a member shall have been posted as delinquent, the Board may order his/her/its
share sold to satisfy the claims of the club. It is pursuant to this provision that VGCCI also sold the subject
share at public auction, of which it was the highest bidder. VGCCI caps its argument by asserting that its
corporate by-laws could prevail. The SEC therefore took proper cognizance of the instant case.
Moreover, VGCCI completely disregarded petitioner’s right as pledgee. It even failed to give petitioner
notice of said auction sale. Such actuations of VGCCI thus belie its claim of good faith. In defending its
actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues that the G.R. is that third
persons are not bound by the by-laws of a corporation since they are not privy to thereto. The exception to
this is when 3rd persons have actual or constructive knowledge of the same. In the case at bar, petitioner
had actual knowledge of the by-laws of private respondent when petitioner foreclosed the pledge made by
Calapatia and when petitioner purchased the share foreclosed. Thus, the petitioner purchased the said share
subject to the right of the PR to sell the said shares for reasons of delinquency and the right of PR to have a
first lien on said shares as these rights are provided for in the by-laws very clearly.
In order to be bound, the 3rd party must have acquired knowledge of the pertinent by-laws at the time
the transaction or agreement between said 3rd party and the shareholder was entered into, in this case, at
the time the pledge agreement was executed. Petitioner’s belated notice of said by- laws at the time of the
foreclosure will not suffice. By-laws signify the rules and regulations of private laws enacted by the corporation
to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and
directors and officers with relation thereto and among themselves in their relation to it. The purpose of a by-
law is to regulate the conduct and define the duties of the members towards the corporation and among
themselves.

Note: Knowledge of the by-laws must be present at the time of the perfection of the contract. Such is not the
case here, knowledge of the by-laws was had only during the proceedings, as such, it cannot bind China
Bank. However, one may argue in the same way in Land Titles, where banks are required to go beyond the
face of the title as they are institutions endowed with public interest; in this case China Bank should have
inquired into such by-laws before entering into the transactions mentioned.
 “Neither can we concede that such contract would be invalid just because the signatory thereon was
not the Chairman of the Board which allegedly violated the corporation’s by-laws. Since by-laws
operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons
who deal with the corporation, unless they have knowledge of the same.”

PMI COLLEGES v. NLRC

FACTS: PMI is an educational institution offering courses on basic seaman training and other marine-related
courses hired private respondent as contractual instructor with an agreement that the latter shall be paid at
an hourly rte of P30 t P50. PR then organized classes in marine engineering. PR and other instructors were
compensated for services rendered during the first three periods of the above- mentioned contract. However,
for reasons unknown to PR, he stopped receiving payment for the succeeding rendition of services.
Repeated demands having likewise failed, PR was soon constrained to file a complaint seeking
payment for salaries earned. PMI contended that classes in the courses offered which complainant claimed
to have remained unpaid were not held in the school premises of PMI. Only PR knew whether classes were
indeed conducted. Later in the proceedings, petitioner manifested that Mr. Tomas Cloma Jr., a member of
the petitioners BoD wrote a letter to the Chairman of the Board clarifying the case of PR and stating therein
that under PMI’s by-laws, only the Chairman is authorized to sign any employment contract. A decision was
rendered by the Labor Arbiter finding for PR. The NLRC affirmed.

HELD: The contract would be invalid just because the signatory was not the chairman which allegedly
violated PMI by-laws but since by-laws operate merely as internal rules among the stock holders, they cannot
affect or prejudice 3rd persons who deal with the corporation in good faith unless they have knowledge of the
same. No proof appears on record that PR ever knew anything about the provisions of said by-laws. Petitioner
itself merely asserts the same without even bothering to attach a copy or excerpt thereof to show that there
is such a provision. That this allegation has never been denied by PR does not necessarily signify admission.

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2. Adoption Procedure (Sec. 46)

Section 46. Adoption of by-laws. - Every corporation formed under this Code must, within one (1) month
after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange
Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of
by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the
outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be
necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in
the principal office of the corporation, subject to the inspection of the stockholders or members during office
hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary
of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to
the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior
to incorporation; in such case, such by- laws shall be approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange
Commission of a certification that the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment
thereto of any bank, banking institution, building and loan association, trust company, insurance company,
public utility, educational institution or other special corporations governed by special laws, unless
accompanied by a certificate of the appropriate government agency to the effect that such by-laws or
amendments are in accordance with law. (20a)

 There can be no automatic dissolution simply because the incorporators failed to file the required by-
laws under Sec. 46 of Corporation Code. There is no outright “demise” of corporate existence. Proper
notice and hearing are cardinal components of due process in any democratic institution, agency or
society. In other words, the incorporators must be given the chance to explain their neglect or
omission and remedy the same.”
3. Contents (Sec. 47)

Section 47. Contents of by-laws. - Subject to the provisions of the Constitution, this Code, other special
laws, and the articles of incorporation, a private corporation may provide in its by-laws for:
1. The time, place and manner of calling and conducting regular or special meetings of the directors or
trustees;
2. The time and manner of calling and conducting regular or special meetings of the stockholders or
members;
3. The required quorum in meetings of stockholders or members and the manner of voting therein;
4. The form for proxies of stockholders and members and the manner of voting them;
5. The qualifications, duties and compensation of directors or trustees, officers and employees;
6. The time for holding the annual election of directors of trustees and the mode or manner of giving
notice thereof;
7. The manner of election or appointment and the term of office of all officers other than directors or
trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates; and
10. Such other matters as may be necessary for the proper or convenient transaction of its corporate
business and affairs. (21a)

4. Amendments (Sec. 48)

- Power to amend may be delegated to the BoD

Section 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote thereof, and
the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a
non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any
by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds
(2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power
to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of
directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked

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whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the
members in non-stock corporations, shall so vote at a regular or special meeting.
Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be
attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath
by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and
Exchange Commission the same to be attached to the original articles of incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the Securities and
Exchange Commission of a certification that the same are not inconsistent with this Code.

 “Admittedly, the right to amend the by-laws lies solely in the discretion of the employer, this being in
the exercise of management prerogative or business judgment. However this right, extensive as it
may be, cannot impair the obligation of existing contracts or rights. . . If we were to rule otherwise, it
would enable an employer to remove any employee from his employment by the simple expediency
of amending its by-laws and providing that his/her position shall cease to exist upon the occurrence
of a specified event.”

IX. CORPORATE POWERS, AUTHORITY AND ACTIVITIES

1. Corporate Power and Capacity

Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring
civil or criminal actions, in conformity with the laws and regulations of their organization.

Sec. 36 Corporate powers and capacity – Every corporation incorporated under this Code has the power
and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of incorporation and
the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporations in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals or public policy, and to amend or repeal the same in
accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a non-
stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, including securities and bonds of other corporations, as the
transactions of the lawful business of the corporation may reasonably and necessary require, subject
to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or hospital or charitable, cultural,
scientific, civic or similar purposes: Provided, That no corporation, domestic or foreign shall give
donations in aid of any political party or candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and
employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes
as stated in the articles of incorporation.
Sec. 45 Ultra vires acts of corporations – No corporation under this Code shall possess or exercise any
corporate powers except those conferred by this Code or by its articles of incorporation and except such as
necessary or incidental to the exercise of the powers so conferred.
A corporation has only such powers as are expressly granted to it by law and by its articles of
incorporation, those which may be incidental to such conferred powers, those reasonably necessary to
accomplish its purposes and those which may be incident to its existence.

a) Classification of Corporate Powers:

EXPRESS IMPLIED INCIDENTAL
These powers given to a Those powers that exist as a Those powers that:
corporation either: necessary consequence of: a.) attach to a corporation at the
a.) By clear or express a.) the exercise of express moment of its creation
provision of the law. powers of the corporation or

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 Some of the other powers b.) the pursuit of its purpose as b.) without regard to its express
expressly granted under provided for in the article of powers or particular primary
Sec. 36 are considered to be incorporation purposes and
inherent or incidental powers c.) is said to be inherent in it as a
which even if not given by  the management of a legal entity or a
express grant are nevertheless corporation, in the absence of legal organization.
deemed to be within the express restrictions, has
capacity of the foreign entities discretionary authority to enter  Powers that go into the very
(such as the power to adopt by- into contracts or nature and extent of a
laws) transactions which may be corporation’s juridical entity
deemed reasonably necessary cannot be presumed to be
b.) By the charter or articles of or incidental to its business incidental or inherent powers.
incorporation. purpose. This juridical entity is State-
 Express grant of grant and cannot be altered or
authority from the board of amended without State
directors needed to validly bind authority (egs. right of
the corporation. succession, right to merger)
 Thus the SC held that absent
any board resolution authorizing
an officer or any person to
exercise express powers given
to a corporation such as filing a
suit on its behalf, such an action
is invalid.
 The power of a corporation to
sue and be sued in any court is
lodged with the board of
directors that exercise its
corporate powers.
 By-laws are not a
source of powers.
 Art. 46 of the Civil Code Sub-paragraph 11 of Sec. 36 Sec. 2 of the Corp. Code
expressly provides for the provide that a corporation has the provides the corporation as
powers of a corporation as a power and capacity to “exercise having “the powers, attributes and
juridical personality possesses. such powers as may be essential properties expressly authorized
 Sec. 36 of the Corporation or necessary to carry out its by law or incident to its existence.”
Code expressly enumerates the purpose or purposes as stated in
ten powers which a corporation its articles of incorporation.
may exercise.
 Sec. 45 of the Corporation
Code recognizes other powers
provided in the Article of
Incorporation.
 Generally exercised by the Generally, purely members of the Generally, purely members of the
Board of Directors with Board of Directors exercise this. Board of Directors exercise this.
exception to certain instances
where shareholders’
assent are needed.

