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ATENEO DE M ANILA LAW SCHOOL

OUTLINE ON PHILIPPINE D EAN CESAR L. VILLANUEVA CORPORATE LAW 1 2 ND S EMESTER , SY 2008-2009

I. HISTORICAL BACKGROUND

1. Ph ! "" #$ C%&"%&'($ L')* 2 S%&( %+ C% '( %# %+ A/$& '# C%&"%&'($ L')Under American sovereignty, attention was drawn to the fact that there was no

entity in Spanish law exactly corresponding to the notion of a "corporation" in Englishand American law; the Philippine ommission enacted the orporation !aw Act #o$1%&'(, to introd)ce the American corporation into the Philippines as the standardcommercial entity and to hasten the day when the sociedad anónima of the Spanishlaw wo)ld *e o*solete$ +he stat)te is a sort of codi cation of American orporate!aw$ Harden v. Benguet Consolidated Mining , &- Phil$ 1%1 1'..($

2. Th$ C%&"%&'( %# L') +he rst corporate stat)te, the orporation !aw, or Act #o$ 1%&', *ecame

e/ective on 1 April 1'0 $ t had vario)s piece3meal amendments d)ring its 4%3yearhistory$ t rapidly *ecame anti5)ated and not adapted to the changing times$

. Th$ C%&"%&'( %# C% $ +he orporation ode Batas Pambansa Blg $ -( too6 e/ect on 1 7ay 1'-0$ t

adopted vario)s corporate doctrines en)nciated *y the S)preme o)rt )nder the oldorporation !aw$ t clari ed the o*ligations of corporate directors and o8cers,

expressed in stat)tory lang)age esta*lished principles and doctrines, and providedfor a chapter on close corporations$

orporation ode provisions apply even to corporations organi9ed )nder the oldorporation !aw$ xCastillo v. Balinghasay , %%0 S :A %%2 200%($

. P&%"$& T&$'(/$#( %+ Ph ! "" #$ C%&"%&'($ L')Philippine orporate !aw comes from the common law system of the UnitedStates$ +herefore, altho)gh we have a orporation ode that provides for stat)toryprinciples, orporate !aw is essentially, and contin)es to *e, the prod)ct of commercial developments$ 7)ch of this development can *e expected to happen inthe world of commerce, and some expressed )rispr)dential r)les that try to applyand adopt corporate principles into the changing concepts and mechanism of thecommercial world$

II. CONCEPTS

1. D$ # ( %# S$ . 2 ; Articles %% .(, %&, % , and 144&, ivil ode(A corporation is an arti cial *eing created *y operation of law$ t has a

personality separate and distinct from the persons composing it, as well as fromany other legal entity to which it may *e related$ PNB v. Andrada Electric &Eng ring Co. , .-1 S :A 2%% 2002($

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

fro the old statute !nown as "The Corporation Law," or ct #o. 1$%&.



2. OUR C ORPORATE A TTRIBUTES B ASED ON S ECTION 2*

3'4 A CORPORATION IS AN ARTI ICIAL BEING > Ability to Contract and 'ransact ?(354 CREATED BY OPERATION O LAW > Creature o# the *a+ ?(3 4 W ITH RIGHT O SUCCESSION >$trong ,uridical Personality ?(3 4 H AS THE POWERS , ATTRIBUTES AND PROPERTIES E6PRESSLY AUTHORI7ED BY

LAW OR INCIDENT TO ITS E6ISTENCE > Creature o# *imited Po+ers ?(

. T RI -L EVEL E 6ISTENCE O THE C ORPORATION

3'4 AGGREGATION O A SSETS AND R ESOURCES

354 BUSINESS E NTERPRISE OR E CONOMIC U NIT 3 4 URIDICAL E NTITY

. R ELATIONSHIPS I NVOLVED IN A C ORPORATE S ETTING

3'4 URIDICAL E NTITY L EVEL , which views the State3corporation relationship

354 I NTRA -C ORPORATE L EVEL , which considers that the corporate setting is at once acontract)al relationship on fo)r %( levels@

• etween the corporation and its agents=representatives to act in thereal world, s)ch as its directors and o8cers, 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

3 4 E6TRA -C ORPORATE L EVEL , which views the relationship *etween thecorporation and third3parties or >o)tsiders?, essentially governed *yontract !aw and !a*or !aw$

