clv corp outline (1)

8/13/2019 CLV Corp Outline (1)

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ATENEO DEMANILALAW SCHOOL

OUTLINEON PHILIPPINE DEANCESAR L. VILLANUEVA

CORPORATELAW1 2NDSEMESTER, SY 2008-2009

I. HISTORICAL BACKGROUND

1. Ph!""#$ C%&"%&'($ L')*2S%&( %+ C%+'(%# %+ A$&'# C%&"%&'($ L')

Under American sovereignty, attention was drawn to the fact that there was no entity inSpanish law exactly corresponding to the notion of a "corporation" in English and American law;the Philippine ommission enacted the orporation !aw Act #o$ 1%&'(, to introd)ce the

American corporation into the Philippines as the standard commercial entity and to hasten theday when the sociedad annimaof the Spanish law wo)ld *e o*solete$ +he stat)te is a sort ofcodification of American orporate !aw$ Harden v. Benguet Consolidated Mining, & Phil$ 1%11'--($

2. Th$ C%&"%&'(%# L')

+he first corporate stat)te, the orporation !aw, or Act #o$ 1%&', *ecame effective on 1 April1'./$ 0t had vario)s piecemeal amendments d)ring its %year history$ 0t rapidly *ecameanti3)ated and not adapted to the changing times$

/. Th$ C%&"%&'(%# C%$

+he orporation ode Batas Pambansa Blg$ /( too4 effect on 1 5ay 1'.$ 0t adoptedvario)s corporate doctrines en)nciated *y the S)preme o)rt )nder the old orporation !aw$ 0tclarified the o*ligations of corporate directors and officers, expressed in stat)tory lang)ageesta*lished principles and doctrines, and provided for a chapter on close corporations$

orporation ode provisions apply even to corporations organi6ed )nder the old orporation!aw$xCastillo v. Balinghasay, %%. S7A %%2 2..%($

. P&%"$& T&$'($#( %+ Ph!""#$ C%&"%&'($ L')

Philippine orporate !aw comes from the common law system of the United States$+herefore, altho)gh we have a orporation ode that provides for stat)tory principles, orporate!aw is essentially, and contin)es to *e, the prod)ct of commercial developments$ 5)ch of thisdevelopment can *e expected to happen in the world of commerce, and some expressed

8)rispr)dential r)les that try to apply and adopt corporate principles into the changing conceptsand mechanism of the commercial world$

II. CONCEPTS

1. D$+#(%# S$. 2; Articles %%-(, %&, %/, and 1&, ivil ode(

A corporation is an artificial *eing created *y operation of law$ 0t has a personality separateand distinct from the persons composing it, as well as from any other legal entity to which itmay *e related$ PNB v. Andrada Electric & Engring Co., -1 S7A 2%% 2..2($

A corporation, )pon coming into existence, is invested *y law with a personality separateand distinct from those persons comprising it as well as from any other legal entity to which itmay *e related$ Construction & !ev. Cor". o# the Phils. v. Cuenca, %// S7A 1% 2..&($

Corporation is a Creature of Limited Powers 9 Except for the powers which areexpressly conferred on it *y the orporation ode and those that are implied *y or areincidental to its existence, a corporation has no powers$ 0t exercises its powers thro)gh its *oard

1Unless otherwise indicated, all references to sections pertain to +he orporation ode of the Philippines$2+he whole *ody of stat)tory and 8)rispr)dential r)les pertaining to corporations is referred to as "orporate !aw" to differentiate it

from the old stat)te 4nown as "+he orporation !aw," or Act #o$ 1%&'$


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of directors and:or its d)ly a)thori6ed officers and agents$ Pascual and $antos% nc. v. 'heMembers o# the 'ramo (a)as Neighborhood Association% nc., %%2 S7A %- 2..%($-

-!e *iano v. Court o# A""eals, -. S7A -%' 2..1(;Mon#ort Hermanos Agricultural !ev. Cor". v. Mon#ort , %-% S7A 22..%(; +nited Paragon Mining Cor". v. Court o# A""eals, %' S7A /- 2../($

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2. OURCORPORATEATTRIBUTESBASEDONSECTION2*

'3A CORPORATIONISANARTIICIALBEING Ability to Contract and 'ransactetween the corporation and its agents:representatives to act in the real world,

s)ch as its directors and officers, which is governed also *y the !aw on Agency

>etween the corporation and its shareholders or mem*ers

>etween and among the shareholders in a common vent)re

3E5TRA-CORPORATELEVEL, which views the relationship *etween the corporation andthirdparties or o)tsidersE7!E, % @!$ !$ 7E$ -%- B1'%C(

A corporation is *)t an association of individ)als, allowed to transact )nder an ass)medcorporate name, and with a distinct legal personality$ 0n organi6ing itself as a collective *ody, itwaives no constit)tional imm)nities and per3)isites appropriate to s)ch a *ody$ P$E v. Court o#

A""eals% 21 S7A 2-2 1''($

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orporations are composed of nat)ral persons and the legal fiction of a separate corporatepersonality is not a shield for the commission of in8)stice and ine3)ity, s)ch as to avoid theexec)tion of the property of a sister company$ 'an Boon Bee & Co.% nc. v. -arencio, 1/- S7A2.& 1'($

;. ADVANTAGESANDDISADVANTAGESOCORPORATEORM*

'3 %>& B': A?'#('@$%>: Ch'&'($&:(: %+ C%&"%&'($ O&@'#'(%#*

3 STRONGLEGALPERSONALITYA corporation is an entity separate and distinct from its stoc4holders$ ?hile not in fact

and in reality a person, the law treats the corporation as tho)gh it were a person *y processof fiction or *y regarding it as an artificial person distinct and separate from its individ)alstoc4holders$< emo% -r. v. AC, 12 S7A %.& 1''($

+he transfer of the corporate assets to the stoc4holder is not in the nat)re of a partition*)t is a conveyance from one party to another$ Stockholders of F. uan!on and Sons"#nc. v. $egister of %eeds of &anila, ; SCRA // 19;23$

Exec)tion pending appeal was allowed in Bor/a v. Court o# A""eals, 1'/ S7A %1''1( only *eca)se the prevailing party is already of advanced age and in danger ofextinction,< *)t not in this case where the winning party is a corporation$ BAC 8)ridicalentityDs existence cannot *e li4ened to a nat)ral personits precario)s financial condition isnot *y itself a compelling circ)mstance warranting immediate exec)tion and does noto)tweigh the long standing general policy of enforcing only final and exec)tory 8)dgment$:$ %+ !($ !'4!( +$'(>&$

/3 H@h %:( %+ '#($#'#$

3 D%>4!$ (''(%#

Fividends received *y individ)als from domestic corporations are s)*8ect to final

1.G tax for income earned on or after 1 Han)ary 1'' Sec$ 2%>(2(, 1'' #07(

0ntercorporate dividends *etween domestic corporations, however, are not s)*8ect to

any income tax Sec$ 2F(%(, 1'' #07(

+here is reimposition of the 1.G improperly acc)m)lated earnings tax< for holding

companies Sec$ 2', 1'' #07(

. COMPAREDWITHOTHERBUSINESSMEDIA)t they were more similar to the English 8oint stoc4

companies than the modern commercial corporations$ Benguet Consolidated Mining Co. v.Pineda, ' Phil$ 11 1'&/($

@)r orporation !aw recogni6es the difference *etween sociedades annimas andcorporations and will not apply legal provisions pertaining to the latter to the former$ Phil.Product Co. v. Primateria $ociete Anonyme, 1& S7A -.1 1'/&($

@3 Cuentas En Participacion

A cuentas en "artici"acionas a sort of an accidental partnership constit)ted in s)ch amanner that its existence was only 4nown to those who had an interest in the same, there*eing no m)t)al agreement *etween the partners, and witho)t a corporate name indicating to

&


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the p)*lic in some way that there were other people *esides the one who ostensi*ly managedand cond)cted the *)siness, governed )nder Article 2-' of the ode of ommerce$

+hose who contract with the person )nder whose name the *)siness of s)ch partnership ofcuentas en "artici"acionis cond)cted, shall have only a right of action against s)ch personand not against the other persons interested, and the latter, on the other hand, shall have noright of action against third person who contracted with the manager )nless s)ch managerformally transfers his right to them$ Bourns v. Carman, Phil$ 11 1'./($

III. NATURE AND ATTRIBUTES O A CORPORATION

1. N'(>&$ %+ P%)$& (% C&$'($ ' C%&"%&'(%# Sec$ 1/, Article I00, 1' onstit)tion(

@)r constit)tion explicitly prohi*its the reg)lation *y special laws of private corporations,with the exception of governmentowned or controlled corporations J@s($ 5eterans1ederation o# the Phili""ines v. eyes, %- S7A &2/ 2../($

ongress cannot enact a law creating a private corporation with a special charter, and itfollows that ongress can create corporations with special charters only if s)ch corporations areJ@s$ 1eliciano v. Commission on Audit, %1' S7A -/- 2..%($

P$F$ 11 creating #ew Agrix, 0nc$ violates the onstit)tion which prohi*its the formation ofa private corporation *y special legislative act which is not a J@, since #F was merelyre3)ired to extend a loan to the new corporation, and the new stoc4s of the corporation were to

*e iss)ed to the old investors and stoc4holders of the insolvent Agrix )pon proof of their claimsagainst the a*olished corporation$ N!C v. Phili""ine 5eterans Ban)%1'2 S7A 2& 1''.($

2. CORPORATIONASAPERSON*

'3 E#((!$ (% D>$ P&%$:: '# E>'! P&%($(%#

+he d)e process cla)se is )niversal in its application to all persons witho)t regard to anydifferences of race, color, or nationality$ Private corporations, li4ewise, are persons< within thescope of the g)aranty insofar as their property is concerned$ $mith Bell & Co. v. Natividad, %.Phil$ 1-/, 1%% 1'2.($

43 U#&$':%#'4!$ S$'&h$: '# S$>&$

A corporation is protected *y the constit)tional g)arantee against )nreasona*le searches

and sei6)res, *)t its officers have no ca)se of action to assail the legality of the sei6)res,regardless of the amo)nt of shares of stoc4 or of the interest of each of them in saidcorporation, and whatever the offices they hold therein may *e, *eca)se the corporation has apersonality distinct and separate from those of said officers$ $tonehill v. !io)no, 2. S7A --1'/($

A corporation is *)t an association of individ)als )nder an ass)med name and with adistinct legal entity$ 0n organi6ing itself as a collective *ody it waives no constit)tionalimm)nities appropriate for s)ch *ody$ 0ts property cannot *e ta4en witho)t compensation; canonly *e proceeded against *y d)e process of law; and is protected against )nlawf)ldiscrimination$Bache & Co. 6Phil.7% nc. v. ui4, - S7A 2-, - 1'1(, 0uoting #romHale v.Hen)el% 2.1 U$S$ %-, &. !$Ed$ /&2$

3 B>( N%( E#((!$ (% P&?!$@$ A@'#:( S$!+ #'(%#

0t is elementary that the right against selfincrimination has no application to 8)ridicalpersons$< Bataan $hi"yard & Engineering v. PC22, 1&. S7A 11 1'($

?hile an individ)al may lawf)lly ref)se to answer incriminating 3)estions )nless protected*y an imm)nity stat)te, it does not follow that a corporation, vested with special privileges andfranchises, may ref)se to show its hand when charged with an a*)se of s)ch privilege$ Hale v.Hen)el, 2.1 U$S$ %- 1'./(; (ilson v. +nited $tates% 221 U$S$ -/1 1'11(; +nited $tates v.(hite% -22 U$S$ /'% 1'%%($

/. P&'($ %+ P&%+$::%#

orporations cannot engage in the practice of a profession since they lac4 the moral andtechnical competence re3)ired *y the P7$ +*EP v. 'he *egal Clinic, 22- S7A - 1''-($

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A corporation engaged in the selling of eyeglasses and which hires optometrists is notengaged in the practice of optometry$ $amahan ng 8"tometrists v. Acebedo nternational Cor".%2. S7A 2' 1''(;Al#a#ara v. Acebedo 8"tical Com"any% -1 S7A 2'- 2..2($

COUNTER-REVOLUTION= Architect)ral Professional orps$ allowed )nder 7$A$ #o$ '2//$

. L'4!( +%& T%&(:

A corporation is civilly lia*le in the same manner as nat)ral persons for torts, *eca)se ther)les governing the lia*ility of a principal or master for a tort committed *y an agent or servantare the same whether the principal or master *e a nat)ral person or a corporation, and whetherthe servant or agent *e a nat)ral or artificial person$ +hat a principal or master is lia*le for everytort which he expressly directs or a)thori6es, is 8)st as tr)e of a corporation as a nat)ral person$P+B v. Court of )ppeals, 8/ SCRA 2/ 1983.