 Ultra Vires doctrine is connected with ancillary doctrines as of (1) apparent authority and of (2)
estoppel.
 One has to look at the corporation as a person before the law because of the (1) issue of consent and
(2) liability – who commits itself to obligation. The state only gives a corporation limited powers and
not general powers as an individual has because of the consent and liability.

(b) Where Corporate Power Lodged

 A corporation has no power except those expressly conferred on it by the Corporation Code and those
that are implied or incidental to its existence. In turn, a corporation exercises said powers through its
board of directors and/or its duly authorized officers and agents. . . In turn, physical acts of the

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 corporation, like the signing of documents, can be performed only by natural persons duly authorized
for the purpose by corporate by-laws or by a specific act of the board of directors.
 Unless otherwise provided by the Corporation Code, corporate powers are exercised by the Board of
Directors, which they may delegate to either an executive committee, officers or contracted managers.
The delegation, except for the executive committee, must be for specific purposes, which makes the
officers the agents of the corporation, and accordingly the general rules of agency as to the binding
effects of their acts would apply. For such officers to be deemed fully clothed by the corporation to
exercise a power of the Board, the latter must specially authorize them to do so.

PRIMARY RULE: The Board of Directors/Trustees is the repository of all corporate powers (sec. 23)
 The source of power of the board of directors is therefore primary and not delegated power from the
stockholders or members of the corporation. However, there are specified instances in the
Corporation Code where the particular exercise of power of the corporation by the board, in order to
be binding and effective, requires the consent and ratification of the stockholders or members, on one
hand, and the State, on the other hand.

IN CONSONANCE WITH CONTRACT LAW PRINCIPLES – in conformity with the principles of contract law,
that a party cannot relieve himself from the contractual terms and conditions, much less amend or alter them,
without the consent or approval of the other party or parties.

EXCEPTION TO THE GENERAL RULE, in cases where the stockholders consent is required, majority rules.
The consent or dissent of the stockholders is recognized by their majority vote or their qualified two-thirds as
the case may be which would bind even those who abstained or dissented. For those who dissented, there
is a way out for them by way of exercising their appraisal right (depending on the issue).

2. ULTRA VIRES DOCTRINE

(a) Concept and Types (Sec. 45)

Sec. 45 Ultra vires acts of corporations – No corporation under this Code shall possess or exercise any
corporate powers except those conferred by this Code or by its articles of
incorporation and except such as necessary or incidental to the exercise of the powers so conferred.
- Sec. 45 of the Corporation Code is the statutory embodiment of the Ultra Vires Doctrine that provides that
the corporation cannot exercise powers beyond what had been granted to it by statute or by its articles
of incorporation except such as necessary or incidental to the exercise of powers so conferred. It was
meant to control and regulate the actions of corporations.

BASIS OF ULTRA VIRES DOCTRINE (Two Corporate Principles)

1. A corporation is a creature of the law and has only such powers and privileges as are granted by the
State – the ultra vires doctrine is a product of the theory of concession as provided in Sec. 2.
2. The doctrine upholds the fiduciary duty of directors and officers to the stockholders or members – such
duty dictates that the corporation engage only in transactions to which the stockholders and members
bind themselves by way of the provisions of the purposes clause. This is also necessarily include an
obligation not to enter into transactions which violate the law.

TEST TO DETERMINE ULTRA VIRES – Whether the act in question is in direct and immediate furtherance
of the corporation’s business, fairly incident to the express powers and reasonably necessary to their
exercise. The strict terms “direct and immediate” refers to the business of the corporation while the liberal
terms “fairly incident” and “reasonably necessary” with reference to the powers of the corporation. With regard
to the business of the corporation as the reference point, much latitude is given to the corporation to enter
into various contracts as long as they have logical relation to the pursuit of such business. On the other hand,
when the purpose clause used limiting words that Court will hold such corporation to such limited business.

POLICIES SUPERVENING IN ULTRA VIRES ISSUES – Acts not per se illegal, liberal interpretation.
1.) PUBLIC CONVENIENCE – if corporation contracts are strictly construed, the public would be
inconvenienced by having to verify and enter into contractual safeguards when entering into contracts
with corporations. As such liberal construction is afforded to such corporate contracts.
2.) CONTRAVENTIONOF CONTRACTUAL EXPECTATIONS – setting aside the corporate contract on
the ground of ultra vires would contravene the expectations of both parties who entered into the
contract expecting to be bound.

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 3.) PRINCIPLE OF BUSINESS JUDGMENT – the court will not sit in judgment to substitute their business
judgment for that of the directors; and that as much as possible, directors in the exercise of their
business judgment, should be given leeway to adopt corporate policies and to engage in transactions
as they deem best for the corporation.
4.) NATURE OF BUSINESS OF OPERATIONS – it is impossible to anticipate all possible contingencies
at the time the Articles are drawn thus there would be a need to amend or revise the Articles to keep
abreast with the various aspects of the business.

ULTRA VIRES ACTS DISTINGUISHED FROM ACTS WHICH ARE ILLEGAL PER SE
- Illegal acts of a corporation are those acts which are contrary to law, morals, or public order or
contravenes some rule of public policy or public duty are void. Such acts or contracts cannot be the basis
of any court action nor acquire validity by performance, ratification or estoppel.
- Ultra vires acts are those which are not illegal and void ab initio but are within the scope of the articles of
incorporation are merely voidable and may become binding and enforceable when ratified by
stockholders. Said ratification cures the infirmity of the corporate act and makes it valid and enforceable.

TYPES OF ULTRA VIRES CASES

1.) acts or contracts which are per se illegal as being contrary to law à VOID
2.) acts done beyond the powers of the corporation as provided for in the law or its articles of
incorporation; and à VOID or VOIDABLE?
3.) acts or contracts entered into in behalf of the corporation by persons who have no corporate authority
à UNENFORCEABLE

- Ultra vires acts of the second type are void as between the corporation and the State or in the first level
of corporate existence while it is merely voidable in the third level because of public policy. The public
who deals in good faith with the corporation has the right to expect that the obligation entered into shall
be complied with.
- First Type Ultra Vires: An ultra vires act is one committed outside the object for which a corporation is
crated as defined by the law of its organization and therefore beyond the power conferred upon it by law.
The term “ultra vires“ is “distinguished from an illegal act for the former is merely voidable which may be
enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated.”

ATRIUM MANAGEMENT CORP. v. COURT OF APPEALS

Facts: Hi-Cement through the corporate signatories (De Leon – treasurer, Delas Alas – chairman) issued
checks in favor of E.T. Henry & Co. Inc. as a collateral for a loan) E.T. Henry endorsed the four checks to
Atrium for valuable consideration. Upon presentment for payment, the bank dishonored all four checks
because the payment was stopped. Atrium filed with the RTC an action for collection of the proceeds of four
postdated checks amounting to P2M. The TC ordered that De Leon, ET Henry and Hi-Cement pay Atrium
jointly and severally the value of the four checks plus interest. The CA on the other hand absolved Hi-Cement
from liability.

Issue: WON De Leon was not authorized to issue the checks WON the issuance of the checks were ULTRA
VIRES ACTS

Held: De Leon was authorized and such issuance is not an ultra vires act.
Ratio: De Leon as treasurer of the corporation is authorized to sign checks for the corporation. As a rule, the
act of issuing checks is within the ambit of a valid corporate act. And securing a loan to finance the activities
of the corporation is not an ultra vires act. While an ultra vires act is one committed outside the object or
which a corporation is created as defined by law of its organization and therefore beyond the power conferred
upon it by law, the act pertained to in the case is not an illegal act.
De Leon on the other hand was negligent in confirming that such checks were issued to ET Henry as
payment for their company’s debt with the former. That is why she was held to be personally liable to Atrium.

- Second Type Ultra Vires: When the President enters into speculative contracts, without prior board
approval, and without subsequent submission of those contracts to the Board for approval or ratification,
nor were the transactions included in the reports of the corporation, such contracts do not bind the
corporation. It must be pointed out that the Board of Directors, not the President, exercises corporate
powers.
(b) Ratification of Ultra Vires Acts: (a Pirovano v. De la Rama Steamship Co., Inc., 96 Phil. 335 [1954];
Carlos v. Mindoro Sugar Co., 57 Phil. 343 [1932]; Republic v. Acoje Mining Co., 3 SCRA 361 [1963];

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aCrisologo Jose v. Court of Appeals, 177 SCRA 594 [1989]; a Harden v. Benguet Consolidated Mining Co.,
58 Phil. 140 [1933]).

PIROVANO DE LA RAMA STEAMSHIP CO. INC.