. T HEORIES ON THE ORMATION O C ORPORATION *

3'4 Th$%&: %+ C%# $;; %# Tayag v. Benguet Consolidated , 2< SCRA 2 2=19<8> ($

+o organi9e a corporation that co)ld claim a )ridical personality of its own andtransact *)siness as s)ch, is not a matter of a*sol)te right *)t a privilege whichmay *e en oyed only )nder s)ch terms as the State may deem necessary toimpose$ c#. Ang Pue & Co. v. $ec. o# Commerce and ndustry , & S :A %& 1' 2(

> t is a *asic post)late that *efore a corporation may ac5)ire )ridicalpersonality, the State m)st give its consent either in the form of a special law or ageneral ena*ling act,? and the proced)re and conditions provided )nder the law forthe ac5)isition of s)ch )ridical personality m)st *e complied with$ Altho)gh thestat)tory grant to an association of the powers to p)rchase, sell, lease andenc)m*er property can only *e constr)ed the grant of a )ridical personality tos)ch an association $ $ $ nevertheless, the fail)re to comply with the stat)toryproced)re and conditions does not warrant a nding that s)ch association ac5)ireda separate )ridical personality, even when it adopts sets of constit)tion and *y3

laws$ nt l Ex"ress 'ravel & 'our $ervices% nc. v. Court o# A""eals% .%. S :A 4%2000($

Bhen the law vests in a government instr)mentality corporate powers, theinstr)mentality does not *ecome necessarily a corporation$ Unless the governmentinstr)mentality is organi9ed as a stoc6 or non3stoc6 corporation, it remains agovernment instr)mentality exercising not only governmental *)t also corporatepowers$ Manila nternational Air"ort Authority v. Court o# A""eals , %'& S :A &'1200 ($

Since all corporations, *ig or small, m)st a*ide *y the provisions of theorporation ode, then even a simple family corporation cannot claim an

'



exemption nor can it have r)les and practices other than those esta*lished *y law$'orres v. Court o# A""eals , 24- S :A 4'. 1''4($

354 Theory of Enterprise Entity E:!E , %4 C! $ !$ : ED$ .%. 1'%4F(

A corporation is *)t an association of individ)als, allowed to transact )nder anass)med corporate name, and with a distinct legal personality$ n organi9ing itself as a collective *ody, it waives no constit)tional imm)nities and per5)isitesappropriate to s)ch a *ody$ P$E v. Court o# A""eals% 2-1 S :A 2.2 1''4($

orporations are composed of nat)ral persons and the legal ction of aseparate corporate personality is not a shield for the commission of in )stice andine5)ity, s)ch as to avoid the exec)tion of the property of a sister company$ 'anBoon Bee & Co.% nc. v. ,arencio , 1 . S :A 20& 1'--($

<. A DVANTAGES AND D ISADVANTAGES O C ORPORATE ORM *

3'4 %?& B'; A @'#(' $%?; Ch'&' ($& ;( ; %+ C%&"%&'($ O& '# '( %#*

3 4 S TRONG L EGAL P ERSONALITY

>A corporation is an entity separate and distinct from its stoc6holders$ Bhilenot in fact and in reality a person, the law treats the corporation as tho)gh itwere a person *y process of ction or *y regarding it as an arti cial person

distinct and separate from its individ)al stoc6holders$? -emo% ,r. v. AC , 142S :A %0& 1'-'($

+he transfer of the corporate assets to the stoc6holder 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

319<24 $

Exec)tion pending appeal was allowed in Bor a v. Court o# A""eals , 1'S :A -%4 1''1( only *eca)se >the prevailing party is already of advanced ageand in danger of extinction,? *)t not in this case where the winning party is acorporation$ > AF )ridical entityGs existence cannot *e li6ened to a nat)ralpersonHits precario)s nancial condition is not *y itself a compellingcirc)mstance warranting immediate exec)tion and does not o)tweigh the long

standing general policy of enforcing only nal and exec)tory )dgment$?Manaco" v. E/uitable PC Ban) , % - S :A 2& 200&($

3 4 C ENTRALI7ED M ANAGEMENT

As can *e gleaned from Sec$ 2. of orporation ode > t is the *oard of directors or tr)stees which exercises almost all the corporate powers in acorporation$? 0irme v. Bu)al Enter"rises and !ev. Cor". , %1% S :A 1'0 200.($

+he exercise of the corporate powers of the corporation rest in the oard of Iirectors save in those instances where the orporation ode re5)iresstoc6holdersG approval for certain speci c acts$ 1reat Asian $ales Center Cor".v. Court o# A""eals , .-1 S :A &&4 2002($

