Cases Corpo Consolidated

7/27/2019 Cases Corpo Consolidated

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INTRODUCTION

-There are four known forms of business establishment:

(a) Sole or individual proprietorship: a one-man form of business entityconducted for profit by a single individual who owns all the assets,personally answers all the liabilities and suffer all the losses and enjoys allthe profits to the exclusion of others.

[Advantages: elimination of bureaucratic process common in corporations

and ownership of all the profits. Disadvantages: Unlimited personalliability for all debts and obligations, and limited capital/resources.]

(b) Partnership: by the contract of partnership, two or more persons bindthemselves to contribute money, property or industry to a common fundwith the intention of dividing the profits among themselves.

(c) Joint venture: one time grouping of two or more persons (natural orjuridical) in a specified undertaking. Joint venture partakes the nature of apartnership contract and is created for the purpose of prosecuting aparticular business transaction (see Art. 783 of the NCC, partnership mayalso be particular or universal), and being a form of partnership, it shouldbe governed by the law on partnership.

[Distinctions: (1) JV does not have a distinct and separate personalityunlike a partnership. (2) JV has for its object a single undertaking ortransaction, while a partnership usually has for its object a general businessof a particular kind. (3) Corporations may enter into joint ventures and notpartnership, because in the latter case, the identity of the corporation is lostor merged with that of another and the discretion of the officials is placedin the hands other than those permitted by law (BoD)]

Exception: when the following requirements concur: (1) the articles ofincorporation expressly authorized the corporation to enter into contractsof partnership; (2) the agreement or articles of partnership provide that allthe partners will manage the firm; and (3) the articles of partnershipstipulate that all the partners are and shall be jointly and severally liable forall obligations of the partnership.

(d) Corporations: (see BP 68 [Corporation Code] which became effectiveupon approval on May 1, 1980. See also Act 1459 [Corporation Law] andCode of Commerce of Spain on sociedad anonimas).

DEFINITION AND ATTRIBUTES

-Corporation: an artificial being, created by operation of law, having theright of succession and the powers, attributes and properties expresslyauthorized by law or incident to its existence. (Sec. 2)

-It is an artificial being: it has juridical personality, separate and distinctfrom the persons composing it. It exists independently from thestockholders, members or its officers.

-It is created by operation of law: compliance with the requirementsimposed by law is necessary for its creation, such that agreement of thepersons organizing it does not grant it independent personality.

-It has the right of succession: the death, incapacity, or civil interdiction ofone or more of the stockholders does not result in its dissolution, unlike inpartnership. In other words, it persists to exist independently of theindividuals composing it.

-It has limited capacity: since it has the powers, attributes and propertiesexpressly authorized by law or incident to its existence.

LBC Express Inc. v. CA (1994)

Facts: Carloto, President and Manager of Rural Bank filed an action fordamages against LBC for wanton and reckless disregard of its obligation,after the document consigned thru LBC to Carloto arrived without the cashpack. The complaint was later amended where Rural Bank joined asplaintiff seeking to recover moral damages.

Held: Moral damages are granted in recompense for physical sufferingmental anguish, fright, serious anxiety, besmirched reputation, woundedfeelings, moral shock, social humiliation and similar injury. A corporationbeing an artificial person and having existence only in legal contemplationcannot experience physical suffering and mental anguish. Thus, the prayerfor moral damages must fail.

[(cases arranged chronologically) In Tamayo v. University of Negros, theCourt held that corporations are not entitled to moral damages. InMambulao Lumber Co. v. PNB, it was held that corporations is not entitled

to moral damages, unless it has a good reputation which if besmirchedmay be a ground for the award of moral damages. In SIMEX Intl v. CA,moral damages were awarded to the corporation in lieu of nominadamages (it also cited Art. 2205 NCC which provides that, actual andcompensatory damages may be awarded to a juridical entity for injury toplaintiffs business entity or commercial credits. In ACME Shoe Rubberand Plastic Corp. v. CA, the Court held that artificial persons are noentitled to moral damages. The issue, however, was finally settled inFilipinas Broadcasting Network v. Ago Medical and Educational Center(2005), where the Supreme Court ruled that the corporations claim formoral damages falls under Art. 2219[7] of the NCC which authorizes therecovery of moral damages in cases of libel, slander, and/or any form ofdefamation, because there is no qualification in the said provision whetherthe plaintiff is a natural or juridical person. The rule now therefore is that ajuridical person can validly complain for libel or any other form odefamation and claim for moral damages.

-Advantages of a corporate form of business:

(1) Capacity to act as a single unit

(2) Limited shareholders liability

(3) Continuity of existence (see right of corporate succession)

(4) Feasibility of greater undertaking (since there is large capital)

(5) Transferability of shares (unless restricted)

(6) Centralized management (see Board of Directors)

(7) Standardized method of organization, management and finance

-Disadvantages of corporate form of business:

(1) Bureaucratic process (causing delay)

(2) Territoriality (it cannot act beyond the State of incorporation)

(3) Limited Credit/Resources: (due to limited shareholders liability)

(4) Uniting of incompatible and conflicting interest (see transferability)

(5) Minority has practically no say in the management of affairs

(6) Double taxation may be imposed on corporate income

(7) Corporations are subject to governmental regulation and supervision

-Distinctions between a Corporation and a Partnership:

(1) Corporation is created by operation of law, whereas partnership icreated by agreement of the parties.

(2) There must be at least five (5) incorporators in order to organize acorporation (except corporation sole), whereas partnership may be formedby two or more natural persons.

(3) Corporation has limited liability, whereas a partnership can do anythingby agreement of the parties provided it is not contrary to law.


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(4) Corporation must transact its business through the Board of Directors,whereas in the absence of an agreement to the contrary, any one of thepartners in the partnership may validly bind the firm.

(5) Corporation has the right of succession, whereas a partnership is basedon mutual trust and confidence such that death etc. of a partner wouldresult to its dissolution.

(6) Stockholder can transfer his shares in the corporation without theconsent of the other stockholders thereby making the transferee a

stockholder, whereas a partner cannot transfer his rights or interests in thefirm so as to make the transferee a partner without the consent of the otherpartners.

(7) The stockholders liability is limited only to the extent of theirsubscription or promised contribution, whereas in partnership (except alimited partner in a limited partnership) are liable pro rata with all theirproperty and after all the partnership property has been exhausted.

(8) The term of corporate existence is limited to 50 years unless extendedby amendment, whereas a partnership may exist for an indefinite periodsubject only to the causes of dissolution.

(9) Corporation cannot be dissolved by mere agreement of thestockholders, and the States consent is necessary for it to cease as a bodycorporate, whereas the partners can dissolve the firm any time or at will.

CLASSIFICATION OF CORPORATION

-Corporations formed or organized under this Code may either be stock ornon-stock corporations. Corporations which have capital stock divided intoshares and are authorized to distribute to the holders of such sharesdividends or allotments of the surplus profits on the basis of the sharesheld are stock corporations. All other private corporations are non-stockcorporations. (Sec. 3)

Stock Corporations:

-Capital stock divided into shares; and

-Authorized to distribute dividends or allotments as surplus profits to its

stockholders on the basis of the shares held by each of them

Non-stock Corporations:

-no part of their income is distributable as dividends to its members,trustees or officers subject to the provisions on dissolution. (see Sec. 87)

-primarily exist for purposes other than profit, but it does not follow thatthey cannot make profits as an incident to their operations.

-profits obtained are used for the furtherance of their purposes.

CIR v. Club Filipino Inc. De Cebu (1968)

Facts: Private respondent, a civic corporation, has an authorized capital of

22,000php which was later increased to 200,000php. Its article ofincorporation and by-laws do not contain any provisions relative todividends and their distribution, rather, it was agreed that the remainingassets upon its dissolution shall be donated to a charitable institution. TheClub is operating bar and restaurant to its members and guests, andwhatever profits it had were used to improve its golf course. In 1951, theClub, as a result of capital surplus, declared stock dividends but no actualcash dividends were distributed to the stockholders. The BIR assessed theClub with percentage taxes on the gross receipt of its bar and restaurant.

Held: The liability for fixed and percentage taxes does not ipso facto attachby mere reason of the operation of a bar and restaurant. For the liability toattach, the operator thereof must be engaged in the business as bar keeperand restaurateur, where profits is the purpose or livelihood is the motive.In the present case, the Club derived profits from the operation of its barand restaurant, but such fact does not necessarily convert it into a profit

making enterprise. The profits derived therefrom are necessarily incidentato the primary object of developing and cultivating sports for the healthfulrecreation and entertainment of the stockholders and members. Also, thefact that the capital of the Club is divided into shares does not detract fromthe finding of the trial court that it is not engaged in the business ofoperating bar and restaurant. What is determinative of whether or not theClub is engaged in such business is its object or purpose as stated in itsarticles and by-laws.