Facts: The story began with Enrico Perovano becoming President of the Dela Rama Corporation. Under his
management, the corporation grew into a multi-million company until his death. Don Esteban dela Rama who
owned and controlled the stock of the corporation, distributed his shareholdings among his five daughters
including Estefania. The company has a bonded indebtedness amounting to P7,500 in 1940 but had
assets/capitals of P15 M as of 1941 which were mortgaged as security for the debt to the National
Development Corp. This bonded indebtedness was converted to non-voting preferred shares of the company
under the condition that they would bear a fixed cumulative divisor of 6% per annum and this was carried out
in 1949. NDC now had the right to be represented by four out of nine members in the Board of Directors. It
was in 1946 that the Board of Directors adopted the questioned resolution where the corporation ser aside
P400,000 to the four minor children with the sum convertible into shares of stock. Lourdes de la Rama later
learned that since the company shares of stock was actually 3.6 times their par value, the company would in
effect be giving them an amount totaling to P1,440,000 and that stocks if were given to the children, the voting
strength of the De la Rama daughters would be adversely affected. This caused Lourdes to ask for the
cancellation and waiver of her pre-emptive rights. Don Esteban then advised the corporate secretary that the
resolution be nullified due to the misunderstanding as to its implications.
In 1947, the Board adopted a resolution changing the form of donation from 4,000 shares to merely
a renunciation in favor of the children of the corporate right, titles and interests as beneficiary to the proceeds
of the life insurance policy subject to the condition that proceeds be retained by the company as a loan with
5% interest ($321,500). Estefania as guardian of the children, accepted the donation in their behalf. Said
donation was formally ratified in 1949 after Estefania bought a house in New York for $75,000. In 1950
Osmena Jr. husband of Lourdes de la Rama addressed an inquiry to the SEC asking for an opinion regarding
the donation. SEC opined that the donation was void because the corporation could not dispose of its assets
by gifts. Therefore, it acted beyond the scope of its powers. Thus, the stockholders revoked the donation on
this ground.
With these revocation, plaintiff as represented by Estefania their mother, seek t enforce this
resolutions adopted by the Board of Directors and Stockholders of De la Rama Steamship Co. giving to said
children the proceeds of the insurance policies of the deceased with the company as the beneficiary. The
company contends that the resolution and the contract executed pursuant thereto are ultra vires and if valid,
the obligation to pay the amount given is not yet due and demandable. Plaintiffs won in the lower court, hence
this petition.

Issue: WON the said Board of Director’s resolution was an ultra vires act?
Held: The grant or donation in question is remunerative in nature and was given in consideration of the
services rendered by the heirs’ father to the corporation. The donation has already been perfected such that
the corporation could no loner rescind it. It was embodied in a Board Resolution. Representatives of the
corporation and even its creditors as the NDC have given their concurrence. The resolution was actually
carried out when the corporation and Estefania entered into an agreement that the proceeds will be entered
as a loan. Estefania accepted the donation and such was recorded by the corporation. The Board of Directors
approved Estefania’s purchase of the house in New York. Company stockholders formally ratified the
donation.
The donation was a corporate act carried out by the corporation not only with the sanction of the
Board of Directors but also of its stockholders. The donation has reached a stage of perfection which is valid
and binding upon the corporation and cannot be rescinded unless there exists legal grounds for doing so.
The SEC opinion nor the subsequent Board Resolution are not sufficient reasons to nullify the donation.
The donation is also not an ultra vires act. The corporation was given broad and unlimited powers to carry
out the purpose for which it was organized which includes the power to (1) invest and deal with corporate
money not immediately required in such manner as from time to time may be determined (2) aid in any
other manner to any person, association or corporation of which any obligation is held by this corporation.
The donation undoubtedly comes within the scope of this broad power.
An ultra vires act is (1) an act contrary to law, morals, or public order or contravene some rules of
public policy or duty. It cannot acquire validity by performance, ratification, estoppel. It is essentially void (2)
those within the scope of the Articles of Incorporation and not always illegal. It is merely voidable and may
become binding and enforceable when ratified by stockholders.
Since it is not contended that the donation is illegal or contrary to any of the expressed provisions of
the Articles of Incorporation nor prejudicial to the creditors of the corporation, said donation even if ultra vires
is not void and if voidable, its infirmity has been cured by ratification and subsequent atcs of the corporation.

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The corporation is now estopped or prevented from contesting the validity of the donation. To allow the
corporation to undo what it has done would be most unfair and contravene the well-settled doctrine that the
defense of ultra vires cannot be se up or availed of in any completed transaction.

NOTE: The ratification of the stockholders of the donation made is the key in this case. Because such
ratification is meant to protect the contractual relationship or interest of stockholders.

CRISOLOGO-JOSE v. COURT OF APPEALS

Facts: Atty. Benares was the President of Movers Enterprise while Ricardo Santos Jr. was the Vice-
President. On April 1980 Atty. Benares in accommodation of his clients, the spouses Jaime and Clarita Ong
issued a check drawn against Traders Royal Bank in the amount of 45,000 payable to Crisologo- Jose. Since
the check was under the account of the corporation, the president and the treasurer should sign the check.
But since the treasurer was not available, Benares asked Santos to be the alternate signatory. The check
was issued to Crisologo-Jose in consideration of the waiver of Crisologo over a certain property which the
GAIA agreed to sell to the clients of Benares (spouses Ong) with the understanding that upon approval of
the compromise agreement with the spouses Ong, the check will be encashed accordingly. However, the
compromise agreement was not approved within the expected period. So Benares replaced the check with
another one with the same amount also payable to Jose. When petitioner deposited the check, it was
dishonored for insufficiency of fund. Petitioner filed criminal complaint for violation of BP 22. Meanwhile,
during the preliminary investigation, Santos tendered cashiers check in payment of the dishonored check but
petitioner refused to accept it. Santos then encashed the check and deposited the money to the Clerk of
Court. Incidentally, Benares purchased the cashier’s check and gave it to the plaintiff to be applied as
payment of the dishonored check. RTC held that it was not persuaded to believe that consignation is
applicable here. So the complaint was dismissed. CA reversed and set aside such decision. Petitioner
contends that the accommodation party in this case is Mover Enterprises and not private respondent who
merely signed the check in a representative capacity.

Issue: Assuming that Mover Enterprises is the accommodation party, WON it may be held liable on the
accommodation instrument.

Held: No. Corporation is not liable. The provisions of the NIL which holds an accommodation party liable on
the instrument to a holder for value, although such holder at the time of taking the instrument knew him to be
only an accommodation party, it does not apply to corporations which are accommodation parties This is
because issue or endorsement of negotiable paper by a corporation without consideration and for the
accommodation is an ultra vires act.
By way of a corporation, an officer or agent may do so ONLY IF specifically authorized to do so. But
where the facts show that the accommodation involved was for their personal account, undertaking or
purpose and the creditor was aware thereof.

NOTE: That while the public is not required to know that one is authorized or not to bind the corporation for
a certain obligation and that while the contract may be enforced even without authority because the public
dealing in good faith has the right to expect that the obligation entered into shall be complied with, such
doctrine does not apply when the dealing public in the first place is in bad faith, as in this case; that is why
the corporation was not bound to such accommodation agreement.

HARDEN v. BENGUET CONSOLIDATED MINING

Facts: Benguet Consolidated Mining and Balatoc Mining Co. are entities organized for the purpose of
engaging in the mining of gold in the Philippines and their respective properties lie only a few miles apart.
The original stockholders of Balatoc were unable to supply the means for profitable operation thus, its board
ordered a suspension of all work. A general meeting of the stockholders approved to establish a committee
to find investors. The committee in turn approached Bean, President and General manager of Benguet to
secure the necessary capital for the development of the Balatoc properties. The management of both
companies executed a contract where Benguet was to proceed with the development and construction of a
milling plant for the mine and to erect a power plact. In return, Benguet would receive from Balatoc shares of
par value of P600,000 in payment of the first 600,000 to be advanced to it.

By 1929, Benguet had spent P1,417,952,15 in pursuance of the contract. Balatoc stockholders have been
receiving large dividends. Harden and two other stockholders filed a suit against Benguet, Balatoc and the
officers to annul the certificate covering P600,000 shares of Balatoc issued to Benguet and to recover a large

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sum of money alleged to have been unlawfully collected by Benguet and to annul the contract. The trial court
dismissed the complaint, hence this petition.

Issue: WON it is lawful for Benguet to hold any interest in another mining corporation?
Held: No. Section 75 of the Philippine Bill of 1902 prohibits corporation engaged in mining from being
interested in any other corporation engaged in mining. This was amended by Act No. 3518 which now
provided that a corporation is prohibited to hold more than 15% of the OCS of another corporation. The Corp.
Law did not contain any clause directly penalizing the acts of a corporation or member in an interest contrary
to Sec. 13 of Act 1459. The penalties imposed by the Corp. Law are of such nature that they can be enforced
only by a criminal prosecution or by an action of quo warranto which can only be maintained by the Atty.
General. Benguet Co. has committed no civil wrong against the plaintiff stockholders and if a public wrong is
committed, the directors of Balatoc and plaintiff Harden himself were the active inducers of the commission
of that wrong. The contracts have been performed on both sides and there is no possibility of undoing what
has been done.
Plaintiffs then invoke Art. 1305 which declares that an innocent party to an illegal contract may recover
anything that he may have given while he is not bound to fulfill any promise he may have made. Supposing
this is applicable, the general remedy provided by Art. 1305 cannot be invoked where a special remedy is
supplied in special law.
In as much as the corporation law prohibits the acquisition by one mining corporation of any interest
in another and that these were enacted in the exercise of general police power of the government, it results
that where a corporation does so, the stockholders cannot maintain an action to annul the contract by which
such interest was acquired. The remedy must be sought in a criminal proceeding or quo warranto action
instituted by the government. Until thus assailed in a direct proceeding, the contract by which the interest
was acquired will be treated as valid as between the parties.

NOTE: We are studying Harden because of the pronouncement that even where corporate contracts are
illegal per se, when only public or government policy is at stake and no private wrong is committed, the courts
will leave the parties as they are in accordance with their original contractual expectations. (The only contracts
that the courts will touch are contracts which are void for being illegal per se.)