3 4 L IMITED L IABILITY TO I NVESTORS AND O ICERSCne of the advantages of the corporation is the limitation of an investorGs

lia*ility to the amo)nt of investment, which Jows from the legal theory that acorporate entity is separate and distinct from its stoc6holders$ $an ,uan$tructural and $teel 0abricators% nc. v. Court o# A""eals , 2' S :A .1 1''-($

t is horn*oo6 law that corporate personality is a shield against personallia*ility of its o8cersHa corporate o8cer and his spo)se cannot *e madepersonally lia*le )nder a tr)st receipt where he entered into and signed thecontract clearly in his o8cial capacity$ Consolidated Ban) and 'rust Cor". v.Court o# A""eals% .& S :A 41 2001($

$



C*ligations inc)rred *y the corporation acting thro)gh its directors, o8cersand employees, are its sole lia*ilities$ Malayang $amahan ng mga Manggaga+asa M. 1reen2eld v. -amos% .&4 S :A 44 2001($

3 @4 REE T RANS ERABILITY O U NITS O O WNERSHIP OR I NVESTORS

t is the inherent right of the stoc6holder to dispose of his shares of stoc6anytime he so desires$ -emo% ,r. v. AC , 142 S :A %0& 1'-'(; PNB v. -itratto1rou"% nc. , . 2 S :A 21 2001($

A)thority granted to corporations to reg)late the transfer of its stoc6 doesnot empower the corporation to restrict the right of a stoc6holder to transferhis shares, *)t merely a)thori9es the adoption of reg)lations as to theformalities and proced)re to *e followed in e/ecting transfer$ 'homson v. Court o# A""eals , 2'- S :A 2-0 1''-($

354 D ;' @'#(' $;*

314 A5?;$ %+ %&"%&'($ /'#' $/$#(324 A5?;$ %+ ! / ($ ! '5 ! (: +$'(?&$3 4 H h %;( %+ /' #($#'# $3 4 D%?5!$ (' '( %#

• Iividends received *y individ)als from domestic corporations are s)* ectto nal 10K tax for income earned on or after 1 Lan)ary 1''- Sec$ 2% (2(, 1''4 # : (

• nter3corporate dividends *etween domestic corporations, however, arenot s)* ect to any income tax Sec$ 24 I( %(, 1''4 # : (

• +here is re3imposition of the 10K >improperly acc)m)lated earnings tax?for holding companies Sec$ 2', 1''4 # : (

. C OMPARED W ITH O THER B USINESS M EDIA=%istri'ution of $isk" Pro(ts and Control >

3'4 S%!$ P&%"& $(%&;h ";

354 P'&(#$&;h "; '# O(h$& A;;% '( %#; Arts$ 14 - and 144&, ivil ode(Can a defective attempt to form a corporation result at least in a partnership) Pioneer #nsurance v. Court of *ppeals , 1 SCRA <<8319894 Lim Tong Lim v. Philippine Fishing ear #ndustries" #nc. , 1SCRA 28 319994.

3 4 % #( V$#(?&$; ,oint venture is an association of persons or companies ointly )nderta6ing

some commercial enterprise; generally all contri*)te assets and share ris6s$ tre5)ires a comm)nity of interest in the performance of the s)* ect matter, a rightto direct and govern the policy in connection therewith, and d)ty, which may *ealtered *y agreement to share *oth in pro t and losses$ 3ilosbayan% nc. v.1uingona% ,r. , 2.2 S :A 110 1''%($

3 4 C%%"$&'( @$; Art$ ., :$A$ #o$ '.-(ooperatives are esta*lished to provide a strong social and economic

organi9ation to ens)re that the tenant3farmers will en oy on a lasting *asis the*ene ts of agrarian reforms$ Cor"u4 v. 1ros"e% ... S :A %2& 2000($

3$4 B?; #$;; T&?;(; Article 1%%2, ivil ode(

3+4 Sociedades *n+nimasA sociedad anónima was considered a commercial partnership >where )pon

the exec)tion of the p)*lic instr)ment in which its articles of agreement appear,and the contri*)tion of f)nds and personal property, *ecomes a )ridical personHan arti cial *eing, invisi*le, intangi*le, and existing only in contemplation of lawH

%



with power to hold, *)y, and sell property, and to s)e and *e s)edHa corporationHnot a general copartnership nor a limited copartnership $ $ $ +he inscri*ing of itsarticles of agreement in the commercial register was not necessary to ma6e it a