Corporations created by Special law or Charter:

-Corporations created by special laws or charters shall be governedprimarily by the provisions of the special law or charter creating them,supplemented by he provisions of this Code, in so far they are applicable(Sec. 4)

-Among those corporations created by special law are Philippine NationaOil Company, National Development Company, Philippine Export andForeign Loan Guarantee Corporation and the Government Services andInsurance System.

-These corporations owe their existence by virtue of the special law orcharter creating them such that registration with the Securities andExchange Commission (SEC) is not required for them to acquire legal andjuridical personality.

-Unless otherwise provided by the law or charter creating them, they areimmune from suits. But when the government engages in a particularbusiness through a corporation, it divests itself pro hoc vice of its sovereigncharacter so as to subject itself to the rules governing private corporations.

-Officers and employees of government owned or controlled corporationscreated by special laws are governed by the Civil Service Law, on the otherhand, their subsidiaries organized under the provisions of the CorporationCode are governed by the Labor Code. The test in determining whetherthey are governed by the Civil Service Law is the manner of their creation.

PNOC-Energy Devt Corp. v. NLRC (1991)

Facts: Private respondent Danilo Mercado, employee of PNOC-EDC, asubsidiary of PNOC, filed a complaint for illegal dismissal before the

NLRC. Petitioner filed a motion to dismiss on the grounds of lack ojurisdiction but the same was denied by the NLRC, hence the presenpetition for certiorari alleging that PNOC-ED is a subsidiary of PNOC,which is a government entity and as such is governed by the Civil ServiceLaw.

Held: Under the present state of law, the test of determining whether agovernment owned or controlled corporation is subject to the Civil ServiceLaw is the manner of its creation, such that government corporationcreated by special charter are subject to its provisions while thoseincorporated under the General Corporation Law are not within itcoverage. PNOC-EDC having been incorporated under the GeneraCorporation Law is subject to the provisions of the Labor Code.

Public Corporations:

-Those created, formed or organized under a special law or with originacharter for political or governmental purposes for the State or any of itspolitical subdivisions. (The same is not absolute since the CorporationCode may apply suppletorily)

Private Corporations:

-Those incorporated under the general corporation law for some privatepurpose, and the fact that the government owns the controlling shares doesnot diminish the fact that the said corporation owes its existence to theCorporation Code.

National Coal v. CIR (146 Phil 583)


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Facts: Petitioner Company was created for the purpose of developing thecoal industry by Act 257 and was actually engaged in the mining of coal onreserved lands belonging to the government. It claimed exemption fromtaxes on the ground that the Philippine government is the owner ofsubstantially all of the shares of the company.

Held: Petitioner is a private corporation organized under the CorporationLaw, and the mere fact that the government happens to be a majoritystockholder does not make it a public corporation. It has no greater rights,powers and privileges than any other private corporations.

Ecclesiastical or Religious Corporations:

-Those composed exclusively of ecclesiastics and organized for spiritualpurposes; administering properties held for religious ones; or to securepublic worship or perpetuating the right of a particular religion.

-Religious corporations are further classified either as religious societies(Sec. 116) or corporation sole (Sec. 110).

Lay Corporations:

-Those established for purposes other than religion or existing for secularor business purposes. It may further be classified as Eleemosynary (createdfor charitable and benevolent purposes such as those organized for thepurpose of maintaining hospital and houses for the sick, aged or poor) orCivil (organized not for the purpose of public charity but for the benefit ofits members).

Aggregate Corporations:

-Those composed of individuals vested with corporate powers, registeredunder the Corporation Code consisting of not less than five (5) but notmore than fifteen (15) incorporators, except the corporation sole.

Corporation Sole:

-Those consist of one person or individual only and who are made ascorporate bodies in order to give them some legal capacity and advantagewhich they cannot have as natural persons. It may be formed by the chiefarchbishop, bishop, priest, minister, rabbi or other presiding elder of

religious denominations, sects or churches. (Sec. 110)

Close Corporations:

-Those whose shares of stock are held by limited number of persons likethe family or other closely-knit group. Under this form of corporation,there are no public investors and the shareholders are active in the conductof the corporate affairs. (see Sec. 96)

Open Corporations:

-Those formed to openly accept outsiders as stockholders or investors.They are authorized and empowered to list in the stock exchange and tooffer their shares to the public such that stock ownership can widely bedispersed.

Domestic Corporations:

-Those organized or created under or by virtue of the Philippine laws,either by legislative act or under the provisions of the General CorporationLaw.

Foreign Corporations:

-Those formed, organized or existing under any laws other than those ofthe Philippines. (see Sec. 123)

-The requirement that the law where the foreign corporation is organizedmust allow Filipino citizens and corporations to do business in its own

country or state was merely for the purpose of qualifying a foreigncorporation to secure a license and to do business in the Philippines.

Parent or Holding Companies:

-One corporation (usually owns controlling interest) controls anothecorporation or several other corporations known as its subsidiaries. Theformer controls the latter by the power and authority to elect management.

-Holding companies have a passive portfolio and hold the securities merely

for purposes of control and management unlike investment companiewhich are active in the sale or purchase of stock or securities

Subsidiary Corporations:

-Those which another corporation (parent) owns at least a majority of theshares, and is in effect a corporation under the control of anothercorporation which is the holding company.

-A subsidiary has an independent and separate juridical personalitydistinct from that of its parent company, hence any claim or suit againstthe latter does not bind the former and vice versa.

Affiliates:

-Those corporations which are subject to common control and operated aspart of a system. They are sometimes called sister companies since thestockholdings of a corporation is not substantial enough to control theformer.

Quasi-public Corporations:

-Private corporations which have accepted from the State the grant offranchise or contract involving the performance of public duties. They arenot strictly organized for governmental purposes, but whose operationscontribute to the convenience or welfare of the general public (publiservice corporations include telegraph and telephone companies, gas, waterand electric companies).

Quasi Corporations:

-Public bodies or municipal societies such as townships, counties, schoodistricts, road or highway districts, not vested with general powers ocorporations, are organized by statutes or immemorial usage.

-They possess some corporate functions and attributes but they areprimarily political subdivisions (agencies in the administration of civigovernment) and their corporate functions are granted to enable them toperform more readily their public duties.

De Jure Corporations:

-Juridical entities created or organized in strict or substantial compliancewith the statutory requirements of incorporation and whose rights to exisas such cannot be successfully attacked even by the State in a quo warrantoproceeding.

De Facto Corporations:

-Those which exist by virtue of an irregularity or defect in the organizationor constitution or from some omission to comply with the conditionsprecedent by which corporations de jure are created, but there wacolorable compliance with the requirements of the law under which theymight be lawfully incorporated. Its existence can only be attacked by theState (not private person) in quo warranto proceedings. (Sec. 20)

Corporations by Estoppel:

-Those which are so defectively formed as not to be either de jure or defacto corporations but which are considered as corporations in relation


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only to those who cannot deny their corporate existence due to theiragreement, admission or conduct.

-All person who assume to act as a corporation knowing it to be withoutauthority to do so shall be liable as general partners for all debts, liabilitiesand damages incurred or arising as a result thereof. (Sec. 21)

FORMATION AND ORGANIZATION OF CORPORATION

Three stages in the life of a corporation are creation; reorganization or

quasi-reorganization; and dissolution and winding up.

Creation:

(a) Promotional stage: the act of getting a corporation organized includingthe procurement of subscription to its capital stock. A promoter is anorganizer or projector who brings persons to unite in forming acorporation.

-Promoter may enter into contract either in his own name or inthe name of the proposed corporation. Promoters could not act for aprojected corporation since that which had no legal existence could have noagent or be a party to a contract. However, after its incorporation, it mayadopt or ratify said contracts (express or implied by accepting its benefitswith knowledge of the terms thereof).

-When a promoter is thus acting for a proposed corporation, theformer have three options: (1) Make a continuing offer on behalf of thecorporation, which if accepted after incorporation, will become a contract.The promoter does not assume any personal liability, whether or not thecorporation will accept the offer; (2) Make a contract at the same timebinding himself, with the understanding that if the corporation, onceformed, accepts or adopts the contract, he will be relieved of responsibility;and (c) Bind himself personally and assume the responsibility of looking tothe proposed corporation, when formed, for reimbursement.

(b) Process of incorporation: the formal and procedural requisite ofdrafting the Articles of Incorporation, preparing other necessarysupporting documents, their subsequent filing with SEC, and the issuanceof the Certificate of Incorporation.

