OUTLINE ON PHILIPPINE Atty. CESAR L. VILLANUEVA

CORPORATE LAW1

I. HISTORICAL BACKGROUND

1. The Philippine Corporate Law:2 Sort of Codification of American Corporate Law

When the Philippines came under American sovereignty, attention was drawn to the fact that there was no entity in Spanish law exactly corresponding to the notion "corporation" in English and American law; the Philippine Commission enacted the Corporation Law (Act No. 1459), to introduce the American corporation into the Philippines as the standard commercial entity and to hasten the day when the sociedad anónima of the Spanish law would be obsolete. The statute is a sort of codification of

American Corporate Law. xHarden v. Benguet Consolidated Mining Co., 58 Phil. 141 (1933).

2. The Corporation Law

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

3. The Corporation Code

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

4. Proper Treatment of Philippine Corporate Law

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

II. CONCEPTS

See opening paragraphs of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No. 2, June 1994).

1. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code).

2. Tri-Level Existence of Corporation

(a) Aggregation of Assets and Resources

(b) Business Enterprise or Economic Unit

(c) Juridical Entity

3. Relationships Involved in Corporate Setting

(a) Juridical Entity Level, which views the State-corporations relationship

(b) Contractual Relationship Level, which considers that the corporate setting is at once a contractual relationship on four (4) levels:

- Between the corporation and its agents or representatives to act in the real world, such as its directors and its officers, which is governed also by the Law on Agency;

- Between the corporation and its shareholders or members;

- Between and among the shareholders in a common venture; and

1Unless otherwise indicated, all references to sections pertain to The Corporation Code of the Philippines.

2The whole body of statutory and jurisprudential rules pertaining to corporations is referred to as "Corporate Law" to differentiate it from the old statute known as "The Corporation Law," or Act No. 1459.

- Between the corporation and third-parties or "outsiders", which is essentially governed by Contract Law.

4. Theories on Formation of Corporation:

(a) Theory of Concession (Tayag v. Benguet Consolidated Inc., 26 SCRA 242 [1968])

To organize a corporation that could claim a juridical personality of its own and transact business as such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose (x-cf. Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 [1962]).

Before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act, and the procedure and conditions provided under the law for the acquisition of such juridical personality must be complied with. The failure to comply with the statutory procedure and conditions does not warrant a finding that such association achieved the acquisition of a separate juridical personality, even when it adopts sets of constitution and by-laws. xInternational Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000).

Since all corporations, big or small, must abide by the provisions of the Corporation Code, then even a simple family corporation cannot claim an exemption nor can it have rules and practices other than those established by law. xTorres v. Court of Appeals, 278 SCRA 793 (1997).

(b) Theory of Enterprise Entity (BERLE, Theory of Enterprise Entity, 47 COL. L. REV. 343 [1947])

Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not a shield for the commission of injustice and inequity, such as the use of separate personality to avoid the execution of the property of a sister company. xTan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205 (1988).

A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such a body. xPhilippine Stock Exchange, Inc. v. Court of Appeals, 281 SCRA 232 (1997).

5. Four Attributes of Corporation from Statutory Definition:

(a) A corporation is an artificial being

(b) Created by operation of law

(c) With right of succession

(d) Only has powers, attributes and properties expressly authorized by law or incident to its existence

6. Advantages and Disadvantages of Corporate Form:

(a) Four Basic Advantageous Characteristics of Corporate Organization:

(i) Strong Legal Personality

- Entity attributable powers

- Continuity of existence

- Purpose

The corporation was evolved to make possible the aggregation and assembling of huge amounts of capital upon which big business depends; and has the advantage of non-dependence on the lives of those who compose it even as it enjoys certain rights and conducts activities of natural persons. Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000.

(ii) Centralized Management.

(iii) Limited Liability to Investors

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One advantage of a corporate business organization is the limitation of an investor’s liability to the amount of the investment, which flows from the legal theory that a corporate entity is separate and distinct from its stockholders. xSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).

(iv) Free Transferability of Units of Ownership for Investors

(b) Disadvantages:

(i) Abuse of corporate management

(ii) Abuse of limited liability feature

(iii) Cost of maintenance

(iv) Double taxation

Dividends received by individuals from domestic corporations are subject to final 10% tax (Sec. 24(B)(2), NIRC of 1997) for income earned on or after 1 January 1998. Inter-corporate dividends between domestic corporations, however, are not subject to any income tax (Sec. 27(D)(4), NIRC of 1997).

In addition, there has been a re-imposition of the “improperly accumulated earnings tax,” under Section 29 of the NIRC of 1997 for corporations at the rate of 10% annually.

7. Compared With Other Media of Business Endeavors

- Distribution of Risk, Profit and Control

(a) Sole Proprietorships

(b) Business Trusts (Article 1442, Civil Code)

(c) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code)

- Can a defective attempt o form a corporation result at least in the formation of a partnership? Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989).

(d) Joint Ventures

Joint venture is defined as an association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement to share both in profit and losses. the acts of working together in a joint project. xKilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110, 143 (1994), citing BLACK’S LAW DICTIONARY, Sixth ed., 839.

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

(f) Sociedades Anónimas

A sociedad anónima was considered a commercial partnership, a sort of a corporation, “where upon the execution of the public instrument in which its articles of agreement appear, and the contribution of funds and personal property, becomes a juridical person—an artificial being, invisible, intangible, and existing only in contemplation of law—with power to hold, buy, and sell property, and to sue and be sued—a corporation—not a general copartnership nor a limited copartnership . . . The inscribing of its articles of agreement in the commercial register was not necessary to make it a juridical person—a corporation. Such inscription only operated to show that it partook of the form of a commercial corporation.” xMead v. McCullough, 21 Phil. 95,106 (1911).

The sociedades anónimas were introduced in Philippine jurisdiction on 1 December 1888 with the extension to Philippine territorial application of Articles 151 to 159 of the Spanish Code of Commerce. Those articles contained the features of limited liability and centralized management granted to a juridical entity. But they were more similar to the English joint stock companies than the modern commercial corporations. xBenguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956)

Our Corporation Law recognizes the difference between sociedades anónimas and corporations and will not apply legal provisions pertaining to the latter to the former xPhil. Product Co. v. Primateria Societe Anonyme, 15 SCRA 301 (1965).

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(g) Cuentas En Participacion

A cuentas en participacion as a sort of an accidental partnership constituted in such a manner that its existence was only known to those who had an interest in the same, there being no mutual agreement between the partners, and without a corporate name indicating to the public in some way that there were other people besides the one who ostensibly managed and conducted the business, governed under article 239 of the Code of Commerce.

Those who contract with the person under whose name the business of such partnership of cuentas en participacion is conducted, shall have only a right of action against such person and not against the other persons interested, and the latter, on the other hand, shall have no right of action against third person who contracted with the manager unless such manager formally transfers his right to them. xBourns v. Carman, 7 Phil. 117 (1906).

III. NATURE AND ATTRIBUTES OF A CORPORATION

1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitution)

2. Corporation as a Person:

(a) Entitled to due process

The due process clause is universal in its application to all persons without regard to any differences of race, color, or nationality. Private corporations, likewise, are "persons" within the scope of the guaranty insofar as their property is concerned." xSmith Bell & Co. v. Natividad, 40 Phil. 136, 144 (1920).

(b) Equal protection clause (xSmith Bell & Co. v. Natividad, 40 Phil. 136 [1920]).

(c) Unreasonable Searches and Seizure

Corporations are protected by the constitutional guarantee against unreasonable searches and seizures, but that the officers of a corporation from which documents, papers and things were seized have no cause of action to assail the legality of the seizures, regardless of the amount of shares of stock or of the interest of each of them in said corporation, and whatever the offices they hold therein may be, because the corporation has a personality distinct and separate from those of said officers. The legality of a seizure can be contested only by the party whose rights have been impaired thereby; and the objection to an unlawful search is purely personal and cannot be availed of by such officers of the corporation who interpose it for their personal interests. xStonehill v. Diokno, 20 SCRA 383 (1967).

A corporation is but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate for such body. Its property cannot be taken without compensation; can only be proceeded against by due process of law; and

is protected against unlawful discrimination. xBache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823, 837 (1971), quoting from xHale v. Henkel, 201 U.S. 43, 50 L.Ed. 652.

(d) But a corporation is not entitled to privilege against self incrimination

“It is elementary that the right against self-incrimination has no application to juridical persons.” Bataan Shipyard & Engineering Co v. PCGG, 150 SCRA 181, 234-235 (1987).

While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested with special privileges and franchises may refuse to show its hand when charged with an abuse of such privilege. xHale v. Henkel, 201 U.S. 43 (1906); xWilson v. United States, 221 U.S. 361 (1911); xUnited States v. White, 322 U.S. 694 (1944).

3. Liability for Torts

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

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directs or authorizes, is just as true of a corporation as a natural person. PNB v. CA, 83 SCRA 237 (1978).

Our jurisprudence is wanting as to the definite scope of “corporate tort.” Essentially, “tort” consists in the violation of a right given or the omission of a duty imposed by law. Simply stated, tort is a breach of a legal duty. When it was found that Clark Field Taxi failed to comply with the obligation imposed under Article 283 of the Labor Code which mandates that the employer to grant separation pay to employees in case of closure or cessation of operations of establishments or undertaking not due to serious business losses or financial reverses; consequently, its stockholder who was actively engaged in the management or operation of the business should be held personally liable. xSergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).

As a general rule, a banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment. A bank will be held liable for the negligence of its officers or agents when acting within the course and scope of their employment, even as regards that species of tort of which malice is an essential element. In this case, we find a situation where the PCIBank appears also to be the victim of the scheme hatched by a syndicate in which its own management employees had participated. Philippine Commercial International Bank vs. Court of Appeals, G.R. No. 121413, 29 January 2001.

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

No criminal suit can lie against an accused who is a corporation. xTimes, Inc. v. Reyes, 39 SCRA 303 (1971).

When a criminal statute forbids the corporation itself from doing an act, the prohibition extends to the board of directors, and to each director separately and individually. xPeople v. Concepcion, 44 Phil. 129 (1922).

5. Recovery of Moral Damages and Other Damages

A corporation, being an artificial person, cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis for moral damages under Art. 2217 of the Civil Code. However, a corporation may have a good reputation which, if besmirched, may be a ground for the award of moral damages. xMambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968).

Even when the corporation's reputation and goodwill have been prejudiced, "there can be no award for moral damages under Article 2217 and succeeding articles of Section 1 of Chapter 3 of Title XVIII of the Civil Code in favor of a corporation." xPrime White Cement Corp. vo Intermediate Appellate Court, 220 SCRA 103, 113-114 (1993).

Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life—all of which cannot be suffered by respondent bank as an artificial person. xLBC Express, Inc. v. Court of Appeals, 236 SCRA 602 (1994); xAcme Shoe, Rubber & Plastic Corp. v. Court of Appeals, 260 SCRA 714 (1996); xSolid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997).

In Asset Privatization Trust v. Court of Appeals, 300 SCRA 579 (1998), the Supreme Court seemed to have gone back to the original doctrine that “[u]nder Article 2217 of the Civil Code, moral damages include besmirched reputation which a corporation may possibly suffer.”

The award of moral damages cannot be granted in favor of a corporation because, being an artificial person and having existence only in legal contemplation, it has no feelings, no emotions, no senses. It cannot, therefore, experience physical suffering and mental anguish, which can be experienced only by one having a nervous system. The statement in People v. Manero [218 SCRA 85 (1993)] and Mambulao Lumber Co. v. PNB [130 Phil. 366 (1968)], that a corporation may recover moral damages if it “has a good reputation that is debased, resulting in social humiliation” is an obiter dictum. . .” The possible basis of recovery of a corporation would be under

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Articles 19, 20 and 21 of the Civil Code, but which requires a clear proof of malice or bad faith. xABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999).

While it is true that a criminal case can only be filed against the officers of a corporation and not against the corporation itself, it does not follow from this, however, that the corporation cannot be a real-party-in-interest for the purpose of bringing a civil action for malicious prosecution for the damages incurred by the corporation for the criminal proceedings brought against its officer. xCometa v. Court of Appeals, 301 SCRA 459 (1999).

6. Nationality of Corporation: COUNTRY UNDER WHOSE LAWS INCORPORATED (Sec. 123).

Exceptions: The TEST OF CONTROLLING OWNERSHIP Applies In:

(a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Constitution; Roman Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the Register of Deeds of Davao, 102 Phil. 596 [1957]).

The donation of land to an unincorporated religious organization, whose trustees are foreigners, cannot be allowed registration for being violation of the constitutional prohibition and it would not be violation of the freedom of religion clause. The fact that the religious association “has no capital stock does not suffice to escape the constitutional inhibition, since it is admitted that its members are of foreign nationality. The purpose of the sixty per centum requirement is obviously to ensure that corporations or associations allowed to acquire agricultural land or to exploit natural resources shall be controlled by Filipinos; and the spirit of the Constitution demands that in the absence of capital stock, the controlling membership should be composed of Filipino citizens.” xRegister of Deeds of Rizal v. Ung Sui Si Temple, 97 Phil. 58 (1955)

(b) Public Utilities (Sec. 11, Article XII, 1987 Constitution; People v. Quasha, 93 Phil. 333 [1953]).

The primary franchise of a corporation, that is, the right to exist as such, is vested in the individuals who compose the corporation and not in the corporation itself and cannot be conveyed in the absence of a legislative authority so to do. But the special or secondary franchises of a corporation are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such special or secondary franchises as are charged with a public use. xJ.R.S. Business Corp. v. Imperial Insurance, 11 SCRA 634 (1964).

The Constitution, in no uncertain terms, requires a franchise for the operation of a public utility; however, it does not requires a franchise before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the public. In law there is a clear distinction between the "operation" of a public utility and the ownership of the facilities and equipment used to serve the public. Tatad v. Garcia, Jr., 243 SCRA 436 (1995)

“A distinction should be made between shares of stock, which are owned by stockholders, the sale of which requires only NTC approval, and the franchise itself which is owned by the corporation as the grantee thereof, the sale or transfer of which requires Congressional sanction. Since stockholders own the shares of stock, they may dispose of the same as they see fit. They may not, however, transfer or assign the property of a corporation, like its franchise. In other words, even if the original stockholders had transferred their shares to another group of shareholders, the franchise granted to the corporation subsists as long as the corporation, as an entity, continues to exist. The franchise is not thereby invalidated by the transfer of the shares. A corporation has a personality separate and distinct from that of each stockholder. It has the right of continuity or perpetual succession Corporation Code, Sec. 2).” Philippine Long Distance Telephone Co. v. National Telecommunications Commission, 190 SCRA 717, 732 (1990).

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

Sources: P.D. 36, as amended by PDs 191 and 197; DOJ Opinion No. 120, s. of 1982; Section 2, P.D. 576; SEC Opinion dated 24 March 1983; DOJ Opinion 163, s. 1973; SEC Opinion dated 15 July 1991, XXV SEC QUARTERLY BULLETIN, (No. 4—December, 1991), at p. 31.

Cable Industry

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The National Telecommunications Commission (NTC), which regulates and supervises the cable television industry in the Philippines under Section 2 of Executive Order No. 436, s. 1997, has provided under NTC Memorandum Circular No. 8-9-95, under item 920(a) thereof provides that “Cable TV operations shall be governed by E.L. No. 205, s. 1987. If CATV operators offer public telecommunications services, they shall be treated just like a public telecommunications entity.”

Under DOJ Opinon No. 95, series of 1999, the Secretary of Justice, taking its cue from Allied Broadcasting, Inc. v. Federal Communications Commission, 435 F. 2d 70, considered CATV as “a form of mass media which must, theefore, be owned and managed by Filipino citizens, or corporations, cooperatives or associations, wholly-owned and managed by Filipino citizens pursuant to the mandate of the Constitution.”

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

(e) War-Time Test (Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., 89 Phil. 54 [1951]; xDavis Winship v. Philippine Trust Co., 90 Phil. 744 [1952]; xHaw Pia v. China Banking Corp., 80 Phil. 604 [1948]).

(f) Investment Test as to "Philippine Nationals" (Sec. 3(a),(b), R.A. 7042, Foreign Investment Act of 1992)

(g) The Grandfather Rule (Opinion of DOJ No. 18, s. 1989, dated 19 January 1989; SEC Opinion, dated 6 November 1989, XXIV SEC QUARTERLY BULLETIN (No. 1- March 1990); SEC Opinion, dated 14 December 1989, XXIV SEC QUARTERLY BULLETIN (No. 2 -June 1990)

Up to what level do you apply the grandfather rule? (Palting v. San Jose Petroleum Inc., 18 SCRA 924 [1966]).

(h) Special Classifications (Sec. 140)

IV. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING VEIL OF CORPORATE FICTION

See relevant portions of VILLANUEVA, Restatement of the Doctrine of Piercing The Veil of Corporate Fiction, 37 ATENEO L.J. 19 (No. 2, June 1993).

A. Main Doctrine: A CORPORATION HAS A PERSONALITY SEPARATE AND DISTINCT FROM ITS STOCKHOLDERS OR MEMBERS.

Rudimentary is the rule that a corporation is invested by law with a personality distinct and separate from its stockholders or members—by legal fiction and convenience it is shielded by a protective mantel and imbued by law with a character alien to the persons comprising it. xLim v. Court of Appeals, 323 SCRA 102 (2000).

1. Sources: Sec. 2; Article 44, Civil Code

2. Importance of Protecting Main Doctrine:

The “separate juridical personality” includes: right of succession; limited liability; centralized management; and generally free transferability of shares of stock. Therefore, an undermining of the separate juridical personality of the corporation, such as the application of the piercing doctrine, necessarily dilutes any or all of those attributes.

One of the advantages of a corporate form of business organization is the limitation of an investor’s liability to the amount of the investment. This feature flows from the legal theory that a corporate entity is separate and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil may be used only for legitimate purposes. On equitable considerations, the veil can be disregarded when it is utilized as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another corporation. xSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).