@)r 8)rispr)dence is wanting as to the definite scope of corporate tort$< Essentially, tort)t when a penalstat)te does not expressly apply to corporations, it does not create an offense for which acorporation may *e p)nished$ @n the other hand, if the State, *y stat)te, defines a crime thatmay *e committed *y a corporation *)t prescri*es the penalty therefor to *e s)ffered *y theofficers, directors, or employees of s)ch corporation or other persons responsi*le for the offense,only s)ch individ)als will s)ffer s)ch penalty$ orporate officers or employees, thro)gh whoseact, defa)lt or omission the corporation commits a crime, are themselves individ)ally g)ilty ofthe crime$ Ching v. Secretary of /ustice, 81 SCRA ;02 200;3. B0T SEE ConsolidatedBank v. Court of )ppeals, /; SCRA ;1 200/3.

;. R$%?$& %+ M%&'! '# O(h$& D''@$:

A corporation, *eing an artificial person, cannot experience physical s)fferings, mentalang)ish, fright, serio)s anxiety, wo)nded feelings, moral shoc4 or social h)miliation which are*asis for moral damages )nder Art$ 221 of the ivil ode$ Ho,ever% a cor"oration may have agood re"utation ,hich% i# besmirched% may be a ground #or the a,ard o# moral damages $Mambulao *umber Co. v. Phili""ine National Ban)% 22 S7A -&' 1'/(; AP' v. Court o#

A""eals% -.. S7A &' 1''(.

A corporation, *eing an artificial person and having existence only in legal contemplation,has no feelings, emotions nor senses; therefore, it cannot experience physical s)ffering andmental ang)ish$ 5ental s)ffering can *e experienced only *y one having a nervo)s system and

it flows from real ills, sorrows, and griefs of lifeall of which cannot *e s)ffered *y an artificialperson$ Prime (hite Cement Cor". v. AC, 22. S7A 1.- 1''-(; *BC Ex"ress% nc. v. Court o#

A""eals%2-/ S7A /.2 1''%(;Acme $hoe% ubber & Plastic Cor". v. Court o# A""eals, 2/.S7A 1% 1''/(; $olid Homes% nc. v. Court o# A""eals, 2& S7A 2/ 1''(; NPC v. Phili""Brothers 8ceanic% nc., -/' S7A /2' 2..1($

+he statement in Peo"le v. Maneroand Mambulao *umber Co. v. PNB, that a corporationmay recover moral damages if it has a good rep)tation that is de*ased, res)lting in socialh)miliation< is an obiter dictum.ecovery o# a cor"oration ,ould be under Articles 9:% ;< and ;9o# the Civil Code% but ,hich re0uires a clear "roo# o# malice or bad #aith. AB$=CBN BroadcastingCor". v. Court o# A""eals, -.1 S7A &' 1'''($

!i4ewise, an ed)cational corporationDs claim for moral damages arising from li*el falls )nderArticle 221'( of the ivi l ode, which expressly a)thori6es the recovery of moral damages incases of li*el, slander or any other form of defamation, and does not 3)alify whether the plaintiffis a nat)ral or 8)ridical person$ +herefore, a 8)ridical person can validly complain for li*el or anyother form of defamation and claim for moral damages$ 1ili"inas Broadcasting Net,or) v. AgoMedical and Educational Center, %% S7A %1- 2..&($

. CORPORATE NATIONALITY* 0+%E$,-1SEL),S#+C1$P1$)TE% S$. 12/3

E5CEPTIONS* TEST1FC1+T$1LL#+1,+E$S-#P '!:% '""!$: #*

'3 E2ploitation of +atural $esources Sec$ 1%.; Sec$ 2, Article I00, 1' onstit)tion;$oman Catholic )postolic )dministrator of %avao" #nc. v. The L$C and the $egister

of %eeds of %avao, 102 Ph!. 9;


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have a strange sit)ation where the ownership of immova*le property s)ch as trees, plants andgrowing fr)it attached to the land wo)ld *e limited to Lilipinos and Lilipino corporations only$-.2. $ummit Holdings% nc. v. Court o# A""eals, %&. S7A 1/' 2..&($

43 Pu'lic 0tilitiesSec$ 11, Art$ I00, onstit)tion; People v. 3uasha, 9/ Ph!. ///(

+he primary franchise, that is, the right to exist as s)ch, is vested in the individ)als whocompose the corporation and not in the corporation itself and cannot *e conveyed in thea*sence of a legislative a)thority so to do$ +he special or secondary franchises are vested in

the corporation and may ordinarily *e conveyed or mortgaged )nder a general power granted toa corporation to dispose of its property, except s)ch special or secondary franchises as arecharged with a p)*lic )se$ -..$. Business Cor". v. m"erial nsurance, 11 S7A /-% 1'/%($

+he onstit)tion re3)ires a franchise for the operation of a p)*lic )tility; however, it doesnot re3)ire a franchise *efore one can own the facilities needed to operate a p)*lic )tility solong as it does not operate them to serve the p)*lic$ +here is a clear distinction *etweenoperation< of a p)*lic )tility and the ownership of the facilities and e3)ipment )sed to serve thep)*lic$ Tatad v.arcia" /r., 2/ SCRA /; 1993.

3 M':: M$' Sec$ 111(, Art$ I0, 1' onstit)tion(

S%>&$:= P$F$ -/, amended *y P$F$s 1'1 and 1'; F@H @pinion #o$ 12., s$ of 1'2; Sec$2, P$F$ &/; SE @pinion, 2% 5arch 1'-; F@H @pinion 1/-, s$ 1'-; SE@pinion, 1& H)ly 1''1, II SE MUA7+E7!N>U!!E+0#, #o$ %Fecem*er, 1''1(,

at p$ -1$Ca'le #ndustry* a*le + operations shall *e governed *y E$@$ #o$ 2.&, s$ 1'$ 0f A+

operators offer p)*lic telecomm)nications services, they shall *e treated 8)st li4e a p)*lictelecomm)nications entity$< #+ 5emo irc)lar #o$ ''&(

a*le + as a form of mass media which m)st, therefore, *e owned and managed *yLilipino citi6ens, or corporations, cooperatives or associations, whollyowned and managed *yLilipino citi6ens p)rs)ant to the mandate of the onstit)tion$< F@H @pinion #o$ '&, s$ 1''',citingAllied Broadcasting% nc. v. 1ederal Communications Commission% %-& L$ 2d .($

3A?$&(:#@ B>:#$:: Sec$ 112(, Art$ I0, 1' onstit)tion(

$3W'&-T$ T$:(1ili"inas Com"ania de $eguros v. Christern% Huene#eld & Co.% nc. , ' Phil$&% B1'&1C; !avis (inshi" v. Phili""ine 'rust Co., '. Phil$ %% B1'&2C; Ha, Pia v. ChinaBan)ing Cor"$, . Phil$ /.% B1'%C($

+3 I#?$:($#( T$:( ': (% FPh!""#$ N'(%#'!: Sec$ -a( O *(, 7$A$ .%2, Loreign0nvestments Act of 1''2(

@3 G&'#+'(h$& R>!$ @pinion of F@H #o$ 1, s$ 1'', 1' Han)ary 1''; SE @pinion, /#ovem*er 1'', II0 SE MUA7+E7!N >U!!E+0##o$ 1 5arch 1''.(; SE @pinion, 1%Fecem*er 1'', II0 SE MUA7+E7!N>U!!E+0##o$ 2 H)ne 1''.(

+" to ,hat level do you a""ly the grand#ather rule> Palting v. San /ose Petroleum#nc., 18 SCRA 92 19;;3$

h3 S"$'! C!'::+'(%#:Sec$ 1%.(

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IV. SEPARATE 7URIDICAL PERSONALITY AND DOCTRINEO PIERCING THE VEIL O CORPORATE ICTION

A. MAIN DOCTRINE* A CORPORATION HAS A PERSONALITY SEPARATE AND DISTINCT ROM ITSSTOCKHOLDERSORMEMBERS. -ardine !avies% nc. v. -B ealty% nc., %/-S7A &&& 2..&($

1. S%>&$:*S$. 2 A&(!$ , C?! C%$

2. I"%&('#$ %+ P&%($(#@ M'# D%($*

A corporation, )pon coming into existence, is invested *y law with a personality separateand distinct from those persons composing it as well as from any other legal entity to which itmay *e related$ +his separate and distinct personality is, however, merely a fiction created *ylaw for conveyance and to promote the ends of 8)stice$ *BP v. Court o# A""eals%-/% S7A-& 2..1(; Martine4 v. Court o# A""eals, %- S7A 1-' 2..%(; Prudential Ban) v. Alviar, %/%S7A -&- 2..&($

A corporation is an artificial *eing vested *y law with a personality distinct and separatefrom those of the persons composing it as well as from that of any other entity to which it may*e related$ +he first conse3)ence of the doctrine of legal entity of the separate personality of

the corporation may not *e made to answer for acts and lia*ilities of its stoc4holders or thoseof legal entities to which it may *e connected or vice versa$ 2eneral Credit Cor". v. Alsons!ev. and nvestment Cor"., &1- S7A 22& 2..(; Mc*eod v. N*C, &12 S7A 222 2..(;+y v. 5illanueva, &2/ S7A - 2..($

/. A""!'(%#:*

'3 &a4ority E5uity 1wnership and #nterlocking %irectorship?