-Contents of Article of Incorporation: (see Sec. 14)

-Form of Articles of Incorporation: (see Sec. 15)

-Prefatory Paragraph: must specify the nature of the corporationbeing organized in order to prevent difficulties of administration andsupervision. (e.g. stock or non-stock corporation)

-Corporate Name: It is the principal means of distinguishing thecorporation not only from its stockholders or members but also from otherfirms and entities. It is essential to its existence since it is through thecorporate name that it can act and perform legal acts. A corporation, onceformed, cannot use any other name, unless it has been amended inaccordance with law as this would result in confusion, fraud, evasion, and

difficulties of administration and supervision.

-No corporate name may be allowed by the SEC if the proposedname is identical or deceptively or confusingly similar to that of anyexisting corporation or to any other name already protected by law or ispatently deceptive, confusing or contrary to law. When a change in thecorporate name is approved, the Commission shall issue an amendedcertificate of incorporation under the amended name. (Sec 18)

-A change upon a corporate name does not in any way affect therights, privileges or obligations previously acquired or incurred by it. Thecorporation upon change of name is in no sense a new corporation or thesuccessor of the original corporation. It is the same corporation with adifferent name, and its character is in no respect changed.

-SEC requires that a Verification Slip from the RecordsDivision of the Commission be submitted showing that the proposed nameis legally permissible.

-To distinguish corporation from other business organizationsthe law requires the corporation to append the word Corporation oIncorporated in full or in abbreviated form, to its proposed name.

-If the proposed name contains a word already used as part othe firm name or style of a registered entity, the proposed name must

contain two other words different and distinct from the name of thecompany already registered or protected by law.

-If the name or surname of a person is used as part of a corporatename, there must be a basis for the use of such name such as it is the nameof one of the incorporators or that of his child.

-If the name used is that of another person, the consent of thelatter or his heirs, if already deceased, should be secured and submitted tothe SEC.

-If the corporate name contains initials, the meaning thereomust be indicated in the verification slip or an explanation to the effect thatit is merely a coinage with no meaning at all.

-If the corporation is a subsidiary of a foreign entity, the wordPhilippines or Phils in parenthesis should be affixed in the corporatename.

-The words engineers, architects, design or designers arereserve for professional partnership, except if it is descriptive of the natureof the business (e.g. engineering equipments).

Red Line Transportation v. Rural Transit Co. (1934)

Facts: Private respondent filed with the Public Service Commission anapplication for a certificate of public convenience for a new transportationservice which was issued in the name of Bachrach Motors Co., Inc andRural Transit Co. is being used by the former only as a trade name.

Held: No law empowers the PSC or any court in this jurisdiction to

authorize one corporation to assume the name of another corporation astrade name. Rural Transit Co and Bachrach Motors Co. are required eachto adopt and certify a distinctive name. The name of a corporation isessential to its existence. It has the power of succession by its corporationname. The incorporators constitute a body politic and corporate under thename stated in the certificate. It cannot change its name except in themanner provided by law. By that name alone it is authorized to transactbusiness.

Universal Mills Corp. v. Universal Textile Mills, Inc. (1977)

Facts: Petitioner Universal Mills Corp. was directed by the SEC to changeits corporate name on the ground that it is confusingly and deceptivelysimilar to that of respondent Universal Textile Mills, Inc. after newspapercarrying reports on the fire created uncertainty and confusion as to the reaidentity of the corporation whose property was burned.

Held: The corporate names in question are not identical but they areindisputably so similar that confusion will usually arise. The court cannotperceive why of all names, petitioner had to choose a name already beingused by respondent firm engaged in practically the same business for morethan a decade enjoying wellearned patronage and goodwill, when thereare so many other appropriate names it could possibly adopt withouarousing any suspicion as to its motive and the degree of confusion whichcould mislead even its own customers.

Lyceum of the Philippines v. CA (1993)

Facts: Petitioner instituted a proceeding before the SEC compellingprivate respondents (Western Pangasinan Lyceum, Lyceum of CabaganLyceum of Lallo, Lyceum of Aparri. Etc) to delete the word Lyceum from


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their corporate names and to permanently enjoin them from using theword as part of their respective names. The SEC, however, ruled in favor ofthe respondents which was affirmed by the CA, hence the present appeal.

Held: The policy underlying the prohibition in Sec. 18 (corporate name) isthe avoidance of fraud upon the public. In the present case, all the privaterespondents carry the word lyceum and any confusion or deception isprecluded by the appending of geographic names to the said word. Theword lyceum denotes a secondary school or college from the Greek wordlykeion. Petitioner cannot validly invoke doctrine of secondary meaning.

[Foreign corporation which has never done business in the Philippines, butis widely and favorably known in the country through the use therein of itsproduct bearing its corporate and trade name has a legal right to maintainaction to protect its name or goodwill. (Puma v. IAC)]

Philips Export v. CA (1992)

Facts: Petitioner is a foreign corporation and the authorized users of thetrademark Philips since 1956. Private respondent Standard PhilipsCorporation, on the other hand, was issued a certificate of registration bythe SEC on 1982. Petitioner then filed a complaint and prayed for a writ ofinjunction to prohibit private respondent from using the word PHILIPS.The SEC denied the petition and ruled that there is no confusing similaritybetween the two marks.

Held: A corporations right to use its corporate and trade name is aproperty right, a right in rem, which it may assert and protect against theworld in the same manner as it may protect its tangible property, real orpersonal against trespass or conversion. A corporation cannot select aname identical with or similar to one already appropriated by a seniorcorporation, otherwise it will mislead and cause injury to the public. Theright to the exclusive use of a corporate name with freedom frominfringement by similarity is determined by priority of adoption. In thepresent case, PHILIPS is the dominant word and will inevitably lead oneto conclude that respondent is affiliated or associated with petitioner.

-Purpose Clause: defines the scope of the authority of thecorporate enterprise or undertaking. It both confers and limits the actualauthority of the corporate representatives. A corporation has only suchpowers as are: (1) expressly granted to it by law and by its article ofincorporations; (2) incidental to such conferred powers; and (3) those

reasonably necessary to accomplish its purse and incidental to itsexistence.(see Doctrine of Limited Liability) The statement of purposes orobjectives enables the:

(a) Stockholder to know within what lines of business his moneyis to be put at risks:

(b) Board of directors and management to know within whatlines of business they are authorized to act; and

(c) Anyone who deals with the company to ascertain whether acontract or transaction which he contemplates entering is one within thegeneral authority of the management.

-There are at least four general limitations on the purpose clause:(1) it must be lawful; (2) it must be specific or stated concisely although in

broad or general terms; (3) if there is more than one purpose, the primaryas well as the secondary ones must be specified; and (4) the purpose mustbe capable of being lawfully combined.

-Special laws prohibit certain business undertaking with regardto their purpose: (a) educational, religious, and other non-stockcorporations cannot include any other purpose which would change orcontradict its nature or to engage in any enterprise to make profits for itsmembers; (b) insurance companies cannot engage in commercial bankingat the same time and vice versa (except when it involves two separateentities); (c) stock brokers can have no other line of business not peculiarto them.

-A corporation cannot be formed for purposes of practicingprofession like law, medicine, or accountancy, directly or indirectlybecause the same are reserved exclusively for professional partnerships.

-Retail trade business where the corporate capital is less than$2.5M, or its peso equivalent are reserved exclusively for Filipinos.

-If corporate purpose or objective includes any purpose underthe supervision of another government agency, prior clearance or approvalof the concerned government agencies will be required (Sec. 17)

-Principal Office: The principal office of the corporation must belocated within the Philippines (Sec. 14[3]). Principal office may be in oneplace but the business operations are actually conducted in other areasThe law does not require a statement as to the place of corporateoperations.

-The statement of the location of the principal office is necessaryas it establishes the residence of the corporation, including venue of actionsfor or against it. It may also serve important in determining the validity ofmeetings of stockholders or members in so far as venue thereof isconcerned. (see Sec. 51) It also determines where the chattel mortgage ofshares should be registered.

Clavecilla Radio System v. Antillon (1967)

Facts: The New Cagayan Grocery filed a complaint for damages againstpetitioner CRS before the City Court of Cagayan when the latter's branchoffice in Cagayan omitted the word not in transmitting the messagethereby changing entirely its context. CRS filed a motion to dismiss on theground of improper venue.

Held: When the action is not upon a written contract, the same must befiled in the municipality where the defendant or any of the defendantsreside or may be served with summons. Settled is the principle that theresidence of a corporation is the place where its principal office isestablished, which in this case is in the City of Manila. The fact that CRSmaintains branch office in some parts of the country does not mean that itcan be sued in any of these places, because to allow an action to beinstituted in any place where a corporate entity has its branch office wouldcreate confusion and work untold inconveniences to the corporation.

