Corporation Law Notes≈

Stella Mariz De Larna

II.
A. DEFINITION
1. Sec 2. Corporation- 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.
2. Juridical person- not entitled to moral damages because, not being a natural person, it cannot experience physical suffering
or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock.

Art. 44. The following are juridical persons:

(1) The state and its political subdivisions;
(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.
Art 45. Juridical persons mentioned in nos. 1 and 2 of the preceding article are governed by the laws creating or recognizing them.
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. Associations and societies, whose articles are kept secret among the members, and wherein any one 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.

B. TRI-LEVEL EXISTENCE OF CORPORATIONS

1. Aggregation of Assets and Resources-assets only level
2. Business Enterprise/Economic Unit-“going concern”
3. Juridical Entity-the business or endeavor pursued in the medium of the corpo
 defines the subj matter of contract
 determines the applicable law

C. RELATIONSHIPS OF CORPORATION
1. Juridical Entity Level- corporation-state relationship
2. Contractual Relationship Level
a. Between the corporation and its agents or representatives to act on its behalf, governed by the Law on Agency
b. Between the corporation and its shareholders or members
c. Between and among shareholders in a common venture
d. Between the corporation and third parties or “outsiders”, governed by the law on contracts.

D. FORMATION OF CORPORATIONS
1. THEORY OF CONCESSION
-an artificial creature without any existence until it has received the imprimatur of the state acting, according to law, through SEC.
a. TAYAG VS. BENGUET CONSOLIDATED INC., 26 SCRA 242
Facts:
On March 27, 1960, Idonah Slade Perkins died in New York City. On August 12, 1960, Prospero Sanidad instituted ancillary
administration proceedings appointing ancillary administrator Lazaro A. Marquez later on substituted by Renato D. Tayag. On January
27, 1964, CFI ordered domiciliary administrator in the Philippines 33, 002 shares of stock certificates owned by her in a Philippine
corporation, Benguet Consolidated, Inc., to satisfy the legitimate claims of local creditors. When Country Trust Company of New York
refused the court ordered Benguet Consolidated, Inc., to declare the stocks lost and required it to issue certificates in lieu thereof.
Appeal was taken by Benguet Consolidated, Inc. alleging the failure to comply with its by-laws setting forth the procedure to be
followed in case of a lost, stolen or destroyed so it cannot issue new stock certs.

Issue:
WON Benguet Consolidated, Inc. can ignore a court order because of its by-laws

Held:
No. CFI affirmed.
Fear of contingent liability – obedience to a lawful order = valid defense
Benguet Consolidated, Inc. is a Philippine corporation owing full allegiance and subject to the unrestricted jurisdiction of local
courts.
Assuming that a contrariety exists between the above by-law and the command of a court decree, the latter is to be followed.
Corporation is an artificial being created by operation of law. “It owes its life to the state, its birth being purely dependent on
its will. Cannot ignore the source of its very existence.

2. THEORY OF ENTERPRISE ENTITY (by Adolf Berle)

 The corporation is not merely an artificial being, but more of an aggregation of persons doing business, or an underlying
business unit (Philippine Corporate Law, Cesar Villanueva, 2001 ed.).
 The theory draws its vitality from the fact that it is not legal fiction alone that creates a corporate entity but also the consent
of those who will form the corporation to engage in a common venture or business for profit.
 Capable of application in many fields of corporation law besides those here examined
 Corporate entity: takes it being from the reality underlying enterprise, formed or in formation
  That the state’s approval of the corporate form sets up a prima facie case that the assets, liabilities and operations of the
corporation are those of the enterprise
 But that where the corporate entity is defective, or otherwise challenged, its existence, extent and consequences may be
determined by the actual existence and extent and operations of the underlying enterprise, which by these very qualities
acquires an entity of its own, recognized by law.
 Application of this theory can systematize the scattered rules of corporation law in a number of areas
Three (3) main fields:
1. De Facto Corporation
- Simplest and most direct disregard of the theory of state-created artificial entity occurred when courts developed the
doctrine of de facto corporations.
Sequence:
a. The enterprise contracts with an outsider, who later brings action against the enterprise as though it were a corporation; and
the enterprise is held liable in corporate form;
- Courts frequently invoke the doctrine of estoppel in pais
b. The enterprise contracts with an outsider, and subsequently brings action in corporate form against the outsider. The outsider
is held to be liable to the enterprise;
c. The enterprise contracts with an outsider, and the outsider brings action against the component individuals. They are
absolved from liability and the outsider held to his remedy against the enterprise only;
- 2&3 involve court-law the set-up of artificial entity despite that the state has not done so
- Use of word rather than a rule
- (c) language of estoppel is discarded; GR: where the component individuals have endeavored to form a corporation, have, in
good faith, believed that they were such a legal entity, and have colorably complied with the incorporation law, they will be
protected from liability
d. The enterprise contracts with an outsider, and the component individuals seek to hold the outsider liable on his contract. It
would seem to follow logically that the individuals are not allowed to recover: recovery must be by the enterprise.
ALL: they have lost their power to enforce liabilities against outsiders in favor of themselves as individuals.