)ridical personHa corporation$ S)ch inscription only operated to show that itpartoo6 of the #orm of a commercial corporation$? Mead v. McCullough , 21 Phil$ '&1'11($

+he sociedades anónimas were introd)ced in Philippine )risdiction on 1Iecem*er 1--- with the extension to Philippine territorial application of Articles1&1 to 1&' of the Spanish ode of ommerce$ +hose articles contained thefeat)res of limited lia*ility and centrali9ed management granted to a )ridicalentity$ )t they were more similar to the English oint stoc6 companies than themodern commercial corporations$ Benguet Consolidated Mining Co. v. Pineda , '-Phil$ 411 1'& ($

C)r orporation !aw recogni9es the di/erence *etween sociedades anónimasand corporations and will not apply legal provisions pertaining to the latter to theformer$ Phil. Product Co. v. Primateria $ociete Anonyme , 1& S :A .01 1' &($

3 4 Cuentas En ParticipacionA cuentas en "artici"acion as a sort of an accidental partnership constit)ted in

s)ch a manner that its existence was only 6nown to those who had an interest inthe same, there *eing no m)t)al agreement *etween the partners, and witho)t acorporate name indicating to the p)*lic in some way that there were other people*esides the one who ostensi*ly managed and 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)chpartnership of cuentas en "artici"acion is cond)cted, shall have only a right of action against s)ch person and not against the other persons interested, and thelatter, on the other hand, shall have no right of action against third person whocontracted with the manager )nless s)ch manager formally transfers his right tothem$ Bourns v. Carman , 4 Phil$ 114 1'0 ($

III. NATURE AND ATTRIBUTES O A CORPORATION

1. N'(?&$ %+ P%)$& (% C&$'($ ' C%&"%&'( %# Sec$ 1 , Article M , 1'-4onstit)tion(

C)r constit)tion explicitly prohi*its the reg)lation *y special laws of privatecorporations, with the exception of government3owned or controlled corporationsNC s($ 5eterans 0ederation o# the Phili""ines v. -eyes , %-. S :A &2 200 ($

ongress cannot enact a law creating a private corporation with a specialcharter, and it follows that ongress can create corporations with special chartersonly if s)ch corporations are NC s$ 0eliciano v. Commission on Audit , %1' S :A. . 200%($

P$I$ 1414 creating #ew Agrix, nc$ violates the onstit)tion which prohi*its theformation of a private corporation *y special legislative act which is not a NC ,

since #I was merely re5)ired to extend a loan to the new corporation, and thenew stoc6s of the corporation were to *e iss)ed to the old investors andstoc6holders of the insolvent Agrix )pon proof of their claims against the a*olishedcorporation$ N!C v. Phili""ine 5eterans Ban)% 1'2 S :A 2&4 1''0($

2. C ORPORATION AS A P ERSON *

3'4 E#( (!$ (% D?$ P&% $;; '# EF?'! P&%($ ( %# +he d)e process cla)se is )niversal in its application to all persons witho)t

regard to any di/erences of race, color, or nationality$ Private corporations, li6ewise,are >persons? within the scope of the g)aranty insofar as their property isconcerned$ $mith Bell & Co. v. Natividad , %0 Phil$ 1. , 1%% 1'20($

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354 U#&$';%#'5!$ S$'& h$; '# S$ ?&$A corporation is protected *y the constit)tional g)arantee against )nreasona*le

searches and sei9)res, *)t its o8cers have no ca)se of action to assail the legalityof the sei9)res, regardless of the amo)nt of shares of stoc6 or of the interest of each of them in said corporation, and whatever the o8ces they hold therein may*e, *eca)se the corporation has a personality distinct and separate from those of said o8cers$ $tonehill v. !io)no , 20 S :A .-. 1' 4($

A corporation is *)t an association of individ)als )nder an ass)med name andwith a distinct legal entity$ n organi9ing itself as a collective *ody it waives noconstit)tional imm)nities appropriate for s)ch *ody$ ts property cannot *e ta6enwitho)t compensation; can only *e proceeded against *y d)e process of law; and isprotected against )nlawf)l discrimination$ Bache & Co. 6Phil.7% nc. v. -ui4 , .4 S :A-2., -.4 1'41(, /uoting #rom Hale v. Hen)el% 201 U$S$ %., &0 !$Ed$ &2$

3 4 B?( N%( E#( (!$ (% P& @ !$ $ A ' #;( S$!+ # & / #'( %#> t is elementary that the right against self3incrimination has no application to