@wnership of a ma8ority of capital stoc4 and the fact that ma8ority of directors of acorporation are the directors of another corporation creates no employeremployee relationshipwith the latters employees$ %BP v. +L$C, 18; SCRA 81 19903$ Also $uldao v. Cimech$ystem Construction% nc., &./ S7A 2&/ 2../(;+nion Ban) o# the Phili""ines v. 8ng, %'1S7A &1 2../($

5ere ownership *y a single stoc4holder or *y another corporation of all or nearly all of thecapital stoc4 of a corporation is not of itself s)fficient gro)nd for disregarding the separatecorporate personality$ $unio v. N*C , 12 S7A -'. 1'%(; Asionics Phili""ines% nc. v.N*C% 2'. S7A 1/% 1''(; 1rancisco v. Me/ia% -/2 S7A - 2..1(; Matutina ntegrated(ood Products% nc. v. CA, 2/- S7A %'. 1''/(; Manila Hotel Cor". v. N*C, -%- S7A 12...(; $ecosa v. Heirs o# Er,in $uare4 1ancisco, %-- S7A 2- 2..%($

A corporate defendant in a case, against whom a writ of possession has *een iss)ed,cannot )se the fact that it has o*tained controlling e3)ities in the corporate plaintiffs to s)spendenforcement of the writ, for their separate 8)ridical personality, and th)s their separate *)sinessand proprietary interests remain$ $ilverio% -r. v. 1ili"ino Business Consultants% nc., %// S7A&% 2..&($

5ere s)*stantial identity of incorporators of two corporations does not necessarily implyfra)d, nor warrant the piercing of the veil of corporate fiction$ 0n the a*sence of clear andconvincing evidence to show that the corporate personalities were )sed to perpet)ate fra)d, orcirc)mvent the law, the corporations are to *e rightly treated as distinct and separate from eachother$ *aguio v. N*C% 2/2 S7A 1& 1''/($

Kaving interloc4ing directors, corporate officers and shareholders is not eno)gh 8)stificationto pierce the veil of corporate fiction in the a*sence of fra)d or other p)*lic policyconsiderations$ 5elarde v. *o"e4, %1' S7A %22 2..%(; $esbreno v. Court o# A""eals, 222S7A %// 1''-($

43 Being Corporate 1fficer6>eing an officer or stoc4holder of a corporation does not *y itselfma4e oneDs property also of the corporation, and vice=versa, for they are separate entities,and that shareholders who are officers are in no legal sense the owners of corporate

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property which is owned *y the corporation as a distinct legal person$ 2ood EarthEm"orium% nc. v. CA, 1'% S7A &%% 1''1($

+he mere fact that one is president of the corporation does not render the property heowns or possesses the property of the corporation, since that president, as an individ)al, andthe corporation are separate entities$ Cru4 v. !alisay, 1&2 S7A % 1'(; Booc v. Bantuas%-&% S7A 2' 2..1($

0t is horn*oo4 law that corporate personality is a shield against personal lia*ility of itsofficersa corporate officer and his spo)se cannot *e made personally lia*le )nder a tr)streceipt where he entered into and signed the contract clearly in his official capacity$ ntestateEstate o# Alexander '. 'y v. Court o# A""eals% -&/ S7A /1 2..1(; Consolidated Ban) and'rust Cor". v. Court o# A""eals, -&/ S7A /1 2..1($

+he President of the corporation which *ecomes lia*le for the accident ca)sed *y its tr)c4driver cannot *e held solidarily lia*le for the 8)dgment o*ligation arising from 3)asidelict,since the fact alone of *eing President is not s)fficient to hold him solidarily lia*le for thelia*ilities ad8)dged against the corporation and its employee$ $ecosa v. Heirs o# Er,in $uare41ancisco, %-- S7A 2- 2..%($

?hen the comp)lsory co)nterclaim filed against corporate officers for their allegedfra)d)lent act indicate that s)ch corporate officers are indispensa*le parties in the litigation,the original incl)sion of the corporation in the s)it does not there*y allow the denial of aspecific co)nterclaim *eing filed to ma4e the corporate officers personally lia*le$ A

corporation has a legal personality entirely separate and distinct from that of its officers andcannot act for and on their *ehalf, witho)t *eing so a)thori6ed$ *a#arge Cement Phils.% nc. v.Continental Cement Cor"., %%- S7A &22 2..%($

3 %ealings Between Corporation and Stockholders6

+he fact that the ma8ority stoc4holder had )sed his own money to pay part of the loan ofthe corporation cannot *e )sed as the *asis to pierce$ 0t is )nderstanda*le that a shareholderwo)ld want to help his corporation and in the process, ass)re that his sta4es in the saidcorporation are sec)red$< *BP v. Court o# A""eals%-/% S7A -& 2..1($

Use of a controlling stoc4holderDs initials in the corporate name is not s)fficient reason topierce the corporate veil, since *y that practice alone does it mean that the said corporation ismerely a d)mmy of the individ)al stoc4holder$ A corporation may ass)me any name provided

it is lawf)l, and there is nothing illegal in a corporation ac3)iring the name or as in this case,the initials of one of its shareholders$ *BP v. Court o# A""eals%-/% S7A -& 2..1($

+he mere fact that a stoc4holder sells his shares of stoc4 in the corporation d)ring thependency of a collection case against the corporation, does not ma4e s)ch stoc4holderpersonally lia*le for the corporate de*t, since the disposing stoc4holder has no personalo*ligation to the creditor, and it is the inherent right of the stoc4holder to dispose of his sharesof stoc4 anytime he so desires$ emo% -r. v. AC, 12 S7A %.& 1''(; PNB v. itratto2rou"% nc., -/2 S7A 21/ 2..1($

H)st *eca)se two foreign companies came from the same co)ntry and closely wor4edtogether on certain pro8ects wo)ld the concl)sion arise that one was the cond)it of the other,th)s piercing the veil of corporate fiction$ Marubeni Cor". v. *irag% -/2 S7A /2. 2..1($

+he creation *y F>P as the mother company of the three mining corporations to

manage and operate the assets ac3)ired in the foreclos)re sale lest they deteriorate fromnon)se and lose their val)e, does not indicate fra)d or wrongdoing and will not constit)teapplication of the piercing doctrine$ !BP v. Court o# A""eals% -/- S7A -. 2..1($

+he property of the corporation is not the property of its stoc4holders or mem*ers and maynot *e sold *y the stoc4holders or mem*ers witho)t express a)thori6ation from thecorporationDs *oard of directors$ (oodchild Holdings% nc. v. oxas Electric and ConstructionCom"any% nc., %-/ S7A 2-& 2..%($

3 1n Privileges En4oyed6+he tax exemption cla)se in the charter of a corporation cannot*e extended to nor en8oyed *y even its controlling stoc4holders$ Manila 2as Cor". v.Collector o# nternal evenue, /2 Phil$ '& 1'-/($

11


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$3 1'ligations and %e'ts6 orporate de*t or credit is not the de*t or credit of thestoc4holder nor is the stoc4holders de*t or credit that of the corporation$ 'raders oyalBan) v. Court o# A""eals, 1 S7A ' 1''($

A corporation has no legal standing to file a s)it for recovery of certain parcels of landowned *y its mem*ers in their individ)al capacity, even when the corporation is organi6ed forthe *enefit of the mem*ers$ $ulo ng Bayan v. Araneta% nc$, 2 S7A -% 1'/($

Stoc4holders have no personality to intervene in a collection case covering the loans ofthe corporation since the interest of shareholders in corporate property is p)rely inchoate$ $a,v. CA, 1'& S7A %. 1''1(; and vice=versa 1rancisco Motors Cor". v. Court o# A""eals% -.'S7A 2 1'''($

+he ma8ority stoc4holder cannot *e held personality lia*le for the attorneyDs fees charged*y a lawyer for representing the corporation$ *a"eral !ev. Cor". v. Court o# A""eals, 22-S7A2/1 1''-($

Even when the foreclos)re on the corporate assets was wrongf)l done, stoc4holders haveno standing to recover for themselves moral damages; otherwise, it wo)ld amo)nt to theappropriation *y, and the distri*)tion to, s)ch stoc4holders of part of the corporationDs assets*efore the dissol)tion of the corporation and the li3)idation of its de*ts and lia*ilities$ AP' v.Court o# A""eals% -.. S7A &' 1''($

+he o*ligations of a stoc4holder in one corporation cannot *e offset from the o*ligation of

the stoc4holder in a second corporation, since the corporation has a separate 8)ridicalpersonality$ C3H ndustrial and !ev. Cor" v. Court o# A""eals% 22 S7A --- 1''($

B. PIERCINGTHEVEILOCORPORATEICTION*

1. S%>&$ %+ I#'#('(%#* 0nited States v. &ilwaukee $efrigerator Transit Co. , 12 $. 21903.

+he notion of corporate entity will *e pierced or disregarded and the individ)als composingit will *e treated as identical if the corporate entity is *eing )sed as a cloa4 or cover for fra)d orillegality; as a 8)stification for a wrong; or as an alter ego, an ad8)nct, or a *)siness cond)it forthe sole *enefit of the stoc4holders$ 2ochan v. @oung, -&% S7A 2. 2..1(; !BP v. Court o#

A""eals, -& S7A /2/, -& S7A &.1, -/- S7A -. 2..1(; & E 'rans"ort% nc. v. *atag,%22 S7A /' 2..%(;$$ecosa v. Heirs o# Er,in $uare4 1ancisco, %-- S7A 2- 2..%(;Martine4 v. Court o# A""eals, %- S7A 1-' 2..%(; Mc*eod v. N*C, &12 S7A 222 2..($

As a general r)le, a corporation will *e loo4ed )pon as a legal entity, )nless and )ntils)fficient reason to the contrary appears$ ?hen the notion of legal entity is )sed to defeatp)*lic convenience, 8)stify wrong, protect fra)d, or defend crime, the law will regard thecorporation as an association of persons$ Also, the corporate entity may *e disregarded in theinterest of 8)stice in s)ch cases as fra)d that may wor4 ine3)ities among mem*ers of thecorporation internally, involving no rights of the p)*lic or third persons$ 0n *oth instances, therem)st have *een fra)d and proof of it$ Lor the separate 8)ridical personality of a corporation to*e disregarded, the wrongdoing m)st *e clearly and convincingly esta*lished$ 0t cannot *epres)med$ $uldao v. Cimech $ystem Construction% nc., &./ S7A 2&/ 2../($

2. N'(>&$ '# E++$( %+ (h$ D%($

+he rationale *ehind piercing a corporationDs identity in a given case is to remove the

*arrier *etween the corporation from the persons comprising it to thwart the fra)d)lent andillegal schemes of those who )se the corporate personality as a shield for )nderta4ing certainproscri*ed activities$ Kowever, in the case at *ar, instead of holding certain individ)als orperson responsi*le for an alleged corporate act, the sit)ation has *een reversed$ 0t is thepetitioner as a corporation which is *eing ordered to answer for the personal lia*ility of certainindivid)al directors, officers and incorporators concerned$ Kence, it appears to )s that thedoctrine has *een t)rned )pside down *eca)se of its erroneo)s invocation$< Francisco&otors Corp. v Court of )ppeals, /09 SCRA 2 19993.

+he notion of separate personality, however, may *e disregarded )nder the doctrinepiercing the veil of corporate fiction


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disregarding the separate 8)ridical personality of the corporation )nifying the gro)p$ Traders$oyal Bank v. Court of )ppeals, 2;9 SCRA 1 1993$

Another form)lation of this doctrine is that when two 2( *)siness enterprises are owned,cond)cted and controlled *y the same parties, *oth law and e3)ity will, when necessary toprotect the rights of third parties, disregard the legal fiction that two corporations are distinctentitled and treat them as identical or one and the same$ 2eneral Credit Cor". v. Alsons !ev.and nvestment Cor"., &1- S7A 22& 2..($

Piercing the veil of corporation fiction is warranted only in cases when the separate legalentity is )sed to defeat p)*lic convenience, 8)stify wrong, protect fra)d, or defend crime, s)chthat in the case of two corporations, the law will regard the corporation as merged into one$5elarde v. *o"e4, %1' S7A %22 2..%($

+he legal fiction of separate corporate existence is not at all times invinci*le and the samemay *e pierced when employed as a means to perpetrate a fra)d, conf)se legitimate iss)es, or)sed as a vehicle to promote )nfair o*8ectives or to shield an otherwise *latant violation of theprohi*ition against for)mshopping$ ?hile it is settled that the piercing of the corporate veil hasto *e done with ca)tion, this corporate fiction may *e disregarded when necessary in theinterest of 8)stice$ ovels Enter"rises% nc. v. 8cam"o, -'1 S7A 1/ 2..2($

'3 E5uita'le $emedy6 +he doctrine of piercing the corporate veil is an e3)ita*le doctrinedeveloped to address sit)ations where the separate corporate personality of a corporation isa*)sed or )sed for wrongf)l p)rposes$ PNB v. itratto 2rou"% nc.%-/2 S7A 21/ 2..1($

?hether the separate personality of the corporation sho)ld *e pierced hinges on theo*taining facts, appropriately pleaded or proved$ Kowever, any piercing of the corporate veilhas to *e done with ca)tion, al*eit the o)rt will not hesitate to disregard the corporate veilwhen it is mis)sed or when necessary in the interest of 8)stice$ After all, the concept ofcorporate entity was not mean to promote )nfair o*8ectives$ 2eneral Credit Cor". v. Alsons!ev. and nvestment Cor"., &1- S7A 22& 2..($

43 $emedy of Last $esort6 Piercing the corporate veil is remedy of last resort and is notavaila*le when other remedies are still availa*le$ 0mali v. Court of )ppeals, 189 SCRA29 19903. ?hen Umali said that all piercing cases are to hold stoc4holders personallylia*le 9 U5A!0 ?AS K@770>!N ?7@#J(

31'4ectives for )vailing of Piercing6Piercing is not allowed )nless the remedy so)ght is toma4e the officer or another corporation pec)niarily lia*le for corporate de*ts$ Q( #ndophil

Te2tile &ill ,orkers 0nion7PT,1 v. Calica, 20 SCRA ;9 19923.