-Term of Existence: A corporation shall exist for a period noexceeding fifty (50) years from the date of incorporation unless soonerdissolved or unless said period is extended. The corporate term aoriginally stated in the articles of incorporation, may be extended forperiods not exceeding fifty (50) years in any single instance by aamendment of the articles of incorporation, in accordance with this CodeProvided, that no extension can be made earlier than five (5) years prior tothe original or subsequent expiry date(s) unless there are justifiablereasons for an earlier extension as may be determined by the SEC. (Sec.11)

-A corporation can sue or be sued and transact business onlywhile it possesses a juridical personality. However, despite termination ofits existence, whether by expiration of its own term or by forfeiture, thecorporation continues as a body corporate, for three (3) years after the timewhen it would have been dissolved, for the purpose of prosecuting anddefending suits for or against it and by enabling it gradually to settle and

close its affairs. (see Sec. 122)

-The Incorporators: Corporators are those who compose acorporation whether as stockholders or members. Incorporators are thosestockholders or members mentioned in the articles of incorporation asoriginally forming and composing the corporation and who are signatoriesthereof. (Sec. 5) Corporators in a stock corporation are called stockholdersor shareholders. Corporators in non-stock corporation are called members.

-Any number of natural persons not less than five (5) but notmore than fifteen (15), all of legal age and a majority of whom are residentsof the Philippines may form a private corporation for any lawful purpose orpurposes. Each of the incorporators of a stock corporation must own or bea subscriber to at least one (1) share of the capital stock of the corporation(Sec. 10)


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-As a rule, only natural persons can be incorporators, exceptcooperatives and corporations primarily organized to hold equities in ruralbanks and may rightfully become incorporators thereof. Minors cannotbecome incorporators, but they can become stockholders (corporators)provided they are legally represented by their parents, guardian, oradministrator.

-Take note of certain areas of activity or industry wherein theownership of shares of stock are reserved wholly (i.e. Retail Trade Businesswhich capital is less than 2.5M$) or partially to Filipino citizens.

-Directors and Trustees: The number of directors (governingboard in stock corporations) or trustees (governing board in non-stockcorporations) shall not be less than five (5) but not more than fifteen (15)

Exceptions: (a) educational corporations registered as non-stockcorporation whose number of trustees, though not less than five and notmore than fifteen should be divisible by five; (b) close corporations whereall the stockholders are considered as members of the board of directors(maximum of 20, see Sec. 96); and (c) Corporation sole.

-Every director must own at least one (1) share of the capitalstock of the corporation of which he is a director, which share shall stand inhis name in the books of the corporation. Any director who ceases to be theowner of at least one (1) share of the capital stock of the corporation ofwhich he is a director shall thereby cease to be a director/trustee. Trustees

of non-stock corporations must be a member thereof. A majority ofdirectors or trustees of all corporations organized under this Code must beresidents of the Philippines. (Sec. 23)

-Although what is required in only residency, it should be notedthat aliens, whether or not residents of the Philippines, may not qualify orbe elected as such, in any activity or business undertaking exclusivelyreserved to Filipino citizens like the management of educationalinstitutions and those governed by the Retail Trade Law.

-Nevertheless, if the business undertaking or activity is onlypartly nationalized, aliens can be elected as such directors (unless the lawprovides otherwise) but their number shall only be in proportion to theirequity or participation in the capital stock of the corporation.

-No person convicted of an offense punishable by imprisonment

for a period exceeding six (6) years or a violation of this Code committedwithin five (5) years prior to the date of his election or appointment, shallqualify as a director, trustee or officer of any corporation. (Sec. 27) Thecorporate by-laws may provide for additional qualifications anddisqualifications but cannot do away with the minimum standardsprovided by law.

-Capitalization: All domestic corporations proposing to organizeunder the Philippine laws are required to provide in its articles ofincorporation its *authorized capital stock, the *number of shares and/orkind of shares into which the authorized capital stock is divided, the *parvalue of each share, if there be any, the *names, nationalities andresidences of the original subscribers, and the *amount subscribe and paidby each on his subscription. At least 25% of the total subscribed capitalmust be paid and in no case may the paid-up capital be less than fivethousand (Php 5,000). (see Sec. 14[8]).

(a) Authorized capital: refers to the maximum amount fixed inthe articles to be subscribed and paid-in or secured to be paid by thesubscribers. It may also refer to the maximum number of shares that thecorporation can issue.

(b) Subscribed Capital Stock: refers to the total number of sharesand its total value for which there are contracts for their acquisition orsubscription. It is in effect the stockholder's equity account showing thatpart of the authorized capital stock which has been paid or promised to bepaid, or that portion of the authorized capital stock which has beensubscribed by the subscribers or stockholders.

(c) Paid up Capital Stock: also known as paid-in capital whichrefers to the actual amount or value which has been actually contributed or

paid to the corporation in consideration of the subscriptions made thereonIt may either be in cash, property or services (see Sec. 62)

-Shares of Stock: designate the units into which the proprietaryinterest in a corporation is divided or the interest or right which thestockholder has in the management of the corporation, in the surplusprofits, and in case of dissolution, in all assets remaining after the paymentof its debts.

-Certificate of Stocks: a document or instrument evidencing the

interest of a stockholder in the corporation or ownership of shares. It is aconvenient instrument for transfer of shares.

-Classification of Shares: The purpose of classification are: (1) tospecify the rights and privileges of the stockholders; (2) for regulation andcontrol of the issuance or sale of corporate securities for the protection ofpurchasers and stockholders (e.g. close corporations); (3) managemencontrol device (e.g. founders' shares); (4) to comply with statutoryrequirements (e.g. limitations on ownership); (5) to insure return oinvestment (e.g. redeemable or preferred shares); (6) for flexibility in price(e.g. no par value shares)

(a) Common Shares: one which entitles its owner to an equapro-rata division of profits, without preference or advantage over anystockholder. It usually carries with it the right to vote

-Except as otherwise provided by the article of incorporation andstated in the certificate of stock, each share shall be equal in all respects toevery other share. (Sec. 6)

(b) Preferred Shares: those which give the holders a preferenceover the holders of common stocks with respect to the payment odividends or with respect to the distribution of capital upon liquidation. Itmay include such other preferences not inconsistent with the Code.

-Preferred stocks can be issued only with a stated par value andthe preference must be stated in the articles of incorporation and in thecertificate of stock, otherwise, each share shall be, in all respect, equal toevery other share.

-Participating preferred shares: those where the holders thereoare still given the right to participate with common stockholders in

dividends beyond their stated preference. (as compare with nonparticipating stock)

-Cumulative preferred shares: those that entitle the ownethereof to the payment not only of current dividends but also backdividends not previously paid whether or not, during the past yearsdividends were declared or paid. In other words, arrears or back dividendsmust be made up in subsequent years, whether earned/declared or not,before any dividends can be declared or paid on common shares.

-If the corporation does not intend to grant preferred stocks suchprivilege, the same must be indicated in the contract of subscription lestthey are deemed cumulative. This, however, is not true in our jurisdictionbecause shares are presumed to be equal in all respects unless otherwisestated in the articles of incorporation and in the certificate of stockTherefore, in order that a preferred stock may be considered cumulative

the same must be provided for and specified.

-Non-cumulative preferred shares: those which grant to thholders of such shares only the payment of current dividends and not backdividends. Thus, if there were no profits in previous years, no dividendsshould be given for that year and does not have to be made up in lateryears, avoiding undue accumulation of arrears of dividends. This type maybe further classified into:

(a) Discretionary dividend type: the holders right to havedividends paid thereon in a particular year is dependent on the judgmentor discretion of the board of directors (unless there is fraud, oppressionand unfair discrimination, the dividend right of stockholders cannot bemade up in subsequent years)


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(b) Mandatory if earned type: impose a positive duty on directorsto declare dividends every year when profits are earned. In effect, it givesthe preferred stockholders a right to annual profit and leaves the directorsno discretion to withhold dividends. Moreso, the dividend right ofstockholders will not be lost by failure of the directors to declare dividendseach year when earned.

(c) Earned cumulative or Dividend credit type: gives the holderthereof the right to arrears in dividends if there were profits earned duringthe previous years but dividends were not declared. In effect, the right toreceive dividends is merely postponed.

-Preferred shares together with redeemable shares areusually denied voting rights, provided the right to vote is clearly withheld.It should be noted, however, that the Code grants even non-voting sharesthe right to vote in specified instances (see Sec. 6)

-Preferred shares are also given preference in the distribution ofcorporate assets upon liquidation or termination of the corporate existence.

-Par value shares: those whose value are fixed in the articles ofincorporation. Its primary function is to fix the minimum subscription ororiginal issue price. The said amount also represents the limited liability ofthe stockholder. To arrive of the true or book value of the shares,determination of the net worth of the company must be made and dividingthe same by the number of outstanding shares.