3. Applications:

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(a) Majority Ownership of or Dealings in Shareholdings: Ownership of a majority of capital stock and the fact that majority of directors of a corporation are the directors of another corporation creates no employer-employee relationship with the latter's employees. DBP v. NLRC, 186 SCRA 841 (1990); Francisco, et al. v. Mejia, G. R. No. 141617, 14 August 2001.

The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a collection case against the corporation, does not make such stockholder personally liable for the corporate debt, since the disposing stockholder has no personal obligation to the creditor, and it is the inherent right of the stockholder to dispose of his shares of stock anytime he so desires. xRemo, Jr. v. Intermediate Appellate Court, 172 SCRA 405, 413-414 (1989).

Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. xSunio v. NLRC , 127 SCRA 390 (1984); xAsionics Philippines, Inc. v. National Labor Relations Commission, 290 SCRA 164 (1998); xLim v. Court of Appeals, 323 SCRA 102 (2000); xManila Hotel Corp. v. NLRC, 343 SCRA 1 (2000); xFrancisco v. Mejia, G. R. No. 141617, 14 August 2001.

Mere substantial identity of the incorporators of the two corporations does not necessarily imply fraud, nor warrant the piercing of the veil of corporate fiction. In the absence of clear and convincing evidence to show that the corporate personalities were used to perpetuate fraud, or circumvent the law, the corporations are to be rightly treated as distinct and separate from each other. xLaguio v. NLRC, 262 SCRA 715 (1996).

(b) Dealings Between the Corporation and Stockholders: The transfer of the corporate assets to the stockholder is not in the nature of a partition but is a conveyance from one party to another. Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).

As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities which it may be connected and vice-versa. xARB Constructions Co., Inc. v. Court of Appeals, 332 SCRA 427 (200)

(c) On Issues of Privileges Enjoyed: The tax privileges enjoyed by a corporation do not extend to its stockholders. "A corporation has a personality distinct from that of its stockholders, enabling the taxing power to reach the latter when they receive dividends from the corporation. It must be considered as settled in this jurisdiction that dividends of a domestic corporation which are paid and delivered in cash to foreign corporations as stockholders are subject to the payment of the income tax, the exemption clause to the charter [of the domestic corporation] notwithstanding." xManila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895, 898 (1936).

(d) Being a Corporate Officer: Being an officer or stockholder of a corporation does not by itself make one's property also of the corporation, and vice-versa, for they are separate entities, and that shareholders are in no legal sense the owners of corporate property which is owned by the corporation as a distinct legal person. Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991)

The mere fact that one is president of the corporation does not render the property he owns or possesses the property of the corporation, since that president, as an individual, and the corporation are separate entities. xCruz v. Dalisay, 152 SCRA 487 (1987).

(e) Properites, Obligations and Debts: Likewise, a corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its members in their individual capacity, even when the corporation is organized for the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347 [1976]).

The corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's debt or credit that of the corporation. xTraders Royal Bank v. CA, 177 SCRA 789 (1989).

Stockholders have no personality to intervene in a collection case covering the loans of the corporation on the ground that the interest of

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shareholders in corporate property is purely inchoate. xSaw v. CA, 195 SCRA 740 [1991])

The interests of payees in promissory notes cannot be off-set against the obligations between the corporations to which they are stockholders absent any allegation, much less, even a scintilla of substantiation, that the parties interest in the corporation are so considerable as to merit a declaration of unity of their civil personalities. xIndustrial and Development Corp. v. Court of Appeals, 272 SCRA 333 (1997).

It is a basic postulate that a corporation has a personality separate and distinct from its stockholders. Therefore, even when the foreclosure on the assets of the corporation was wrongful and done in bad faith, the stockholders of the corporation have no standing to recover for themselves moral damages. Otherwise, it would amount to the appropriation by, and the distribution to, such stockholders of part of the corporation’s assets before the dissolution of the corporation and the liquidation of its debts and liabilities. xAsset Privatization Trust v. Court of Appeals, 300 SCRA 579, 617 (1998).

Where real properties included in the inventory of the estate of a decedent are in the possession of and are registered in the name of the corporations, in the absence of any cogency to shred the veil of corporate fiction, the presumption of conclusiveness of said titles in favor of said corporations should stand undisturbed. xLim v. Court of Appeals, 323 SCRA 102 (2000).

(f) Third-Parties: The fact that respondents are not stockholders of the disputed corporations does not make them non-parties to the case, since the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the Complaint. In this case, it is alleged that the aforementioned corporations are mere alter egos of the directors-petitioners, and that the former acquired the properties sought to be reconveyed to FGSRC in violation of directors-petitioners’ fiduciary duty to FGSRC. The notion of corporate entity will be pierced or disregarded and the individuals composing it will be treated as identical if, as alleged in the present case, the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. Gochan v. Young, G.R. No. 131889, 21 March 2001.

B. Piercing the Veil of Corporate Fiction:

1. Source of Incantation: xUnited States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 [1905]). xSee also Francisco v. Mejia, G. R. No. 141617, 14 August 2001.

2. Nature of the Piercing Doctrine (Traders Royal Bank v. Court of Appeals, 269 SCRA 15 [1997])

Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguishes one corporation from a seemingly separate one, were it not for the existing corporate fiction. xLim v. Court of Appeals, 323 SCRA 102 (2000).

This Court has pierced the veil of corporate fiction in numerous cases where it was used, among others, to avoid a judgment credit, to avoid inclusion of corporate assets as part of the estate of a decedent, to avoid liability arising from debt; when made use of as a shield to perpetrate fraud and/or confuse legitimate issues, or to promote unfair objectives or otherwise to shield them. xReynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000; also xRamoso v. Court of Appeals, G.R. No. 117416, 8 December 2000.

3. When Piercing Doctrine Not Applicable:

(a) Piercing the veil of corporate fiction is remedy of last resort and is not available when other remedies are still available. Umali v. CA, 189 SCRA 529 (1990).

(b) Piercing is not allowed unless the remedy sought is to make the officer or another corporation pecuniarily liable for corporate debts. Umali v. CA, 189 SCRA 529 (1990); Indophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697 (1992).

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(c) Piercing is not available when the personal obligations of an individual are sought to be enforced against the corporation. xRobledo v. NLRC, 238 SCRA 52 (1994)

“The rationale behind piercing a corporation’s identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar, instead of holding certain individuals or person responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been turned upside down because of its erroneous invocation.” Francisco Motors Corp. v Court of Appeals, 309 SCRA 72, 83 (1999).

(d) To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed. This is elementary. The organization of the corporation at the time when the relationship between the landowner and the developer were still cordial cannot be used as a basis to hold the corporation liable later on for the obligations of the landowner to the developer under the mere allegation that the corporation is being used to evade the performance of obligation by one of its major stockholders. xLuxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999); xDevelopment Bank of the Philippines vs. Court of Appeals, G.R. No. 126200, 16 August 2001.

(e) Not Applicable to Theorizing: Piercing of the veil of corporate fiction is not allowed when it is resorted to justify under a theory of co-ownership the continued use and possession by stockholders of corporate properties. Boyer-Roxas v. Court of Appeals, 211 SCRA 470 [1992]).

The piercing doctrine cannot be availed of in order to dislodge from the jurisdiction of the SEC a the petition for suspension of payments filed under Section 5(e) of Pres. Decree No. 902-A, on the ground that the petitioning individuals should be treated as the real petitioners to the exclusion of the petitioning corporate debtor. “The doctrine of piercing the veil of corporate fiction heavily relied upon by the petitioner is entirely misplaced, as said doctrine only applies when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.” xUnion Bank of the Philippines v. Court of Appeals, 290 SCRA 198 (1998).

Changing of the petitioners’s subsidiary liabilities by converting them to guarantors of bad debts cannot be done by piercing the veil of corporate identity. xRamoso v. Court of Appeals, G.R. No. 117416, 8 December 2000.

(f) Piercing doctrine is meant to prevent fraud, and cannot be employed to perpetrate fraud or a wrong. Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal, 91 Phil. 786 (1952).

The theory of corporate entity was not meant to promote unfair objectives or otherwise, nor to shield them. xVillanueva v. Adre, 172 SCRA 876 (1989).

(g) Piercing is a power belonging to the court and cannot be assumed improvidently by a sheriff. Cruz v. Dalisay, 152 SCRA 482 (1987).

3. Consequences and Types of Piercing Cases: Umali v. CA, 189 SCRA 529 [1990])

(a) The application of the doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance for which the doctrine was applied. Koppel (Phil.) Inc. v. Yatco, 77 Phil. 496 (1946); xTantoco v. Kaisahan ng Mga Manggagawa sa La Campana, 106 Phil. 198 (1959).

(b) Classification of the Piercing Cases:

(i) When the corporate entity is used to commit fraud or to do a wrong ("fraud cases");

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(ii) When the corporate entity is merely a farce since the corporation is merely the alter ego, business conduit or instrumentality of a person or another entity ("alter ego cases"); and

(iii) When the piercing the corporate fiction is necessary to achieve justice or equity ("equity cases").

The three cases may appear together in one application. See R.F. Sugay & Co., v. Reyes, 12 SCRA 700 (1964).

4. Fraud Cases:

(a) Acts by the Controlling Shareholder: Where a stockholder, who has absolute control over the business and affairs of the corporation, entered into a contract with another corporation through fraud and false representations, such stockholder shall be liable jointly and severally with his co-defendant corporation even when the contract sued upon was entered into on behalf of the corporation. Namarco v. Associated Finance Co., 19 SCRA 962 (1967).

The tests in determining whether the corporate veil may be pierced are: (1) the defendant must have control or complete domination of the other corporation’s finances, policy and business practices with regard to the transaction attached; (2) control must be used by the defendant to commit fraud or wrong; and (3) the aforesaid control or breach of duty must be the proximate cause of the injury or loss complained of. Manila Hotel Corporation v. NLRC, 343 SCRA 1 (2000); xAlso Lim v. Court of Appeals, 323 SCRA 102 (2000).

(b) One cannot evade civil liability by incorporating properties or the business. Palacio v. Fely Transportation Co., 5 SCRA 1011 (1962).

(c) The veil of corporation fiction may be pierced when used to avoid a contractual commitment against non-competition. Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).

(d) The Supreme Court found the following facts to be legal basis to pierce: One company was merely an adjunct of the other, by virtue of a contract for security services, the former provided with security guards to safeguard the latter’s premises; both companies have the same owners and business address; the purported sale of the shares of the former stockholders to a new set of stockholders who changed the name of the corporation appears to be part of a scheme to terminate the services of the security guards, and bust their newly-organized union which was then beginning to become active in demanding the company’s compliance with Labor Standards laws. De Leon v. NLRC, G.R. No. 112661, 30 May 2001.

(e) Parent-Subsidiary Relations; Affiliates (Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000; Commissioner of Internal Revenue v. Norton and Harrison, 11 SCRA 704, [1954]; Tomas Lao Construction v. NLRC, 278 SCRA 716 [1997]).

- Why is there inordinate showing of alter-ego elements?

(e) Guiding Principles in Fraud Cases:

(i) There must have been fraud or an evil motive in the affected transaction, and the mere proof of control of the corporation by itself would not authorize piercing; and

(ii) The main action should seek for the enforcement of pecuniary claims pertaining to the corporation against corporate officers or stockholders.

5. Alter-Ego Cases:

(a) Where the stock of a corporation is owned by one person whereby the corporation functions only for the benefit of such individual owner, the corporation and the individual should be deemed the same. Arnold v. Willets and Patterson, Ltd., 44 Phil. 634 (1923).

(b) When the corporation is merely an adjunct, business conduit or alter ego of another corporation, the fiction of separate and distinct corporation entities should be disregarded. xTan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988).

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The corporation veil cannot be used to shield an otherwise blatant violation of the prohibition against forum-shopping. Shareholders, whether suing as the majority in direct actions or as the minority in a derivative suit, cannot be allowed to trifle with court processes, particularly where, as in this case, the corporation itself has not been remiss in vigorously prosecuting or defending corporate causes and in using and applying remedies available to it. xFirst Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996).

(c) Employment of same workers; single place of business, etc. La Campana Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953).

The doctrine that a corporation is a legal entity or a person in law distinct from the persons composing it is merely a legal fiction for purposes of convenience and to subserve the ends of justice. This fiction cannot be extended to a point beyond its reason and policy. Where, as in this case, the corporation fiction was used as a means to perpetrate a social injustice or as a vehicle to evade obligations or confuse the legitimate issues, it would be discarded and the two (2) corporations would be merged as one, the first being merely considered as the instrumentality, agency conduit or adjunct of the other. In this case, because of the actions of management of the two corporations, there was much confusion as to the proper employment of the claimant. xAzcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).

(d) Use of nominees. xMarvel Building v. David, 9 Phil. 376 (1951).

(e) Avoidance of tax. Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160

(1961); xLiddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961).

(f) Mixing of bank deposit accounts. xRamirez Telephone Corp. v. Bank of America, 29 SCRA 191 (1969).

(g) Where it appears that two business enterprises are owned, conducted, and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities and treat them as identical. xSibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992).

(h) Thinly-capitalized corporations. McConnel v. Court of Appeals, 1 SCRA 722 (1961).

(i) Parent-subsidiary relationship. Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946); xPhilippine Veterans Investment Development Corporation v. CA, 181 SCRA 669 (1990).

(j) Affiliated companies. xGuatson International Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990).

(k) Summary of Probative Factors: Philippine National Bank vs. Ritratto Group, Inc., et al., G.R. No. 142616, 31 July 2001; xConcept Builders, Inc. v. NLRC, 257 SCRA 149 (1996).

Whether the existence of the corporation should be pierced depends on questions of facts, appropriately pleaded. Mere allegation that a corporation is the alter ego of the individual stockholders is insufficient. The presumption is that the stockholders or officers and the corporation are distinct entities. The burden of proving otherwise is on the party seeking to have the court pierce the veil of corporate entity. xRamoso v. Court of Appeals, G.R. No. 117416, 8 December 2000.

(l) Guiding Principles in Alter-Ego Cases:

(i) The doctrine applies in this case even in the absence of evil intent; it applies because of the direct violation of a central corporate law principle of separating ownership from management.

(ii) The doctrine in such cased is based on estoppel: if stockholders do not respect the separate entity, others cannot also be expected to be bound by the separate juridical entity.

(iii) Piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced against the stockholders or officers of the corporation.

6. Equity Cases:

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(a) When used to confuse legitimate issues. Telephone Engineering and Service Co., Inc. V. WCC, 104 SCRA 354 (1981).

(b) When used to raise technicalities. xEmilio Cano Ent. v. CIR, 13 SCRA 291 (1965).

7. Piercing Doctrine and Due Process Clause

(a) The need to bring a new case against the officer. McConnel v. Court of Appeals, 1 SCRA 723 (1961).

(b) When corporate officers are sued in their official capacity when the corporation was not made a party, the corporation is not denied due process. Emilio Cano Enterprises v. Court of Industrial Relations, 13 SCRA 291 (1965).

(c) Provided that evidential basis has been adduced during trial to apply the piercing doctrine. Jacinto v. Court of Appeals, 198 SCRA 211 (1991); xArcilla v. Court of Appeals, 215 SCRA 120 (1992).

V. CLASSIFICATIONS OF CORPORATIONS

1. In Relation to the State:

(a) Public corporations (Sec. 3, Act No. 1459)

Organized for the government of the portion of the state (e.g., barangay, municipality, city and province)

Majority shares by the Government does not make an entity a public corporation. xNational Coal Co., v. Collector of Internal Revenue, 46 Phil. 583 (1924).

(b) Quasi-public corporations xMarilao Water Consumers Associates v. IAC, 201 SCRA 437 (1991)

Although Boy Scouts of the Philippines does not receive any monetary or financial subsidy from the Government, and that its funds and assets are not considered government in nature and not subject to audit by the COA, the fact that it received a special charter from the government, that its governing board are appointed by the Government, and that its purpose are of public character, for they pertain to the educational, civic and social development of the youth which constitute a very substantial and important part of the nation, it is not a public corporation in the same sense that municipal corporation or local governments are public corporation since its does not govern a portion of the state, but it also does not have proprietary functions in the same sense that the functions or activities of government-owned or controlled corporations such as the National Development Company or the National Steel Corporation, is may still be considered as such, or under the 1987 Administrative Code as an instrumentality of the Government. Therefore, the employees are subject to the Civil Service Law. xBoy Scouts of the Philippines v. NLRC, 196 SCRA 176 (1991).

(c) Private Corporation (Sec. 3, Act 1459)

A government-owned or -controlled corporation when organized under the Corporation Code is still a private corporation. But being a government-owned or -controlled corporation makes it liable for laws and provisions applicable to the Government or its entities and subject to the control of the Government. xCervantes v. Auditor General, 91 Phil. 359 (1952).

A private corporation is created by operation of law under the Corporation while a government corporation is normally created by special law referred to often as a charter. xBliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271 (1994).

The doctrine that employees of government-owned and -controlled corporations, whether created by special law or formed as subsidiaries under the general corporation law are governed by the Civil Service Law and not by the Labor Code, has been supplanted by the 1987 Constitution. The present doctrine in determining whether a government-owned or -controlled corporation is subject to the Civil Service Law is the manner of its creation, such that government corporations created by special charter are subject to the Civil Service Law, while those incorporated under the general corporation law are governed by the Labor Code. xPNOC-Energy Development Corp. v. NLRC, 201 SCRA 487 (1991); xDavao City Water District v. Civil Service Commission, 201 SCRA 593 (1991).

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The test to determine whether a corporation is government owned or controlled, or private in nature is simple. Is it created by its own charter for the exercise of a public function, or by incorporation under the general corporation law? Those with special charters are government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are compulsory members of the Government Service Insurance System. xCamparedondo v. NLRC, 312 SCRA 47 (1999).

Section 31 of the Corporation Code (Liability of Directors and Officers) is applicable to corporations which have been organized by special charters since Sec. 4 of the Corporation Code renders the provisions of thereof applicable in a supplementary manner to all corporations, including those with special or individual charters, such as cooperatives organized under Pres. Decree No. 269, so long as those provisions are not inconsistent with such charters. xBenguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).