Piercing is not availa*le when personal o*ligations of an individ)al are to *e enforcedagainst the corporation Q( obledo v. N*C% 2- S7A &2 1''%($

Piercing doctrine is meant to prevent fra)d, and cannot *e employed when the net res)ltwo)ld *e to perpetrate fra)d or a wrong$ 2regorio Araneta% nc. v. 'uason de Paterno and 5idal,'1 Phil$ / 1'&2($

+he theory of corporate entity was not meant to promote )nfair o*8ectives or otherwise, norto shield them$ 5illanueva v. Adre, 12 S7A / 1''($

+he attempt to ma4e the sec)rity agencies appear as two separate entities, when in realitythey were *)t one, was a devise to defeat the law Bi$e$, in this case no avoid lia*ilities )nderla*or lawsC and sho)ld not *e permitted$ Enri0ue4 $ecurity $ervices% nc. v. Cabota/e, %'/

S7A 1/' 2../(; where, the fra)d was committed *y petitioners to the pre8)dice of respondent*an4$ Mendo4a v. Banco eal !ev. Ban), %. S7A / 2..&($

3 Basis &ust Be Clear Evidence6 +o disregard the separate 8)ridical personality of acorporation, it is elementary that the wrongdoing cannot *e pres)med and m)st *e clearlyand convincingly esta*lished$ +he organi6ation of the corporation at the time when therelationship *etween the landowner and the developer were still cordial cannot *e )sed as a*asis to hold the corporation lia*le later on for the o*ligations of the landowner to thedeveloper )nder the mere allegation that the corporation is *eing )sed to evade theperformance of o*ligation *y one of its ma8or stoc4holders$ *uxuria Homes% nc. v. Court o#

A""eals% -.2 S7A -1& 1'''($

1-


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+he mere assertion *y a Lilipino litigant against the existence of a tandem< *etween twoHapanese corporations cannot *e the *asis for piercing, which can only *e applied *y showingwrongdoing *y clear and convincing evidence$ Marubeni Cor". v. *irag% -/2 S7A /2. 2..1($

+o disregard the separate 8)ridical personality of a corporation, the wrongdoing m)st *eclearly and convincingly esta*lished$ 0t cannot *e pres)med$ 0n this case, the o)rt finds thatthe 7emington failed to discharge its *)rden of proving *ad faith on the part of 5arind)3)e5ining and its transferees in the mortgage and foreclos)re of the s)*8ect properties to 8)stifythe piercing of the corporate veil$ !BP v. Court o# A""eals, -/- S7A -. 2..1($ Also

Mc*eod v. N*C, &12 S7A 222 2..(; +y v. 5illanueva, &2/ S7A - 2..($

+he party see4ing for the piercing of the corporate veil has the *)rden of presenting clearand convincing evidence to 8)stify the setting aside of the separate corporate personality r)le$PNB v. Andrada Electric & Engineering Co., -1 S7A 2%% 2..2($

Application of the doctrine of piercing the corporate veil sho)ld *e done with ca)tion$ Aco)rt sho)ld *e mindf)l of the milie) where it is to *e applied$ 0t m)st *e certain that thecorporate fiction was mis)sed to s)ch an extent that in8)stice, fra)d, or crime was committedagainst another, in disregard of its rights$ +he wrongdoing m)st *e clearly and convincinglyesta*lished; it cannot *e pres)med$ @therwise, an in8)stice that was never )nintended mayres)lt from an erroneo)s application$ PNB v. Andrada Electric & Engineering Co., -1 S7A2%% 2..2($

$3 +ot )pplica'le to Theori!ing6Piercing of the veil of corporate fiction is not allowed when

it is resorted )nder a theory of coownership to 8)stify contin)ed )se and possession *ystoc4holders of corporate properties$ Boyer7$o2as v. Court of )ppeals, 211 SCRA 019923$

+he piercing doctrine cannot *e availed of to dislodge from SEDs 8)risdiction a petition fors)spension of payments filed )nder P$F$ '.2A, on the gro)nd that the petitioning individ)alssho)ld *e treated as the real petitioners to the excl)sion of the petitioning corporate de*tor$+he doctrine of piercing the veil of corporate fiction heavily relied )pon *y the petitioner isentirely misplaced, as said doctrine only applies when s)ch corporate fiction is )sed to defeatp)*lic convenience, 8)stify wrong, protect fra)d or defend crime$< +nion Ban) v. Court o#

A""eals%2'. S7A 1' 1''($

Application of the piercing the veil of separate fiction of the s)*sidiary company to merge itwith the holding company was not allowed to s)pport a theory of setoff or compensation, there

*eing no allegation m)ch less any proof of fra)d$ Nisce v. E0uitable PC Ban)% nc., &1/ S7A2-1 2..($

+3 )pplica'le to 8Third7Parties96 +hat respondents are not stoc4holders of the sistercorporations does not ma4e them nonparties to this case, since it is alleged that the sistercorporations are mere alter egos of the directorspetitioners, and that the sister corporationsac3)ired the properties so)ght to *e reconveyed to LJS7 in violation of directorspetitionersD fid)ciary d)ty to LJS7$ +he notion of corporate entity will *e pierced and theindivid)als composing it will *e treated as identical if the corporate entity is *eing )sed as acloa4 or cover for fra)d or illegality; as a 8)stification for a wrong; or as an alter ego, anad8)nct, or a *)siness cond)it for the sole *enefit of the stoc4holders$ ochan v. :oung,/ SCRA 20 20013.

@3Piercing is a power *elonging to the co)rt and cannot *e ass)med improvidently *y a sheriffQ($ Cru4 v. !alisay, 1&2 S7A %2 1'(; !.. CA'C $ervices% nc. v. amos, % S7A

1 2..&($

h3 Conse5uences )pplication of Piercing %octrine6 Application of the doctrine to apartic)lar case does not deny the corporation of legal personality for any and all p)rposes,*)t only for the partic)lar transaction or instance, or the partic)lar o*ligation for which thedoctrine was applied$ 3o""el 6Phil.7 nc. v. @atco, Phil$ %'/ 1'%/(; 'antoco v. 3aisahanng Mga Manggaga,a sa *a Cam"ana, 1./ Phil$ 1' 1'&'(; 1rancisco v. Me/ia, -/2 S7A- 2..1($

/. C!'::+'(%# %+ P$@ C':$:*

'3&'> P$@* ?hen corporate entity )sed to commit fra)d or do a wrong

1%


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43A!($&-$@% P$@* ?hen corporate entity merely a farce since the corporation is merelythe alter ego, *)siness cond)it, or instr)mentality of a person or another entity

3E>( C':$:* ?hen piercing the corporate fiction is necessary to achieve 8)stice or e3)ity$

A)thorities are agreed on at least three -( *asic areas where piercing the veil, with whichthe law covers and isolates the corporation from any other legal entity to which it may *erelated, is allowed$ +hese are= 1( defeat of p)*lic convenience, as when the corporation is )sedas vehicle for the evasion of existing o*ligation; 2( fra)d cases or when the corporate entity is)sed to 8)stify wrong, protect fra)d, or defend a crime; or -( alter ego cases, where thecorporation is merely a farce since it is a mere alter ego or *)siness cond)it of a person, orwhere the corporation is so organi6ed and controlled and its affairs are so cond)cted as toma4e it merely an instr)mentality, agency, cond)it or ad8)nct of another corporation$ eneralCredit Corp. v. )lsons %ev. and #nvestment Corp., 1/ SCRA 22 2003, citing0!!A#UEA,@55E70A!!A?7E0E?2..% ed(, at p$ &/$

$undown on Piercing )pplication6 +his o)rt pierced the corporate veil to ward off a8)dgment credit, to avoid incl)sion of corporate assets as part of the estate of the decedent, toescape lia*ility arising for a de*t, or to perpet)ate fra)d and:or conf)se legitimate iss)es eitherto promote or to shield )nfair o*8ectives to cover )p an otherwise *latant violation of theprohi*ition against for)m shopping$ @nly is these and similar instances may the veil *e piercedand disregarded$ PNB v. Andrada Electric & Engineering Co., -1 S7A 2%% 2..2($

S>'& %+ P&%4'(?$ '(%&:* Concept Builders" #nc. v. +L$C, 2 SCRA 19

199;3; PNB v. itratto 2rou"% nc., -/2 S7A 21/ 2..1(; 5elarde v. *o"e4, %1' S7A %222..%(; -ardine !avies% nc. v. -B ealty% nc., %/- S7A &&& 2..&($

+he a*sence of these elements prevents piercing the corporate veil$ *im v. Court o#A""eals, -2- S7A 1.2 Child *earning Center% nc. v. 'agorio, %& S7A 2-/ 2..&(;2eneral Credit Cor". v. Alsons !ev. and nvestment Cor". , &1- S7A 22& 2..(; Nisce v.E0uitable PC Ban)% nc., &1/ S7A 2-1 2..($

. &'> C':$:*

?hen the legal fiction of the separate corporate personality is a*)sed, s)ch as when thesame is )sed for fra)d)lent or wrongf)l ends, the co)rts have not hesitated to pierce thecorporate veil$ Francisco v. &e4ia" /;2 SCRA /8 20013.

+he general r)le is that o*ligations inc)rred *y a corporation, acting thro)gh its directors,

officers or employees, are its sole lia*ilities$ Kowever, the veil with which the law covers andisolates the corporation from its directors, officers or employees will *e lifted when thecorporation is )sed *y any of them as a cloa4 or cover for fra)d or illegality or in8)stice$ Kere,the fra)d was committed *y petitioners to the pre8)dice of respondent *an4$ Mendo4a v. Bancoeal !ev. Ban), %. S7A / 2..&($

Lra)d and *ad faith on the part of certain corporate officers or stoc4holders may warrantthe piercing of the veil of corporate fiction so that the said individ)al may not see4 ref)getherein, *)t may *e held individ)ally and personally lia*le for his or her actions$ *a#argeCement Phils.% nc. v. Continental Cement Cor"., %%- S7A &22 2..%($

Kowever, mere allegation of fra)d or *ad faith, witho)t evidence s)pporting s)ch claimscannot warrant the piercing of the corporate veil$ !BP v. Court o# A""eals, -& S7A /2/, -&S7A &.1, -/- S7A -. 2..1($

'3)cts 'y Controlling Shareholder6?here a stoc4holder, who has a*sol)te control over the*)siness and affairs of the corporation, entered into a contract with another corporationthro)gh fra)d and false representations, s)ch stoc4holder shall *e lia*le soidarily with codefendant corporation even when the contract s)ed )pon was entered into on *ehalf of thecorporation$ +amarco v. )ssociated Finance Co., 19 SCRA 9;2 19;3.