-Par value shares cannot be issued nor sold by the corporation atless than par, to do so would violate the provisions on watered stocks orshares issued at less than par where the stockholders will remain liable forthe difference between what he paid and the actual par value.

-No par value shares: those whose issue price is not stated in thecertificate of stock but which may be fixed in the articles of incorporation,or by the board when so authorized by the said articles or by-laws, or in theabsence thereof, by the stockholders themselves.

-Issuance of no par value shares are subject to the followinglimitations: (1) Such shares, once issued, are deemed fully paid and thus,non-assessable; (2) the consideration for its issuance should not be lessthan five [5] pesos; (3) the entire consideration for its issuance constitutescapital, hence, not available for dividend declaration; (4) they cannot be

issued as preferred stock; and (5) they cannot be issued by banks, trustcompanies, insurance companies, public utilities and building and loanassociations.

-The issuance of no par value shares have the followingadvantages: (1) flexibility in price since it may be issued from time to timeat different prices; (2) evasion of danger of liability upon watered stock incase of overvaluation of the consideration paid for it; (3) disappearance ofpersonal liability on the part of the holder thereof for unpaid subscription,since they are deemed fully paid and non-assessable.

-Voting shares: give the holders thereof the right to vote andparticipate in the management of the corporation through the exercise ofsuch right, either at the election of the board of directors or in any matterrequiring stockholders' approval.

-Non-voting shares: do not give the holders thereof a voice in theelection of directors and some other matters requiring stockholders'approval. Only preferred or redeemable shares may, however, be deniedthe right to vote.

-Founders' shares: shares of stock issued to the founders of thecorporation. Founders' shares classified as such in the articles ofincorporation may be given certain rights and privileges not enjoyed by theowners of other stocks, provided that where the exclusive right to vote andbe voted for in the election of directors is granted, it must be for limitedperiod not to exceed five (5) years subject to the approval of the SEC. Thefive (5) year period shall commence from the date of the aforesaid approvalby the SEC, (Sec. 7) the five year period is non-extendible because it mayresult in perpetual disqualification of other stockholders to elect or beelected as members of the board.

-Redeemable shares: issued by a corporation subject toredemption as may be provided in the articles of incorporation. They maybe purchased or taken up by the corporation upon the expiration of a fixedperiod, regardless of the existence of unrestricted retained earnings in thebooks of the corporation, and upon, such other terms and conditions asmaybe stated in the articles of incorporation, which terms and conditionsmust also be stated in the certificate of stock representing said shares. (Sec8) Redemption may either be optional or mandatory at a fixed or futuredate.

-The purchase price thereof is based on the face or issued valuethereof plus a specified premium. The right of a corporation to redeemregardless of the existence of unrestricted retained earnings is a departurefrom the established rule that a corporation may acquire its own shares if ithas unrestricted retained earnings (see Sec. 41)

-Treasury shares: issued and fully paid for, but subsequentlyreacquired by the issuing corporation by purchase, redemption, anddonation or through some other lawful means. Such shares may again bedisposed of for a reasonable price fixed by the board of directors.

-It may be issued for a price even for less than par, and thepurchaser will not be liable to the creditors of the corporation for thedifference, since the full value had previously been paid in full.

-Treasury shares, while in the possession of the corporation

have no dividend or voting rights since, in all instances, voting anddividend rights are granted only to the outstanding shares of stock.

-Treasury shares may, however, be declared as dividends sincethey are properties of the corporation.

[Note: *Differentiate subscribed capital stock from outstanding capitastock (subscribed and paid, see Sec. 137). *Common share, aside frompreferred and redeemable shares, can also be deprived of voting rights (seeFounders shares). *Redeemable shares can be reacquired whether or nothere is unrestricted retain earnings (see General Rule on Sec. 41)*Treasury shares may be issued below par value stated in the certificate.*Treasury shares have no dividend/voting rights as long as they are in thepossession of the corporation (see Sec. 57), but once issued, they becomeoutstanding stock (with dividend/voting rights).

CIR v. Manning (1975)

Facts: Manta Trading and Supply Co. (MANTRASCO) had an authorizedcapital stock of 2.5 million divided into 25,000 shares; 24,700 of thosewere owned by Julius Reese and the rest by the respondents (JohnManning, McDonald and Simmons). In view of Resses desire that upon hisdeath, MANTRASCO would continue under the management orespondents, a trust agreement was executed, the law firm of RossCarrascoso and Janda as trustees and respondents as managers. TheMANTRASCO stockholders passed a resolution reverting Reeses sharesback to the capital of the company, terminating the trust agreement. It wasdiscovered that respondents failed to declare the stock dividends actuallydistributed in 1958 as part of their taxable income. The respondents werethus assessed deficiency income tax.

Held: After examining the trust agreement, the 24,700 shares declared as

stock dividends were not treasury shares. Treasury shares are stock issuedand fully paid for and reacquired by the corporation. Treasury shares do nohave the status of outstanding shares; consequently, it may be re-issued orsold again. It neither participates in dividends, because dividends cannotbe declared by the corporation to itself nor in meetings of the corporationas voting stock. In the present case, the shares of stock of Reeseparticipated in dividends which the trustee received and the said shareswere voted upon by the trustee in all corporate meetings. It is therefore notreasury shares. A stock dividend, being one payable in capital stockcannot be declared out of outstanding corporate stock but only fromretained earnings. Corporate earnings used to purchase outstanding stockas treasury shares are a prohibited device to avoid the effects of incometaxation. Distribution of said corporate earnings in the form of stockdividends will subject the stockholders receiving them to income tax.


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-Capital Requirement:

Minimum capital stock required of stock corporations. - Stockcorporations incorporated under this Code shall not be required to haveany minimum authorized capital stock except as otherwise specificallyprovided for by special law, and subject to the provisions of the followingsection. (Sec. 12)

Amount of capital stock to be subscribed and paid for thepurposes of incorporation. - At least twenty-five percent (25%) of the

authorized capital stock as stated in the articles of incorporation must besubscribed at the time of incorporation, and at least twenty-five (25%) percent of the total subscription must be paid upon subscription, the balanceto be payable on a date or dates fixed in the contract of subscriptionwithout need of call, or in the absence of a fixed date or dates, upon call forpayment by the board of directors: Provided, however, That in no case shallthe paid-up capital be less than five Thousand (P5,000.00) pesos. (Sec 13)

-Take note of minimum paid-up capital required in certain businesses (i.e.Holding companies 100T; Real Estate Brokerage 50T; Pawnshops 100T;Security Agency 500T; Non-stock foundations 1M working capital)

-Restrictions and Preferences on transfer of shares: As a general rule,corporations are not required to provide restrictions and preferencesregarding transfer of shares, except close corporations (see Sec. 96), inwhich the restrictions imposed must not only be indicated in the articles of

incorporation and certificate of stocks (as in other corporations) but also inby-laws of the close corporation, otherwise it may not bind purchasers ofsuch shares in good faith (see Sec. 98). Restrictions imposed should not bemore onerous than granting the existing shareholders the preferential rightto buy the shares of the selling stockholder (right of first refusal).

-The No Transfer Clause: (see Sec. 15 eleventh article)

-The Treasurer: (see Sec 15)

-The Execution Clause: part of the document where the incorporators signthe document with an indication as to where it was signed and when thesame was executed, witnessed by two disinterested persons. (see Sec. 15).

-Acknowledgment: notarial part of the articles of incorporation, where thesignatories thereof acknowledge before a notary public that they have

executed and signed the articles in their own free, voluntary act and deed.

-Grounds for disapproval: (see Sec 17) The grounds, however is notexclusive (i.e. corporate name is not legally permissible or the minimumcapital requirement s not sufficient.

-Commencement of Corporate Existence: (see Sec. 19) reckoned at the timeof the issuance of its certificate of incorporation.

Cagayan Fishing Dev't Co. v. Sandiko (1937)

Facts: On May 1930, Manuel Tabora sold four parcels of land to petitionercorporation, said to be under the process of incorporation. The petitionersarticles of incorporation were filed with the Bureau of Commerce andIndustry on October 22, 1930. In 1931, its board of directors adopted a

resolution authorizing its president to sell the parcels of land to TeodoroSandiko.

Held: Petitioner was not incorporated when it entered into the contract ofsale Tabora and neither can it be considered a de facto corporation at thattime. Not being in legal existence then, it did not possess juridicalpersonality to enter into contracts. Corporations are creatures of law, andcan only come into existence in the manner prescribed by law.Consequently, if the company could not and did not acquire the fourparcels of land here involved, it follows that it did not have the resultantright to dispose the same to respondent Sandiko.