(i) Theory of Estoppel or Ratification

- The principle of estoppel precludes a corporation and its Board of Directors from denying the validity of
the transaction entered into by its officer with a third party who in good faith, relied on the authority of the
former as manager to act on behalf of the corporation.
- In order to ratify the unauthorized act of an agent and make it binding on the corporation, it must be shown
that the governing body or officer authorized to ratify had full and complete knowledge of all the material
facts connected with the transaction to which it relates. Ratification can never be made on the part of the
corporation by the same person who wrongfully assume the power to make the contract, but the
ratification must be by the officer or governing body having authority to make such contract.
- The admission by counsel on behalf of the corporation of the latter’s culpability for personal loans obtained
by its corporate officers cannot be given legal effect when the admission was “without any enabling act
or attendant ratification of corporate act,” as would authorize or even ratify such admission. In the absence
of such ratification or authority, such admission does not bind the corporation.
- Doctrine of Laches or “Stale Demands”: The principle of laches or “stale demands” provides that the
failure or neglect, for an unreasonable and unexplained length of time, to do that which by exercising due
diligence could or should have been done earlier, or the negligence or omission to assert a right within a
reasonable time, warrants a presumption that the party entitled to assert it either has abandoned it or
declined to assert it.

PRINCIPLE OF ESTOPPEL à It being merely voidable, an ultra vires act can be enforced or validated if there
are equitable grounds for taking such action. Here it is fair that the resolution be upheld at least on the ground
of estoppel.
- Ratification (a) the act must be consummated and not executory (b) creditors are not prejudiced
or all of them have given their consent (c) rights of the public or the State are not involved (d) all the
stockholders must give their consent.

(ii) Theory of Apparent Authority (Art. 1883, Civil Code;a Prime White Cement Corp. v. IAC, 220 SCRA
103, 113-114 [1993]; a Francisco v. GSIS, 7 SCRA 577 [1963]; a Yao Ka Sin Trading v. CA, 209 SCRA 763
[1992]).

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- Outward appearance, the agent’s apparent representation yields to the principal’s true representation
and the contract is considered as entered into between the principal and the third person.
- Due what seems to be and what happens otherwise.

Q: Upon whom is placed the burden of discovering that the agent has no authority?
A: In view of the authority of apparent authority, the third person dealing with the corporation is not given the
burden of discovering whether the agent has authority or not. It is also therefore reasonable in a case where
an officer of a corporation has made a contract in its name, that the corporation should be required, if it denies
the authority of the officer, to state such defense in its answer, since it allows the plaintiff to be appraised of
the fact that the agent’s authority is contested; and he is given an opportunity to adduce evidence showing
either that the authority existed or that the contract was ratified and approved.

NOTE: The theory of apparent authority is classified into two types by which such may be manifested or
proved, which are by position and by circumstance. The burden of proof mentioned above applies to the
second classification.
PRIME WHITE CEMENT CORP. v INTERMEDIATE APPELLATE COURT
Facts: A director (Te) entered into an agreement of Dealership agreement with PWCC, signed by its
chairman and president of the corporation to supply 20,000 bags of white cement per month for five years at
a fixed price of P9.70 per bag. Subsequently, the Board refused to abide by the contract unless new
conditions are accepted providing for a new price formula. The dealing director sued for specific performance
on the contract.

Held: The Court held that under both the Corporation Law then and the present Corporation Code, the
doctrine is that all corporate powers shall be exercised by the Board of Directors, except as those provided
by law. Although it cannot completely abdicate its powers and responsibility to act for the juridical entity, the
Board may expressly delegate specific powers to its president or any of its officers. In the absence of such
express delegation, a contract entered into by its President on behalf of the corporation may still bind the
corporation if the Board should ratify the same expressly or impliedly.
Implied ratification takes various forms (1) silence or acquiescence (2) by acts showing approval or
adoption of the contract or (3) by acceptance and retention of the benefits flowing therefrom.
Even in the absence of express or implied authority by ratification, the President as a general rule
may bind the corporation by a contract in the ordinary course of business, provided the same is reasonable
under the circumstances. These rules are basic but general and flexible. Applies where the President is
dealing with third persons but different where a director is dealing with his own corporation.
The court herein held that the director holds a position of trust and as such he owes a duty of loyalty
to his corporation and his contracts with the corporation must always be at reasonable terms, otherwise the
contract is void or voidable at the instance of the corporation. The court here found the terms of the Dealership
Agreement were unreasonable for the corporation and that the unfairness in the contract was a basis which
renders a contract entered into the President without authority from the Board, void or voidable, although it
may have been in the ordinary course of business.

NOTE: The President as the highest office of the corporation, by practice and jurisprudence embodies
apparent authority. On the other hand, the general manager on its own may or may not embody such authority
depending on the circumstances that go with it. The corporate secretary and lawyer enjoy no such
presumption because their positions do entail much commercial significance.

FRANCISCO v. GSIS
Facts: Trinidad Francisco mortgaged to GSIS a parcel of land with 21 bungalows (Vic-Mari Compound) for
a P400,000 loan of which P336,100 was released payable within 10 years with 7% interest per annum
compounded monthly. In 1959 GSIS extrajudicially foreclosed the mortgage on the ground of default of
payment in the amount of P32,000 ( total payment amounted to P130,000) where GSIS was also the buyer.
Atty. Francisco, the father of Trinidad proposed to the General Manager of GSIS to pay P30,000 of the
P52,000 and asked that the foreclosure be set aside and for GSIS to take over the administration of the
mortgaged property and to collect installments due on the unpaid purchase price for more than 31 house and
lot payees to be applied to the arrearage and the loan. The GSIS approved this and Atty. Francisco was
notifed by telegram. GSIS accepted a check for P30,000 and remittances totaling to P44,121.29 for which
the corresponding OR’s were issued. GSIS then sent 3 letters signed by the GM asking a proposal for the
payment of the debt since the 1yr. Period for redemption had expired.
Atty. Francisco protested and brought to the attention of GSIS the concluded contract and its
acceptance by telegram. GSIS replied asking payment for various expenses and that the telegram should be

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disregarded for its failure toe express the content of a board resolution due to error of its minor employees in
the sending of the telegram. The approval was apparently conditioned on Atty. Francisco’s agreement to pay
all expenses incurred in foreclosure. GSIS held that the remittances were insufficient so that GSIS
consolidated title to the compound in its name. Hence, this suit for specific performance and damages. The
lower court ruled in favor of Francisco.

Held: The SC finds no reason for altering the conclusion that the offer of compromise made by Francisco
had been validly accepted and was binding on the defendant GSIS. The terms of the offer were clear and the
acceptance of the proposal was signed by the GM Andal. The telegram hinted on no anomaly and was within
Andal’s apparent authority.
Corporation transactions would speedily come to a standstill where every person dealing with a
corporation held duty-bound to disbelieve every act of its responsible officers, no matter how regular they
should appear on their face.
If a corporation knowingly permits one of its officers or any other agent within the scope of an apparent
and thus holds him out to the public as possessing power to do those acts, the corporation will as against
any one who has in good faith dealt with the corporation through such agent be estopped from denying such
authority. Hence, even if it were the Board Secretary who sent the telegram, the corporation could not evade
the binding effect produced by the telegram. The corporation had sufficient notice of the allegedly
unauthorized telegram when it pocketed the P30,000 but kept silent about it.
Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of his
employment and in relation to matters within the scope of his authority is notice to the corporation, whether
he communicates such knowledge or not.
The silence taken together with the unconditional acceptance of 3 other substantial remittances of the
original agreement constitute a binding ratification of the original agreement. Ratification may be effected
expressly or tacitly. There is tacit ratification if with knowledge of the reason which renders it voidable and
such reason having ceased, to a person who has a right to invoke it should execute an act which necessarily
implies an intention to waive his right.
As between two innocent parties, the one who made it possible for the wrong to be done should be
the one t bear the resulting loss.

YAO KA SIN TRADING v. COURT OF APPEALS

Facts: Maglana, the president and chairman of PWCC sent a letter to Yao Ka Sin Trading represented by its
manager Yao. It quoted the following P24.30/94 lbs. Bag net FOB CEBU; P24.30/94 lbs. Bag FOB Asturias;
45,000 bags (15,000/month). On June 30, 1973 Mr. Yao accepted the letter offer and issued a check for
P243,000, PWCC Board of Directors disapproved the same. On July 5, 1973 PWCC informed YKS of the
disapproval. However with respect to the 10,000 bags of cement. YKS accepted without protest. On August
4, 1973 PWCC wrote a letter to YKS stating that it is withdrawing or taking delivery of not less than 10,000
bags of cement. On September 10, 1973 YKS insisted on the delivery of the 45,000 bags of cement. On
December 7, 1973 PWCC only delivered 9,775 bags. YKS filed an action for specific performance with the
CFI. It was discovered that PWCC by-laws give the Chairman and the President the power to execute and
sign for and in behalf of the corporation all contracts or agreements which the corporation enters into subject
to the qualification that all his actuations shall be given to the Board of Directors of the corporation. PWCC
contends that Mr. Maglana was not authorized to make any offer and sign a contract in behalf of the
corporation and only the Board has the power to do so. The lower court ruled in favor of YKS but the CA
reversed. Hence, this peition.

Issue: WON the contract originally entered into by PWCC through President Maglana, binds the corporation
despite the rejection of the Board of Directors.