2. Disregard of the corporate fiction

3. Added liability of shareholders

E. STATUTORY ATTRIBUTES OF CORPORATION

1. ARTIFICIAL BEING WITH SEPARATE PERSONALITY
DOCTRINE OF SEPARATE PERSONALITY
-A corporation is a legal or juridical person with a personality separate and apart from its individual stockholders or members and from
any other legal entity to which it may be connected (The Corporation Code of the Philippines, Hector S. De Leon & Hector M. De Leon,
Jr., 2006 ed.).

Consequences:
1. Liability for acts or contracts The general rule is that obligations incurred by a corporation, acting through its authorized agents are
its sole liabilities. Similarly, a corporation may not generally, be made to answer for acts or liabilities of its stockholders or members
or those of the legal entities to which it may be connected and vice versa (Creese vs. CA, 93 SCRA 483).
2. Right to bring actions It may bring civil and criminal actions in its own name in the same manner as natural persons (Art. 46, NCC).
3. Right to acquire and possess property Property conveyed to or acquired by the corporation is in law the property of the corporation
itself as a distinct legal entity and not that of the stockholders or members (Art. 44(3), NCC).
4. Acquisition of court of jurisdiction Service of summons may be made on the president, general manager, corporate secretary,
treasurer or in-house counsel (Sec. 11, Rule 14, Rules of Court).
5. Changes in individual membership Corporation remains unchanged and unaffected in its identity by changes in its individual
membership (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.).
6. Entitlement to constitutional guaranties
Corporations are entitled to certain constitutional rights.
a. Due process (Albert v. University Publishing, Inc. 13 SCRA 84 [1965])
b. Equal Protection of the law (Smith, Bell & Co. v. Natividad, 40 Phil. 136 [1919])
c. Protection against unreasonable searches and seizures (Stonehill v. Diokno, 20 SCRA 383 [1967])

However, it is not entitled to certain constitutional rights such as political rights or purely personal rights not only because it is an
artificial being but also because it is a mere creature of law (Reviewer in Commercial Law, Jose R. Sundiang & Timoteo Aquino, 2005
ed.).
a. Right against self-incrimination (Bataan Shipyard v. PCGG, 150 SCRA [1987]).
7. Moral Damages
 A corporation is not entitled to moral damages because it has no feelings, no emotions, no senses (ABS-CBN vs. Court of
Appeals, G.R. No. 128690, Jan. 21, 1999).
 In Filipinas Broadcasting vs. Ago Med., however, it was held that a juridical person such as a corporation can validly complain
for libel or any other form of defamation and claim for moral damages. The SC had rationated that Art. 2219 (7) does not
qualify whether the plaintiff is a natural or a juridical person (Filipinas Broadcasting vs. Ago Medical Center-Bicol, et. al., 448
SCRA 413).
8. Liability for torts A corporation is liable whenever a tortuous act is committed by an officer or agent under the express direction
or authority of the stockholders or members acting as a body, or, generally, from the directors as the governing body (PNB vs. CA,
83 SCRA 237 [1978]).
 9. Liability for Crimes Since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its officers since
it does not have the essential element of malice, except if by express provision of law, the corporation is held criminally liable; In
such case the responsible officers would be criminally liable (People vs. Tan Boon Kong, 54 Phil. 607 [1930]).