2. As to Place of Incorporation:(a) Domestic Corporation

(b) Foreign Corporation (Sec. 123)

3. As to Purpose of Incorporation:

(a) Municipal or Public corporation

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

(c) Educational corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)

(d) Charitable, Scientific or Vocational corporations

(e) Business corporation

4. As to Number of Members:

(a) Aggregate Corporation

(b) Corporation Sole (Secs. 110 to 115; xRoman Catholic Apostolic Administrator of Davao, Inc. v. LRC and the Register of Deeds of Davao City, 102 Phil. 596 (1957).

xDirector of Land v. IAC, 146 SCRA 509 (1986), which held that a corporation sole has no nationality, overturned the previous doctrine (xRepublic v. Villanueva, 114 SCRA 875 [1982] and Republic v. Iglesia Ni Cristo, 127 SCRA 687 [1984]) that a corporation sole is disqualified to acquire or hold alienable lands of the public domain, because of the constitutional prohibition qualifying only individuals to acquire land of the public domain and the provision under the Public Land Act which applied only to Filipino citizens or natural persons. xRepublic v. Iglesia ni Cristo, 127 SCRA 687 (1984); xRepublic v. IAC, 168 SCRA 165 (1988).

5. As to Legal Status:

(a) De Jure Corporation

(b) De Facto Corporation (Sec. 20)

(c) Corporation by Estoppel (Sec. 21)

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

(a) Stock Corporation

(b) Non-Stock Corporation

VI. CORPORATE CONTRACT LAW

See relevant portion of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No. 2, June 1994)

1. Pre-Incorporation Contracts

(a) Who Are Promoters?

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“Promoter” is a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. (Sec. 3.10, Securities Regulation Code [R.A. 8799])

(b) Nature of Pre-incorporation Agreements (Secs. 60 and 61; Bayla v. Silang Traffic Co., Inc., 73 Phil. 557 [1942])

(c) Theories on Liabilities for Promoter's Contracts (Cagayan Fishing Development Co., Inc. v. Teodoro Sandiko, 65 Phil. 223 [1937]; Rizal Light & Ice Co., Inc. v. Public Service Commission, 25 SCRA 285 [1968]; Caram, Jr. v. CA, 151 SCRA 372 [1987]).

2. De Facto Corporation (Sec. 20)

(a) Elements for Existence of De Facto Corporation:

(1) Valid law under which incorporated;

(2) Attempt in good faith to incorporate; “colorable compliance;”

(3) Assumption of corporate powers; and

(4) Issuance of certificate of incorporation. Arnold Hall v. Piccio, 86 Phil. 634 (1950).

3. Corporation by Estoppel Doctrine (Sec. 21; Salvatierra v. Garlitos, 103 Phil. 757 [1958]; Albert v. University Publishing Co., 13 SCRA 84 [1965]; International Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000); xAsia Banking Corporation v. Standard Products, 46 Phil. 145 [1924]; xMadrigal Shipping Co., Inc. v. Ogilvie, Supreme Court Advanced Decision, 55 O.G. No. 35, p. 7331).

An individual should be held personally liable for the unpaid obligations of the unincorporated association in whose behalf he entered into such transactions, under the principle that “any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered into or for other acts performed as such agent.” International Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000).

(a) Nature of Doctrine

Corporation by estoppel doctrine is founded on principles of equity and is designed to prevent injustice and unfairness. It applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Where there is no third person involved and the conflict arises only among those assuming the form of a corporation, who therefore know that it has not been registered, there is no corporation by estoppel. Lozano v. De Los Santos, 274 SCRA 452 (1997)

A party cannot challenge the personality of the plaintiff as a duly organized corporation after having acknowledged same when entering into the contract with the plaintiff as such corporation for the transportation of its merchandise. (xOhta Dev. Co. v. Steamship Pompey, 49 Phil. 117 [1926]); the same principle applied in xCompania Agricole de Ultramar v. Reyes, 4 Phil. 1 [1911] but that case pertained to a commercial partnership which required registration in the registry under the terms of the Code of Commerce.

(b) Two Levels: (i) With "fraud" and (ii) Without "fraud"

When incorporating individuals represent themselves to be officers of the corporation never duly registered with SEC, and engages in the name of purported corporation in illegal recruitment, they are estopped from claiming that they are not liable as corporate officers, since Section 25 of Corporation Code provides that all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all the debts, liabilities and damages incurred or arising as a result thereof. xPeople v. Garcia, 271 SCRA 621 (1997).

An individual cannot avoid his liabilities to the public as an incorporator of a corporation whose incorporation was not consummated, when he held himself out as officer of the corporation and received money from applicants who availed of their services. Such individual is estopped from claiming that they are not liable as corporate officers for illegal recruitment under the corporation by estoppel doctrine under Sec. 25 of the Corporation Code which provides that all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all the debts, liabilities and damages incurred or

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arising as a result thereof. xPeople v. Pineda, G.R. No. 117010, 18 April 1997 (Unpublished).

4. Trust Fund Doctrine

See VILLANUEVA, "The Trust Fund Doctrine Under Philippine Corporate Setting," 31 ATENEO L.J. (No. 1, Feb. 1987).

(a) Commercial/Common Law Premise on Equity vis-a-vis Debts

(b) Nature of Doctrine

Under the trust fund doctrine, the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. xCommissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).

The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the capital stock, property and other assets of a corporation are regarded as equtiy in trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void. xBoman Environmental Dev. Corp. v. CA, 167 SCRA 540 (1988).

The “Trust Fund” doctrine considers the subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital stock may be turned over or released to the stockholder (except in the redemption of the redeemable shares) without violating this principle. Thus dividends must never impair the subscribed capital stock; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the consideration therefore. NTC v. Court of Appeals, 311 SCRA 508, 514-515 (1999).

(c) Corporation Purchasing Own Shares (Secs. 8, 41, 43 and 122, last paragraph; Phil. Trust Co. v. Rivera, 44 Phil. 469 [1923]; Steinberg v. Velasco, 52 Phil. 953 [1929])

VII. ARTICLES OF INCORPORATION

See relevant portions of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No. 2, June 1994).

1. Nature of Charter - The charter is in the nature of a contract between the corporation and the Government. Government of P.I. v. Manila Railroad Co., 52 Phil. 699 (1929).

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

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

(b) Corporate Name (Secs. 18, 14(1) and 42; Red Line Trans. v. Rural Transit, 60 Phil. 549 [1934]).

A corporation may change its name by the amendment of its articles of incorporation, but the same is not effective until approved by the SEC. xPhilippine First Insurance Co. v. Hartigan, 34 SCRA 252 (1970)

A change in the corporate name does not make a new corporation, and whether affected by special act or under a general law, has no effect on the identity of the corporation, or on its property, rights, or liabilities. xRepublic Planters Bank v. CA, 216 SCRA 738 (1992).

Similarity in corporate names between two corporations would cause confusion to the public especially when the purposes stated in their charter are also the same type of business. xUniversal Mills Corp. v. Universal Textile Mills Inc., 78 SCRA 62 [1977]).

A corporation has not right to intervene in a suit using a name other than its registered name; if a corporation legally and truly wants to intervene, it should have used its corporate name as the law requires and not another name which it had not

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registered. xLaureano Investment and Development Corporation v. Court of Appeals, 272 SCRA 253 (1997).

There would be no denial of due process when a corporation is sued and judgment is rendered against it under its unregistered trade name, holding that a corporation may be sued under the name by which it makes itself known to its workers. xPison-Arceo Agricultural Development Corp. v. NLRC, 279 SCRA 312 (1997)

(c) Purpose Clause (Secs. 14(2) and 42; Uy Siuliong v. Director of Commerce and Industry, 40 Phil. 541 [1919])

(d) Corporate Term (Sec. 11).

No extension can be effected once dissolution stage has been reached. xAlhambra Cigar v. SEC, 24 SCRA 269 (1968).

(e) Principal Place of Business

Place of residence of the corporation is the place of its principal office. xClavecilla Radio System v. Antillon, 19 SCRA 379 (1967)

The residence of its president is not the residence of the corporation because a corporation has a personality separate and distinct from that of its officers and stockholders. xSy v. Tyson Enterprises, Inc., 119 SCRA 367 (1982).

(f) Minimum Capitalization (Sec. 12)

- Why is maximum capitalization required to be indicated?

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

(h) Steps and Documents Required in SEC

3. Grounds for Disapproval (Sec. 17)

When the proposed articles presented show that the object of incorporation is to organize a barrio of a given municipality into a separate corporation for the purpose of taking possession and having control of all municipal property within the barrio so incorporated and administer it exclusively for the benefit of the residents, the object is unlawful and the articles can be denied registration. xAsuncion v. De Yriarte, 28 Phil. 67 [1914]).

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

5. Commencement of Corporate Existence (Sec. 19)

VIII. BY-LAWS

See relevant portions of VILLANUEVA, "Corporate Contract Law," 38 ATENEO L.J. 1 (No. 2, June 1994).

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

As the “rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it,” by-laws are indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Nonetheless, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation. Loyola Grand Villas Homeowners (South) Association, Inc. v. Court of Appeals, 276 SCRA 681 (1997).

(a) Common Law Limitations on By-Laws

(i) By-Laws Cannot Be Contrary to Law and Articles of Incorporation

A by-law provision granting to a stockholder a permanent representation in the Board of Directors is contrary to the Corporation Code requiring all members of the Board to be elected by the stockholders or members. Even when the members of the association may have formally adopted the provision, their action would be of no avail because no provision of the by-laws

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can be adopted if it is contrary to law. xGrace Christian High School v. Court of Appeals, 281 SCRA 133 (1997).

Although the right to amend by-laws lies solely in the discretion of the employer, this being in the exercise of management prerogative or business judgment, such right cannot impair the obligation of existing contracts or rights or undermine the right to security of tenure of a regular employee. Otherwise, it would enable an employer to remove any employee from employment by the simple expediency of amending its by-laws and providing the position shall cease to exist upon occurrence of a specified event. xSalafranca v. Philamlife (Pamplona) Village Homeowners Association, Inc., 300 SCRA 469, 479 (1998).

(ii) By-Laws Cannot Be Unreasonable or Be Contrary to Nature of By-laws. xGovernment of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399 (1927).

Authority granted to a corporation to regulate the transfer of its stock does not empower corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer. xThomson v. Court of Appeals, 298 SCRA 280 (1998).

By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restrictions; they are always subject to the charter of the corporation. xRural Bank of Salinas, Inc. v. CA, 210 SCRA 510 (1992), quoting from Thompson on Corporation Sec. 4137, cited in xFleischer v. Nolasco, 47 Phil. 583.

(iii) By-Laws Cannot Discriminate

(b) Binding Effects of By-laws (China Banking Corp. v. Court of Appeals, 270 SCRA 503 [1997]).

“Neither can we concede that such contract would be invalid just because the signatory thereon was not the Chairman of the Board which allegedly violated the corporation’s by-laws. Since by-laws operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons who deal with the corporation, unless they have knowledge of the same.” PMI Colleges v. NLRC, 277 SCRA 462 (1997).

2. Adoption Procedure (Sec. 46)

Section 46 of the Corporation, which requires the filing of by-laws, does not expressly provide for the consequence of their non-filing within the period provided therein; however, Pres. Decree 902-A allows the SEC to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations which fail to file their by-laws. Clearly, there can be no automatic corporate dissolution simply because the incorporators failed to abide by the required filing of by-laws, and there is no outright “demise” of corporate existence. Proper notice and hearing are cardinal components of due process in any democratic institution, agency or society, which would require that the incorporators must be given the chance to explain their neglect or omission and remedy the same. xLoyola Grand Villas Homeowners (South) Association, Inc. v. Court of Appeals, 276 SCRA 681 (1997).

3. Contents (Sec. 47)

4. Amendments (Sec. 48)

Power to amend may be delegated to the board of directors

IX. CORPORATE POWERS, AUTHORITY AND ACTIVITIES

1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45; Land Bank of the Philippines v. COA, 190 SCRA 154 [1990])

A corporation has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a

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corporation exercises said powers through its board of directors and/or its duly authorized officers and agents, since the physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose of by corporate by-laws or by a specific act of the board of directors. xReynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000.

Precisely because the corporation is such a prevalent and dominating factor in the business life of the country, the law has to look carefully into the exercise of powers by these artificial persons it has created. Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000.

(a) Classification of Corporate Powers: Express; Implied; and Incidental

There is basis to rule that the act of issuing the checks on behalf of the corporation was well within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not an ultra vires act. Atrium Management Corporation vs. Court of Appeals, G.R. No. 109491, 28 February 2001.

(b) Where Corporate Power is Lodged (Sec. 23)

Unless otherwise provided by the Corporation Code, corporate powers, such as the power to enter into contracts, are exercised by the Board of Directors. However, the Board may delegate such powers to either an executive committee or officials or contracted managers, which delegation, except for the executive committee, must be for specific purposes. The delegated officers makes the latter agents of the corporation, and rules of agency as to the binding effects of their acts would apply. For such officers to be deemed fully clothed by the corporation to exercise a power of the Board, the latter must specially authorize them to do so. xABS-CBN Broadcasting Corporation v. Court of Appeals, 301 SCRA 572 (1999).

2. Ultra Vires Acts

See relevant portions of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No. 2, June 1994).

(a) Concept and Types (Sec. 45)

An ultra vires act is one committed outside the object for which a corporation is created as define by the law of its organization and therefore beyond the power conferred upon it by law.” The term “ultra vire” is “distinguished from an illegal act from the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. Atrium Management Corporation vs. Court of Appeals, G.R. No. 109491, 28 February 2001.

(b) Ratification of Ultra Vires Acts: (Pirovano v. De la Rama Steamship Co., Inc., 96 Phil. 335 [1954]; Carlos v. Mindoro Sugar Co., 57 Phil. 343 [1932]; Republic v. Acoje Mining Co., 3 SCRA 361 [1963]; Crisologo Jose v. CA, 177 SCRA 594 [1989];

(i) Theory of Estoppel or Ratification

In order to ratify the unauthorized act of an agent and make it binding on the corporation, it must be shown that the governing body or officer authorized to ratify had full and complete knowledge of all the material facts connected with the transaction to which it relates. Ratification can never be made on the part of the corporation by the same person who wrongfully assume the power to make the contract, but the ratification must be by the officer or governing body having authority to make such contract. The act or conduct for which the corporation may be liable under the doctrine of estoppel must be by those of the corporation, its governing body or authorized officers, and not those of the purported agent who is himself responsible for the misrepresentation. xVicente v. Geraldez, 52 SCRA 210 (1973).

When the counsel representing the corporation in a collection suit admits on behalf of the corporation that the latter admitted culpability for personal loans obtained by its corporate officers, such admission cannot be given legal effect to the detriment of the corporation. The admission made in the answer by the counsel for the corporation was “without any enabling act or attendant ratification of corporate act,” as would authorize or even ratify such admission. In the absence of such ratification or authority, such admission does not bind the corporation. Also, the letter issued by the corporate officers who obtained the loan “as indicating the corporate liability of the corporation,” cannot also

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serve to make the corporation liable. The documents and admissions cannot have the effect of a ratification of an unauthorized act. Ratification can never be made on the part of the corporation by the same persons who wrongfully assume the power to make the contract, but the ratification must be by the officers as governing body having authority to make such contract. xAguenza v. Metropolitan Bank and Trust Co., 271 SCRA 1 (1997).

(ii) Doctrine of Apparent Authority (Prime White Cement Corp. v. Intermediate Appellate Court, 220 SCRA 103, 113-114 [1993]; Francisco v. GSIS, 7 SCRA 577 [1963])

A contract signed by the President/Chairman without authority from the Board of Directors is void. Although the by-laws grant authority to the President "to execute and sign for and in behalf of the corporation all contracts and agreements which the corporation may enter into," the same presupposes a prior act of the corporation exercised through its Board of Directors. Yao Ka Sin Trading v. CA, 209 SCRA 763 (1992).

Although an officer or agent acts without, or in excess of, his actual authority if he acts within the scope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as having such authority, the corporation is bound thereby in favor of a person who deals with him in good faith in reliance on such apparent authority, as where an officer is allowed to exercise a particular authority with respect to the business, or a particular branch of it, continuously and publicly, for a considerable time. Yao Ka Sin Trading v. CA, 209 SCRA 763 (1992).

Persons who deal with corporate agents within circumstances showing that the agents are acting in excess of corporate authority, may not hold the corporation liable. xTraders Royal Bank v. Court of Appeals, 269 SCRA 601 (1997); also Art. 1883, Civil Code.

The authority of a corporate officer in dealing with third persons may be actual or apparent. . . the principal is liable for the obligations contracted by the agent. The agent's apparent representation yields to the principal's true representation and the contract is considered as entered into between the principal and the third person. xFirst Philipine International Bank v. Court of Appeals, 252 SCRA 259 (1996).

If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority. xSoler v. Court of Appeals, G.R. No. 123892, 21 May 2001.

Under Article 1898 of the Civil Code, the acts of an agent beyond the scope of his authority do no bind the principal unless the latter ratifies the same expressly or implied. It also bears emphasizing that when the third person knows that the agent was acting beyond his power or authority, the principal can not be held liable for the acts of the agent. If the said third person is aware of such limits of authority, he is to blame, and is not entitled to recover damages from the agent, unless the latter undertook to secure the principal’s ratification. In the case of the corporation as the principal, there was no such ratification. Therefore, when the officer entered into the speculative contracts without securing the Board’s approval, nor did he submit the contracts to the Board after their consummation nor were they recorded in the books of the corporation, there was, in fact, no occasion at all for ratification. xSafic Alcan & Cie. V. Imperial Vegetable Co., G.R. No. 126751, 28 March 2001.

(iii) Theory of No State Damage (Harden v. Benguet Consolidated Mining Co., 58 Phil. 140 [1933]).

3. Specific (Express) Powers

(a) Enumerated Powers (Secs. 36)

Example of Poor Draftsmanship:

When the article of incorporation expressly provides that the purpose of the corporation was to “engage in the transportation of person by water,” such corporation cannot engage in the business of land transportation, which is an

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entirely different line of business, and, for which reason, may not acquire any certificate of public convenience to operate a taxicab service. xLuneta Motor Co. v. A.D. Santos, Inc., 5 SCRA 809 [1962]).