Held: The by-laws do not confer upon the President, the authority to enter into contracts independently of
the Board of Directors. The fact that contracts are signed through the President was only meant to expedite
its execution but still presupposes a prior act of the corporation, through the Board of Directors. No greater
authority can be implied from such express, but limited, delegated authority. It may be presumed that the
President has authority to make contracts if he is given general control and supervision over affairs of the
corporation. But here, there is a general manager charged with direct management of the business which
Mr. Maglana was not involved in.
The doctrine on apparent authority provide that if a private corporation intentionally or negligently
clothes its officers or agents with apparent power to perform acts for it, the corporation will be estopped to
deny that such apparent authority is real, as to innocent 3rd persons dealing in good faith with such officers

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or agents. This apparent authority may result from: (1) the general manager by which the corporation holds
out an officer or agents as having power to act (2) the acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, whether with or without the scope of power. However, YKS failed
to prove that PWCC indeed clothed Mr. Maglana with apparent power. PWCC also showed that no contract
can be signed by the President without the Board of Directors’ approval (and clearance from the NIDC
representative and legal counsel). The first contract is at most unenforceable.
The first contract was disapproved and rejected by the Board of Directors which at the same time
considered the P243,000 received by Maglana as payment for 10,000 bags of cement, treated as an entirely
different contract. YKS had in fact agreed to this by accepting the delivery receipt without protest.
NOTE: Under the doctrine of apparent authority and under the sub-classification of apparent authority by
circumstance, the first contract is unenforceable because PWCC effectively proved through clear and
convincing evidence that their President cannot bind the corporation without authorization from the Board of
Directors, so not the burden shifted upon YKS for him to provide for such circumstances which have led him
to believe that the President has such apparent authority to bind the corporation; however such was not
effectively discharged by YKS, that is why the first contract is unenforceable. Also, it is most important to
note, that the contract for 10,000 bags of cement is enforceable because such is a contract of sale entered
into by the President in the regular course of business of the corporation. However, the 45,000 bags contract
is unenforceable because it is a contract of dealership which is in the extraordinary course of the business of
the corporation., hence, not within the purview of the apparent authority of the President.

NOTE: By-laws can bind third parties only when they have knowledge of such, otherwise, such may not bind
third parties. In the same manner, knowledge of a third person of such by-laws may bind the corporation.
- If a corporation knowingly permits one of its officers to act within the scope of an apparent authority, it
holds him out to the public as possessing the power to do those acts, the corporation will, as against
anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s
authority.
- The authority of a corporate officer dealing with third persons may be actual or apparent . . . the principal
is liable for the obligations contracted by the agent. The agent’ apparent representation yields to the
principal's true representation and the contract is considered as entered into between the principal and
the third person.
- Persons who deal with corporate agents within circumstances showing that the agents are acting in
excess of corporate authority, may not hold the corporation liable.
- Apparent authority may be ascertained through (1) the general manner in which the corporation holds out
an officer or agent as having the power to act, or, in other words the apparent authority to act in general
with which is clothes them; or (2) the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, within or beyond the scope of his ordinary powers.
- When a banking corporation, when an officers arranges a credit line agreement and forwards the same
to the legal department at its head officer, and the bank did no disaffirm the contract, then it is bound by
it.
- A corporation cannot disown its President’s act of applying to the bank for credit accommodation, simply
on the ground that it never authorized the President by the lack of any formal board resolution. The
following placed the corporation and its Board of Directors in estoppel in pais: Firstly, the by-laws provides
for the powers of the President, which includes, executing contracts and agreements, borrowing money,
signing, indorsing and delivering checks; secondly, there were already previous transaction of discounting
the checks involving the same personalities wherein any enabling resolution from the Board was
dispensed with and yet the bank was able to collect from the corporation.

NYCO SALES CORPORATION v BA FINANCE CORPORATION

Facts: Rufino Yao was the President and General Manager of Nyco Sales Corporation which was engaged
in the business of selling construction materials. Nyco Sales through Yao was approached by Santiago and
Renato Fernandez on behalf of Sanshell Corporation requesting for credit accommodation since Nyco had
discounting privileges with BA Finance. The Fernandezes wen to Yao for the purpose of discounting their
post-dated BPI check worth P60,000 made payable to Nyco. The discounting process agreed upon was that
Nyco through Yao endorsed the check to BA Finance then BA Finance would issue a check payable to Nyco
for which Nyco would then endorse it to Sanshell. With the exchange of checks, the parties agreed to a Deed
of Assignment executed by Nyco in favor of BA Finance the subject of which was the check. The Deed
contained a Continuing Suretyship Agreement at the back whereby the Fernandezes unconditionally
guaranteed to BA Finance full and prompt payment and discharge of any and all indebtedness of Nyco. BPI
check was dishonored which therefore led BA Finance to report it to the Fernadezes. They then issued

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another check, this time from Security Bank which was also dishonored. Despite repeated demands, Nyco
and Fernandezes failed to settle their obligation which prompted BA Finance to file an action in court. TC
ruled against Nyco and the Fernandezes to pay jointly and severally. Nyco’s cross-claim against the
Fernadezes
was denied they were not declared in default in connection with the cross-claim and that no1 evidence was
presented (it was also mentioned that Nyco should have impleaded Sanshell by way of a third party complaint
and not a cross-claim). CA affirmed the TC with modifications.

Issue: WON Nyco can be held liable for its President unauthorized acts.
Held: Nyco as an assignor-vendor warranted that both the credit itself (its existence and legality) and the
person of the debtor (his solvency) according to Article 1628of the NCC. Therefore, any breach of the
warranties, the assignor should be held answerable. It is of no question that the assignor is liable for the
invalidity of whatever he assigned. The deed of assignment executed by Nyco in favor of BA Finance with
Sanshell as debtor. BA Finance is actually enforcing the assignment. The check is merely an incidental matter
and so Nyco is not being held liable for both the BPI and the Security Bank check but rather the deed of
assignment. The issue on no notice of dishonor was given is belied not only by the formal demand letter but
also the findings of the TC that Yao and the Fernandezes had frequent contacts before, during and after
dishonor. There is no novation because there was no express agreement that BA Finance;s acceptance with
Security Bank check will discharge Nyco from liability. Neither is there incompatibility because both checks
were given precisely to terminate a single obligation.
Nyco disowned the President’s acts claiming that it had not authorized Yao to apply to BA Finance
for credit accommodation saying that it did not issue a board resolution giving such authority. However, the
by-laws clearly provide for the power of its President, which include executing contracts and agreements,
borrowing money, signing, indorsing and delivering checks, all in behalf of the corporation. Also, there was
already a prior transaction of discounting checks involving the same parties wherein any enabling resolution
from Nyco was dispensed with and yet BA was still able to collect from Nyco and Sanshell was able to
discharge of its liabilities. Therefore, that places Nyco under estoppel in pais which arises when one, by his
acts, representations or admissions, or by his silence when he ought to speak out, intentionally or through
culpable negligence, induce another to believe certain facts to exist and such other rightfully relies on such
belief, so that he will be prejudiced if the former is permitted to deny the existence of such fact..
Per its Secretary’s Certificate, the foundation had given its President ostensible and apparent
authority to inter alia deal with the respondent Bank, and therefore the foundation is estopped from
questioning the President’s authority to obtain the subject loans from the respondent Bank. Lapulapu
Foundation, Inc., v. Court of Appeals, G.R. No. 126006, 29 January 2004.

3. Express Powers
a) Enumerated Powers (Secs. 36)

Sec. 36 Corporate powers and capacity – Every corporation incorporated under this Code has the power
and capacity:
1.) To sue and be sued in its corporate name;
2.) Of succession by its corporate name for the period of time stated in the articles of incorporation and
the certificate of incorporation;
3.) To adopt and use a corporate seal;
4.) To amend its articles of incorporations in accordance with the provisions of this Code;
5.) To adopt by-laws, not contrary to law, morals or public policy, and to amend or repeal the same in
accordance with this Code;
6.) In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a non-
stock corporation;
7.) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, including securities and bonds of other corporations, as the
transactions of the lawful business of the corporation may reasonably and necessary require, subject
to the limitations prescribed by law and the Constitution;
8.) To enter into merger or consolidation with other corporations as provided in this Code;
9.) To make reasonable donations, including those for the public welfare or hospital or charitable, cultural,
scientific, civic or similar purposes: Provided, That no corporation, domestic or foreign shall give
donations in aid of any political party or candidate or for purposes of partisan political activity;
10.) To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and
employees; and

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 11.) To exercise such other powers as may be essential or necessary to carry out its purpose or purposes
as stated in the articles of incorporation.

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

Sec. 37 Power to extend or shorten corporate term – A private corporation may extend or shorten its term
as stated in the articles of incorporation when approved by majority vote of the board of director or trustees
and ratified at a meeting by the stockholders representing at least 2/3 of the outstanding capital stock or by
at least 2/3 of the members in case of non- stock corporation. Written notice of the proposed action and of
the time and place of the meeting shall be addressed to each stockholder or member at his place of residence
as shown on the books of the corporation and deposited to the addressee in the post office with postage
prepaid or served personally. Provided, that in case of extension of corporate term, any dissenting
stockholder may exercise his appraisal right under the conditions provided in this code.

Sec. 81[1] Instances of appraisal right – Any stockholder of a corporation shall have the right to dissent
and demand payment of all the fair value of his shares in the following instances: In case any amendment to
the articles of incorporation has the effect of changing or restricting the rights of any stockholders or rights of
any stockholder class of shares, or of authorizing preferences in any respect superior to those outstanding
shares of any class, or of extending or shortening the term of the corporate existence.
- Such power only concerns the Juridical Entity Level – such extending or shortening of the term of the
corporation tampers with the powers given the corporation by the State.