TESTS TO DETERMINE NATIONALITY OF CORPORATIONS

1. Incorporation Test – determined by the state of incorporation, regardless of the nationality of its stockholders.
2. Domicile Test – determined by the state where it is domiciled.
 The domicile of a corporation is the place fixed by the law creating or recognizing it; in the absence thereof, it shall be
understood to be the place where its legal representation is established or where it exercise its principal functions (Art. 51,
NCC).
4. Control Test – determined by the nationality of the controlling stockholders or members. This test is applied in times of war.
Also known as the WARTIME TEST.
2.CREATED BY OPERATION OF LAW
DOCTRINE OF CORPORATE ENTITY
-A corporation comes into existence upon the issuance of the certificate of incorporation (Sec. 19). Then and only then will it acquire
a juridical personality to sue and be sued, enter into contracts, hold or convey property or perform any legal act, in its own name
(Corporation Code of the Philippines, Ruben C. Ladia, 2001 Ed.).
-Corporations cannot come into existence by mere agreement of the parties as in the case of business partnerships. They require
special authority or grant from the State. This power is exercised by the State through the legislature, either by a special incorporation
law or charter which directly creates the corporation or by means of a general corporation law under which individuals desiring to be
and act as a corporation may incorporate (The Corporation Code of the Philippines, Hector S. De Leon & Hector M. De Leon, Jr., 2006
ed.).

3.RIGHT OF SUCCESSION
It is the capacity to have continuity of existence despite the changes on the persons who compose it. Thus, the personality continues
despite the change of stockholder, members, board members or officers (Reviewer in Commercial Law, Jose R. Sundiang & Timoteo
Aquino, 2005 ed.).

4. POWERS, ATTRIBUTES, PROPERTIES

THEORY OF SPECIAL CAPACITIES/LIMITED CAPACITY DOCTRINE
-No corporation under the Code, shall possess or exercise any corporate power, except those conferred by law, its Articles of
Incorporation, those implied from express powers and those as are necessary or incidental to the exercise of the powers so conferred.
The corporation’s capacity is limited to such express, implied and incidental powers (Reviewer in Commercial Law, Jose R. Sundiang &
Timoteo Aquino, 2005 ed.).
-If the act of the corporation is not one of those express, implied or incidental powers, the act is ultra vires. (Reviewer in Commercial
Law, Jose R. Sundiang & Timoteo Aquino, 2005 ed.).

F. ADVANATAGES AND DISADVANTAGES OF CORPORATIONS

 G. COMPARISON WITH OTER BUSINESS ENTITIES

III. NATURE AND ATTRIBUTES OF CORPORATIONS

A. CREATION OF CORPORATIONS
1. SECTION 15, RCC

B. THE CORPORATION AS A PERSON

1. RIGHTS AS A PERSON-corporations are entitled to certain constitutional rights.
a. Due Process
b. Equal protection clause
c. Unreasonable searches and seizures

However, it is not entitled to certain constitutional rights such as political rights or purely personal rights not only because it is an
artificial being but also because it is a mere creature of law (Reviewer in Commercial Law, Jose R. Sundiang & Timoteo Aquino, 2005
ed.).
a. Right against self-incrimination (Bataan Shipyard v. PCGG, 150 SCRA [1987]).
2. LIABILITY FOR TORTS-A corporation is liable whenever a tortuous act is committed by an officer or agent under the express
direction or authority of the stockholders or members acting as a body, or, generally, from the directors as the governing
body (PNB vs. CA, 83 SCRA 237 [1978]).
3. CRIMINAL LIABILITY-Since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its officers
since it does not have the essential element of malice, except if by express provision of law, the corporation is held criminally
liable; In such case the responsible officers would be criminally liable (People vs. Tan Boon Kong, 54 Phil. 607 [1930]).
4. RECOVERY OF MORAL AND OTHER DAMAGES-A corporation is not entitled to moral damages because it has no feelings, no
emotions, no senses (ABS-CBN vs. Court of Appeals, G.R. No. 128690, Jan. 21, 1999).