Power to Sue

Under section 36 of the Corporation Code, in relation to Section 23, it is clear that where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. A minority stockholder and member of the Board, who fails to show any proof that he was authorized by the Board of Directors, has no such power or authority to sue on the corporation’s behalf. Nor can we uphold this as a derivative suit. For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. There is now showing that petitioner has complied with the foregoing requisites. xTam Wing Tak v. Makasiar, G.R. 122452, 29 January 2001.

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

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

Prior to SEC approval of the increase in the authorized capital stock, and despite the Board resolution approving the increase in capital stock, and the receipt of payment on the future issues of the shares from the increased capital stock, such funds do not constitute part of the capital stock of the corporation until approval of the increase by SEC. xCentral Textile Mills, Inc. v. National Wages and Productivity Commission, 260 SCRA368 (1996).

A reduction of capital to justify the mass layoff of employees, especially of union members, amounts to nothing but a premature and plain distribution of corporate assets to obviate a just hearing to labor of the vast profits obtained by its joint efforts with capital through the years, and would constitute unfair labor practice. xMadrigal & Co. v. Zamora, 151 SCRA 355 [1987]);

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

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

Sale by the Board of the only property of the corporation without compliance with the provisions of Sec. 40 of the Corporation Code requiring the ratification of members representing at least two-thirds of the membership, would make the sale null and void. xIslamic Directorate of the Philippines v. Court of Appeals, 272 SCRA 454 (1997); also xPeña v. CA, 193 SCRA 717 (1991).

(f) Invest Corporate Funds in Another Corporation or Business or For Any Other Purpose (Sec. 42; De la Rama v. Ma-ao Sugar Central Co., 27 SCRA 247 [1969]).

(g) Declare Dividends (Sec. 43; Nielson & Co. v. Lepanto Consolidated Mining Co., 26 SCRA 540 [1968]).

Stock dividend is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can loosely be terms as the “trust fund” of the corporation. xNational Telecommunications Commission v. Court of Appeals, 311 SCRA 508, 514-515 (1999).

Although the certificates of stock granted the stockholder the right to receive quarterly dividends of 1%, cumulative and participating, the stockholders do not become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividends. . . Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code prohibit the issuance of any stock dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, “interest bearing stocks”, on which the corporation agrees absolutely to pay interest before dividends are paid to the common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. xRepublic Planters Bank v. Agana, 269 SCRA 1 (1997).

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(i) Enter into Management Contracts (Sec. 44; Nielson & Co., Inc. v. Lepanto Consolidated Mining, 26 SCRA 540 [1968]; Ricafort v. Moya, 195 SCRA 247, at pp. 266-267 [1991]). Why the difference in rule between entity and individual?

(j) Other Powers

- To Sell Land and Other Properties

A corporation whose primary purpose is to market, distribute, export and import merchandise, the sale of land is not within the actual or apparent authority of the corporation acting through its officers, much less when acting through the treasurer. Likewise Article 1874 and 1878 of the Civil Code requires that when land is sold through an agent, the agent’s authority must be in writing, otherwise the sale is void. xSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).

- To Borrow Funds

The power to borrow money is one of those cases where even a special power of attorney is required under Art. 1878 of the New Civil Code. There is invariably a need of an enabling act of the corporation to be approved by its Board of Directors. The argument that the obtaining of loan was in accordance with the ordinary course of business usages and practices of the corporation is devoid of merit because the prevailing practice in the corporation was to explicitly authorize an officer to contract loans in behalf of the corporation. xChina Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).

- To Provide Gratuity Pay for Employees

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

- To Donate

- To Enter Into Partnership, Joint Venture. Tuason & Co. v. Bolanos, 95 Phil. 106 (1954).

X. DIRECTORS, TRUSTEES AND OFFICERS

1. Powers of Board of Directors or Trustees (Sec. 23; Gamboa v. Victoriano, 90 SCRA 40 [1979]).

(a) Two Theories on Source of Power of Board of Directors (Angeles v. Santos, 64 Phil. 697 [1937]).

(b) Board Must Act As Body (Sec. 25; The Board of Liquidators v. Heirs of Maximo M. Kalaw, 20 SCRA 987 [1967]; Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634 [1918]; Acuña v. Batac Producers Cooperative Marketing Association, 20 SCRA 526 [1967]).

The general rule is that a corporation, through its broad of directors, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law. Thus, directors must act as a body in a meeting called pursuant to the law or the corporation's by-laws, otherwise, any action taken therein may be questioned by any objecting director or shareholder. Be that as it may, jurisprudence tells us that an action of the board of directors during a meeting, which was illegal for lack of notice, may be ratified either expressly, by the action of the directors in subsequent legal meeting, or impliedly, by the corporation's subseqeunt course of conduct. xLopez Realty v. Fontecha, 247 SCRA 183, 192 (1995).

(c) Effects of a “Bogus” Board

The acts or contracts effected by a bogus board would be void pursuant to Art. 1318 of the Civil Code because of the lack of “consent”. Islamic Directorate of the Philippines v. Court of Appeals, 272 SCRA 454 (1997).

(d) Executive Committee (Sec. 35)

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2. BUSINESS JUDGMENT RULE (Montelibano v. Bacolod-Murcia Miling Co., Inc., 5 SCRA 36 [1962]; Philippine Stock Exchange, Inc. v. Court of Appeals, 281 SCRA 232 [1997])

Board members and officers who purport to act for and in behalf of the corporation, keep within the lawful scope of their authority in so acting and act in good faith, do not become liable, whether civilly or otherwise, for the consequences of their acts. Those acts, when they are such a nature and are done under such circumstances, are properly attributed to the corporation alone and no personal liability is incurred by such officers and Board members. xBenguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992)

3. Qualifications of Directors and Trustees (Secs. 23 and 27; Gokongwei, Jr. v. SEC, 89 SCRA 336 [1979]).

(a) A director must own at least one share of stock (xPeña v. CA, 193 SCRA 717 [1991]; xDetective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 [1969])

(b) Mere beneficial ownership in a voting trust arrangement no longer qualifies (Lee v. CA, 205 SCRA 752 [1992]).

4. Election of Directors and Trustees

(a) Directors (Secs. 24 and 26; Premium Marble Resources v. Court of Appeals, 264 SCRA 11 [1996]).

(b) Trustee (Secs. 92 and 138)

(c) Cumulative Voting (Sec. 24; Cumulative Voting in Corporate Elections: Introducing Strategy in the Equation, 35 SOUTH CAROLINA L. REV. 295)

5. Vacancy in Board (Sec. 29)

By-law provision or the practice giving a stockholder a permanent seat in the Board of Directors would be against the provision of Sections 28 and 29 of the Corporation Code which requires member of the board of corporations to be elected. In addition, Section 23 of the Corporation Code which provides for the powers of the Board of Directors or Trustees expressly requires them “to be elected from among the holders of stock, or where there is no stock, from among the members of the corporation. xGrace Christian High School v. Court of Appeals, 281 SCRA 133 (1997).

6. Term of Office, Hold-over Principle

Directors may lawfully fill vacancies occurring in the board, and such officials, as well as the original directors, hold until qualification of their successors. xGovernment v. El Hogar Filipino, 50 Phil. 399 (1927).

The remedy is quo warranto to question the legality and proper qualification of persons elected to the board. xPonce v. Encarnacion, 94 Phil. 81 (1953).

7. Removal of Directors or Trustees (Sec. 28; Roxas v. De la Rosa, 49 Phil. 609 [1926]).

8. Directors' or Trustees' Meetings (Secs. 49, 53, 54 and 92)

In a board meeting, an abstention is presumed to be counted as an affirmative vote insofar as it may be construed as an acquiescence in the action of those who voted affirmatively; but such presumption, being merely prima facie would not hold in the face of clear evidence to the contrary. xLopez v. Ericta, 45 SCRA 539 [1972]).

9. Compensation of Directors (Sec. 30)

Directors and trustees are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office, founded on the presumption that directors and trustees render service gratuitously, and that the return upon their shares adequately furnishes the motives for service, without compensation. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216, 223 (1997).

Under Section 30 of the Corporation Code, there are two (2) ways by which members of the board can be granted compensation apart from reasonable per diems: (a) when there is a provision in the by-laws fixing their compensation; and (b) when the stockholders representing a majority of the outstanding capital stock at a regular or special meeting agree to give them compensation. From the language of Section 30, it may also be deduced that members of the board may also receive compensation,

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when they render services to the corporation in a capacity other than as directors or trustees of the corporation. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).

The position of being Chairman and Vice-Chairman, like that of Treasurer and Secretary, were considered by the officers as not mere directorship position, but officership position that would entitle the occupants to compensation. Likewise, the limitation placed under Section 30 of the Corporation that directors cannot receive compensation exceeding 10% of the net income of the corporation, would not apply to the compensation given to such positions since it is being given in their capacity as officers of the corporation and not as board members. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).

10. Role of Directors

(a) Directors as Fiduciaries.

- Pre-Corporation Code. Palting v. San Jose Petroleum, Inc., 18 SCRA 924 (1966).

- Nature of Duties of Directors and Officers. Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993).

(b) Duty of Obedience

A corporation, through its board of directors, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law. xLopez Realty, Inc. v. Fontecha, 247 SCRA 183 (1995)

(c) Duty of Diligence (Sec. 31; Steinberg v. Velasco, 52 Phil. 953 [1929]; Bates v. Dresser, 251 U.S. 524, 64 L. Ed. 388, 40 S. Ct. 247 [1919]; Smith v. Van Gorkam, 488 A.2d 858, Supreme Court of Delaware, 1985)..

(d) Duty of Loyalty (Secs. 31 to 34; Mead v. McCullough, 21 Phil. 95 [1911]).

- Doctrine of Corporate Opportunity (Gokongwei v. SEC, 89 SCRA 336 [1979]; See Annotations: Doctrine of Corporate Opportunity, 89 SCRA 412).

- Self-dealings (Secs. 32 and 33)

- Using Inside Information (Gokongwei v. SEC, 89 SCRA 336 [1979]).

When a director, who also owns ¾ of the equity of the corporation, who has also been designated as the administrator of corporate affairs, and who was directly negotiating the sale of the corporations large landholdings to the Government at great prices, purchases the shares of stock of a shareholder without informing the latter of the on-going negotiations, such director is deemed to have fraudulently acquired the shareholdings by way of deceit practiced by means of concealing his knowledge of the state of the negotiations and their probable successful result. xStrong v. Repide, 41 Phil. 947 [1909];

- Applies to confidential employees (cf. xSing Juco v. Llorente, 43 Phil. 589 [1922])

(e) Duty to Creditors and Outsiders

[xVILLANUEVA, The Fiduciary Duties of Directors and Officers Representing the Creditor Pursuant to a Loan Workout Arrangement: Parameters Under Philippine Corporate Setting, 35 ATENEO L.J. (No. 1, Feb. 1991)]

(f) Corporate Dealings with Directors and Officers (Sec. 32; Gokongwei v. SEC, 89 SCRA 336 [1979]; Prime White Cement Corp. v. IAC, 220 SCRA 103 [1993]).

(g) Contracts Between Corporations with Interlocking Directors (Sec. 33)

11. Who Is an "Officer" of the Corporation (Sec. 25; Gurrea v. Lezama, 103 Phil. 553 [1958]; Mita Pardo de Tavera v. Tuberculosis Society, 112 SCRA 243 [1982]; PSBA v. Leaño, 127 SCRA 778 [1984]; Dy v. NLRC, 145 SCRA 211 [1986]; xVisayan v. NLRC, 196 SCRA 410 [1991]).

Corporations act only through their officers and duly authorized agents. All acts within the powers of a corporation may be performed by agents of its selection; except so far as limitations or restrictions imposed by special charter, buy-laws, or statutory provisions. xBA Savings Bani v. Sia, 336 SCRA 484 (2000).

An “office” is created by the charter of the corporation and the officer is elected by the directors or stockholders. . . Note that a corporate officer’s removal from his

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office is a corporate act. If such removal occasions an intra-corporate controversy, its nature is not altered by the reason or wisdom, or lack thereof, with which the Board of Directors might have in taking such action. When petitioner, as Executive Vice-President allegedly diverted company funds for his personal use resulting in heavy financial losses in the company, this matter would amount to fraud. Such fraud would be detrimental to the interest not only of the corporation but also of its members. This type of fraud encompasses controversies in a relationship within the corporation covered by the SEC jurisdiction [now with the regular courts]. Perforce, the matter would come within the area of corporate affairs and management, and such a corporate controversy would call for the adjudicative expertise of the SEC, not the Labor Arbiter or the NLRC.” De Rossi v. NLRC, 314 SCRA 245 (1999).

When the by-laws of the condominium corporation specifically includes the position of “Superintendent/Administrator” in is roster of corporate officers, then such position is clearly a corporate officer position and issues of reinstatement would be within the jurisdiction of the SEC and not the NLRC. xOngkingco v. NLRC, 270 SCRA 613 (1997).

When the by-laws provide that one of the powers of the Board of Trustees is “[t]o appoint a Medical Director, Comptroller/Administrator, Chiefs of Services and such other officers as it may deem necessary and prescribe their powers and duties,” then such specifically designated positions should be considered “corporate officers” position. The determination of the rights and the concomitant liability arising from any ouster from such positions, would be intra-corporate controversy subject to the jurisdiction of the SEC (now RTC). xTabang v. NLRC, 266 SCRA 462 (1997).

An “office” is created by the charter of the corporation and the officer is elected by the directors or stockholders (2 Fletcher Cyc. Corp. Ch. II, Sec. 266). On the other hand, an “employee” usually occupies no office and generally is employed not by action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee. (Ibid) . . . A corporate officer’s dismissal is always a corporate act, or an intra-corporate controversy, and the nature is not altered by the reason or wisdom with which the Board of Directors may have in taking such action. xTabang v. NLRC, 266 SCRA 462 (1997).

The president, vice-president, secretary and treasurer are commonly regarded as the principal or executive officers of a corporation, and modern corporation statutes usually designate them as the officers of the corporation. However, other offices are sometimes created by the charter or by-laws of a corporation, or the board of directors may be empowered under the by-laws of a corporation to create additional offices as may be necessary. xTabang v. NLRC, 266 SCRA 462 (1997).

12. Powers of Corporate Officers:

(a) The Rule on Corporate Officer’s Power to Bind Corporation

An officer's power as an agent of the corporation must be sought from the statute, charter, the by-laws or in a delegation of authority to such officer, from the acts of the board of directors formally expressed or implied from a habit or custom of doing business. xVicente v. Geraldez, 52 SCRA 210 [1973]; reiterated in xBoyer-Roxas v. CA, 211 SCRA 470 (1992).

(b) When Corporation Bound by Act of Its President. People’s Aircargo v. Court of Appeals, 297 SCRA 170 (1998)

(c) Corporate Secretary

In the absence of provisions to the contrary, the corporate secretary is the custodian of corporate records—he keeps the stock and transfer book and makes proper and necessary entries therein. It is the duty and obligation of the corporate secretary to register valid transfers of stock in the books of the corporation; and in the event he refuses to comply with such duty, the transferor-stockholder may rightfully bring suit to compel performance. xTorres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).

When a Secretary’s Certificate is regular on its face, it can be relied upon by a third party who does not have to investigate the truths of the facts contained in such certification; otherwise business transactions of corporations would become tortuously slow and unnecessarily hampered. xEsguerra v. Court of Appeals, 267 SCRA 380 (1997).

(d) Corporate Treasurer

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A corporate treasurer’s function have generally been described as “to receive and keeps funds of the corporation, and to disburse them in accordance with the authority given him by the board or the properly authorized officers.” Unless duly authorized, a treasurer, whose power are limited, cannot bind the corporation in a sale of its assets. Selling is obviously foreign to a corporate treasurer’s function. When the corporation categorically denies ever having authorized its treasurer to sell the subject parcel of land, the buyer had the burden of proving that the treasurer was in fact authorized to represent and bind the allegedly selling corporation in the transaction. And failing to discharge such burden, and failing to show any provision of the articles of incorporation, by-laws or board resolution to prove that the treasurer possessed such power, the sale is void and not binding on the alleged selling corporation. xSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).

(e) Other “Officers” for Service of Summons on Corporation

For purposes of determining proper service of summons to a corporation in a quasi-judicial proceeding before the NLRC, a bookkeeper can be considered as an agent of the corporation within the purview of the Rules of Court. The rationale of all rules with respect to service of process on a corporation is that such service must be made to an agent or a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him. The bookkeeper’s task is one under consideration that his regular recording of the corporation’s “business accounts” and “essential facts about the transactions of a business or enterprise” safeguards the corporation from possible fraud being committed adverse to its own corporate interest. xPabon v. NLRC, 296 SCRA 7 (1998).

In spite of provisions of the Rules of Court on service of process to bind corporate entities, service made to a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him, has been considered proper service to bind the corporation. (xVilla Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298 [1078], overturning xDelta Motor Sales Corp. v. Mangosing, 70 Phil. 598 [1976]; reiterated in xR. Transport Corp. v. CA, 24a SCRA 77 [1995]).

Section 11, Rule 14 of the 1997 Rules of Civil Procedure uses the term “general manager” and unlike the old provision in the Rules of Court, it does not include the term “agent”. Consequently, the enumeration of persons to whom summons may be served is “restricted, limited and exclusive” following the rule on statutory construction expressio unios est exclusion alterius. Therefore, the earlier cases that uphold service of summons upon a construction project manager;1 a corporation’s assistant manager;2 ordinary clerk of a corporation;3 private secretary of corporate executives;4 retained counsel;5 officials who had charge or control of the operations of the corporation, like the assistant general manager;6 or the corporation’s Chief Finance and Administrative Officer;7 no longer apply since they were decided under the old rule that allows service of summons upon an agent8 of the corporation. xE.B. Villarosa & Partners Co., Ltd. v. Benito, 312 SCRA 65 (1999).