Q: Why should such extension or shortening require the ratificatory vote of stockholders when this does not
concern the business enterprise level but the juridical entity level?
A: Such in effect is an amendment of the articles of incorporation, and any amendment to such would always
require the consent of the State and of the corporation’s stockholders. They also have a say in this
because the extension or shortening of the corporate term affects these stockholder’s investments.

Q: Why do stockholders not have appraisal right with respect to the shortening of the corporate term whereas
they do in the extension of the corporate term?
A: Actually, there is a seeming conflict between Sec. 37 which makes no mention of stockholder’s appraisal
right with respect to the shortening of the corporate term while Sec. 81(1) refers to such. CLV tells us that
stockholders should be afforded an appraisal right even in the case of the shortening of the corporate
term because it is not enough to talk of free transferability of interests when you dissent to the decrease
because such concerns ones expectations with respect to the business enterprise.

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

Sec. 38 Power to increase or decrease capital stock; incur, create or increase bonded indebtedness
– No corporation shall increase or decrease its capital stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of the board of directors and, at a stockholder’s meeting
duly called for the purpose, 2/3 of the outstanding capital stock shall favor the increase or diminution of the
capital stock, or the incurring, creating, or increasing ant bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded3
indebtedness and of the time and place of the stockholders meeting at which the proposed increase or
diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered,
must be addressed to each stockholder at his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of directors of the corporation and countersigned
by the chairman and the secretary of the stockholders’ meeting, setting forth:
1. That the requirements of this section have been complied with;
2. The amount of the increase or diminution of the capital stock;
3. If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock
thereof actually subscribed the names, nationalities, residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by each., and the amount paid by each
on his subscription in cash or property, or the amount of capital stock or number of shares of no-par
stock allotted to each stockholder if such increase is for the purpose of making effective stock dividend
thereof authorized;
4. Any bonded indebtedness to be incurred, created or increased;
5. The actual indebtedness of the corporation on the day of meeting;

76
 6. The amount of stock represented at the meeting; and
7. The vote authorizing the increase or diminution of the capital stock, or the incurring, creating, or
increasing of any bonded indebtedness.

- Any increase or decrease in the capital stock or the incurring, creating or increasing any bonded
indebtedness shall require prior approval of the Securities and Exchange Commission.
- One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be
filed with the Securities and Exchange Commission and attached to the original articles of incorporation.
From and after approval by the Securities and Exchange Commission and the issuance by the
Commission of its certificate of filing, the capital stock shall stand increased or decreased and the
incurring, creating or increasing any bonded indebtedness authorized, as the certificate of filing may
declare Provided, That the Securities and Exchange Commission shall not accept for filing any certificate
of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation
lawfully holding office at the time of the filing of the certificate, showing that at least 25% of such increased
capital stock has been subscribed and that at least 25% of the amount subscribed has been paid either
in actual cash to the corporation or that there has been transferred to the corporation property the
valuation of which is equal to 25% of the subscription: Provided further, that no decrease of the capital
stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors.
- Non-stock corporations may incur or create bonded indebtedness or increase the same with the approval
by a majority vote of the board of trustees and of at least 2/3 of the members in a meeting duly called for
that purpose.
- Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which
shall have the authority to determine the sufficiency of the terms thereof.
- The policy behind the non-granting of appraisal right with respect to the increase and decrease of the
capital of the corporation is the fact that every stockholder should come into the corporation setting aware
that the expediencies of corporate life may require that eventually the corporation may need to increase
capitalization to fund its operations or expansions, and needs to look primarily into its equity investors to
fund the same.
- In the increase, a stockholder may always sell his stock if he dissents to the increase of the capital stock.
Moreover, such appraisal right may defeat the purpose of the corporation in increasing the funds; by
increasing the funds for survival, if you grant the appraisal right in effect you pay out capital when you
seek to keep more money inside.
- In the decrease of capital stock, why appraise when in effect you will be returning capital to your
stockholders.
- Despite the board resolution approving the increase in capital stock and the receipt of payment on the
future issues of the shares from the increased capital stock, such funds do not constitute part of the capital
stock of the corporation until approval of the increase by SEC.
- A reduction of capital to justify the mass layoff of employees, especially of union members, amounts to
nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the
vast profits obtained by its joint efforts with capital through the years, and would constitute unfair labor
practice.
- Why do you need the consent of the stockholders when you increase or decrease capital stock? When
you increase the capital stock, stockholders have to put in more money to maintain their proportionate
interest in the corporation, as such the increase dilutes the value of the stock they have prior to such
increase. Moreover, such increase affects their rights as in their voting capacity, their sharing in the
dividends, their participation in the management, the extent of their participation in the dissolution of the
corporation, etc. The consent of the stockholders is needed because such change once again affects
their contractual expectation when they first entered into the corporation.
- But in decreasing capital stock, why do you again need the consent of the stockholders whereas in effect
they will be receiving part of their investment? Such once again affects their contractual expectation when
they first entered into the corporation.

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

Sec. 38 Power to increase or decrease capital stock; incur, create or increase bonded indebtedness
– No corporation shall increase or decrease its capital stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of the board of directors and, at a stockholder’s meeting
duly called for the purpose, 2/3 of the outstanding capital stock shall favor the increase or diminution of the
capital stock, or the incurring, creating, or increasing ant bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded

77
indebtedness and of the time and place of the stockholders meeting at which the proposed increase or
diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered,
must be addressed to each stockholder at his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of directors of the corporation and countersigned
by the chairman and the secretary of the stockholders’ meeting, setting forth:
1. That the requirements of this section have been complied with;
2. The amount of the increase or diminution of the capital stock;
3. If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock
thereof actually subscribed the names, nationalities, residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by each., and the amount paid by each
on his subscription in cash or property, or the amount of capital stock or number of shares of no-par
stock allotted to each stockholder if such increase is for the purpose of making effective stock dividend
thereof authorized;
4. Any bonded indebtedness to be incurred, created or increased;
5. The actual indebtedness of the corporation on the day of meeting;
6. The amount of stock represented at the meeting; and
7. The vote authorizing the increase or diminution of the capital stock, or the incurring, creating, or
increasing of any bonded indebtedness.

- Any increase or decrease in the capital stock or the incurring, creating or increasing any bonded
indebtedness shall require prior approval of the Securities and Exchange Commission.
- One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be
filed with the Securities and Exchange Commission and attached to the original articles of incorporation.
From and after approval by the Securities and Exchange Commission and the issuance by the
Commission of its certificate of filing, the capital stock shall stand increased or decreased and the
incurring, creating or increasing any bonded indebtedness authorized, as the certificate of filing may
declare Provided, That the Securities and Exchange Commission shall not accept for filing any certificate
of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation
lawfully holding office at the time of the filing of the certificate, showing that at least 25% of such increased
capital stock has been subscribed and that at least 25% of the amount subscribed has been paid either
in actual cash to the corporation or that there has been transferred to the corporation property the
valuation of which is equal to 25% of the subscription: Provided further, that no decrease of the capital
stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors.
- Non-stock corporations may incur or create bonded indebtedness or increase the same with the approval
by a majority vote of the board of trustees and of at least 2/3 of the members in a meeting duly called for
that purpose.
- Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which
shall have the authority to determine the sufficiency of the terms thereof.

Bond – security representing denominated units of indebtedness issued by a corporation to raise money or
capital obliging the issuer to pay the maturity value at the end of a specified period which should be not less
than 360 days. That is why not all indebtedness of the corporation require the ratification of the stockholders,
only bonded indebtedness require the ratification of the stockholders.
- A bond in contrast to a promissory note represents a unit of a large indebtedness, whereas a promissory
note represents a single indebtedness and may stand on its own. Mostly all properties of the corporation
i.e. the business enterprise comprise of the security of such bonded indebtedness.
- The SEC also require that a company has a minimum net worth of P25 M at the time of the filing of the
application and must have been in operation for three years.

(e) Sell or Dispose of Assets (Sec. 40)

- Sale by Board of Trustees of the only corporate property without compliance with Sec. 40 of Corporation
Code requiring ratification of members representing at least two-thirds of the membership, would make
the sale null and void.

Sec. 40 Sale or other disposition of assets – Subject to the provisions of existing law on illegal combination
and monopolies, a corporation may by a majority vote of its board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets including
its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds
or other instruments for the payment of money or other property or consideration as its board of directors or

78
trustees deem expedient, when authorized by the vote of stockholders representing at least 2/3 of the
outstanding capital stock, or in the case of non-stock corporation, by the vote of at least 2/3 of the members,
in a stockholders’ or members’ meeting duly called for that purpose. Written notice of the proposed action
and of the time and place of the meeting shall be addressed to each stockholder or members at his place of
residence as shown on the books of the corporation and deposited to the addressee in the post office with
postage prepaid paid, or served personally: Provided, that any dissenting stockholder may exercise his
appraisal right under the conditions provided for in the Code.
- A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of continuing the business or accomplishing the
purpose for which it was organized.
- After such authorization or approval by the stockholders or members, the board of directors or trustees,
may nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other
disposition of property and assets subject to the rights of third parties under any contracting relating
thereto without further action or approval by the stockholders or members.
- Nothing in this section is intended to restrict the power of any corporation, without the authorization by
the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of
its property and assets if the same is necessary in the usual and regular course of business of said
corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated
for the conduct of its remaining business.
- In non-stock corporations where there are no members with voting rights, the vote of at least a majority
of the trustees in office will be sufficient authorization for the corporation to enter into any transaction
authorized by this section.