-Defectively Formed Corporations:

-De Facto Corporations: may exist as a corporation separate anddistinct from the stockholders if the following conditions are met:

(1) Valid statute under which the corporation could have been created as dejure corporation (or according to some apparently valid statute)

(2) An attempt in good faith to form a corporation according to threquirements of law (amounting to colorable compliance)

(3) Use of corporate powers or the transaction of business as if it were a

corporation

(4) Good faith in claiming to be and doing business as a corporation.

-The recognition of de facto corporation has been found necessary topromote security of business transactions, to protect third persons and toeliminate quibbling over irregularities.

Municipality of Malabang v. Benito, et al. (1969)

Facts: Petitioner Amer Macario (mayor of Malabang) filed an action foprohibition to nullify Executive Order 386 and to restrain respondents(municipal officials of Balabagan) from performing functions of theirespective offices, on the ground that Executive Order by virtue of whichthe Municipality of Balabagan was created is null and void for being undue

delegation of legislative power (invoking the ruling in Pelaez case). On theother hand, respondents argue that Pelaez case has no application in thepresent case, because unlike barrios, the municipality of Balabagan is atleast a de facto corporation, having been organized under color of statutebefore the same was declared unconstitutional, officers having beenelected, and discharging functions for the past five years from the time thisaction was filed.

Held: In cases where a de facto municipal corporation was recognized assuch despite the fact that the statute creating was later invalidated, thedecision could fairly be made to rest on consideration that there was someother valid law giving it corporate existence. In the case at bar, howeverthere is no other valid statute existing that can give color of authority to itscreation. Furthermore, an unconstitutional act is not a law; it confers norights, it imposes no duties, it affords no protection, it creates no office, it isin legal contemplation, as inoperative as though it had never been passedThe actual existence of a statute, prior to such a determination o

unconstitutionality is an operative act and may have consequences whichcannot justly be ignored, this exception however has no application to thepresent case.

Hall v. Piccio (1950)

Facts: On May 1947, petitioner along with private respondents (FredBrown, Chapman, and Abella) signed and acknowledged the articles ofincorporation of Far East Lumber and Commercial Co. Inc. Immediatelyafter its execution, the corporation proceeded to do business with theadoption of by-laws and election of its officers. It was only on December1947 that the said articles of incorporation was filed with the SEC. Pendingapproval of the articles of incorporation, private respondents filed anaction before the CFI to have the Corporation dissolved on the ground thatthe same was an unregistered partnership. Petitioner, on the other handargued that CFI has no jurisdiction over the case alleging that Far East is a

de facto corporation, the dissolution of which may be ordered only in a quowarranto proceedings, and that private respondents were estopped fromclaiming otherwise.

Held: Far East is not a de facto corporation and its stockholders cannotclaim its due incorporation in good faith in the absence of certificate ofregistration with the SEC. The claim of due incorporation in good faith byde facto corporations is compatible with the existence of error andirregularities, but not with a total or substantial disregard of the law. All ofthe parties know and ought to know that the personality of the corporationbegins only from the moment the certificate of incorporation is issued. Thepresent case, also, is not a suit in which the corporation is a party but alitigation between stockholders of the alleged corporation, for the purposeof obtaining its dissolution, which can be made without the intervention othe State.


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-Corporation by Estoppel: applies to both the alleged corporation or to athird person transacting with the former. Members or agents of theassociation may be stopped to deny the existence of corporation if theiracts, relied upon by third persons, is equivalent to a representation oradmission of corporate existence. Third person is stopped from denying theexistence of the corporation if he dealt with or treated it as a corporation ordealt with it knowing that it is not a corporation and tries to escape liabilityon a contract entered with the corporation.

-Estoppel does not apply if the third person does not know or isnot chargeable with knowledge, but rather supposes that the corporation isdoing business as an unincorporated association and not claiming to be acorporation. Estoppel likewise cannot be invoked by members of anassociation (trying to escape liability) who are presumed to know that it isnot a corporation.

-Remedy: if a corporation by estoppel exists and entered into acontract or transacts business with a third party, the latter has threepossible remedies:

(1) File a suit against the ostensible corporation to recover from corporateproperties;

(2) File a case directly against the associates personally who held out theassociation as a corporation; and

(3) File an action against both the ostensible corporation and personsforming it, jointly and severally.

[Note: The last two remedies may not be availed of if the third party by hisconduct is stopped from denying the existence of the association as acorporation, in which case recovery is limited only against the corporateassets.]

[In earlier cases before the Corporation Code, principles of agency areapplied to determine liability of member/s of the corporation by estoppel,however, from May 1, 1980, Sec. 21 of the Code must apply (persons whoassume are liable as general partners)]

Lozano v. De Los Santos (1977)

Facts: Petitioner and respondent agreed to consolidate their respectiveassociations and form the United Mabalacat-Angeles Jeepney Operatorsand Driver's Association Inc. Petitioner won as president but privaterespondent protested on grounds of fraud and refused to abide by theiragreement and continue collecting dues from the members of hisassociation. Petitioner was thus constrained to file the complaint fordamages against private respondent before the MCTC. The trial court heldthat the dispute was intra-corporate, hence, subject to the jurisdiction ofSEC.

Held: There is no intra-corporate nor partnership relation betweenpetitioner and private respondent. The unified association was, however,still a proposal. It had not been approved by the SEC, neither its officersand members submitted their articles of consolidation nor a certificate ofconsolidation issued. The dispute is between two separate entities, and notintra-corporate in the absence of intra-corporate relations. Consequently,the SEC has no jurisdiction over the complaint. The doctrine of estoppel

advanced by respondent cannot override jurisdictional requirements.Jurisdiction is fixed by law and is not subject to agreement of the parties. Itcannot be acquired, enlarged or diminished by any act or omission of theparties; neither can it be conferred by the acquiescence of the court. Thedoctrine of corporation by estoppel is founded on principle of equity and isdesigned toprevent injustice and unfairness. It applies when personsassume to form a corporation and exercise corporate functions and enterinto business relations with third persons. Where there is no third personinvolved and the conflict arises only among those assuming to form acorporation, who therefore know that it has not been registered, there is nocorporation by estoppel.

Albert v. University Publishing Co. Inc. (1965)

Facts: Petitioner sued respondent, alleged as a corporation duly organizedand existing under Philippine laws, for breach of contract entered by itsPresident Jose Aruego in behalf of the corporation. The trial court renderedjudgment in favor of petitioner, but the writ of execution was issued againsAruego, as the real defendant, after the court discovered that UniversityPublishing is neither a corporation nor a partnership registered with theSEC.

Held: The fact of non-registration is not disputed, and on account thereofUniversity Publishing cannot be considered as a corporation, not even a defacto one. It therefore cannot be sued independently since it has nopersonality separate and distinct from Aruego. The doctrine of corporationby estoppel has not been invoked. At any rate, the same is inapplicable inthe present case. Aruego represented a non-existent entity, and one whoinduced another to act upon his willful misrepresentation that acorporation was duly organized and existing under the law, cannotthereafter set up against his victim the principle of corporation by estoppelEven with regard to corporations duly organized and existing under thelaw, we have in many cases pierced the veil of corporate fiction toadminister the ends of justice. A person acting or purporting to act onbehalf of a corporation which has no valid existence assumes suchprivileges and obligations and becomes personally liable for contractentered into or for other acts performed as such agent. ConsequentlyAruego, acting as representative of a non-existent principal, was the reaparty to the contract sued upon.

Salvatierra v. Garlitos, et al. (1958)

Facts: Petitioner, owner of a parcel of land, entered into a contract of leasewith Philippine Fibers Process Co. Inc. (PFPC) allegedly a corporation dulyorganized and existing under the laws of the Philippines, represented by itspresident Segundino Refuerzo. Petitioner thus filed an action foaccounting, rescission and damages against PFPC before the CFI, aftercorporation breach its obligations under the lease contract. The trial courtheld Refuerzo personally liable, but the same was reversed on appeal.

Held: PFPC is not a registered corporation, and Refuerzo acting on behalfof a corporation which he knew to be unregistered assumed the risk ofreaping the consequential damages resulting from the transaction. Anorganization which before the law is non-existent has no personality andwould be incompetent to act and appropriate for itself the powers andattributes of a corporation as provided by law. It cannot create agents orconfer authority on another to act on its behalf, thus, those who act or

purport to act as its representatives or agents do so without authority andat their own risk. It is elementary principle that a person who acts as anagent without authority or without principal is himself regarded as theprincipal. As a rule, a person who contracted with an association in such away as to recognize its existence as a corporate body is estopped fromdenying the same in an action arising out of such contract or transaction,yet this doctrine is not applicable where fraud takes part in the saidtransaction. In the present case, Salvatierra was made to believe that suchcorporation was duly organized in accordance with law.