?here the corporation is )sed as a means to appropriate a property *y fra)d whichproperty was later resold to the controlling stoc4holders, then piercing sho)ld *e allowed$ Heirso# amon !urano% $r. v. +y, -%% S7A 2- 2...($

43)voidance of Ta2es6+he plea to pierce the veil of corporate fiction on the allegation thatthe corporations tr)e p)rpose is to avoid payment *y the incorporating spo)ses of theestate taxes on the properties transferred to the corporations= ?ith regard to their claim

1&


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that Bthe companiesC Ellice and 5argo were meant to *e )sed as mere tools for theavoidance of estate taxes, s)ffice it to say that the legal right of a taxpayer to red)ce theamo)nt of what otherwise co)ld *e his taxes or altogether avoid them, *y means which thelaw permits, cannot *e do)*ted$< 2ala v. Ellice Agro=ndustrial Cor"., %1 S7A %-12..-($

3 )voidance of Contractual Commitments or Civil Lia'ilities6 @ne cannot evade civillia*ility *y incorporating properties or the *)siness$ Palacio v. Fely Transportation Co., SCRA 1011 19;23$ Also Mendo4a and @oto)o v. Banco eal !ev. Ban), %. S7A /2..&($

?hen )sed to avoid a contract)al commitment against noncompetition$ ;illa $eyTransit" #nc. v. Ferrer, 2 SCRA 8 19;83$

?here a de*tor registers his residence to a family corporation in exchange of shares ofstoc4 and contin)es to live therein, then the separate 8)ridical personality may *e disregarded$PBCom v. CA, 1'& S7A &/ 1''1($

3)voiding Legal $estrictions6 +he corporate veil cannot *e )sed to shield an otherwise*latant violation of the prohi*ition against for)mshopping$ Shareholders, whether s)ing asthe ma8ority in direct actions or as the minority in a derivative s)it, cannot *e allowed totrifle with co)rt processes, partic)larly where the corporation itself has not *een remiss invigoro)sly prosec)ting or defending corporate ca)ses and in )sing and applying remedies

availa*le to it$ 1irst Phili""ine nternational Ban) v. Court o# A""eals, 2&2 S7A 2&'1''/($

$3Thinly7capitali!ed corporations6 &cConnel v. C), 1 SCRA 22 19;13.

+3 Parent7Su'sidiary $elations< )ffiliates* Commissioner o# nternal evenue v. Nortonand Harrison, 11 S7A .%, B1'&%C; 'omas *ao Construction v. N*C, 2 S7A 1/B1''C($

+he fact that a corporation owns all of the stoc4s of another corporation, ta4en alone, is nots)fficient to 8)stify their *eing treated as one entity$ 0f )sed to perform legitimate f)nctions, as)*sidiaryDs separate existence shall *e respected, and the lia*ility of the parent corporation, aswell as the s)*sidiary shall *e confined to those arising in their respective *)siness$ Acorporation has a separate personality distinct from its stoc4holders and from other corporationsto which it may *e cond)cted$ +his separate and distinct personality of a corporation is a fiction

created *y law for convenience and to prevent in8)stice$ Nisce v. E0uitable PC Ban)% nc., &1/S7A 2-1 2..($

Kowever, mere ownership *y a single stoc4holder or *y another corporation of all or nearlyall of the capital stoc4s of a corporation is not *y itself a s)fficient gro)nd to disregard theseparate corporate personality$ +he s)*stantial identity of the incorporators of two or morecorporations does not warrantly imply that there was fra)d so as to 8)stify the piercing of the writof corporate fiction$ +o disregard the said separate 8)ridical personality of a corporation, thewrongdoing m)st *e proven clearly and convincingly$ Martine4 v. Court o# A""eals, %- S7A1-. 2..%($

@3 uiding Principles in Fraud Cases*

,hy is there inordinate showing of alter7ego elements( +here m)st have *een fra)d or an evil motive in the affected transaction, and the mere

proof of control of the corporation *y itself wo)ld not a)thori6e piercing;

+he corporate fiction is )sed as a means to commit the fra)d or avoid the conse3)ences

thereof; and

+he main action sho)ld see4 for the enforcement of pec)niary claims pertaining to the

corporation against corporate officers or stoc4holders$

7espondent corporations may *e engaged in the same *)siness or even share the sameaddress,or have interloc4ing incorporators, directors or officers, in the a*sence of fra)d or otherp)*lic policy consideration, does not warrant piercing the veil of corporate fiction$ Mc*eod v.

1/


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N*C, &12 S7A 222 2..(, 0uoting #rom ndo"hil 'extile Mill (or)ers +nion v. Calica, 2.&S7A /' 1''2(, and !el osario v. N*C, 1 S7A 1''.($

. A!($&-E@% C':$:*

'3Factual Basis6+he 3)estion of whether a corporation is a mere alter ego is a p)rely one offact, and the *)rden is on the party who alleges it$ PNB v. Andrada Electric & EngineeringCo., -1 S7A 2%% 2..2($ Also Conce"t Builders% nc. v. N*C%2& S7A 1%' 1''/(;Heirs o# amon !urano% $r. v. +y% -%% S7A 2- 2...(; M Holdings% *td. 5. Ba/ar, -.

S7A /1 2..2($

43 0sing Corporation as Conduit or )lter Ego6

?here the capital stoc4 is owned *y one person and it f)nctions only for the *enefit of s)chindivid)al owner, the corporation and the individ)al sho)ld *e deemed the same$ )rnold v.,illets and Patterson" Ltd., Ph!. ;/ 192/3$

?hen corporation is merely an ad8)nct, *)siness cond)it or alter ego of anothercorporation, the fiction of separate and distinct corporation entities sho)ld *e disregarded$ 'anBoon Bee & Co. v. -arencio%1/- S7A 2.& 1'($

+he o)rt agrees with the disposition of the appellate co)rt on the application of thepiercing doctrine to the transaction s)*8ect of this case$ Per the o)rtDs co)nt, the trial co)rten)merated no less than 2. doc)mented circ)mstances and transaction, which ta4en as a

pac4age, indeed strongly s)pported the concl)sion that respondent EMU0+N was *)t anad8)nct, as instr)mentality or *)siness cond)it of petitioner eneral Credit Corp. v. )lsons%ev. and #nvestment Corp., 1/ SCRA 22 2003$

#either has it *een alleged or proven that 5erryland is so organi6ed and controlled and itsaffairs are so cond)cted as to ma4e it merely an instr)mentality, agency cond)it or ad8)nct ofardale$ Even ass)ming that the *)sinesses of ardale and 5erryland are interrelated, thisalone is not 8)stification for disregarding their separate personalities, a*sent any showing that5erryland was p)rposely )sed as a shield to defra)d creditors and third persons of their rights$1rancisco v. Me/ia, -/2 S7A - 2..1($

3)voidance of ta2es6 :utivo Sons -ardware v. Court of Ta2 )ppeals 1 SCRA 1;019;13; *iddell & Co. v. Collector o# nternal evenue,2 S7A /-2 1'/1($

Use of nominees to constit)te the corporation for the *enefit of the controlling stoc4holder

who so)ght to avoid payment of taxes$ Marvel Building v. !avid, ' Phil$ -/ 1'&1($

3&i2ing7up 1perations< %isrespect to the Corporate Entity6

Employment of same wor4ers; single place of *)siness, etc$, may indicate alter egosit)ation$ La Campana Coffee Factory v. aisahan ng &anggagawa , 9/ Ph!. 1;0 19/3Shoemart v. +L$C"22 SCRA /11 199/($

+he facts that two corporations may *e sister companies, and that they may *e sharingpersonnel and reso)rces, witho)t more, is ins)fficient to prove that their separate corporatepersonalities are *eing )sed to defeat p)*lic convenience, 8)stify wrong, protect fra)d, ordefend crime$ Padilla v. Court of )ppeals, /0 SCRA 208 20013.

?here two *)siness enterprises are owned, cond)cted, and controlled *y the same parties,*oth law and e3)ity will, when necessary to protect the rights of third persons, disregard thelegal fiction that two corporations are distinct entities and treat them as identical$ $ibagat'imber Cor". v. 2arcia, 21/ S7A . 1''2($

5ixing of personal acco)nts with corporate *an4 deposit acco)nts$ amire4 'ele"honeCor". v. Ban) o# America, 2' S7A 1'1 1'/'($

3Parent7su'sidiary< )ffiliated Companies63o""el 6Phil.7% nc. v. @atco, Phil$ ' 1'%/(;PH5!EC v. Court o# A""eals, 11 S7A //' 1''.($

A s)*sidiary corporation has an independent and separate 8)ridical personality, distinct fromthat of its parent company, hence, any claim or s)it against the latter does not *ind the formerand viceversa$ -ardine !avies% nc. v. -B ealty% nc., %/- S7A &&& 2..&($

1


18/67

A*sence of proof that control over a corporation is *eing )sed *y a mother company tocommit fra)d or wrong, there wo)ld *e no *asis to disregard their separate 8)ridicalpersonalities$ amoso v. Court o# A""eals% -% S7A %/- 2...(; 2uatson ntl 'ravel and'ours% nc. v. N*C% 2-. S7A 1& 1''.($

0f )sed to perform legitimate f)nctions, a s)*sidiaryDs separate existence shall *erespected, and the lia*ility of the parent corporation as well as the s)*sidiary will *e confined tothose arising in their respective *)sinesses$ Even when the parent corporation agreed to theterms to s)pport a stand*y credit agreement in favor of the s)*sidiary, does not mean that its

personality has merged with that of the s)*sidiary$ M. Holdings% *td. 5. Ba/ar, -. S7A /12..2($

$3 uiding Principles in )lter7Ego Cases6

Foctrine applies even in the a*sence of evil intent, *eca)se of the direct violation of a

central corporate law principle of separating ownership from management;

Foctrine in s)ch case is *ased on estoppel= if stoc4holders do not respect the separateentity, others cannot also *e expected to *e *o)nd *y the separate 8)ridical entity;

Piercing in alter ego cases may prevail even when no monetary claims are so)ght to *e

enforced against the stoc4holders or officers of the corporation$

+3 %istinction Between Fraud Piercing and )lter7ego Piercing6 Lipat v. Pacific Banking

Corp., 02 SCRA //9 200/3$

;. E>( C':$:*

'3?hen )sed to conf)se legitimate iss)es$ 'ele"hone Engineering and $ervice Co.% nc. 5.(CC, 1.% S7A -&% 1'1($

?here corporate fiction was )sed to perpetrate social in8)stice or as a vehicle to evadeo*ligations or conf)se the legitimate iss)es as in this case where the actions of managementof the two corporations created conf)sion as to the proper employer of claimants(, it wo)ld *ediscarded and the two corporations wo)ld *e merged as one$ A4cor Manu#acturing% nc. v.N*C% -.- S7A 2/ 1'''($

43?hen )sed to raise technicalities$ Emilio Cano Ent. v. C, 1- S7A 2'1 1'/&($

. D>$ P&%$:: C!'>:$

'3#eed to *ring a new case against the officer$ McConnel v. Court o# A""eals, 1 S7A 2-1'/1($

A s)it against individ)al shareholders in a corporation is not a s)it against the corporation$Lail)re to implead the corporations as defendants and merely annexing a list of s)chcorporations to the complaints is a violation of d)e process for it wo)ld in effect *e disregardingtheir distinct and separate personality witho)t a hearing$ PC22 v. $andiganbayan%-/& S7A&- 2..1($