(f) Coverage of Corporate “Agents”

Black’s Law Dictionary defines an “agent” as “a business representative, whose function is to bring about, modify, affect, accept performance of, or terminate contractual obligations between principal and third persons.” To this extent, an “agent” may also be shown to represent his principal in some one or more of his relations to others, even though he may not have the power to enter into contracts. The rules on service of process make service on “agent” sufficient. It does not in any way distinguish whether the “agent” be general or special, but is

1Kanlaon Construction Enterprises Co., Inc. v. NLRC, 279 SCRA 337 (1997). 2Gesulgon v. NLRC, 219 SCRA 561 (1993). 3Golden Country Farms, Inc. v. Sanvar Development Corp., 214 SCRA 295 (1992); G & G Trading

Corp. v. Court of Appeals, 158 SCRA 466 (1988). 4Summit Trading and Dev. Corp. v. Avendaño, 135 SCRA 397 (1985); also Vlason Enterprises Corp.

v. Court of Appeals, 310 SCRA 26 (1999). 5Republic v. Ker & Co., Ltd., 18 SCRA 207 (1966). 6Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298 (1978). 7Far Corporation v. Francisco, 146 SCRA 197 (1986). 8Filoil Marketing Corp. v. Marine Dev. Corp. of the Philippines, 177 SCRA 86 (1982).

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complied with even by a service upon an agent having limited authority to represent his principal. As such, it does not necessarily connote an officer of the corporation. However, though this may include employees other than officers of a corporation, this does not include employees whose duties are not so integrated to the business that their absence or presence will not toll the entire operation of the business. xPabon v. NLRC, 296 SCRA 7 (1998).

13. LIABILITIES OF CORPORATE OFFICERS: (Sec. 31; Vazquez v. Borja, 74 Phil. 560 (1944); Palay, Inc. v. Clave, 124 SCRA 638 [1093]; Tramat Mercantile, Inc. v. CA, 238 SCRA 14 [1994]; Pabalan v. NLRC, 184 SCRA 495 [1990]; xSulo ng Bayan, Inc. v. Araneta, Inc. Inc., 72 SCRA 347 [1976]; xMindanao Motors Lines, Inc. v. Court of Industrial Relations, 6 SCRA 710 (1962);

The general rule is that corporate officers are not personally liable for their official acts unless it is shown that they have exceeded their authority. xARB Constructions Co., Inc. v. Court of Appeals, 332 SCRA 427 (200)

Jurisprudential Enumeration of Officer Liabilities - MAM Realty v. NLRC, 244 SCRA 797, (1995); reiterated in xNational Food Authority v. Court of Appeals, 311 SCRA 700 (1999); xUichico v. NLRC, 273 SCRA 35 (1997).

The hornbook law is that corporate personality is a shield against personal liability of its officers. Thus, when the trust receipt sued upon was clearly entered into in behalf of the corporation by its Executive Vice-President, then such officer and his spouse cannot be made personally liable; the personality of the corporation is separate and distinct from the persons composing it. xThe Consolidated Bank and Trust Corp. v. Court of Appeals, G.R. No. 114286, 19 April 2001.

Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when:

(a) He assents to a patently unlawful act of the corporation;

(b) Guilty of bad faith or gross negligence in directing its affairs;

(c) for conflict on interest resulting in damages to the corporation, its stockholders or other persons;

(d) He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

(e) He agrees to hold himself personally and solidarily liable with the corporation; or

(f) He is made, by a specific provisions of law, to personally answer for his corporate action. xAtrium Management Corporation vs. Court of Appeals, G.R. No. 109491, 28 February 2001

The finding of solidary liability among the corporation and its officers and directors would patently be baseless when the decision contains no allegation, finding or conclusion regarding particular acts committed by said officers and members of the Board of Directors that show them to have been individually guilty of unmistakable malice, bad faith, or ill-motive in their personal dealings with third parties. When corporate officers and directors are sued merely as nominal parties in their official capacities as such, they cannot be held liable personal for the judgment rendered against the corporation. xNational Power Corp. v. Court of Appeals, 273 SCRA 419 (1997).

When corporate officers are sued in their official capacity, the suit is equivalent to a suit against the corporation, and judgment may be enforced against corporate assets. xEmilio Cano Enterprises, Inc. v. CIR, 13 SCRA 291 (1965).

An attempt by the corporation to avoid liability by distancing itself from the acts of the its President was struck down with the Court holding that a corporation may not distance itself from the acts of a senior officer: "the dual roles of Romulo F. Sugay should not be allowed to confuse the facts." xR.F. Sugay v. Reyes, 12 SCRA 700 (1961).

Generally, officers or directors under the old corporate name bear no personal liability for acts done or contracts entered into by officers of the corporation, if duly authorized. xRepublic Planters Bank v. CA, 216 SCRA 738 (1992).

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An officer-stockholder who is a party signing in behalf of the corporation to a fraudulent contract cannot claim the benefit of separate juridical entity: "Thus, being a party to a simulated contract of management, petitioner Uy cannot be permitted to escape liability under the said contract by using the corporate entity theory. This is one instance when the veil of corporate entity has to be pierced to avoid injustice and inequity." xParadise Sauna Massage Corporation v. Ng, 181 SCRA 719 (1990).

(a) Special Provisions in Labor Laws. - In the Labor Code since a corporate employer is an artificial person, it must have an officer who can be presumed to be the employer, being the "person acting in the interest of (the) employer" as provided in the Labor Code. A.C. Ransom Labor Union-CCLU v. NLRC, 142 SCRA 269 (1986).

Under the Labor Code, in the case of corporations, it is the president who responds personally for violation of the labor pay laws. xVillanueva v. Adre, 172 SCRA 876 (1989).

For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. Del Rosario v. NLRC, 187 SCRA 777 (1990).

A corporate officer cannot be held personally liable for a corporate debt simply because he had executed the contract for and in behalf of the corporation. It held that when a corporate officer acts in behalf of a corporation pursuant to his authority, is "a corporate act for which only the corporation should be made liable for any obligations arising from them." xWestern Agro Industrial Corporation v. Court of Appeals, 188 SCRA 709 (1990).

Only the responsible officer of a corporation who had a hand in illegally dismissing an employee should be held personally liable for the corporate obligations arising from such act. Maglutac v. NLRC,189 SCRA 767 (1990); reiterated in xGudez v. NLRC, 183 SCRA 644 (1990) and xChua v. NLRC, 182 SCRA 353 (1990).

The case of Ransom v. NLRC is not in point because there the debtor corporation actually ceased operations after the decision of the Court of Industrial Relations was promulgated against it, making it necessary to enforce it against its former president. When the corporation is still existing and able to satisfy the judgment in favor of the private respondent, the corporate officers cannot be held personally liable. Lim v. NLRC, 171 SCRA 328 (1989).

The aforecited cases will not apply to the instant case, however, because the persons who were there made personally liable for the employees' claims were stockholders-officers of the respondent corporation. In the case at bar, the petitioner while admittedly the highest ranking local representative of the corporation, is nevertheless not a stockholder and much less a member of the board of directors or an officer thereof. xDe Guzman v. NLRC, 211 SCRA 723 (1992)

A mere general manager cannot be held solidarily liable with the corporation for unpaid labor claims, especially when he is neither a stockholder or a member of the board of the corporation. xDe Guzman v. NLRC, 211 SCRA 723 (1992)

A president cannot be held solidarily liable personally with the corporation absent evidence of showing that he acted maliciously or in bad faith. xEPG Constructions Co. v. CA, 210 SCRA 230 (1992).

A judgment rendered against a person "in his capacity as President" of the corporation was enforceable against the assets of such officer when the decision itself found that he merely used the corporation as his alter-ego or as his business conduit. xArcilla v. Court of Appeals, 215 SCRA 120 (1992).

The President and General Manager of a corporation who entered into and signed a contract in his official capacity cannot be made liable thereunder in his individual capacity in the absence of stipulation to that effect due to the personality of the corporation being separate and distinct from the persons composing it. xRustan Pulp & Paper Mills, Inc. v. IAC, 214 SCRA 665 (1992), citing xBanque Generale Belge v. Walter Bull and Co., 84 Phil. 164 (1949).

Reahs Corporation v. NLRC, 271 SCRA 247 (1997), reviewed the A.C. Ransom doctrine of imposing solidarily liability on the highest officers of the corporation for judgment on labor claims rendered against the corporation pursuant to Art. 283 of the Labor Code, and reviewed its application in subsequent cases of

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Maglutac, Chua, Gudez and Pabalan. It reiterated the main doctrine of separate personality of a corporation which should remain as the guiding rule in determining corporate liability to its employees, and that at the very least, to justify solidary liability, “there must be an allegation or showing that the officers of the corporation deliberately or maliciously designed to evade the financial obligation of the corporation to its employees,” or a showing that the officers indiscriminately stopped its business to perpetuate an illegal act, as a vehicle for the evasion of existing obligations, in circumvention of statutes, and to confuse legitimate issues.

Corporate officers are not personally liable for money claims of discharged employees unless they acted with evident malice and bad faith in terminating their employment. xAHS/Philippines v. Court of Appeals, 257 SCRA 319 (1996).

The finding of solidary liability among the corporation and its officers and directors would patently be baseless when the decision contains no allegation, finding or conclusion regarding particular acts committed by said officers and members of the Board of Directors that show them to have been individually guilty of unmistakable malice, bad faith, or ill-motive in their personal dealings with third parties. When corporate officers and directors are sued merely as nominal parties in their official capacities as such, they cannot be held liable personal for the judgment rendered against the corporation. xNational Power Corp. v. Court of Appeals, 273 SCRA 419 (1997).

In labor cases, particularly, corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. In this case, it is undisputed that the corporate officers have a direct hand in the illegal dismissal of the employees. They were the one, who as high-ranking officers and directors of the corporation, signed the Board Resolution retrenching the employees on the feigned ground of serious business losses that had no basis apart from an unsigned and unaudited Profit and Loss Statement which, to repeat, had no evidentiary value whatsoever. This is indicating of bad faith on the part of the corporate officers for which they can be held jointly and severally liable with the Corporation for all the money claims of the illegally terminated employees. xUichico v. NLRC, 273 SCRA 35 (1997).

A corporation, being a juridical entity, may act only through its directors, officers and employees and obligations incurred by them, acting as corporate agents, are not theirs but the direct accountabilities of the corporation they represent. xBrent Hospital, Inc. v. NLRC, 292 SCRA 304 (1998).

The manager of a corporation are not personally liable for their official acts unless it is shown that they have exceeded their authority. There is nothing on record to show that the manager deliberately and maliciously evaded the corporation’s financial obligation to the employee; hence, there appearing to be no evidence on record that the manager acted maliciously or deliberately in the non-payment of benefits to the employee, the manager cannot be held jointly and severally liable with the corporate employers. [CLV – Nothing was shown to determine whether the corporate employer had no assets with which to pay the claims of the employee]. xNicario v. NLRC, 295 SCRA 619 (1998).

In xRestuarante Las Conchas v. Llego, 314 SCRA 24 (1999), the Supreme Court had apparently returned to the A.C. Ransom principle that “[a]lthough as a rule, the officers and members of a corporation are not personally liable for acts done in the performance of their duties, this rule admits of exceptions, one of which is when the employer corporation is no longer existing and is unable to satisfy the judgment in favor of the employee, the officers should be held liable for acting on behalf of the corporation.” In that case, the restaurant business had to be closed down because possession of the premises had been lost through an adverse decision in an ejectment case. The Court held: “In the present case, the employees can no longer claim their separation benefits and 13th month pay from the corporation because it had already ceased operation. To require them to do so would render illusory the separation and 13tj month pay awarded to them by the NLRC. Their only recourse is to satisfy their claim from the officers of the corporation who were, in effect, acting in behalf of the corporation.”

The A.C. Ransom doctrine has been reiterated in xCarmelcraft Corp. v. NLRC, 186 SCRA 393 (1990), xValderrama v. NLRC, 256 SCRA 466 (1996).

XI. STOCKHOLDERS AND MEMBERS

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1. Shareholders Not Creditors of Corporation (Garcia v. Lim Chu Sing, 59 Phil. 562 [1934]).

2. Subscription Contracts (Sec. 60 and 72; Trillana v. Quezon Colegialla, 93 Phil. 383 [1953]).

(a) Purchase Agreement (Bayla v. Silang Traffic Co., Inc., 73 Phil. 557 [1942]).

(b) Pre-Incorporation Subscription (Sec. 61)

(c) Release from Subscription Obligation (Velasco v. Poizat, 37 Phil. 802 [1918]; PNB v. Bitulok Sawmill, Inc., 23 SCRA 1968 [1968]; National Exchange Co. v. Dexter, 51 Phil. 601 [1928])

(d) When condition of payment provided for in the by-laws (De Silva v. Aboitiz & Co., 44 Phil. 755 [1923]).

3. Consideration (Sec. 62).

(a) Cash

(b) Property

(c) Service

(d) Retained Earnings

(e) Share

Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings converted into equity in the corporation’s books. xLincoln Philippine Life v. Court of Appeals, G.R No. 118043, 23 July 1998.

4. Watered Stocks (Sec. 65)

5. Payment of Balance of Subscription (Secs. 66 and 67; Lingayen Gulf Electric Power Co. v. Baltazar, 93 Phil. 404 [1953]).

6. Delinquency on Subscription (Secs. 68, 69, 70 and 71; xPhilippine Trust Co. v. Rivera, 44 Phil. 469 [1923]; xMiranda v. Tarlac Rice Mill Co., 57 Phil. 619 [1932])

The prescriptive period to recover on unpaid subscription does not commence from the time of subscription but from the time of demand by the corporation through it board of directors for the stockholder to pay the balance of his subscription (xGarcia v. Suarez, 67 Phil. 441[1939]).

(a) Who May Question a Delinquency Sale (Sec. 68 and 69).

7. Certificate of Stock (Sec. 63)

(a) Nature of Certificate (Tan v. SEC, 206 SCRA 740 [1992]; De los Santos v. Republic, 96 Phil. 577 [1955]; xC.N. Hodges v. Lezama, 14 SCRA 1030 [1965]).

A stock certificate is merely evidence of a share of stock and not the share itself. xLincoln Philippine Life v. Court of Appeals, 293 SCRA 92 (1998).

A formal certificate of stock could not be considered issued in contemplation of law unless signed by the president or vice-president and countersigned by the secretary or assistance secretary. Bitong v. Court of Appeals, 292 SCRA 503 (1998).

(b) Quasi-negotiable Character of the Certificate of Stock (Bachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681 [1937]).

In order for a transfer of stock certificate to be effective, the certificate must be properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. Indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. Razon v. IAC, 207 SCRA 234 (1992).

The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or any other person legally authorized to make the transfer shall be sufficient to effect the transfer of shares only if the same is couple with delivery. The delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new transferee. Thus, for a valid transfer of stocks, the requirements are as follows: (a) There must be delivery of the stock certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and (c) to

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be valid against third parties, the transfer must be recorded in the books of the corporation. Bitong v. Court of Appeals, 292 SCRA 503 (1998).

(c) Right to Issuance (Sec. 64; Baltazar v. Lingayen Gulf Elect. Power Co., Inc., 14 SCRA 522 [1965]).

(d) Lost or Destroyed Certificates (Sec. 63 and 73)

While Section 73 of the Corporation Code appears to be mandatory, the same admits exceptions, such that a corporation may voluntarily issue a new certificate in lieu of the original certificate of stock which has been lost without complying with the requirements under Section 73 of the Corporation Code, provided that the corporation is certain as to the real owner of the shares to whom the new certificate shall be issued. . . . It would be an internal matter for the corporation to find measures in ascertaining who are the real owners of stock for purposes of liquidation. It is well-settled that unless proven otherwise, the “stock and transfer book” of the corporation is the best evidence to establish stock ownership. (SEC Opinion, dated 28 January 1999, addressed to Ms. Ma. Cecilia Salazar-Santos).

(e) Forged and Unauthorized Transfers (J. Santamaria v. HongKong and Shanghai Banking Corp., 89 Phil. 780 [1951]; Neugene Marketing, Inc. v. Court of Appeals, 303 SCRA 295 [1999]).

8. Stock and Transfer Book (Secs. 63, 72 and 74; Fua Cun v. Summers, 44 Phil. 704 [1923]; Monserrat v. Ceran, 58 Phil. 469 [1933]; Chua Guan v. Samahang Magsasaka, Inc., 62 Phil. 472 [1935]; Uson v. Diosomito, 61 Phil. 535 [1935]; Escaño v. Filipinas Mining Corporation, 74 Phil. 71 [1944]; Bachrach Motors v. Lacson-Ledesma, 64 Phil. 681 [1937]; Nava v. Peers Marketing Corp., 74 SCRA 65 [1976]).

In Garcia v. Jomouad, 323 SCRA 424 (2000), the Supreme Court directly resolved the issue “Whether a bona fide transfer of the shares of a corporation, not registered or noted in the books of the corporation, is valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not.” The Court quoted from Uson v. Diosomito, which held that all transfers of shares not entered in the stock and transfer book of the corporation are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to subsequent purchasers in good faith and to all persons interested, except the parties to such transfers: “All transfers not so entered on the books of the corporation are absolutely void; bot because they are without notice or fraudulent in law or fact, but because they are made so void by statute. The Supreme Court held that “the transfer of the subject certificate made by Dico to petitioner was not valid as to the spouses Atinon, the judgment creditors, as the same still stood in the name of Dico, the judgment debtor, at the time of the levy on execution. In addition, as correctly ruled by the CA, the entry in the minutes of the meeting of the Club’s board of directors noting the resignation of Dico as proprietary member does not constitute compliance with Section 63 of the Corporation Code. Said provision of law strictly requires the recording of the transfer in the books of the corporation, and not elsewhere, to be valid as against third parties.”

Attachments of shares of stock are not included in the term "transfer" as provided in Section 63 of the Corporation Code. Both the Revised Rules of Court and the Corporation Code do not require annotation in the corporation's stock and transfer books for the attachment of shares to be valid and binding on the corporation and third parties. Chemphil Export & Import Corporation v Court of Appeals, 251 SCRA 257 (1995).