Chang Kai Shek School v. CA (1989)

Facts: Private respondent Faustina Oh filed before the CFI a complaintdemanding separation pay and other benefits after the school terminatedhis services as teacher. The complaint was later amended to include certainschool officials as solidarily liable with the school. The CFI held the school

liable and absolved its officials.

Held: The school although unincorporated may be sued by reason ofestoppel. The omission to register should not prejudice private respondentin the assertion of her claim against the school. There is no question thatpetitioner contracted with private respondent for 32 years and thusrepresented itself as possessed of juridical personality to do so, thpetitioner is now estopped from denying such personality to defeat herclaim against it. Article 1431 of the NCC provides that through estoppel, anadmission or representation is rendered conclusive upon the personmaking it and it cannot be denied as against the person relying on it. As theschool itself may be sued in its own name, there is no need to apply the rulethat persons associated under a common name without juridicapersonality may be sued under said common name.

Asia Banking Corp. v. Standards Products Co. Inc. (1924)


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Facts: The trial court rendered a judgment in favor of the plaintiff (AsiaBanking) in a complaint to recover a certain sum in money (balance due onthe promissory note). Defendant appealed and argued that plaintiff failedto prove affirmatively the corporate existence of the parties.

Held: In the absence of fraud, a person who has contracted or otherwisedealt with an association in such a way as to recognize and admit its legaland corporate existence is estopped from claiming otherwise, this principleapplies to foreign as well as domestic corporations. In the present case, thedefendant having recognized the corporate existence of the plaintiff bymaking a promissory note in its favor and making partial payments on thesame is therefore estopped to deny plaintiffs corporate existence.Defendant is also estopped from denying its own corporate existence.Under the circumstances, it was unnecessary for the plaintiff to presentother evidence of the corporate existence of either party.

International Express Travel and Tours Services, Inc. v. CA(2000)

Facts: Petitioner filed a complaint against Henri Khan, president of thePhilippine Football Federation before the RTC for failure of the latter topay its outstanding balance under a contract entered by Henri Khan inbehalf of the Federation. Henri Khan sought to dismiss the complaint forlack of cause of action, arguing that he cannot be made personally liable.The RTC, however, held Khan liable, but the same was reversed by the CA,applying doctrine of estoppel.

Held: National sports associations may be granted corporate status, butsuch does not automatically takes place, because the law requires that saidnational associations be accredited and recognized by the PhilippineAmateur Athletic Federation and the Department of Youth and SportsDevelopment. In the absence of such accreditation, the national associationcannot be considered as a corporate body having separate and distinct legalpersonality. Consequently, Henri Khan should be held liable for the unpaidobligations of the unincorporated Federation. It is settled in corporationlaw that any person acting or purporting to act on behalf of a corporationwhich has no valid existence assumes privileges and obligations andbecomes personally liable for contracts entered into or for other actsperformed as such agents. As president of the Federation, Henri Khan ispresumed to have known about the corporate existence or non-existence ofthe Federation. The CA erred in applying the doctrine of corporation byestoppel. The doctrine applies to a third party only when he tries to escapeliability on a contract from which he has benefited on the irrelevant ground

of defective incorporation. In case at bar, the petitioner is not trying toescape liability from the contract but rather is the one claiming from thecontract.

Georg Grotjahn GMBH and Co. v. Isnani (1994)

Facts: Petitioner, a multinational company organized in Germany, filed anapplication with SEC for the establishment of regional or area headquartersin the Philippineas, and corresponding cerificate of registration was thusissued. Private respondent Romana Lanchinebre was a sales representativeof petitioner, and she secured loans several times from petitioner. Privaterespondent failure to settle her obligation caused the petitioner to file acomplaint for collection of sum of money. Private respondent moved todismiss the complaint on the ground that petitioner has no capacity to suebecause the same is not doing business in the Philippines, which wasgranted by the RTC.

Held: From uninterrupted performance (since 1983) by petitioner of actspursuant to its primary purpose and functions as regional/areaheadquarters for its home office, it is clear that petitioner is doing businessin the country. Moreover, private respondent is estopped from assailing thepersonality of petitioner. The rule is that a party is estopped to challengethe personality of a corporation after having acknowledged the same byentering into contract with it. The doctrine of estoppel to deny thecorporate existence applies to foreign as well as domestic corporation. Theprinciple will be applied to prevent a person contracting with a foreigncorporation from later taking advantage of its non-compliance with thestatutes chiefly in cases where such person has received the benefits of thecontract. Foreign corporation doing business in the Philippines may sue inPhilippine courts although not authorized to do business here against thePhilippine citizen who had contracted with and been benefited by saidcorporation.

[Note: General Rule laid on Asia Banking case is subject to exceptionsnamely, Salvatierra case (if third party is defrauded) and InternationalExpress Travel case (if third party is claiming or enforcing the contract).]

(c) Organization and commencement of business: refers to certain overacts after incorporation such as adoption of by-laws, election of corporateofficers and other acts tending to show intent of transacting its business.

-After the issuance of the certificate of incorporation oregistration, the corporation must formally organize and commence it

business lest it will be deemed dissolved.

-Effect of non-use of corporate charter and continuouinoperation of a corporation: If a corporation does not formally organizeand commence the transaction of its business or the construction of itworks within two (2) years from the date of its incorporation, its corporatepowers cease and the corporation shall be deemed dissolve. However, if acorporation has commenced the transaction of its business busubsequently becomes continuously inoperative for a period of at least five(5) years, the same shall be a ground for the suspension or revocation of itscorporate franchise or certificate of registration. (Sec. 22) This provisionshall not apply if the failure to organize, commence the transaction of itsbusiness or the construction of its works, or to continuously operate is dueto causes beyond the control of the corporation as may be determined bythe SEC.

-Formal organization: refers to the process of structuring thecorporation to enable it to effectively pursue the purpose for which it wasorganized, and includes the following: (1) Organizational meeting of thestockholders to elect its board of directors; (2) Adoption of by-laws (Sec46); and (3) Organizational meeting of the board of directors elected toelect the corporate officers, adoption of corporate seal, accepting preincorporation subscriptions; establishing the principal office and suchother steps necessary to transact the legitimate business for which thecorporation was formed.

-Commencement of business/transaction: refers to the actuafunctioning or engaging of the corporation in the business for which it wasorganized, like entering into contracts which tend to pursue its businessundertaking or other acts related thereto.

CORPORATE CHARTER AND ITS AMENDMENTS

Corporate Charter

-Signifies an instrument or authority from the sovereign bestowing rightsand power.

-Act of Incorporation: the corporation was formed under a special act ofthe legislature. As to this type of corporation (see Sec. 4), the term charterconsists of the special law creating the same and all laws, rules andregulations affecting or applicable to them.

-Articles of Incorporation: the corporation was formed under a generalaw (Corporation Code). As to this type of corporation, the term charterconsists of articles of incorporation and the relevant laws under which it iscreated inclusive of the by-laws and all pertinent provisions of any statutegoverning them.

-The charter of a corporation, whether formed under a special law or byvirtue of the general corporation law is regarded as a three-fold contract(1) between the corporation and the State [as it concerns its primaryfranchise to be and act as a corporation]; (2) between the corporation andthe stockholders or members [insofar as it governs their respective rightsand obligations]; and (3) between and among the stockholders [as far astheir relationship with one another is concerned].

-Franchise refers to the right or privilege itself to be and act as acorporation or to do a certain act, while charter applies to the instrumentby which the state vests such right or privilege (maybecongressional/national or municipal franchise).


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-Primary Franchise: the right or privilege of being a corporation or theright to exist as a corporation as conferred by the State.

-Secondary Franchise: the powers and privileges vested and to beexercised by the corporation (also known as special franchise)

[e.g. SEC issues certificate of incorporation in favor of an EmploymentAgency (primary), to legally act as such, it must secure a license orauthority from POEA (secondary).]

The Corporate Entity Theory

-A corporation comes into existence or acquires juridical personality uponthe issuance of the certificate of incorporation. As a legal entity, thecorporation is possessed with a personality separate and distinct from theindividual stockholders or members and is not affected by the personalrights, obligations or transactions of the latter.

[e.g. properties belonging to the corporation cannot be attached by thepersonal creditors of its stockholders, the corporation cannot be liable forthe debts, obligations or liabilities of its stockholders.]

Sulo ng Bayan Inc. v. Gregorio Araneta, Inc. (1976)

Facts: Petitioner filed an accion reinvindicatoria before the CFI against the

defendant to recover the ownership of land for and in behalf of itsmembers. Defendant filed a motion to dismiss on the ground that thecomplaint states no cause of action.