Altho)gh *oth lower co)rts fo)nd s)fficient *asis for the concl)sion that PRA and Phoenix@mega were one and the same, and the former is merely a cond)it of the other the S)premeo)rt held void the application of a writ of exec)tion on a 8)dgment held only against PRA,

since the 7+ o*tained no 8)risdiction over the person of Phoenix @mega which was nevers)mmoned as formal party to the case$ +he general principle is that no person shall *e affected*y any proceedings to which he is a stranger, and strangers to a case are not *o)nd *y the

8)dgment rendered *y the co)rt$ Padilla v. Court of )ppeals, /0 SCRA 208 20013$

43?hen corporate officers are s)ed in their official capacity when the corporation was notmade a party, the corporation is not denied d)e process$ Emilio Cano Enter"rises v. C,1- S7A 2'1 1'/&($

3Provided that evidential *asis has *een add)ced d)ring trial to apply the piercing doctrine$/acinto v. Court of )ppeals, 198 SCRA 211 19913; Arcilla v. Court o# A""eals, 21&

S7A 12. 1''2($

1


19/67

V.2CLASSIICATIONS O CORPORATIONS

1. I# R$!'(%# (% (h$ S('($*

'3 Pu'lic CorporationSec$ -, Act #o$ 1%&'($

43 3uasi7pu'lic Corporation.Marilao (ater Consumers Associates v. AC, 2.1 S7A %-1''1(;

3 Private CorporationSec$ -, Act 1%&'($

JovernmentDs ma8ority shares does not ma4e an entity a p)*lic corporation$ National CoalCo.% v. Collector o# nternal evenue, %/ Phil$ &- 1'2%($

A corporation is created *y operation of law )nder the orporation ode while agovernment corporation is normally created *y special law referred to often as a charter$ Bliss!ev. Cor". Em"loyees +nion v. Calle/a% 2- S7A 21 1''%($

+he test to determine whether a corporation is government owned or controlled, or privatein nat)re is simple$ 0s it created *y its own charter for the exercise of a p)*lic f)nction, or *yincorporation )nder the general corporation lawQ +hose with special charters are governmentcorporations s)*8ect to its provisions, and its employees are )nder the 8)risdiction of the ivilService ommission, and are comp)lsory mem*ers of the JS0S$ Cam"aredondo v. N*C, -12S7A % 1'''(

?hile p)*lic *enefit and p)*lic welfare may *e attri*)ta*le to the operation of the >ases

onversion and Fevelopment A)thority >FA(, yet it is certain that the f)nctions it performsare *asically proprietary in nat)rethe promotion of economic and social development ofentral !)6on, partic)larly, and the co)ntryDs goal for enhancement$ +herefore, the r)le thatprescription does not r)n against the State will not apply to >FA, it *eing said that when titleof the 7ep)*lic has *een divested, its grantees, altho)gh artificial *odies of its own creation,are in the same category as ordinary persons$ $hi"side nc. v. Court o# A""eals% -&2 S7A--% 2..1($

Altho)gh >oy Sco)ts of the Philippines does not receive any monetary or financial s)*sidyfrom the Jovernment, and its f)nds and assets are not considered government in nat)re andnot s)*8ect to a)dit *y the @A, the fact that it received a special charter from the government,that its governing *oard are appointed *y the Jovernment, and that its p)rpose are of p)*liccharacter, for they pertain to the ed)cational, civic and social development of the yo)th whichconstit)te a very s)*stantial and important part of the nation, it is not a p)*lic corporation in the

same sense that m)nicipal corporation or local governments are p)*lic corporation since itsdoes not govern a portion of the state, *)t it also does not have proprietary f)nctions in thesame sense that the f)nctions or activities of governmentowned or controlled corporations, ismay still *e considered as s)ch, or )nder the 1' Administrative ode as an instr)mentality ofthe Jovernment, and it employees are s)*8ect to the ivil Service !aw$ Boy $couts o# thePhili""ines v. N*C, 1'/ S7A 1/ 1''1($

>)t *eing a J@ ma4es it lia*le for laws and provisions applica*le to the Jovernment orits entities and s)*8ect to the control of the Jovernment$ Cervantes v. Auditor 2eneral, '1 Phil$-&' 1'&2($

A governmentowned or controlled corporation m)st *e organi6ed as a stoc4 or nonstoc4corporation$ +he 50AA is not a governmentowned or controlled corporation *eca)se it is notconstit)ted of capital divided into shares of stoc4, and neither is it a nonstoc4 corporation

*eca)se it has no mem*ers$ 50AA is a government instr)mentality vested with corporatepowers to perform efficiently its government f)nctions$ Manila nternational Air"ort Authority v.Court o# A""eals, %'& S7A &'1 2../($

>eyond cavil, a J@ has a personality of its own, distinct and separate from that of thegovernment, and the intervention in a transaction of the @ffice of the President thro)gh theExec)tive Secretary does not change the independent existence of a government entity as itdeals with another government entity$ P+P v. Court o# A""eals, -/ S7A /'1 2..1($

+he doctrine that employees of J@s, whether created *y special law or formed ass)*sidiaries )nder the general corporation law are governed *y the ivil Service !aw and not*y the !a*or ode, has *een s)pplanted *y the 1' onstit)tion$ +he present doctrine indetermining whether a J@ is s)*8ect to the ivil Service !aw is the manner o# its creation,s)ch that government corporations created *y special charter are s)*8ect the ivil Service !aw,

1'


20/67

while those incorporated )nder the general corporation law are governed *y the !a*or ode$PN8C=Energy !evelo"ment Cor". v. N*C, 2.1 S7A % 1''1(; !avao City (ater !istrictv. Civil $ervice Commission, 2.1 S7A &'- 1''1($

Section -1 of orporation ode *iability o# !irectors and 8##icers( is applica*le tocorporations which have *een organi6ed *y special charters since Sec$ % of orporation oderenders the provisions s)pplementarily applica*le to all corporations, incl)ding those withspecial or individ)al charters, s)ch as cooperatives organi6ed )nder P$F$ 2/', so long as thoseprovisions are not inconsistent with s)ch charters$ Benguet Electric Coo"erative% nc. v. N*C,

2.' S7A && 1''2($

?ater districts can validly exists as corporate entities )nder PF 1', and provided they aregovernmentowned or controlled, and their *oard of directors and other personnel aregovernment employees s)*8ect to civil service laws and antigraft laws$ 1eliciano v.Commission on Audit, %1' S7A -/- 2..%($

2. A: (% P!'$ %+ I#%&"%&'(%#*

'3 %omestic Corporation

43 Foreign Corporation Sec$ 12-(

/. A: (% P>&"%:$ %+ I#%&"%&'(%#*

'3 &unicipal Corporation

43 $eligious Corporation Secs$ 1.' and 11/(Since in matters p)rely ecclesiastical the decisions of the proper ch)rch tri*)nals are

concl)sive )pon the civil tri*)nals, then a ch)rch mem*er who is expelled from themem*ership *y the ch)rch a)thorities, or a priest or minister who is *y them deprived of hissacred office, is witho)t remedy in the civil co)rts$ *ong v. Basa, -// S7A 11- 2..1($

3 Educational Corporations Secs$ 1./, 1. and 1.; Sec$ 2&, >$P$ >lg$ 2-2(

3 Charita'le" Scientific or ;ocational Corporations

$3 Business Corporation

. A: (% N>4$& %+ M$4$&:*

'3)ggregate Corporation

43 Corporation Sole Secs$ 11. to 11&; oman Catholic A"ostolic Administrator o# !avao%nc. v. *C and the egister o# !eeds o# !avao City, 1.2 Phil$ &'/ B1'&C($

+he doctrine in e"ublic v. 5illanueva, 11% S7A & 1'2( and e"ublic v. glesia niCristo, 12 S7A / 1'%(, that a corporation sole is dis3)alified to ac3)ire:hold aliena*lelands of the p)*lic domain, *eca)se of the constit)tional prohi*ition 3)alifying only individ)alsto ac3)ire land and the provision )nder the P)*lic !and Act which applied only to Lilipinociti6ens or nat)ral persons, has *een e2pressly overturned in !irector o# *and v. AC, 1%/S7A &.' 1'/($1

. A: (% L$@'! S('(>:*

'3 %e /ureC%&"%&'(%#

43 %e FactoC%&"%&'(%#Sec$ 2.(

3 C%&"%&'(%# 4 E:(%""$!Sec$ 21(

;. A: (% E:($#$ %+ Sh'&$:Secs$ - and &(=

'3 Stock Corporation

43 +on7Stock Corporation

18verturning a##irmed in e"ublic v. glesia ni Cristo, 12 S7A / 1'%(; e"ublic v. AC, 1/ S7A 1/& 1'($

2.


21/67

VI. CORPORATE CONTRACT LAW

1$ P&$-I#%&"%&'(%# C%#(&'(:

'3 ,ho )re Promoters(

Promoter< is a person who, acting alone or with others, ta4es initiative in fo)nding andorgani6ing the *)siness or enterprise of the iss)er and receives consideration therefor$ Sec$-$1., Sec)rities 7eg)lation ode B7$A$ ''C(

43 +ature of Pre7incorporation )greementsSecs$ /. and /1; Bayla v. $ilang 'ra##ic Co.%nc., - Phil$ && B1'%2C($

3 Theories on Lia'ilities for Promoter=s Contracts Cagayan Fishing %ev. Co." #nc. v.Teodoro Sandiko, ; Ph!. 22/ #ce Co." #nc. v. Pu'lic ServiceComm., 2 SCRA 28 y its fail)re to s)*mit its *ylaws on time, the A00>P may *e considered a de #actocorporation whose right to exercise corporate powers may not *e in3)ired into collaterally in anyprivate s)it to which s)ch corporations may *e a party$ $a,ad/aan v. Court o# A""eals, %&'

S7A &1/ 2..&($

/. C%&"%&'(%# 4 E:(%""$! Sec$ 21; Salvatierra v. arlitos, 10/ Ph!.