Until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. Thus, the unrecorded transferee cannot vote nor be voted for. The purpose of registration, therefore, is two-fold: to enable the transferee to exercise all the rights of a stockholder, including the right to vote and to be voted for, and to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting; his vote can be properly counted to determine whether a stockholders’ resolution was approved, despite the claim of the alleged transferee. On the other hand, a person who has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the corporate books. Until the transfer is registered,

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the transferee is not a stockholder but an outsider. Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, G.R. No. 137934, 10 August 2001.

Section 63 of the Corporation Code which provides that “no share of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation” cannot be utilized by the corporation to refuse to recognize ownership over pledged shares purchased at public auction. The term “unpaid claims” refers to “any unpaid claims arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transactions. Obligations arising from unpaid monthly dues do not fall within the coverage of Section 63. China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).

Entries made on the stock and transfer book by any person other than the corporate secretary, such as those made by the President and Chairman, cannot be given any valid effect. xTorres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).

A person cannot claim a right to intervene as a stockholder in corporate issue on the strength of the transfer of shares allegedly executed by a registered stockholder. The transfer must be registered in the books of the corporation to affect third persons. The law on corporation is explicit on this under Sec. 63 of the Corporation Code. xMagsaysay-Labrador v. CA, 180 SCRA 266 (1989)

Section 63 of the Corporation Code envisions a formal certificate of stock which can be issued only upon compliance with certain requisites. First, the certificate must be signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation. A mere typewritten statement advising a stockholder of the extent of his ownership is a corporation without qualification and/or authentication cannot be considered as a formal certificate of stock. Second, delivery of the certificate is an essential element of its issuance. Hence, there is no issuance of a stock certificate where it is never detached from the stock books although blanks therein are properly filled up if the person whose name is inserted therein has no control over the books of the company. Third, the par value, as to par value shares, or the full subscription as to no par value shares, must first be fully paid. Fourth, the original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from a stockholder. Bitong v. Court of Appeals, 292 SCRA 503 (1998).

9. Situs of Shares of Stocks (Sec. 55)

The situs of shares of stock would be the place of domicile of the corporation to which they pertain to. xWells Fargo Bank and Union v. Collector, 70 Phil. 325 (1940); xTayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968); cf. xPerkins v. Dizon, 69 Phil. 186 (1939).

XII. RIGHTS OF STOCKHOLDERS AND MEMBERS

1. What does “Share” represent?

While shares of stock constitute personal property, they do not represent property of the corporation [i.e., they are properties of the stockholders who own them]. Share of stock only typifies an aliquot part of the corporation’s property, or the right to share in its proceeds to that extent when distributed according to law and equity, but the holder is not the owner of any part of the capital [properties] of the corporation, nor is he entitled to the possession of any definite portion of its property or assets. The stockholder is not a co-owner or tenant in common of the corporate property. xStockholders of F. Guanson and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).

2. Right to Certificate of Stock for Fully Paid Shares (Sec. 64; Tan v. SEC, 206 SCRA 740 [1992])

3. Preemptive Rights (Sec. 39; Datu Tagoranao Benito v. SEC, 123 SCRA 722 [1983]; Dee v. SEC, 199 SCRA 238 [1991]).

4. Right to Transfer of Shareholdings (Sec. 63)

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Authority of a corporation to regulate the transfer of its stock does not empower the corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer. xThomson v. Court of Appeals, 298 SCRA 280 (1998).

(a) Non-transferability of Membership in Non-Stock Corporation (Secs. 90 and 91).

(b) Restriction on Transfers (Lambert v. Fox, 26 Phil. 588 [1914])

- Right of Refusal (Padgett v. Babcock & Templeton, Inc., 59 Phil. 232 [1933]).

Section 63 of the Corporation Code contemplates no restriction as to whom the stocks may be transferred. It does not suggest that any discrimination may be created by the corporation in favor of, or against a certain purchaser. The owner of shares, as owner of personal property, is at liberty, under said section to dispose them in favor of whomever he pleases, without limitation in this respect, than the general provisions of law. Fleishcher v. Botica Nolasco, 47 Phil. 583 (1925).

The only limitation imposed by Section 63 of the Corporation Code is when the corporation holds any unpaid claim against the shares intended to be transferred. A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers, because "Restrictions in the traffic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. By-laws are intended merely for the protection of the corporation, and prescribe relation, not restriction; they are always subject to the charter of the corporation. Rural Bank of Salinas v. CA, 210 SCRA 510 (1992).

Restraint of Trade — An agreement by which a person obliges himself not to engage in competitive trade for five years is valid and reasonable and not an undue or unreasonable restraint of trade and is obligatory on the parties who voluntarily enter into such agreement. xOllendorf v. Abrahamson, 38 Phil. 585 (1918).

(c) Remedy If Registration Is Refused (Hager v. Bryan, 19 Phil. 138 [1911])

A stipulation on stock certificate that assignment thereof would not be binding on the corporation unless such assignment is registered in the books of the club as required under the by-laws, which does not provide when the registration should be made, would mean that the cause of action and the determination of the prescription period would begin only upon demand for registration is made and not at the time of the assignment of the certificate. xWon v. Wack Wack Golf & Country Club, 104 Phil. 466 (1958).

The claim for damages of what the shares could have sold had the demand been complied with is deemed to be speculative damage and non-recoverable xBatong Buhay Gold Mines v. CA, 147 SCRA 4 (1987).

5. Rights to Dividends (Sec. 43)

Although the certificates of stock granted the stockholder the right to receive 1% quarterly dividends, cumulative and participating, the stockholders do not become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividends. . . Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code prohibit the issuance of any stock dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, “interest bearing stocks” on which the corporation agrees absolutely to pay interest before dividends are paid to the common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. xRepublic Planters Bank v. Agana, 269 SCRA 1 (1997).

6. Rights to Attend Meetings and Vote (Sec. 6, Sec. 89)

Until challenged successfully in the proper proceedings, a stockholder according to the books of the corporation has a right to participate in any meeting, and in the absence of fraud the action of the stockholders’ meeting cannot be collaterally attacked on account of such participation, even if it be shown later on that the shares had been

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previously sold (but not recorded). xPrice and Sulu Dev. Co. v. Martin, 58 Phil. 707 (1933)

Sequestration of shares does not entitle the government to exercise acts of ownership over the shares; consequently, even sequestered shares may be voted upon by the registered stockholder of record. xCojuangco Jr. v. Roxas, 195 SCRA 797 (1991).

(a) Instances When Stockholders Entitled to Vote:

- Election of directors and trustees (Sec. 24)

- Amendment of articles of incorporation (Sec. 16)

- Investment in another business or corporation (Secs. 36 and 42)

- Merger and consolidation (Sec. 72)

- Increase and Decrease of capital stock (Sec. 38)

- Adoption, amendment and repeal of by-laws (Sec. 48)

- Declaration of stock dividends (Sec. 43)

- Management contracts (Sec. 44)

- Fixing of consideration of no par value shares (Sec. 62)

(b) Joint Ownership (Sec. 56)

(c) Treasury Share No Voting Rights (Sec. 57)

(d) Pledgor, Mortgagors and Administrators (Sec. 55)

When shares of stocks are pledged by means of endorsement in blank and delivery of the covering certificates to secure a mortgage loan, the pledgee does not become the owner of the shares simply by the failure of the registered stockholder to pay his loan. Consequently, without proper foreclosure, the lender cannot demand that the shares be registered in his name. A contract of pledge of shares does not make the pledgee the owners of the shares pledged. xLim Tay v. Court of Appeals, 293 SCRA 634 (1998).

(e) Conduct of Stockholders' or Members' Meetings:

Kinds and Requirements of Meetings (Secs. 49 and 50)

Place and Time of Meeting (Secs. 51 and 93)

Quorum (Sec. 52)

7. Rights to Inspect and Copy Corporate Records

(a) Basis of Right (Gokongwei, Jr. v. SEC, 89 SCRA 336 [1979]).

Right to inspect covers controlled subsidiaries. xGokongwei v. SEC, 89 SCRA 336 (1979).

(b) Limitations on Right

The only express limitations on the right of inspection under Sec. 74 of the Corporation Code are: (a) the right of inspections should be exercised at reasonable hours on business days; (b) the person demanding the right to examine and copy excerpts from the corporate records and minutes has not improperly used any information secured through any previous examination of records of the corporation; and (c) the demand is made in good faith or for a legitimate purpose. xAfrica v. PCGG, 205 SCRA 39 (1992).

The right is exercisable through agents and representatives, otherwise it would often be useless to the stockholder who does not know corporate intricacies. xW.G. Philpotts v. Philippine Manufacturing Co., 40 Phil. 471 (1919).

A director has the unqualified right to inspect the books and records of the corporation at all reasonable times, and cannot be denied on the ground that the director or shareholder is on unfriendly terms with the officers of the corporation whose records are sought to be inspected. xVeraguth v. Isabela Sugar Co., 57 Phil. 266 (1932)

The right to inspect, although it includes the right to make copies, does not authorize bringing the books or records outside of the corporate premises. xVeraguth v. Isabela Sugar Co., 57 Phil. 266 (1932)

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The right to inspect does not include the right of access to minutes until such minutes have been written up and approved by the directors. xVeraguth v. Isabela Sugar Co., 57 Phil. 266 (1932)

A board resolution limiting the right to inspect to a period of ten days shortly prior to the annual stockholders’ meeting is an unreasonable restriction and violates the legal provision granting the exercise of such right “at reasonable hours.” xPardo v. Hercules Lumber Co., 47 Phil. 964 (1924)

(c) Specified Records (Secs. 74, 75 and 141)

(d) Remedies If Inspection Denied: Mandamus (Gonzales v. PNB, 122 SCRA, 489 [1983]; Republic v. Sandiganbayan, 199 SCRA 39 [1991]).

(e) Confidential Nature of SEC Examinations (Sec. 142)

8. Appraisal Right (Secs. 81 to 86 and 105)

9. Derivative Suits (San Miguel Corp. v. Kahn, 176 SCRA 447 [1989]).

(a) Who May Bring Suit ((Pascual v. Orozco, 19 Phil. 83 [1911]).

(b) Exhaustion of Intra-Corporate Remedies (Everett v. Asia Banking Corp., 49 Phil. 512 [1927]; Angeles v. Sanmtos, 64 Phil. 697 [1937]).

(c) Nature of Relief (Evangelista v. Santos, 86 Phil. 387 [1950]; Republic Bank v. Cuaderno, 19 SCRA 671 [1967]; Reyes v. Tan, 3 SCRA 198 [1961]; Commart (Phils.) Inc. v. SEC, 198 SCRA 73 [1991]).

Appointment of receiver can be an ancillary remedy in a derivative suit xChase v. CFI of Manila, 18 SCRA 602 (1966).

A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs committed against the corporation, for which the directors refuse to sue. It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority. xWestern Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).

For a derivative suit to prosper, it is required that the minority shareholder who is suing for and on behalf of the corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join. xWestern Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).

In the absence of a special authority from the board of directors to institute a derivative suit for and in behalf of the corporation, the president or managing director is disqualified by law to sue in her own name. The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the board of directors that exercises its corporate powers and not in the president or officer thereof. xBitong v. Court of Appeals, 292 SCRA 503 (1998).

For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. There is now showing that petitioner has complied with the foregoing requisites. Tam Wing Tak v. Makasiar, G.R. 122452, 29 January 2001.

The allegations of injury to the spouses-relators can co-exist with those pertaining to the corporation. The personal injury suffered by the spouses cannot disqualify them from filing a derivative suit on behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring directors. This cause of action is also included in the Complaint filed before the SEC. Gochan v. Young, G.R. No. 131889, 12 March 2001.

10. Right to Proportionate Share of Remaining Assets Upon Dissolution

(a) Different rules apply to non-stock corporations and foundations (Secs. 94 and 95; Section 34(H)(2)(c), NIRC of 1997).

11. Contracts and Agreement Affecting Shareholdings

(a) Proxy (Sec. 58)

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(b) Voting Trust Agreements (Sec. 59; Lee v. CA, 205 SCRA 752 [1992]).

The trustor has a right to terminate the VTA for breach thereof. xEverett v. Asia Banking Corporation, 49 Phil. 512 (1926).

Voting trust agreement as part of a loan arrangement. NIDC v. Aquino, 163 SCRA 153 (1988).

(c) Pooling Agreements or Shareholders’ Agreements (Sec. 100)

XIII. CAPITAL STRUCTURE: SHARES OF STOCK

2. Concept of "Capital Stock" (Central Textile Mills v. National Wage and Productivity Commission, 260 SCRA 368 [1996]).

By express provision of Section 13 [of the Corporation Code], paid-up capital is that portion of the authorized capital stock which has been both subscribed and paid. Not all funds or assets received by the corporation can be considered paid-up capital, for this term has a technical signification in Corporation Law. Such must form part of the authorized capital stock of the corporation, subscribed and then actually paid up. xMSCI-NACUSIP Local Chapter v. National Wages and Productivity Commission, 269 SCRA 173 (1997).

The term “capital” and other terms used to describe the capital structure of a corporation are of universal acceptance, and their usages have long been established in jurisprudence. Briefly, capital refers to the value of the property or assets of a corporation. The capital subscribed is the total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily be, and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives, inclusive of the premium if any, in consideration of the original issuance of the shares. xNational Telecommunications Commission v. Court of Appeals, 311 SCRA 508, 514-515 (1999).

2. Classification of Shares (Sec. 6)

(a) Common Shares

“A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits.” xCommissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).

(b) Preferred Shares (Republic Planters Bank v. Agana, 269 SCRA 1 [1997]).

Participating and Non-participating

Cumulative and Non-cumulative

Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution. xCommissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).

“A preferred share of stock, on one hand, is one which entitles the holder thereof to certain preferences over the holders of common stock. The preferences are designed to induce persons to subscribe for shares of a corporation. Preferred shares take a multiplicity of forms. The most common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred shares as to dividends. The former is a share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation; the latter is a share the holder of which entitled to receive dividends on said shares to the extent agreed upon before any dividends at all are paid to the holders of common stock. There is no guaranty, however, that the share will receive any dividends. . . Similarly, the present Corporation Code provides that the board of directors of a stock corporation may declare dividends only out of unrestricted retained earnings. The Code, in Section 43, adopting the change made in accounting terminology, substituted the phrase “unrestricted retained earnings,” which may be a more precise term, in place of “surplus profits arising from its business” in the former law. Thus, the declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained earnings, as the case may be. Preferences granted to preferred stockholders, moreover, do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to

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the latter. Dividends are thus payable only when there are profits earned by the corporation and as a general rule, even if there are existing profits, the board of directors has the discretion to determine whether or not dividends are to be declared. Shareholders, both common and preferred, are considered risk takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fully paid. Republic Planters Bank v. Agana, 269 SCRA 1 (1997).

(b) Redeemable shares (Sec. 8)

Redeemable shares are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price. A redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation. The present Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. This is a new provision which in effect qualifies the general rule that the corporation cannot purchase its own shares except out of current retained earnings. However, while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature. Republic Planters Bank v. Agana, 269 SCRA 1 (1997).

“Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock in exchange for property, whether or not the acquired stock is cancelled, retired or held in the treasury. Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues in business as before. The redemption of stock dividends previously issued is used as a veil for the constructive distribution of cash dividends. xCommissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).

(c) Founder Shares (Sec. 7)

(d) Treasury Shares (Sec. 9; Commissioner v. Manning, 66 SCRA 14 [1975]).

When a treasury share which has not been retired by the corporation may be sold again; but so long as it remains a treasury share, it does not participate in dividends (since a corporation cannot pay dividends to itself) and cannot vote in stockholders’ meeting. San Miguel Corp. v. Sandiganbayan, 340 SCRA 289 (2000).

(e) Stock Warrants

(f) Stock Options

(g) Re-Classification of Shares

“Reclassification of shares does not always bring any substantial alteration in the subscriber’s proportional interest. But the exchange is different—there would be a shifting of the balance of stock features like priority in dividend declarations or absence of voting rights. Yet neither the reclassification nor exchange per se yields income for tax purposes. . . In this case, the exchange of shares, without more, produces no realized income to the subscriber. There is only a modification of the subscriber’s rights and privileges—which is not a flow of wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of his entire interests and not when there is still maintenance of proprietary interest.” xCommissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).

3. Hybrid Securities (Government v. Phil. Sugar Estates, 38 Phil. 15 [1918]; John Keley Co. v. Comm. of Internal Revenue, 326 U.S. 521, 66 S. Ct. 299, 90 L. Ed., 278 [1945])

4. Quasi-Reorganization

(a) Reduction of Capital Stock (Sec. 38; xMadrigal & Co. v. Zamora, 151 SCRA 355 [1987]);

(b) Stock Splits

(c) Stock Consolidations

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XIV. ACQUISITIONS, MERGERS AND CONSOLIDATIONS

A. Acquisitions and Transfers

See relevant portion of VILLANUEVA, Restatement of the Doctrine of Piercing the Veil of Corporate Fiction, 37 ATENEO L.J. 19 (No. 2, June 1993)

1. Concept of "Enterprise" or "Economic unit" or "Going concern" (Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 [1968]).

2. Types of Acquisitions\Transfers (Edward J. Nell Co. v. Pacific, 15 SCRA 415 [1965]):

(a) In a pure "Assets only" Transfer, the transferee is not liable for the debts and liabilities of the transferor, except where the transferee expressly or impliedly agrees to assume such debts;

(b) In a “Business Enterprise” Transfer, the transferee is liable for the debts and liabilities of the transferor; and

(c) In an Equity Transfer, the transferee is not liable for the debts and liabilities of the transferor, except where the transferee expressly or impliedly agrees to assume such debts.

3. Business Enterprise Transfers (A.D. Santos v. Vasquez, 22 SCRA 1156 [1968]; Laguna Transportation Co., Inc. v. SSS, 107 Phil. 833 [1960]).