NOTE: When the transaction is in the normal course of business, it only needs the majority of the quorum of
the Board of Director to approve such transaction. However, when such is in the extraordinary course of the
business as in the disposition of all or substantially all of the assets of the corporation, such needs the vote
of the absolute majority of the Board of Directors plus the ratification of 2/3 vote of stockholders representing
at least 2/3 of the outstanding capital stock of the corporation in case it is a stock corporation, or in the case
of a non-stock corporation, 2/3 of the members.

- This case is one of the exceptions to the rule where the stockholders have proprietary interests in the
business enterprise. This is also an exception to the rule that generally the Board of Directors have the
power to bind the, and transact for the corporation.
- If transactions are entered into relating to this section without the ratification of the stockholders, such
transaction is void for it is illegal per se as it runs contrary to Sec. 40 of the Corporation Code.

Example: San Miguel decides to sell its Pale Pilsen formula, but retains all of its P 4B worth of investment,
will such transaction need the ratification of the stockholders and the absolute majority vote of the Board?
Yes, since it concerns substantially all of the assets of the corporation as such formula pertains to the capacity
of the corporation to earn. The absence of such ratification violates the social compact as between the
stockholders and the corporation. Such sale violates the contractual expectation of these stockholders, and
as such, their ratification must be availed of before it may be entered into. The same is also the case, if San
Miguel decides to share the P 4B and retain the Pale Pilsen formula.

(f) Invest Corporate Funds for Non-Primary Purpose Endeavor

Sec. 42 Power to invest corporate funds in another corporation or business or for any other business
purpose – Subject to the provisions of this Code, a private corporation may invest its funds in any other
corporation or business or for any purpose other than the primary purpose for which it was organized when
approved by a majority of the board of directors or trustees and ratified by the stockholders representing at
least 2/3 of the outstanding capital stock, or at least by 2/3 of the members in the case of non-stock
corporations, at a stockholders’ or members’ meeting duly called for that purpose. Written notice of the
proposed investment and the time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation and deposited to the addressee
in the post office with postage prepaid or served personally: Provided, That any dissenting stockholder shall
have appraisal right as provided in this Code: Provided however, That where the investment by the
corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or members shall not be necessary.

DE LA RAMA v. MA-AO SUGAR CENTRAL CO.

79
Facts: De la Rama et.al. contend that Ma-ao Sugar Central through its President, subscribed P300,000 worth
of capital stock of the Philippine Fiber Processing Co. Inc. They allege that the time of the first two payments
were made there was no board resolution authorizing the investment and that it was only before the third
payment that the President was so authorized by the Board of Directors. De la Rama also contends that even
assuming, arguendo, that the said Board Resolutions are valid, the transaction is still wanting in legality, no
resolution having been approved by the affirmative vote of the stockholders holding shares in the corporation,
entitling them to at least 2/3 of the voting power.

Issue: WON the investment of corporate funds of Ma-ao were in violation of corporation law.
Held: Investment of corporate funds in another corporation if done in pursuance of the corporate purpose,
does not need the approval of the stockholders, but where the purchase of the shares of another corporation
is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of
the stockholders is necessary. The investment made in Philippine Fiber was upheld by the SC. Philippine
Fiber was engaged in the manufacture of bags or investments in another corporation engaged in the
manufacture of bags. Since the sugar central is engaged in the manufacture of sugars, sugar bags
necessarily would come under the purview of its needs under the regular course of business

- Any corporation whatever its primary purpose has a choice of placing such fund either in a savings or
time deposit account or in money market placements, or treasury bills, or even in shares of stocks of
other corporations which are traded in the stock exchange. The exercise of such business judgment on
the part of the board in consistency with the primary purpose, since it is expected even from the
stockholders to believe, that it is within the ordinary business discretion of the Board to place the
corporation’s investible fund in the form of investment that would yield the best possible return to the
corporation and would not require the ratification of the stockholders or members each time.
- Hotel Corporation invest 2M in 10M Bagoong Company à in this case while it contemplates a situation
where the Board exercises ordinary business discretion, such investment would run contrary to the
relationship of the Board to the stockholders whereby they engaged to manage the hotel corporation
alone, and whereby they vowed to devote all their time and all their effort in such corporation. By investing
in 20% of another corporation, said Board obtained a very big role in the management of such corporation,
hence such would run contrary to its obligation to the stockholders to take care of the business enterprise
of the hotel corporation and not any other corporation’s business enterprise. As such, it would need a
ratificatory vote of 2/3 of the stockholders.
- Hotel Company invest 2M in 100B San Miguel Corporation à in this case, the ratificatory vote is not
needed since such is really within the ordinary business discretion of the Board. And by investing only in
a relatively minimal share in the assets of another company, it does not really engage in the business
enterprise of another corporation, hence, they still afford priority to the business enterprise of the hotel
corporation.

(g) Declare Dividends

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 dividend 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 paid subscription is fully paid:
Provided further, that no stock dividend shall be issued without the approval of stockholders representing not
less than 2/3 of the outstanding capital stock at a regular or special meeting duly called for that purpose.
- Stock corporations are prohibited from retaining surplus profits in excess of 100% 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 when there is need for special reserve for
probable contingencies.

NIELSON & CO. v. LEPANTO CONSOLIDATED MINING CO.

Facts: In 1937, Lepanto entered into a management contract with Nielson. In this agreement, Nielson was
to manage and operate the Mankayan mining claim of Lepanto in consideration for (a) P2,500 a month and
(b) 10% of dividends declared and paid. In 1941, Lepanto declared dividends amounting to P175,000 10%of
which Nielson was entitled to P17,500. Lepanto however never paid Nielson a cent. During the liberation in

80
1945, Lepanto unilaterally terminated the management contract with Nielson. In 1958, Nielson instituted an
action for its 10% share in the dividends declared by Lepanto in 1941. The suit reached the SC and it decided
against Lepanto in 1941. The suit between Nielson and Lepanto was suspended in 1942 when the US Army
bombarded the Mankayan mining claims, thus preventing Nielson from complying with its obligation (i.e.
operating and managing the claim). The tribunal further said that the contract remained suspended even after
the war was over in 1945 until 1948 when the mines were fully operational; and that the management contract
still had five years to go from 1948. Thus, the SC stated that Nielson was entitled to 10% of the dividend
declarations in 1949 and 1950 worth P3M. Lepanto sought reconsideration of SC’s decision in 1966. It raised
two main points at issue namely: (1) What is the nature of the management contract? Is it one of agency and
hence terminable at the principal’s will or is it a contract of lease of services which may be terminated only
upon agreed causes? (2) Is Nielson entitled to 10% of the stock dividend even though Lepanto is not a
stockholder?

Held: The management contract is a contract for lease of service. (1) The theory of agency was raised only
on reconsideration which is a belated move by Lepanto (2) Agency is premised on representation while lease
of service is based on employment. While an agent can execute juridical acts in behalf of his principal ; an
employee under a lease of service can only perform non-juridical acts or only material acts. (3) Since the acts
of Nielson (exploration, purchase, etc.) are subject to general control and approval of the Board of Directors
of Lepanto and cannot create, modify, extinguish business relations between Lepanto and Nielson, these
acts can only be considered as material acts done for an employer for compensation. The contract, is
therefore, a contract of lease of services. Being such a contract, it cannot be revocable at the will of the
employer. The contract specifically provided that Lepanto can cancel the contract only: a.) upon the 90-day
written notice and b.) for Nielson’s failure to operate and develop the mining claims for any cause except
those causes due to the acts of God.
Since the war and the bombardment constitute acts of God, they cannot be considered as grounds
to terminate the contract. In fact, the contract is deemed suspended from 1942 to 1948 when neither of the
parties could comply with their obligations under it. Under its terms, the contract is suspended in cases of
fortuitous events. And such terms must be interpreted to mean that a period equal to the period of suspension
must be added to the original term of the contract by way of extension. Thus, from 1948 the contract still had
five more years. And by virtue of this extension, Nielson is entitled to 10% of the dividends declared in 1949
and 1950.

Stock dividend is the amount that the corporation transfers from its surplus profit account to its capital
account. It is the same amount that can loosely be termed as the “trust fund” of the corporation.

h) Enter into Management Contracts

Sec. 44 Power to enter into management contracts – No corporation shall conclude a management
contract with another corporation unless such contract shall have been approved by the board of directors
and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of
the members in the case of a non-stock corporation of both managing and the managed corporation at a
meeting duly called for that purpose: Provided, That (1) where a stockholder or stockholders representing
the same interest of both the managing and managed corporations own or control more than 1/3 of the total
outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members
of the board of directors of the managing corporation also constitute a majority of the members of the board
of directors of the managed corporation, then the management contract must be approved by the
stockholders of the managed corporation owning at least 2/3 of the total outstanding capital stock entitled to
vote, or by at least 2/3 of the members in the case of a non-stock corporation. No management contract shall
be entered into for a longer period than five years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a corporation
undertakes to mange or operate all or substantially all of the business of another corporation, whether such
contracts are called service contracts, operating agreements or otherwise: Provided however, That such
service contracts or operating agreements which relate to exploration, development, exploitation or utilization
of natural resources may be entered into for such periods as may be provided by the pertinent laws or
regulations.

4. Implied Powers
- When the articles expressly provide that the purpose of the corporation was to “engage in the
transportation of person by water,” such corporation cannot engage in the business of land transportation,

81
 which is an entirely different line of business, and, for which reason, may not acquire any certificate of
public convenience to operate a taxicab service.
- A corporation whose primary purpose is to generate electric power has no authority to undertake
stevedoring services to unload coal into its pier since it is not reasonably necessary for the operation of
its power plant.
- A corporation organized to engage as a lending investor cannot engage in pawbroker.
- A mining company has not power to engage in real estate development.
- An officer who is authorized to purchase the stock of another corporation has implied power to perform
all other obligations arising therefrom such as payment of the shares of stock.