22/67

the de*ts, lia*ilities and damages inc)rred or arising as a res)lt thereof$ Peo"le v. 2arcia, 21S7A /21 1''(; Peo"le v. Pineda, J$7$ #o$ 11.1., 1 April 1'' )np)*($

. TRUSTUNDDOCTRINE

'3 Commercial@Common Law Premise6 E5uity versus %e'tsArt$ 22-/, ivil ode(

43 +ature of %octrine6

Under the tr)st f)nd doctrine, the capital stoc4, property and other assets of the corporation

are regarded as e3)ity in tr)st for the payment of the corporate creditors$ Comm. o# nternalevenue v. Court o# A""eals% -.1 S7A 1&2 1'''($

+he tr)st f)nd< doctrine considers the s)*scri*ed capital stoc4 as a tr)st f)nd for thepayment of the de*ts of the corporation, to which the creditors may loo4 for satisfaction$ Untilthe li3)idation of the corporation, no part of the s)*scri*ed capital stoc4 may *e t)rned over orreleased to the stoc4holder except in the redemption of the redeema*le shares( witho)tviolating this principle$ +h)s dividends m)st never impair the s)*scri*ed capital stoc4;s)*scription commitments cannot *e condoned or remitted; nor can the corporation *)y its ownshares )sing the s)*scri*ed capital as the consideration therefore$ N'C v. Court o# A""eals%-11 S7A &. 1'''($

+he re3)irement of )nrestricted retained earnings to cover the shares is *ased on the tr)stf)nd doctrine which means that the capital stoc4, property and other assets of a corporation are

regarded as e3)tiy in tr)st for the payment of corporate creditors$ +he reason is that creditors ofa corporation are preferred over the stoc4holders in the distri*)tion of corporate assets$ +herecan *e no distri*)tion of assets among the stoc4holders witho)t first paying corporate creditors$Kence, any disposition of corporate f)nds to the pre8)dice of creditors is n)ll and void$ BomanEnvironmental !ev. Cor". v. CA, 1/ S7A &%. 1'($

3 T% P>&h':$ O)# Sh'&$: Secs$ , %1, %- and 122, last paragraph; Phil. 'rust Co. v.ivera, %% Phil$ %/' B1'2-C; $teinberg v. 5elasco, &2 Phil$ '&- B1'2'C(

3 R$:::%# %+ S>4:&"(%# A@&$$$#( B':$ %# B&$'h

+he violation of terms em*odied in a s)*scription agreement, with are personalcommitments, do not constit)te legal gro)nd to rescind the s)*scription agreement since s)chwo)ld violate the +r)st L)nd Foctrine and the proced)res for the valid distri*)tion of assets andproperty )nder the orporation ode$ 0n the instant case, the rescission of the PreS)*scription

Agreement will effectively res)lt in the )na)thori6ed distri*)tion of the capital assets andproperty of the corporation, there*y violating the +r)st L)nd Foctrine and the orporationode, since the rescission of a s)*scription agreement is not one of the instances whendistri*)tion of capital assets and property of the corporation is allowed$(%# %+ C%&"%&'($ A::$(:

+he distri*)tion of corporate assets and property cannot *e made to depend on the whimsand caprices of the stoc4holders, officers or directors of the corporation, or even, for thatmatter, on the earnest desire of the co)rt a 0uo to prevent f)rther s3)a**les and f)t)relitigationsD )nless the indispensa*le conditions and proced)res for the protection of thecorporate creditors are followed$ @therwise, the corporate peaceD la)da*ly hoped for *y theco)rt will remain nothing *)t a dream *eca)se this time, it will *e the creditorsD t)rn to engage

in s3)a**les and litigationsD sho)ld the co)rt order an )nlawf)l distri*)tion in *latant disregardof the +r)st L)nd Foctrine$< 1ng :ong v. Tiu, 01 SCRA 1 200/3$

22


23/67

VII. ARTICLES O INCORPORATION

1. N'(>&$ %+ Ch'&($&* +he charter is in the nat)re of a contract *etween the corporation and thegovernment$ 2overnment o# P.. v. Manila ailroad Co$, &2 Phil$ /'' 1'2'($

+he articles of incorporation has *een descri*ed as one that defines the charter of thecorporation and the contract)al relationships *etween the state and the corporation, thestoc4holders and the State, and *etween the corporation and its stoc4holders$ *anu4a v. Court o#

A""eals, %&% S7A &% 2..&($

2. P&%$>&$ '# D%>$#('& R$>&$$#(: Sec$ 1% and 1&(

'3)s to +um'er and $esidency of #ncorporatorsSec$ 1.(

0t is possi*le for a *)siness to *e wholly owned *y one individ)al, and the validity of itsincorporation is not affected when he gives nominal ownership of only one share of stoc4 toeach of the other fo)r incorporators$ +his arrangement is not necessarily illegal, *)t it valid only*etween and among the incorporators privy to the agreement$ 0t does not *ind the corporationwhich will consider all stoc4holders of record as the lawf)l owners of their registered shares$ As*etween the corporation on the one hand, and its stoc4holders and third persons on the other,the corporation loo4s only to its *oo4s for the p)rpose of determining who its shareholders are$Nautica Canny Cor". v. @umul, %- S7A %1& 2..&($

43 Corporate +ameSecs$ 1, 1%1( and %2; ed *ine 'rans. v. ural 'ransit, /. Phil$ &%'($

Parties organi6ing a corporation m)st choose a name at their peril; and the )se of a namesimilar to one adopted *y another corporation, ,hether a business or a non"ro#it organi4ation, ifmisleading or li4ely to in8)re the exercise of its corporate f)nctions, regardless of intent, may *eprevented *y the corporation having a prior right$ Ang Mga 3aanib sa glesia ng !ios 3ay 3ristoHesus v. glesia ng !ios 3ay !risto -esus, -2 S7A 11 2..1($

Similarity in corporate names *etween two corporations wo)ld ca)se conf)sion to the p)*licespecially when the p)rposes stated in their charter are also the same type of *)siness$+niversal Mills Cor". v. +niversal 'extile Mills nc., S7A /2 1'($

Section 1 of orporation ode expressly prohi*its the )se of a corporate name which isidentical or dece"tively or con#usingly similar to that o# any existing cor"oration or to any othername already "rotected by la, or is "atently dece"tive% con#using or contrary to existing la,s.+he policy *ehind the foregoing prohi*ition is to avoid fra)d )pon the p)*lic that will occasion todeal with the entity concerned, the evasion of legal o*ligations and d)ties, and the red)ction ofdiffic)lties of administration and s)pervision over corporations$ ndustrial e#ractories Cor". v.Court o# A""eals, -'. S7A 2&2 2..2(; *yceum o# the Phili""ines v. Court o# A""eals% 21'S7A /1., /1& 1''-($

A corporation has no right to intervene in a s)it )sing a name, not even its acronym, otherthan its registered name, as the law re3)ires and not another name which it had not registered$*aureano nvestment and !ev. Cor". v. Court o# A""eals, 22 S7A 2&- 1''($

+here wo)ld *e no denial of d)e process when a corporation is s)ed and 8)dgment isrendered against it )nder its )nregistered trade name, holding that BaC corporation may *e s)ed)nder the name *y which it ma4es itself 4nown to its wor4ers$< Pison=Arceo Agricultural !ev.Cor". v. N*C% 2' S7A -12 1''($

A corporation may change its name *y the amendment of its articles of incorporation, *)tthe same is not effective )ntil approved *y the SE$ Phili""ine 1irst nsurance Co. v. Hartigan,-% S7A 2&2 1'.($

A change in the corporate name does not ma4e a new corporation, and has no effect on theidentity of the corporation, or on its property, rights, or lia*ilities$ e"ublic Planters Ban) v.Court o# A""eals, 21/ S7A - 1''2(; P.C. -avier & $ons% nc. v. Court o# A""eals , %/2S7A -/ 2..&($

3 P>&"%:$ C!'>:$Secs$ 1%2( and %2; +y $iuliong v. !irector o# Commerce and ndustry, %.Phil$ &%1 B1'1'C(

2-


24/67

+he *est proof of the p)rpose of a corporation is its articles of incorporation and *ylaws$+he articles of incorporation m)st state the primary and secondary p)rposes of the corporation,while the *ylaws o)tline the administrative organi6ation of the corporation, which, in t)rn, iss)pposed to ins)re or facilitate the accomplishment of said p)rpose$< +herefore, the o)rt*r)shed aside the contention that the corporations were organi6ed to illegally avoid theprovisions on land reform and to avoid the payment of estate taxes, as *eing prohi*itedcollateral attac4$ 2ala v. Ellice Agro=ndustrial Cor"., %1 S7A %-1 2..-($

3 C%&"%&'($ T$&Sec$ 11(

#o extension of term can *e effected once dissol)tion stage has *een reached, as itconstit)tes new *)siness$Alhambra Cigar v. $EC, 2% S7A 2/' 1'/($

Article /.& of the ivi l ode clearly limits any )s)fr)ct constit)ted in favor of a corporationor association to &. years$ A )s)fr)ct is meant only as a lifetime grant$ Unli4e a nat)ral person,a corporation or associationDs lifetime may *e extended indefinitely$ +he )s)fr)ct wo)ld then *eperpet)al$ +his is especially invidio)s in cases where the )s)fr)ct given to a corporation orassociation covers p)*lic land$< NHA v. Court o# A""eals, %&/ S7A 1 2..&($

$3 P"'! P!'$ %+ B>:#$::Sec$ &1(

?ell esta*lished in o)r 8)rispr)dence is the r)le that the residenceof a corporation is theplace where its principal office is located, as stated in its Articles of 0ncorporation$ $ $ $ 0t now*ecomes apparent that the residence or domicile of a 8)ridical person is fixed *y the law

creating or recogni6ing< it$ Under Section 1%-( of the orporation ode, the place where theprincipal office of the corporation is to *e located is one of the re3)ired contents of the articlesof incorporation, which shall *e filed with the Sec)rities and Exchange ommission SE($Hyatt Elevators and Escalators Cor". v. 2oldstar Elevators% Phils.% nc., %- S7A .& 2..&($

Altho)gh the 7)les of o)rt do not provide that when the plaintiff is a corporation, thecomplaint sho)ld *e filed in the location of its principal office as indicated in its articles ofincorporation, 8)rispr)dence has, however, settled that the place where the principal office of acorporation is located, as stated in the articles, indeed esta*lishes its residence$ +his r)ling isimportant in determining the ven)e of an action *y or against a corporation, as in the presentcase$ Hyatt Elevators and Escalators Cor". v. 2oldstar Elevators% Phils.% nc. , %- S7A .&2..&(, citing 0!!A#UEA, PK0!0PP0#E@7P@7A+E!A?1''(, p$ 1/2$

Place of residence of the corporation is the place of its principal office$ Clavecilla adio

$ystem v. Antillon, 1' S7A -' 1'/(+he residence of its president is not the residence of the corporation *eca)se a corporation

has a personality separate and distinct from that of its officers and stoc4holders$ $y v. 'ysonEnter"rises% nc., 11' S7A -/ 1'2($

+3 M#> C'"('!'(%#Sec$ 12(

- ,hy is ma2imum capitali!ation re5uired to 'e indicated(

@3 S>4:&"(%# '# P'->" R$>&$$#(:Sec$ 1-(

+he entries in the articles of incorporation of the original iss)ances of shares of stoc4 has astronger weight that the stoc4 and transfer *oo4 in determining the validity and iss)ance of s)chshares$ *anu4a v. Court o# A""eals, %&% S7A &% 2..&($

h3 S($": '# D%>$#(: R$>&$ # SEC

/. G&%>#: +%& D:'""&%?'!Sec$ 1(

?hen the proposed articles show that the o*8ect is to organi6e a *arrio into a separatecorporation for the p)rpose of ta4ing possession and having control of all m)nicipal propertywithin the incorporated *arrio and administer it excl)sively for the *enefit of the residents, theo*8ect is )nlawf)l and the articles can *e denied registration$Asuncion v. !e @riarte, 2 Phil$ /1'1%($

0t is well to note that, if a corporationDs p)rpose, as stated in the Articles of 0ncorporation, islawf)l, then the SE has no a)thority to in3)ire whether the corporation has p)rposes other

2%


25/67

than those stated, and mandam)s will lie to compel it to iss)e the certificate of incorporation$&$ '# >#(%#: okongwei v. SEC, 89 SCRA // y!aws< wo)ld *e an )nd)e technicality, as well as a red)ndancy$$an Miguel Cor". v. Mandaue Pac)ing Products Plants +nion=11(, %/ S7A 1. 2..&($

As the r)les and reg)lations or private laws enacted *y the corporation to reg)late, governand control its own actions, affairs and concerns and its stoc4holders or mem*ers and directors

and officers with relation thereto and among themselves in their relation to it,< *ylaws areindispensa*le to corporations$ +hese may not *e essential to corporate *irth *)t certainly, theseare re3)ired *y law for an orderly governance and management of corporations$ *oyola 2rand5illas Homeo,ners v. CA% 2/ S7A /1 1''($