Although the business enterprise was held under a partnership scheme and latter the business was transferred to a corporation, the business enterprise is deemed to have been in operation for the required two-year period as to come under the coverage of the SSS Law. xSan Teodoro Dev. Ent. Inc. v. SSS, 8 SCRA 96 (1963).

Although a corporation may have ceased business operations and an entirely new company has been organized to take over the same type of operations, it does not necessarily follow that no one may now be held liable for illegal acts committed by the earlier firm. Pepsi-Cola Bottling Co., v. NLRC, 210 SCRA 277 (1992).

4. Equity Transfers (Philippine Veterans Investment Development Corp. v. CA, 181 SCRA 669 [1990]).

The fact that instead on foreclosing on the mortgaged assets, DBP converted its loans to equity, making it the controlling stockholder of a bank, and although the majority of the members of the board of directors of the bank are from DBP, the same does not make DBP an employer of the bank employees, nor does it make DBP liable for the wage claims of the bank's employees. xDBP v. NLRC, 186 SCRA 841 (1990).

B. Merger and Consolidation

1. Concepts

2. Procedure:

(a) Plan of Merger or Consolidation (Sec. 76);

(b) Stockholders' or Members' Approval (Sec. 77);

(c) Articles of Merger or Consolidation (Sec. 78);

(d) Approval by SEC (Sec. 79).

3. Effects of Merger or Consolidation (Sec. 80)

It is settled that in the merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation. xBabst v. Court of Appeals, G.R. No. 99398, 26 January 2001.

Ordinarily, in the merger of two or more existing corporations, one of the combining corporations survives and continues the combined business, while the rest are dissolved and all their rights, properties and liabilities are acquired by the surviving corporation. Although there is dissolution of the absorbed corporations, there is no winding up of their affairs or liquidation of their assets, because the

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surviving corporation automatically acquires all their rights, privileges and powers, as well as their liabilities. xAssociated Bank v. Court of Appeals, 291 SCRA 511 (1998)

The merger, however, does not become effective upon the mere agreement of the constituent corporations. The procedure to be followed is prescribed under the Corporation Code. Section 79 of said Code requires the approval by the Securities and Exchange Commission (SEC) of the articles of merger which, in turn, must have been duly approved by a majority of the respective stockholders of the constituent corporations. The same provision further states that the merger shall be effective only upon the issuance by the SEC of a certificate of merger. The effectivity date of the merger is crucial for determining when the merged or absorbed corporation ceases to exist: and when its rights, privileges, properties as well as liabilities pass on to the surviving corporation. xAssociated Bank v. Court of Appeals, 291 SCRA 511 (1998).

C. Effects on Employees of Corporation (Complex Electronics Employees Association v. NLRC, 310 SCRA 403 [1999]).

1. Assets Only Transfers (Sundowner Dev. Corp. v. Drilon, 180 SCRA 14 [1989])

There is no law requiring that the purchaser of MDII’s assets should absorb its employees. As there is no such law, the most that the NLRC could do, for reasons of public policy and social justice, was to direct [the buyer] to give preference to the qualified separated employees of MDII in the filling up of vacancies in the facilities. xMDII Supervisors & Confidential Employees Asso. V. Pres. Assistance on Legal Affairs, 79 SCRA 40 (1977).

2. Business-Enterprise Transfers (Yu v. NLRC, 245 SCRA 134 [1995]; Sunio v. NLRC, 127 SCRA 390 [1984]; Central Azucarera del Danao v. Court of Appeals, 137 SCRA 295 [1985]; xSan Felipe Neri School of Mandaluyong, Inc. v. NLRC, 201 SCRA 478 (1991).

3. Equity Transfers (Manlimos v. NLRC, 242 SCRA 145 [1995]; Robledo v. NLRC, 238 SCRA 52 [1994]; Pepsi-Cola Bottling Co. v. NLRC, 210 SCRA 277 (1992); xDevelopment Bank of the Philippines v. NLRC, 186 SCRA 841[1990]; Pepsi Cola Distributors of the Philippines, Inc. v. NLRC, 247 SCRA 386 (1995); xCoral v. NLRC, 258 SCRA 704 [1996]; xAvon Dale Garments, Inc. v. NLRC, 246 SCRA 733 [1995]; Electronics Employees Association v. NLRC, 310 SCRA 403 [1999]).

4. Mergers and Consolidations (Filipinas Port Services, Inc. v. NLRC, 177 SCRA 203 [1989]; Filipinas Port Services, Inc. v. NLRC, 200 SCRA 773 [1991]; National Union Bank Employees v. Lazaro, 156 SCRA 123 [1988]); xFirst General Marketing Corp. v. NLRC, 223 SCRA 337 (1993).

5. Spin-Offs (San Miguel Corp. Employees Union-PTGWO v. Confessor, 262 SCRA 81 [1996])

XV. REHABILITATION AND INSOLVENCY

See VILLANUEVA, Revisiting the Philippine “Laws” on Corporate Rehabilitation, XLIII ATENEO LAW JOURNAL No. 2 (May, 1999).

1. Corporate Bankruptcy Laws in General

(a) Governing Laws (The Insolvency Act, PD 902-A, and Securities Regulation Code [RA 8799]; Interim Rules of Procedure for Corporate Rehabilitation of 2000)

(b) Types of bankruptcy proceedings in the Philippines

(c) Resolution on jurisdiction issues on bankruptcy proceedings (Ching v. Land Bank of the Philippines, 201 SCRA 190 [1991]).

2. Suspension of Payments

(a) Insolvency Law (Secs. 2 to 13)

- Situation of the corporate debtor

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- Nature of petition

- Required vote of creditors

- Consequences of approval/non-approval

(b) Pres. Decree 902-A (Sec. 5[d]), and Section 5.10 of Securities Regulation Code.

(c) Supreme Court Interim Rules of Procedure on Corporation Rehabilitation (2000).

3. Corporate Rehabilitation

(a) Nature of “Rehabilitation” (Ruby Industrial Corp. v. Court of Appeals, 284 SCRA 445 (1998).

Liquidation, in Corporation Law, connotes a winding up or setting with creditors and debtors. It is the winding up of a corporation so that assets are distributed to those entitled to receive them. It is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss. On the opposite end of the spectrum is rehabilitation which connotes a reopening or reorganization. Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency. It is crystal clear that the concept of liquidation is diametrically opposed or contrary to the concept of rehabilitation, such that both cannot be undertaken at the same time. To allow the liquidation proceedings to continue would seriously hinder the rehabilitation of the subject bank. Philippine Veterans Bank Employees Union – N.U.B.E., G.R. No. 105364, 28 June 2001.

(b) Basis of RTC Power to Undertake Corporate Rehabilitation (Secs. 5[d] and 6, Pres. Decree 902-A, in relation to Sec. 5.10, Securities Regulation Code)

(c) Appointment of Management Committee or a Rehabilitation Receiver

(d) Automatic Stay and its Legal Effects; When it becomes effective

The appointment of a management committee or rehabilitation receiver may only take place after the filing with the SEC of an appropriate petition for suspension of payments. The conclusion is inevitable that pursuant to Section 6(c), taken together with Sections 5(d) and (d), a court action is ipso jure suspended only upon the appointment of a management committee or a rehabilitation receiver. (Barotac Sugar Mills v. Court of Appeals, 275 SCRA 497 [1997]; reiterated in Union Bank v. Court of Appeals, 290 SCRA 198 [1998])

- Duration (B.F. Homes, Inc. v. Court of Appeals, 190 SCRA 262 [1990])

- Effect on Individual Petitioners Joining the Petition (Union Bank of the Philippines v. Court of Appeals, 290 SCRA 198 (1998); xModern Paper Products, Inc. v. Court of Appeals, 286 SCRA 749 (1998); xTraders Royal Bank v. Court of Appeals, 177 SCRA 788 [1989]; xChung Ka Bio v. Intermediate Appellate Court, 163 SCRA 534 (1988))

- Claims Covered by the Automatic Stay (xPCIB v. Court of Appeals, 172 SCRA 436 [1989]; Alemar’s Sibal & Sons, Inc. v. Elbinias, 186 SCRA 94 [1990]; xRizal Commercial Banking Corp. v. IAC, 213 SCRA 830 [1992]; xBank of PI v. Court of Appeals, 229 SCRA 223 [1994]).

- Types of “claims” Covered (Finasia Investments v. Court of Appeals, 237 SCRA 446 [1994])

Labor claims are not exempted from the automatic stay under Pres. Decree No. 902-A. The justification for the automatic stay of all pending actions for claims is to enable the management committee or the rehabilitation receiver to effectively exercise its/his powers free from any judicial or extra-judicial interference that migh unduly hinder or prevent the “rescue” of the debtor company. To allow such other actions for labor claims to continue would only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted defending claims against the corporation instead of being directed toward its restructuring and rehabilitation. xRubberworld [Phils.], Inc. v. NLRC, 305 SCRA 721 (1999); G.R. No. 128003, 26 July 2000.

(e) Rationale for Suspensive Effect of Appointment on Existing Suits and Causes of Action

(f) Powers of Management Committee or the Rehabilitation Receiver (Sec. 6, PD 902-A)

(g) SEC Power to Liquidate Corporation

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(h) Basic Differences Between Suspension of Payments Proceedings under the Insolvency Law and Under Pres. Decree No. 902-A

4. Insolvency Proceedings

A liquidation proceeding is a proceeding in rem so that all other interested persons whether known to the parties or not may be bound by such proceedings. xChua v. NLRC, 190 SCRA 558 (1990).

(a) Governing Law and Jurisdiction

(b) General Effect of Corporate Insolvency Proceedings

(c) VOLUNTARY INSOLVENCY

(d) Filing of Petition (Sec. 14, TIL)

(e) Effect of Order of Insolvency (Sec. 18; De Amuzategui v. Macleod, 33 Phil. 80 [1915]).

Section 18 on the automatic stay is no self-executory; applications for suspension of proceedings must be made in the various courts where actions in pending (xUnson v. Abeto, 47 Phil. 42 [1924]).

(f) INVOLUNTARY INSOLVENCY (Sec. 20 to 33)

(g) Qualifications of Petitioning Creditors

A foreign corporation whichs shows that it is a resident of the Philippines has legal standing to petition for involuntary insolvency of a corporate debtor xState Investment House, Inc. v. Citibank, N.A., 203 SCRA 9 (1991).

(h) Order to Show Cause (Sec. 21); Hearing of petition (Sec. 24)

(i) Acts of Insolvency and Order of Adjudication (Sec. 20)

(j) Meeting of Creditors to Elect Assignee (Secs. 29 and 30)

(k) Effects of Order of Insolvency and Appointment of Receiver (Secs. 32, 34 and 35; xRadiola-Toshiba Phil. v. IAC, 199 SCRA 373 [1991])

(l) Liquidation of assets and payment of debts (Sec. 33)

(m) Remedies of Secured Creditors (Sec. 29, 43 and 59)

(n) Composition (Sec. 63)

(o) Discharge (Secs. 52, 64, and 66)

(p) Appeal in certain cases (Sec. 82)

XVI. DISSOLUTION

1. No Vested Rights to Corporation Fiction (Gonzales v. Sugar Regulatory Administration, 174 SCRA 377 [1989]).

2. Voluntary Dissolution (Sec. 117)

(a) No Creditors Affected (Sec. 118)

(b) There Are Creditors Affected (Secs. 119 and 122).

3. Involuntary Dissolution (Sec. 121; Sec. 6(l), P.D. 902-A; Sec. 2, Rule 66; Rules of Court)

(a) Quo Warranto (Republic v. Bisaya Land Transportation Co., 81 SCRA 9 [1978]; Republic v. Security Credit & Acceptance Corp., 19 SCRA 58 [1967]; xGovernment v. El Hogar Filipino, 50 Phil. 399 [1927]).

(b) Expiration of Term

(c) Shortening of Corporate Term (Sec. 120)

(d) Non-user of Corporate Charter and Continuous Inoperation of a Corporation (Sec. 22)

"Organize" when used in reference of a corporation involves the election of officers, providing for the subscription and payment of the capital stock, the adoption of by-laws, and such other steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which it was created. The term "organization" relates merely to the systematization and orderly arrangement of the internal and managerial affairs and organs of the corporation. xBenguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956).

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The failure to file the by-laws does not automatically operate to dissolve a corporation but is now considered only a ground for such dissolution. xChung Ka Bio v. Intermediate Appellate Court, 163 SCRA 534 (1988).

(f) Demand of Minority Stockholders for Dissolution (Financing Corp. of the Phil. v. Teodoro, 93 Phil. 404 [1953]).

4. Legal Effects of Dissolution

A corporation cannot extend its life by amendment of its articles of incorporation effected during the three-year statutory period for liquidation when its original term of existence had already expired, as the same would constitute new business. xAlhambra Cigar & Cigarette Manufacturing Company, Inc. v. SEC, 24 SCRA 269 (1968).

When the period of corporate life expires, the corporation ceases to be a body corporate for the purpose of continuing the business for which it was organized xPhilippine National Bank v. Court of First Instance of Rizal, Pasig, Br. XXI , 209 SCRA 294 (1992).

5. Methods of Liquidation (Sec. 122; Board of Liquidators v. Kalaw, 20 SCRA 987 [1967]; Sumera v. Valencia, 67 Phil. 721 [1939]; Buenaflor v. Camarines Industry, 108 Phil. 472 [1960]).

“Liquidation” is “the settlement of the affairs of a corporation [which] consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts.” xChina Banking Ciorp. V. M. Michelin & Cie, 58 Phil. 261 (1933).

There can be no doubt that under Sections 77 and 78 of the Corporation Law, the Legislature intended to let the shareholders have the control of the assets of the corporation upon dissolution in winding up its affairs. The normal method of procedure is for the directors and executive officers to have charge of the winding up operations, though there is the alternative method of assigning the property of the corporation to the trustees for the benefit of its creditors and shareholders. “While the appointment of a receiver rests within the sound judicial discretion of the court, such discretion must, however, always be exercised with caution and governed by legal and equitable principles, the violation of which will amount to its abuse, and in making such appointment the court should take into consideration all the facts and weigh the relative advantages and disadvantages of appointing a receiver to wind up the corporate business.” xChina Banking Ciorp. V. M. Michelin & Cie, 58 Phil. 261 (1933).

“The appointment of a receiver by the court to wind up the affairs of the corporation upon petition for voluntary dissolution does not empower the court to hear and pass on the claims of the creditors of the corporation at first hand. . . all claims must be presented for allowance to the receiver or trustee or other proper persons during the winding up proceedings which in this jurisdiction would be within the three years provided by sections 77 and 78 of the Corporation Law as the term for the corporate existence of the corporation, and if a claim is disputed or unliquidated so that the receiver cannot safely allow the same, it should be transferred to the proper court for trial and allowance, and the amount so allowed then presented to the receiver or trustee for payment. The rulings of the receiver on the validity of claims submitted are subject to review by the court appointing such receiver though no appeal is taken to the latter’s ruling.” xChina Banking Corp. V. M. Michelin & Cie, 58 Phil. 261 (1933).

While Section 77 of the Corporation Law [now section 122 of the Corporation Code] provides for a three year period for the continuation of the corporate existence of the corporation for purposes of liquidation, there is nothing in said provision which bars an action for the recovery of the debts of the corporation against the liquidator thereof, after the lapse of the said three-year period. “It immaterial that the present action was filed after the expiration of the three years . . . for at the very least, and assuming that judicial enforcement of taxes may not be initiated after said three years despite the fact that actual liquidation has not terminated and the one in charge thereof is still holding the assets of the corporation, obviously for the benefit of all the creditors thereof, the assessment aforementioned, made within the three years, definitely established the Government as a creditor of the corporation for whom the liquidator is supposed to hold assets of the corporation.” xRepublic v. Marsman Development Company, 44 SCRA 418 (1972).

6. Who Are Liable After Dissolution and Winding-Up? (National Abaca Corp. v. Pore, 2 SCRA 989 [1961]; Tan Tiong Bio v. Commissioner, 100 Phil. 86 [1956]; Gelano v. CA, 103 SCRA 90 [1981]).

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Although a corporate officer, such as a general manager is not liable for corporate obligations, such as claims for wages, however, when such corporate officer ceases corporate property to apply to his own claims against the corporation, he shall be liable to the extent thereof to corporate liabilities, since knowing fully well that certain creditors had similarly valid claims, he took advantage of his position as general manager and applied the corporation's assets in payment exclusively to his own claims. xDe Guzman v. NLRC, 211 SCRA 723 (1992).

The corporation continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. It may, during the three-year term, appointing a trustee or a receiver who may act beyond that period. The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity nor those of its owners and creditor. If the three-year extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period, the board of directors (or trustee) itself, following the rationale of the Supreme Court's decision in Gelano v. court of Appeals (103 SCRA 90) may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation. Still in the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make proper representations with the Securities and Exchange Commission, which has primary and sufficient broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns. Clemente v. Court of Appeals, 242 SCRA 717, 723 (1995).

Since the law specifically allows a trustee to manage the affairs of the corporation in liquidation, any supervening fact, such as the dissolution of the corporation, repeal of the law, or any other fact of similar nature, would not serve as an effective bar to the enforcement of such right. xReburiano v. Court of Appeals, 301 SCRA 342 (1999).

In Gelano case, the counsel of the dissolved corporation was considered a trustee. In the later case of Clemente v. Court of Appeals [242 SCRA 717 (1995)], we held that the board of directors may be permitted to complete the corporate liquidation by continuing as “trustees” by legal implication. Under Section 145 of the Corporation Code, “No right of remedy in favor or against any corporation . . . shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof.” This provision safeguards the rights of a corporation which is dissolved pending litigation. xReburiano v. Court of Appeals, 301 SCRA 342 (1999)

7. Reincorporation (Chung Ka Bio v. Intermediate Appellate Court, 163 SCRA 534 [1988]).

XVII. CLOSE CORPORATION

See VILLANUEVA, The Philippine Close Corporation, 32 ATENEO L.J. (No. 2, March, 1988).

1. Definition (Sec. 96; Manuel R. Dulay Enterprises v. Court of Appeals, 225 SCRA 678 [1993]; San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).