5. Incidental Powers
- The act of issuing checks is within the ambit of a valid corporate act, for it as for securing a loan to
finance the activities of the corporation, hence, not an ultra vires act.

6. Other Powers

a) Sell Land and Other Properties

- When the corporation’s primary purpose is to market, distribute, export and import merchandise, the
sale of land is not within the actual or apparent authority of the corporation acting through its officers,
much less when acting through the treasurer. Likewise Articles 1874 and 1878 of Civil Code requires
that when land is sold through an agent, the agent’s authority must be in writing, otherwise the sale
is void.
b) Borrow Funds
- The power to borrow money is one of those cases where even a special power of attorney is required
under Art. 1878 of Civil Code. There is invariably a need of an enabling act of the corporation to be
approved by its Board of Directors. The argument that the obtaining of loan was in accordance with
the ordinary course of business usages and practices of the corporation is devoid of merit because
the prevailing practice in the corporation was to explicitly authorize an officer to contract loans in
behalf of the corporation.

c. Power to Sue
- Under Sec. 36 of Corporation Code, in relation to Sec. 23, where a corporation is an injured party, its
power to sue is lodged with its Board of Directors. A minority stockholder who is a member of the Board
has no such power or authority to sue on the corporation’s behalf.
- Where the corporation is real party-in-interest, neither administrator or a project manager could sign
the certificate against forum-shopping without being duly authorized by resolution of the Board of
Directors, nor the General Manager who has no authority to institute a suit on behalf of the corporation
even when the purpose is to protect corporate assets.
- When the power to sue is delegated by the by-laws to a particular officer, such officer may appoint
counsel to represent the corporation in a pre-trial hearing without need of a formal board resolution
- For counsel to sign the certification for the corporation, he must specifically be authorized by the Board
of Directors.

(d) Provide Gratuity Pay for Employees

- Providing gratuity pay for employees is an express power of a corporation under the Corporation
Code, and cannot be considered to be ultra vires to avoid any liability arising from the issuance of
resolution granting such gratuity pay. Lopez Realty v. Fontecha, 247 SCRA 183, 192 (1995).

(e) Donate
(f) Enter Partnership or Joint Venture.

TUASON & CO. v. BOLANOS

Facts: JM Tuason & Co. Inc. represented by its managing partner Gregorio Araneta Inc. filed a complaint in
the CFI for recovery of possession of registered land situated in Tatalon, QC against Quirino Bolanos.
Defendant in his answer claims through prescription and that the registration of said land was obtained
through fraud. The CFI ruled in favor of the plaintiff and declared that defendant had no right to the land.
Hence, this appeal.

Issue: WON the case should have been dismissed on the ground that it was not brought by the real party in
interest?

82
Held: No, the rules of court require that an action be brought in the name of but not necessarily by the real
party in interest. In fact,the practice really is for the attorney-at-law to bring the action and file the complaint
in plaintiff’s name which was done her. And while it is true that the complaint also states that the plaintiff is
represented herein by its managing partner G. Araneta Inc. another corporation, there is nothing against one
corporation being represented by another person, natural or juridical in a suit in court.
The contention that G. Araneta Inc. cannot act as managing partner on the theory that it is illegal for
two corporations to enetr into a partnership is without merit for the true rule is that though a corporation has
no power to enter into a partnership, it may nevertheless enter into a joint venture with another where the
nature of the venture is inline with the business authorized by is charter. There is nothing in the record to
show that the venture which plaintiff is represented by G. Araneta is not inline with the corporate business of
either corporation.
The SEC rule provides in an Opinion, that the right of the corporation to engage as a limited partner
(not a general partner, meaning that its liability is limited to the amount of investment it pours into the
partnership). But such a power to engage in a partnership must be specifically provided for in the corporation’s
charter.

WITH OR
STATUTORY WITHOUT
POWER PROCEDURE
REQUIREMENT APPRAISAL
RIGHT
- Power to shorten or - Approved by a majority - Written notice to each - Extension à
extend corporate term vote of the Board of stockholder Yes, such
(Sec. 37) Directors (majority of the constitutes a
quorum) novation of
- Ratified by at least 2/3 of the contract.
the OCS or 2/3 of Shortening à No,
members in a non-stock but not because
corporation. such is inherent,
because such is
not inherent as it
constitutes an
alteration of the
powers granted
it by the State.
- Power to increase - Approved by a majority - Written notice to - ▪Increase à
capital stock and also vote of the Board of each stockholders None, dilutes the
the power to decrease Directors (majority of Special worth of
capital stock (Sec. 38) quorum) - documentary - the stock, defeats
- Ratified by at least 2/3 of requirements the purpose of
the OCS - Prior approval of the the increase.
SEC; SEC shall not - Decrease à
accept for filing unless None, because in
with a sworn statement effect there is a
by treasurer that return of part of
25- investments of
- 25 rule complied with the stockholders
- SEC approval triggers
effectivity
Power to incur, create or Approved by a majority vote Written notice None – drains the
increase of the Board of Directors Prior approval of corporation of
indebtedness (Sec. 38) (majority of quorum) the SEC financial
Supporting documents resources
▪ Ratified by at least 2/3 of required: contrary to the
the OCS 1) trust indenture with purpose for which
SEC INTERIM a trustee bank the power is
GUIDELINES 2) underwriting exercised.
à agreement
Corporation must have: ▪ Bonds registered with
the SEC

83
 ▪ Minimum net worth of P25
M at the
time of the filing of the
application
▪ Have been in operation
for at
least 3 years
▪ Must fulfill financial ratio
mandated by
SEC in interim
guidelines
Power to sell, dispose, 1) Of all or (1) Must comply with the Yes, such a sale
lease, encumber (Sec. substantially all of its Bulk Sales Law does not
40) property ▪ Listing the necessarily leas
▪ Majority vote of Board of corporate creditors to a dissolution of
ALL à Quantitative Test Directors and the amount and the corporation
SUBSTANTIALLY ALL (majority of quorum) nature of their claims and return of the
à ▪ Ratified or approved ▪ Failure renders residual value of
Qualitative Test by 2/3 of the OCS or 2/3 of transaction void the corporation.
(purpose for which it was the members (2) If no ratificatory vote of Such is afforded
incorporated) ▪ Relates to the primary stockholders, it is an utra as a matter of
purpose. vires act of the third kind equity and
fairness.
2) Exception to Sec.
40 – if the sale is
necessary in the usual
and regular course of
business or if proceeds of
the sale or other
disposition of such
property and assets be
appropriated for the
conduct of its remaining
businesses
▪ Majority vote of Board of
Directors
(business judgment rule
▪ Does not relate to primary
or secondary
purpose
Power to purchase own ▪ Must be for a legitimate purpose – example: None
shares (Sec. 41) (1) eliminate fractional shares arising out of stock
dividends
Buy back of shares (i) (2) collect or compromise an indebtedness to the
decrease the cost of corporation arising out of unpaid subscription in a
doing business (ii) delinquency sale, and to purchase delinquent shares
perpetuate control of during said sale and
the enterprise. (3) to pay dissenting or withdrawing
stockholders exercising appraisal right
Taken from URE only except redeemable shares
Power to invest Approved by a majority Written notice of the Yes, because
corporate funds in vote of the proposed investment minus
another corporation or Board of Directors and the time and place of the ratificatory vote
business or for any majority of quorum) meeting shall be the contract or
other purpose (Sec. Ratified by at least 2/3 of addressed to each transaction falls
42) the OCS stockholder or member under the realm
As a general rule, section 42 at his place of residence of ultra vires
applies if the investment is as shown in the books transactions of
for secondary or other of the the third type.
than the

84
 primary purpose. corporation and deposited
Except if the to the addressee in the
investment is Post Office with postage
reasonably necessary prepaid or served
to personally.
accomplish its primary
purpose as stated in the
Articles of
Incorporation, approval
of the stockholders
is not necessary as it is
included in the
Business Judgment of
Board of Directors
Power to declare ▪ Cash dividends ▪ Sec. 43 prohibits stock Yes.
dividends (Sec. 43) (1) Absolute majority ofcorporation
Board of Directors à in From retaining surplus
accordance with the
profits in excess of 100%
Business Judgment Rule of their paid-up
(2) Only declared out ofcapital stock, EXCEPT:
the URE which shall be (1) When justified by
payable in cash, in definite corporate
property or in stock expansion projects or
(3) However, cash
programs as
dividends due on
approved by the Board of
delinquent shares shall be Directors
first applied to the unpaid
(2) When corporation
balance while stock
is prohibited under any
dividends shall be withheldloan agreement from
until fully paid the OCS atdeclaring dividends
a regular or special without its consent and
meeting called for that such consent has not
purpose 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 reserved for
profitable contigencies
Power to enter into ▪ Approved by absolute majority of the Board of Directors
management contracts ▪ Approved by stockholders owning majority of the OCS
(Sec. 44)
HOWEVER where:
(1) Stockholders representing the same interest of both
managing and the managed corporation own or
control more than 1/3 of the total OCS entitled to vote
of the managing corporation OR
(2) Where a majority of the members of the Board of
Directors of the managing corporation also constitute
a majority of the members of the Board of Directors
of the managed corporation. Then it must be
approved by the stockholders of the managed
corporation owning at least 2/3 of the OCS

EXCEPT if the corporation is organized primarily as

management company.

85
▪ Not for a period longer than five years for any one term.

86