'3 Common Law Limitations on By7Laws

3 B-L'): C'##%( B$ C%#(&'& (% L') '# Ch'&($&

A *ylaw provision granting to a stoc4holder permanent seat in the >oard of Firectors iscontrary to the provision in orporation ode re3)iring all mem*ers of the >oard to *eelected *y the stoc4holders$ Even when the mem*ers of the association may have formallyadopted the provision, their action wo)ld *e of no avail *eca)se no provision of the *ylawscan *e adopted if it is contrary to law$ 2race Christian High $chool v. Court o# A""eals% 21S7A 1-- 1''($

3 B-L') P&%?:%#: C'##%( B$ U#&$':%#'4!$ %& B$ C%#(&'& (% (h$ N'(>&$ %+ B-!'):. 2overnment o# P.. v. El Hogar 1ili"ino, &. Phil$ -'' 1'2($

A)thority granted to a corporation to reg)late the transfer of its stoc4 does not empowerthe corporation to restrict the right of a stoc4holder to transfer his shares, *)t merelya)thori6es the adoption of reg)lations as to the formalities and proced)re to *e followed ineffecting transfer$ 'homson v. Court o# A""eals% 2' S7A 2. 1''($

>ylaws are intended merely for the protection of the corporation, and prescri*ereg)lation, not restriction; they are always s)*8ect to the charter of the corporation$ uralBan) o# $alinas% nc. v. CA, 21. S7A &1. 1''2($

3 B-L') "&%?:%#: '##%( :'($

43 Binding Effects on By7laws6China Banking Corp. v. Court of )ppeals, 20 SCRA 0/#either can we concede that s)ch contract wo)ld *e invalid 8)st *eca)se the signatory

thereon was not the hairman of the >oard which allegedly violated the corporationDs *ylaws$Since *ylaws operate merely as internal r)les among the stoc4holders, they cannot affect orpre8)dice third persons who deal with the corporation, )nless they have 4nowledge of thesame$


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democratic instit)tion, agency or society$ 0n other words, the incorporators m)st *e given thechance to explain their neglect or omission and remedy the same$< *oyola 2rand 5illasHomeo,ners v. CA% 2/ S7A /1 1''($

A corporation which has failed to file its *ylaws within the prescri*ed period does not i"so#acto lose its powers as s)ch, and may *e considered a de #acto corporation whose right toexercise corporate powers may not *e in3)ired into collaterally in any private s)it to which s)chcorporations may *e a party$ $a,ad/aan v. Court o# A""eals, %&' S7A &1/ 2..&($$a,ad/aan v. Court o# A""eals, %&' S7A &1/ 2..&($

/. C%#($#(: Sec$ %(

. A$#$#(: Sec$ %(

Admittedly, the right to amend the *ylaws lies solely in the discretion of the employer, this*eing in the exercise of management prerogative or *)siness 8)dgment$ Kowever this right,extensive as it may *e, cannot impair the o*ligation of existing contracts or rights$ $ $ 0f we wereto r)le otherwise, it wo)ld ena*le an employer to remove any employee from his employment*y the simple expediency of amending its *ylaws and providing that his:her position shallcease to exist )pon the occ)rrence of a specified event$< $ala#ranca v. Philamli#e 6Pam"lona75illage Homeo,ners%-.. S7A %/' 1''($

I5.CORPORATE POWERS, AUTHORITY AND ACTIVITIES

1. C%&"%&'($ P%)$& '# C'"'( Art$ %/, ivil ode; Secs$ -/ and %&; *and Ban) o# thePhili""ines v. C8A, 1'. S7A 1&% B1''.C(

A corporation has only s)ch powers as are expressly granted to it *y law and *y its articlesof incorporation, those which may *e incidental to s)ch conferred powers, those reasona*lynecessary to accomplish its p)rposes and those which may *e incident to its existence$Pili"inas *oan Com"any v. $EC% -&/ S7A 1'- 2..1($

'3 C!'::+'(%# %+ C%&"%&'($ P%)$&:* E2press< #mplied< and #ncidental

43 Wh$&$ C%&"%&'($ P%)$& L%@$

A corporation has no power except those expressly conferred on it *y the orporation odeand those that are implied or incidental to its existence$ 0n t)rn, a corporation exercises said

powers thro)gh its *oard of directors and:or its d)ly a)thori6ed officers and agents$ $ $ 0n t)rn,physical acts of the corporation, li4e the signing of doc)ments, can *e performed only *ynat)ral persons d)ly a)thori6ed for the p)rpose *y corporate *ylaws or *y a specific act of the*oard of directors$ $hi"side nc. v. Court o# A""eals, -&2 S7A --% 2..1($

Unless otherwise provided *y the orporation ode, corporate powers are exercised *y the>oard of Firectors, which they may delegate to either an exec)tive committee, officers orcontracted managers$ +he delegation, except for the exec)tive committee, m)st *e for specificp)rposes, which ma4es the officers the agents of the corporation, and accordingly the generalr)les of agency as to the *inding effects of their acts wo)ld apply$ Lor s)ch officers to *edeemed f)lly clothed *y the corporation to exercise a power of the >oard, the latter m)stspecially a)thori6e them to do so$ AB$=CBN Broadcasting Cor". v. Court o# A""eals, -.1S7A &2 1'''($

2. 0LT$);#$ES%1CT$#+E

'3 Concept

ontracts or acts of a corporation m)st *e made either *y the *oard of directors or *y acorporate agent d)ly a)thori6ed *y the *oarda*sent s)ch valid delegation:a)thori6ation, ther)le is that the declaration of an individ)al directors relating to the affairs of the corporation, *)tnot in the co)rse of, or connected with the performance of a)thori6ed d)ties of s)ch director,are held not *inding on the corporation$ Manila Metal Container Cor". v. PNB, &11 S7A %%%2../($

43 Types of 0ltra;ires )cts Sec$ %&(

2/


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A corporation has no power except those expressly conferred on it *y the orporation odeand those that are implied or incidental to its existence$ 0n t)rn, a corporation exercises saidpowers thro)gh its >oard of Firectors and :or its d)ly a)thori6ed officers and agents$ Mon#ortHermanos Agricultural !ev. Cor". v. Mon#ort , %-% S7A 2 2..%($

First Type 0ltra ;ires6An ultra viresact is one committed o)tside the o*8ect for which acorporation is crated as defined *y the law of its organi6ation and therefore *eyond the powerconferred )pon it *y law$ +he term ultra vires is disting)ished from an illegal act for theformer is merely voida*le which may *e enforced *y performance, ratification, or estoppel,

while the latter is void and cannot *e validated$< )trium &anagement Corp. v. Court of)ppeals, // SCRA 2/ 20013.

Second Type 0ltra ;ires6?hen the President enters into spec)lative contracts, witho)tprior *oard approval, and witho)t s)*se3)ent s)*mission of those contracts to the >oard forapproval or ratification, nor were the transactions incl)ded in the reports of the corporation,s)ch contracts do not *ind the corporation$ 0t m)st *e pointed o)t that the >oard of Firectors,not the President, exercises corporate powers$ $a#ic Alcan & Cie v. m"erial 5egetable 8il Co.%nc., -&& S7A &&' 2..1($

Jenerally, the acts of the corporate officers within the scope of their a)thority are *indingon the corporation$ Kowever, )nder Article 1'1. of the #ew ivil ode, acts done *y s)chofficers *eyond the scope of their a)thority cannot *ind the corporation )nless it has ratifieds)ch acts expressly or tacitly, or is estopped from denying them$ $ $ $ +h)s, contracts enteredinto *y corporate officers *eyond the scope of a)thority are )nenforcea*le against thecorporation )nless ratified *y the orporation$ (oodchild Holdings% nc. v. oxas ElectricConstructions Com"any% nc., %-/ S7A 2-& 2..%($

3 $atification of 0ltra ;ires )cts6Pirovano v. %e la $ama Steamship Co." #nc. , 9; Ph!.//


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sale or disposition m)st *e )nderstood as valid only if it does not pre8)dice the creditors of theassignor, which necessarily implies that the assignee ass)mes the de*ts of the assignor$ Caltex6Phils.7% nc. v. PN8C $hi""ing and 'rans"ort Cor"., %' S7A %.. 2../($

Sale *y >oard of +r)stees of the only corporate property witho)t compliance with Sec$ %. oforporation ode re3)iring ratification of mem*ers representing at least twothirds of themem*ership, wo)ld ma4e the sale n)ll and void$ slamic !irectorate v. Court o# A""eals, 22S7A %&% 1''(; PeDa v. CA, 1'- S7A 1 1''1($

+3 #nvest Corporate Funds for +on7Primary Purpose Endeavor Sec$ %2;%e la $ama v.&a7ao Sugar Central Co., 2 SCRA 2 Co. v. Lepanto Consolidated &ining Co. , 2;SCRA 0 Co." #nc. v. LepantoConsolidated &ining, 2; SCRA 0


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+he power to *orrow money is one of those cases where even a special power of attorneyis re3)ired )nder Art$ 1 of ivil ode$ +here is invaria*ly a need of an ena*ling act of thecorporation to *e approved *y its >oard of Firectors$ +he arg)ment that the o*taining of loanwas in accordance with the ordinary co)rse of *)siness )sages and practices of the corporationis devoid of merit *eca)se the prevailing practice in the corporation was to explicitly a)thori6ean officer to contract loans in *ehalf of the corporation$ China Ban)ing Cor". v. Court o#

A""eals, 2. S7A &.- 1''($

3 Power to Sue

Under Sec$ -/ of orporation ode, in relation to Sec$ 2-, where a corporation is an in8)redparty, its power to s)e is lodged with its >oard of Firectors$ A minority stoc4holder who is amem*er of the >oard has no s)ch power or a)thority to s)e on the corporationDs *ehalf$ 'am(ing 'a) v. Ma)asiar, -&. S7A %& 2..1(; $hi"side nc. v. Court o# A""eals% -&2 S7A --%2..1(; $$$ v. C8A, -% S7A &% 2..2(; +nited Paragon Mining Cor". v. Court o# A""eals ,%' S7A /- 2../($

?here the corporation is real partyininterest, neither administrator or a pro8ect managerco)ld sign the certificate against for)mshopping witho)t *eing d)ly a)thori6ed *y resol)tion ofthe >oard of Firectors Esteban% -r. v. 5da. de 8norio% -/. S7A 2-. B2..1C(, nor the Jeneral5anager who has no a)thority to instit)te a s)it on *ehalf of the corporation even when thep)rpose is to protect corporate assets$ Central Coo"erative Exchange nc. v. Enciso, 1/2 S7A./ 1'($

?hen the power to s)e is delegated *y the *ylaws to a partic)lar officer, s)ch officer mayappoint co)nsel to represent the corporation in a pretrial hearing witho)t need of a formal*oard resol)tion$ Citiban)% N.A. v. Chua%22. S7A & 1''-($

Lor co)nsel to sign the certification for the corporation, he m)st specifically *e a)thori6ed*y the >oard of Firectors$ BP *easing Cor". v. CA, %1/ S7A % 2..-(; Mariveles $hi"yardCor". v. CA, %1& S7A &- 2..-($

0f the petitioner is a corporation, a *oard resol)tion a)thori6ing a corporate officer toexec)te the certification against for)m shopping is necessarya certification not signed *y ad)ly a)thori6ed person renders the petition s)*8ect to dismissal$ 2on4ales v. Climax Mining *td.,%&2 S7A /. 2..&(; !BP v. Court o# A""eals, %%. S7A 2.. 2..%(; Public Estates

Authority v. +y, -2 S7A 1. 2..1(; Metro !rug !istribution% nc. v. Narcisco, %'& S7A 2/2.../($

3 Provide ratuity Pay for EmployeesProviding grat)ity pay for employees is an express power of a corporation )nder the

orporation ode, and cannot *e considered to *e ultra viresto avoid any lia*ility arising fromthe iss)ance of resol)tion granting

clv corp outline (1)

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