2. Articles of Incorporation Requirements (Sec. 97)

(a) Pre-Emptive Rights (Sec. 102);

(b) Amendment (Sec. 103)

3. Restriction on Transfer of Shares (Secs. 98 and 99)

4. Agreements by Stockholder (Sec. 100)

5. No Necessity of Board (Sec. 101; Sergio F. Naguiat v. NLRC, 269 SCRA 564 [1997]).

6. Deadlocks (Sec. 104)

7. Withdrawal and Dissolution (Sec. 105)

Even prior to the passage of the Corporation Code which recognized close corporation, the Supreme Court had on limited instances recognized the common law

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rights of minority stockholders to seek dissolution of the corporation. Financing Corp. of the Phil. v. Teodoro, 93 Phil. 404 (1953).

XVIII. NON-STOCK CORPORATIONS AND FOUNDATIONS

See VILLANUEVA, Distinguishing Foundations from Other Non-Stock Corporations. (Unpublished)

1. Theory on Non-Stock Corporation (Secs. 14(2), 43, 87, 88 and 94(5); Collector of Internal Revenue v. Club Filipino Inc. de Cebu, 5 SCRA 321 [1962]; Collector of Internal Revenue v. University of Visayas, 1 SCRA 669 [1961]).

A non-stock corporation may only be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic or other similar purposes. It may not engage in undertakings such as the investment business where profit is the main or underlying purpose. Although the non-stock corporation may obtain profits as an incident to its operation such profits are not to be distributed among its members but must be used for the furtherance of its purposes. People v. Menil, G.R. 115054-66, 12 September 1999.

The incurring of profit or losses does not determine whether an activity is for profit or non-profit, and the courts will consider whether dividends have been declared or its members or that is property, effects or profit was ever used for personal or individual gain, and not for the purpose of carrying out the objectives of the enterprise. xManila Sanitarium and Hospital v. Gabuco, 7 SCRA 14 (1963).

2. What is a Foundation? (Secs. 30 and 34(H), NIRC of 1997; Sec. 24, Revenue Regulations No. 2; BIR-NEDA Regulations No. 1-81, as amended)

The formal requirements of Revenue Regulations No. 2 are not mandatory and that an entity may, in the absence of compliance with such requirements, still show that it falls under the provisions of Section 26 of the NIRC. xCollector v. V.G. Sinco Educational Corp., 100 Phil. 127 (1956).

3. Dissolution (Secs. 94 and 95)

XIX. FOREIGN CORPORATION

See VILLANUEVA, Philippine Doctrine of "Doing Business," THE LAWYERS REVIEW, - Part I - Vol. VII, No. 4, (April, 1993); Part II - Vol. VII, No. 6 (June, 1993).

1. Definition (Sec. 123).

A foreign corporation owes its existence to the laws of another state, and generally, has no legal existence within the state in which it is foreign. xAvon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997).

A fundamental rule of international jurisdiction is that no state can by its laws, and no court which is only a creature of the state, can by its judgments and decrees, directly bind or affect property or persons beyond the limits of that state. xTimes, Inc. v. Reyes, 39 SCRA 303 (1971).

2. Statutory Concept of "Doing Business" (Art. 44, Executive Order No. 226, Omnibus Investment Code; Sec. 3(d), R.A. No. 7042, Foreign Investment Act of 1991).

(a) Application for License (Secs. 124 and 125; also Art. 48, Omnibus Investment Code)

(b) Issuance of License (Sec. 126; Art. 49, Omnibus Investment Code)

(c) Amendment of License (Sec. 131)

(d) Rationale for Requiring License to Do Business

The purpose of the law in requiring that foreign corporations doing business in the country be licensed to do so, it to subject the foreign corporations doing business in the Philippines to the jurisdiction of the courts, otherwise, a foreign corporation illegally doing business here because of its refusal or neglect to obtain the required license and authority to do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the

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jurisdiction of the local courts. Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997).

The same danger does not exist among foreign corporations that are indubitably not doing business in the Philippines. Indeed, if a foreign corporation does not do business here, there would be no reason for it to be subject to the State’s regulation. As we observed, in so far as the State is concerned, such foreign corporation has no legal existence. Therefore, to subject such foreign corporation to the courts’ jurisdiction would violate the essence of sovereignty. xAvon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997).

A foreign corporation licensed to do business in the Philippines should be subjected to no harsher rules that is required of domestic corporation and should not generally be subject to attachment on the pretense that such foreign corporation is not residing in the Philippines. xClaude Neon Lights v. Phil. Advertising Corp., 57 Phil. 607 (1932).

3. Jurisprudential Concepts of "Doing Business":

(a) "Doing business" implies a continuity of commercial dealings and arrangements and the performance of acts or works or the exercise of some of the functions normally incident to the purpose or object of its organization. Mentholatum v. Mangaliman, 72 Phil. 525 (1941).

Where a single act or transaction, however, is not merely incidental or casual but indicates the foreign corporation's intention to do other business in the Philippines, said single act or transaction constitutes doing business. xFar East Int'l. v. Nankai Kogyo, 6 SCRA 725 (1962).

A foreign corporation with a settling agent in the Philippines which issues twelve marine policies covering different shipments to the Philippines is doing business in the Philippines. xGeneral Corp. of the Phil. v. Union Insurance Society of Canton, Ltd., 87 Phil. 313 (1950).

A foreign corporation which had been collecting premiums on outstanding policies was regarded as doing business in the Philippines. xManufacturing Life Ins. v. Meer, 89 Phil. 351 (1951)

Solicitation of business contracts constitutes doing business in the Philippines. xMarubeni Nederland B.V. v. Tensuan, 190 SCRA 105 (1990).

It is not really the fact that there is only a single act done that is material for determining whether a corporation is engaged in business in the Philippines, since other circumstances must be considered. Where a single act or transaction of a foreign corporation is not merely incidental or casual but is of such character as distinctly to indicate a purpose on the part of the foreign corporation to do other business in the state, such act will be considered as constituting business. xLitton Mills, Inc. v. Court of Appeals, 256 SCRA 696 (1996).

Participating in bidding process shows an intention to engage in business in the Philippines. xHutchison Philippines Ltd. v. Subic Bay Metropolitan Authority, 339 SCRA 434 (2000).

(b) Unrelated or Isolated Transactions (Eastboard Navigation, Ltd. v. Juan Ysmael and Co., Inc., 102 Phil. 1 [1957]; Antam Consolidated v. CA, 143 SCRA 288 [1986]).

The following were all held not to be engaged in business in the Philippines:

The collision of two vessels at the Manila Harbor (xDampfschieffs Rhederei Union v. La Campañia Transatlantica, 8 Phil. 766 [1907]);

Loss of goods bound for Hongkong but erroneously discharged in Manila (xThe Swedish East Asia Co., Ltd. v. Manila Port Service, 25 SCRA 633 [1968]);

Infringement of trade name (xGeneral Garments Corp. v. Director of Patens, 41 SCRA 50 [1971]; xUniversal Rubber Products, Inc. v. Court of Appeals, 130 SCRA 104 [1988]);

Recovery of damages sustained by cargo shipped to the Philippines (xBulakhidas v. Navarro, 142 SCRA 1 [1986]);

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Sale to the Government of road construction equipment and spare parts with no intent of continuity of transaction (xGonzales v. Raquiza, 180 SCRA 254 [1989]); and

Recovery on a Hongkong judgment against a Manila resident (xHang Lung Bak v. Saulog, 201 SCRA 137 [1991]).

In the case of foreign movie companies who have registered intellectual property rights over their movies in the Philippines, it was held that the appointment of local lawyer to protect such rights for piracy is not deemed to be doing business: "We fail to see how exercising one's legal and property rights and taking steps for the vigilant protection of said rights, particularly the appointment of an attorney-in-fact, can be deemed by and of themselves to be doing business here." xColumbia Pictures Inc. v. Court of Appeals, 261 SCRA 144 (1996).

(c) The "Contract Test" of Doing Business (Pacific Vegetable Oil Corp. v. Singson, Advanced Decision Supreme Court, April 1955 Vol., p. 100-A; Aetna Casualty & Surety Co. v. Pacific Star Line, 80 SCRA 635 [1977]; Universal Shipping Lines, Inc. v. IAC, 188 SCRA 170 [1990]).

(d) Transactions with Agents and Brokers (Granger Associates v. Microwave Systems, Inc., 189 SCRA 631 [199 ]; La Chemise Lacoste, S.A. v. Fernandez, 129 SCRA 373 [1984]; xSchmid & Oberly v. RJL, 166 SCRA 493 [1988]; xWang Laboratories, Inc. v. Mendoza, 156 SCRA 44 [1974];

4. Different Rules on Trademark and Tradenames (Western Equipment & Supply Co. v. Reyes, 51 Phil. 115 [1927]; xLeviton Industries v. Salvador, 114 SCRA 420 [1982]; xConverse Rubber v. Universal Rubber, 147 SCRA 154 [1987]; xConverse Rubber Corp. v. Jacinto Rubber & Plastic Co., 97 SCRA 158 [1980]; xUniversal Rubber Products, Inc. v. CA, 130 SCRA 104 [1984]; xPuma Sportschunhfabriken Rudolf Dassler, K.G. v. IAC, 158 SCRA 233 [1988]; xPhilips Export B.V. v. CA, 206 SCRA 457 [1992]).

5. Effects of Failure to Obtain License:

(a) On the contract entered into by such foreign corporation (Home Insurance Company v. Eastern Shipping Lines, 123 SCRA 424 [1983]).

Section 69 of the then Corporation Law was intended to subject the foreign corporation doing business in the Philippines to the jurisdiction of our courts and not to prevent the foreign corporation from performing single acts, but to prevent it from acquiring domicile for the purpose of business without taking the necessary steps to render it amenable to suit in the local courts. Marshall-Wells Co., v. Elser, 46 Phil. 70 (1924).

(b) Standing of such foreign corporation to sue in Philippine courts (Sec. 133; Marshall-Wells v. Elser, 46 Phil. 71 [1924])

(c) Criminal liability under Sect. 144 of the Corporation Code. Home Insurance Company v. Eastern Shipping Lines, 123 SCRA 424 (1983).

(d) Pari Delicto Doctrine: The local party to a contract with a foreign corporation that does business in the Philippines without license cannot maintain suit against the foreign corporation just as the foreign corporation cannot maintain suit, under the principle of pari delicto. (Top-Weld Mfg. v. ECED, 119 SCRA 118 [1985])

But Now See Communication Materials and Design, Inc. v. Court of Appeals, 260 SCRA 673 (1996).

(e) Estoppel Doctrine: A foreign corporation doing business in the Philippines may sue in Philippine courts although it is without license to do business here against a Philippine citizen who had contracted with and been benefitted by said corporation and knew it to be without the necessary license to do business, under the principle of estoppel. Merrill Lynch Futures, Inc. v. CA, 211 SCRA 824 (1992); xGeorg Grotjahn GMBH & C. v. Isnani, 235 SCRA 216 (1994).

(f) Proper Doctrine: Ericks Ltd. v. Court of Appeals, 267 SCRA 567 (1997).

But see lately: Subic Bay Metropolitan Authority v. Universal International Group of Taiwan, 340 SCRA 359 (2000).

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6. Suits Against Foreign Corporations:

(a) Jurisdiction Over the "Person" of Foreign Corporations (Sec. 14, Rule 14, Rules of Court; General Corp. of the Phil. v. Union Insurance Society of Canton, Ltd., 87 Phil. 313 [1950]; Johnlo Trading Co., v Flores, 88 Phil. 741 [1951]; xJohnlo Trading Co. v. Zulueta, 88 Phil. 750 [1951]; xPacific Micronisian Line, Inc. v. Del rosario, 96 Phil. 23 [1954]; xFar East International Import and Export Corp. v. Nankai Kogyo Co., Ltd., 6 SCRA 725 [1962]).

It the appearance of a foreign corporation to a suit is precisely to question the jurisdiction of the said tribunal over the person of the defendant, then this appearance is not equivalent to service of summons, nor does it constitute an acquiescence to the court’s jurisdiction. xAvon Insurance PLC v. Court of Appeals, 278 SCRA 312, 327 (1997).

For the purpose of having summons served on a foreign corporation in accordance with Rule 14, Section 14, it is sufficient that it be alleged in the complaint that the foreign corporation is doing business in the Philippines. xHahn v. Court of Appeals, 266 SCRA 537 (1997).

When it is shown that a foreign corporation is doing business in the Philippines, summons may be served on (a) its resident agent designated in accordance with law; (b) if there is no resident agent, the government official designated by law to that effect; or (c) any of its officers or agent within the Philippines. The mere allegation in the complaint that a local company is the agent of the foreign corporation is not sufficient to allow proper service to such alleged agent. Although there is no requirement to first substantiate the allegation of agency, yet it is necessary that there must be specific allegations in the complaint that establishes the connection between the principal foreign corporation and its alleged agent with respect to the transaction in question. Nowhere in the case of Signetics Corporation v. Court of Appeals, did the Court state that if the “complaint alleges that defendant has an agent in the Philippines, summons can validly be served thereto even without prior evidence of the truth of such factual allegation; it is only in the headnote of the reporter which is not part of the decision. xFrench Oil Mills Machinery Co., Inc. v. Court of Appeals, 295 SCRA 462 (1998).

(b) The Odd Doctrine (Facilities Management Corp. v. De la Osa, 89 SCRA 131 [1979]; xFBA Aircraft v. Zosa, 110 SCRA 1 [1981]; xRoyal Crown International v. NLRC, 178 SCRA 569 [1989]; xWang Laboratories, Inc. v. Mendoza, 156 SCRA 44 [1987]).

Contra: The sine qua non requirement for service of summons and other legal processes or any such agent or representative is that the foreign corporation is doing business in the Philippines. xHyopsung Maritime Co., Ltd. v. CA, 165 SCRA 258 1988); Signetics Corp. v. CA, 225 SCRA 737 (1993).

But Now See Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997)

(c) Stipulation on Venue

When the contract sued upon has a venue clause within the Philippines, it is deemed a confirmation by the foreign corporation, even though not doing business in the Philippines, to be sued in local courts. xLinger & Fisher GMBH v. IAC, 125 SCRA 522 (1983).

7. Pleading "Doing" and "Not Doing" of Business

The fact that a foreign corporation is not doing business in the Philippines must be alleged if a foreign corporation desires to sue in Philippines courts under the "isolated transactions rule." Atlantic Mutual Inc. Co. v. Cebu Stevedoring Co., 17 SCRA 1037 (1966); xCommissioner of Customs v. K.M.K. Gani, 182 SCRA 591 (1990).

This overturned the previous doctrine in xMarshall-Wells (as well as in xIn re Liquidation of the Mercantile Bank of China, etc., 65 Phil. 385 (1938), that the lack of authority of foreign corporation to sue in Philippine courts for failure to obtain the license is a matter of affirmative defense.

A complaint filed by a foreign corporation is fatally defective for failing to allege its duly authorized representative or resident agent in Philippine jurisdiction. xNew York Marine Managers, Inv. c. Court of Appeals, 249 SCRA 416 (1995).

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For the purpose of having summons served on a foreign corporation in accordance with Rule 14, Section 14, it is sufficient that it be alleged in the complaint that the foreign corporation is doing business in the Philippines. xHahn v. Court of Appeals, 266 SCRA 537 (1997).

8. Resident Agent (Sec. 127 and 128)

(a) Concept of "residence" (State Investment House v. Citibank, 203 SCRA 9 [1991]).

(b) When a corporation has designated a person to receive service of summon pursuant to the Corporation Code, the designation is exclusive and service of summons on any other person is inefficacious. xH.B. Zachry Company International v. CA, 232 SCRA 329 (1994).

9. Applicable Laws to Foreign Corporations (Sec. 129; Grey v. Insular Lumber Co., 67 Phil. 139 [1938])

10. Amendment of Articles of Incorporation (Sec. 130)

11. Merger and Consolidation (Sec. 132; Art. 51, Omnibus Code)

12. Revocation of License (Secs. 134 and 135; Art. 50, Omnibus Investment Code)

14. Withdrawal of Foreign Corporation (Sec. 136)

XX. PENALTY PROVISIONS OF THE CODE

See VILLANUEVA, The Penal Provision Under Sec. 144 of the Corporation Code, THE LAWYERS REVIEW, Vol. X, No. 2 (29 February 1996).

1. Penalty Clause for Violations of the Provisions of the Code (Sec. 144).

2. Cross-reference (Sec. 27).

3. Specific application (Sec. 74).

4. Strict Principles in Criminal Law; the issue of malice.

5. Historical Background of Sec. 144 (Sec. 190 1/7 of the Corporation Law)

Sec. 190 was not intended to make every casual violation of one of the Corporation Law provisions ground for involuntary dissolution of the corporation and that the court was entitled to exercise discretion in such matters. xGovernment of the

Philippine Islands v. El Hogar Filipino, 50 Phil. 399 (1927).

The penalties imposed in Sec. 190(A) of the Corporation Law for the violation of the prohibition in question are of such nature that they can be enforced only by a criminal prosecution or by an action of quo warranto. But these proceedings can be maintained only by the Attorney-General in representation of the Government." xHarden v. Benguet Consolidated Mining Co., 58 Phil. 141 (1933).

6. Violation of Section 133 by Foreign Corporations

Section 133 of the present Corporation Code, which unlike its counterpart Section 69 of the Corporation Law provided specifically for penal sanctions for foreign corporations engaging in business in the Philippines without obtaining the requisite license, should be deemed to have a penal sanction by virtue of Section 144 of the Corporation Code. Home Insurance Company v. Eastern Shipping Lines, 123 SCRA 424 (1983).

Home may therefore provides the second instance of violation of the Code (under Section 133), when the criminal penalties of Sec. 144 are applicable.

XXI. MISCELLANEOUS

1. SEC power and supervision (Secs. 108 and 143; PD 902-A).

2. Special corporations (Sec. 4).

3. New requirements on existing corporations (Sec. 148).

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4. Applicability of other provision of the old Corporation Law, (Sec. 145 and 146).

—oOo—

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