Held: Properties registered in the name of the corporation are owned by itas an entity separate and distinct from its stockholders. Conversely, acorporation ordinarily has no interest in the individual property of itsstockholders, unless transferred to the corporation, even in the case of aone-man corporation. In the present case, the stockholders did notassigned or transferred whatever rights they may have on the land to theplaintiff corporation, and absent any showing of interest, the latter has nopersonality to bring an action for and in behalf of its stockholders. It isfundamental that there can be no cause of action without an antecedentprimary legal right, and there can be no wrong without a correspondingright.

Fermin and Rosa Caram v. CA and Alberto Arellano (1987)

Facts: The Court of Appeals held petitioners jointly and severally liablewith their co-defendants in the lower court for technical services renderedby private respondent that led to the organization of defendantcorporation. Petitioners claim that they have no contract whatsoever withprivate respondent, and as subsequent investors in the corporation, theycannot be held solidarily liable with Filipinas Orient Airways, a separatejuridical entity and Barreto and Garcia (promoters) who requested the saidservices from private respondent.

Held: Petitioners were not involved in the initial stages of the organizationof the Airline Corporation, but were merely among the financiers whoseinterest was to be invited and who were in fact persuaded. The Corporationis not fictitious but in fact has a separate juridical personality.Consequently, petitioners, as principal stockholders cannot be maderesponsible for the corporate obligations. It is important to note thatpetitioners did not contract such services; it was only the result of suchservices which the promoters presented to them and which persuadedthem to invest in the proposed airline. Petitioners benefited from that suchservices, but that surely is no justification to hold them personally liabletherefore.

Rustan Pulp and Paper Mills Inc. v. IAC (1992)

Facts: A contract of sale of raw materials was executed between Rustanand Lluch. Bienvenido Tantoco as president manager of Rustan signed thecontract. In 1968, Romeo Vergara, resident manager of Rustan, sent aletter to Lluch for the stoppage of delivery. Lluch filed a complaint forbreach of contract and damages against petitioner corporation includingTantoco and Vergara.

Held: The president and manager of a corporation who entered into andsigned a contract in his official capacity, cannot be made liable thereunderin his individual capacity in the absence of stipulation to that effect due tothe personality of the corporation being separate and distinct from theperson composing it.

Cruz v. Dalisay (1987)

Facts: Adelio Cruz charged Sheriff Quiterio Dalisay with malfeasance andserious irregularities when the latter attached and levied the money

belonging to the former, on the ground that he is not the judgment debtorin a labor case but rather the company known as Qualitrans LimousineService Inc. Sheriff Dalisay explained that when he granished Cruzs cashdeposit, he was merely performing a ministerial duty and that Cruzexecuted an affidavit stating that he is the owner/president of thecorporation.

Held: Considering the ministerial duty in enforcing writs of execution, it isincumbent upon the sheriff to ensure that only that portion of a decisionordered or decreed should be the subject of execution. Sheriff Dalisayhowever, chose to pierce the veil of corporate entity usurping a powerbelonging to the court, which act calls for disciplinary action. It is welsettled, both in law and equity that as a legal entity, the corporation has apersonality distinct and separate from its individual stockholders ormembers. The mere fact that one is president of a corporation does notrender the properties he owns or possesses as properties of thecorporation, since the president and the corporation are separate entities.

Palay Inc. v. Clave (1983)

Facts: Petitioner through its president Albert Onstott executed in favor ofprivate respondent Nazario Dumpit a contract to sell a parcel of land onwhich the latter paid down payment and several installments. Whenprivate respondent updated his account, petitioner informed him that hiscontract to sell had long been rescinded. Hence, Dumpit questioned thevalidity of the rescission before the NHA. The latter ruled that therescission in void in the absence of judicial or notarial demand, orderedpetitioner including Albert Onstott, jointly and severally, to refundDumpits payment.

Held: As a general rule, a corporation may not be made to answer for actsor liabilities of its stockholders or those of the legal entities to which it may

be connected and vice-versa. However, the veil of corporate fiction may bepierced when it is used as a shield to further an end subversive of justice; orfor purposes that could not have been intended by the law that created itor to defeat public convenience, justify wrong, protect fraud, or defendcrime; or to perpetuate fraud or confuse legitimate issues; or to circumventhe law or perpetuate deception; or as an alter ego, adjunct or businessconduit for the sole benefit of the stockholders. Onsott, being the presidenof the corporation and controlling stockholder cannot be held liable in theabsence of sufficient proof that he used the corporation t defraud privaterespondent. Mere ownership by a single stockholder or by anothercorporation of all or nearly all of the capital stock of a corporation is not, ofitself, sufficient ground for disregarding the separate corporate personality

Soriano v. Court of Appeals and Cu (1989)

Facts: The president, manager, treasurer and director representative oBacarra Facome, Inc. executed a document for the receipt of truckload oftobacco from Mr. Geruacio Cu. The latter however was not paid his tobaccoprompting him to file a complaint for the collection of sum of moneyagainst all the signatories to the receipt. The trial court held thesignatories/officers jointly and severally liable in their personal capacity.

Held: The designations of the petitioners written on the document cannotbe considered meaningless and hollow decorations without any relevanceto the liability of the corporation these officers obviously representedIndeed, the receipt discloses the capacity by which the petitioners enterinto the contract with private respondent. The Association referred to inthe receipt does not refer to the signatories but to Bacarra Facoma Inc. It isclear that the liability of the petitioners under the subject document is notpersonal but corporate, and therefore attached to Bacarra Facoma Inc.having a personality distinct and separate from that of the petitioners. Also


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there is no showing that petitioners used the corporation to defraud privaterespondent which would otherwise pierce the veil of corporate fiction.

Piercing the Veil of Corporate Fiction

-The application of corporate entity theory is confined to legitimatetransactions and is subject to equitable limitations. The legal fiction orpersonality of a corporation is introduced for the purpose of convenienceand to prevent its being used as cloak or cover for fraud or illegality, or towork an injustice.

-When the notion of legal entity is used to defeat public convenience,justify a wrong, protect fraud or defend crime, the law will regard thecorporation as a mere association of persons, or in the case of twocorporations, merge them into one, the one being merely regarded as partor instrumentality of the other.

-The same is true where a corporation is a mere dummy and serves nobusiness purpose and is intended only as a blind, or an alter-ego orbusiness conduit for the sole benefit of the stockholders.

-This theory also applies when the corporate entity is used to evade taxes,or when necessary to protect creditors. In such cases, liability will attachdirectly to the officers and stockholders, at least, in so far as that particularact is concerned.

Palacio v. Fely Transportation Company (1962)

Facts: Plaintiff filed a complaint for damages against defendant companyafter its driver, Alfredo Carillo, recklessly run over his child. The CFI,however, ruled that the action is barred by the judgment in the criminalcase and held Isabelo Calingasan subsidiarily liable to pay civil liability ex-delicto. Plaintiff contends that defendant corporation should be madesubsidiarily liable.

Held: The corporation and Isabelo Calingasan may be regarded as one andthe same person. Calingasans main purpose in forming the corporationwas to evade his subsidiary civil liability resulting from the conviction ofhis driver. This conclusion is borne out by the fact that the incorporators ofFely Transportation are his family members. The defendant corporationcannot be allowed to invoke its separate and distinct personality when thesame would sanction the use of corporate fiction as a shield to further an

end subversive of justice. Furthermore, failure of the corporation to provethat it has other property than the jeep sold to it by Calingasan strengthensthe conviction that its formation was for the purpose above indicated.Isabelo Calingasan and the corporation should be held subsidiarily liableon account of Alfredo Carillos insolvency.

Marvel Building Corporation v. David (1954)

Facts: Plaintiff filed an action to enjoin the defendant Collector of InternalRevenue from selling the corporate properties at public auction for thepurpose of collecting profits taxes assessed against Maria Castro, astockholder. Defendant claims that Maria Castro is the true and sole ownerof all the subscribed stock of the corporation.

Held: Maria Castro is the sole and exclusive owner of the shares of stock ofthe corporation and the other stockholders are her dummies for thefollowing facts and circumstances: First, endorsements in blank of theshares of stock issued in the name of the other incorporators werediscovered to be in the possession of Maria Castro. Second, the otherstockholders did not have incomes in such amount proportionate to theirsubscription, and in fact, it was Maria Castro who made enormous gainsand profits. Third, the directors never met to discuss the business of thecorporation. Fourth, Maria Castro advance big sums of money to thecorporation without any previous arrangements or accounting. Lastly, theother stockholders failed to deny or refute the charge that they were meredummies which is equivalent to an admission.

Yutivo and Sons Corp. v. CTA (1961)

Facts: Petitioner (Yutivo Corp.) imports cars and trucks from GeneralMotors Overseas Corp (GM), where the latter, as importer, paid sales taxes.

Yutivo paid no sales tax on its sale to the public, since under the Tax Codesales tax are collected only once on original sales. GM then appointedYut

Documents

Cases Corpo Consolidated