)ridical persons$? Bataan $hi"yard & Engineering v. PC11 , 1&0 S :A 1-1 1'-4($

Bhile an individ)al may lawf)lly ref)se to answer incriminating 5)estions)nless protected *y an imm)nity stat)te, it does not follow that a corporation,vested with special privileges and franchises, may ref)se to show its hand whencharged with an a*)se of s)ch privilege$ Hale v. Hen)el , 201 U$S$ %. 1'0 (; (ilsonv. 8nited $tates% 221 U$S$ . 1 1'11(; 8nited $tates v. (hite% .22 U$S$ '% 1'%%($

. P&' ( $ %+ P&%+$;; %#orporations cannot engage in the practice of a profession since they lac6 the

moral and technical competence re5)ired *y the P: $ 8*EP v. 'he *egal Clinic , 22.S :A .4- 1''.($

A corporation engaged in the selling of eyeglasses and which hires optometristsis not engaged in the practice of optometry$ $amahan ng 9"tometrists v. Acebedonternational Cor".% 240 S :A 2'- 1''4(; Al#a#ara v. Acebedo 9"tical Com"any% .-1S :A 2'. 2002($

COUNTER -R EVOLUTION @ Architect)ral Professional orps$ allowed )nder :$A$ #o$ '2 $. L '5 ! (: +%& T%&(;

A corporation is civilly lia*le in the same manner as nat)ral persons for torts,*eca)se the r)les governing the lia*ility of a principal or master for a tort committed*y an agent or servant are the same whether the principal or master *e a nat)ralperson or a corporation, and whether the servant or agent *e a nat)ral or arti cialperson$ +hat a principal or master is lia*le for every tort which he expressly directsor a)thori9es, is )st as tr)e of a corporation as a nat)ral person$ P,B v. Court of

*ppeals , 8 SCRA 2 319 84.

C)r )rispr)dence is wanting as to the de nite scope of >corporate tort$?Essentially, >tort? consists in the violation of a right given or the omission of a d)tyimposed *y law; a *reach of a legal d)ty$ +he fail)re of the corporate employer tocomply with the law3imposed d)ty )nder the !a*or ode to grant separation pay toemployees in case of cessation of operations constit)tes tort and its stoc6holderwho was actively engaged in the management or operation of the *)siness sho)ld*e held personally lia*le$ $ergio 0. Naguiat v. N*-C , 2 ' S :A & % 1''4($

. C%&"%&'($ C& / #'! L '5 ! (: -est Coast Life #ns. Co. v. urd , 2 Ph !. 013191 4 People v. Tan Boon /ong , Ph !. <0 =19 0> Sia v. Court of

*ppeals , 121 SCRA < =198 > ; Consolidated Ban) v. Court o# A""eals , .&S :A 42 2001(; Articles 102 and 10., :evised Penal ode($

+he +r)st :eceipts !aw recogni9es the impossi*ility of imposing the penalty of imprisonment on a corporation, hence, if the entr)stee is a corporation, the law

(



ma6es the o8cers or employees or other persons responsi*le for the o/ense lia*leto s)/er the penalty of imprisonment$ 9ng v. Court o# A""eals , %01 S :A %4-200.($

#o criminal s)it can lie against an acc)sed who is a corporation$ 'imes% nc. v.-eyes , .' S :A .0. 1'41($

Bhen a criminal stat)te for*ids the corporation itself from doing an act, theprohi*ition extends to the *oard of directors, and to each director separately and

individ)ally$ Peo"le v. Conce"cion% %% Phil$ 12' 1'22($Bhile it is tr)e that a criminal case can only *e led against the o8cers and not

against the corporation itself, it does not follow that the corporation cannot *e areal3party3in3interest for the p)rpose of *ringing a civil action for malicio)sprosec)tion for the damages inc)rred *y the corporation for the criminalproceedings *ro)ght against its o8cer$ Cometa v. Court o# A""eals , .01 S :A %&'1'''($

t has *een held that the existence of the corporate entity does not shield fromprosec)tion the corporate agent who 6nowingly and intentionally ca)ses thecorporation to commit the crime$ +he corporation o*vio)sly acts, and can act, only*y and thro)gh its h)man agents, and it is their cond)ct which the law m)st deter$

+he employee or agent of a corporation engaged in )nlawf)l *)siness nat)rally aids

and a*ets in the carrying on of s)ch *)siness and will *e prosec)ted as principal if,with 6nowledge of the *)siness, its p)rpose and e/ect, he conscio)sly contri*)teshis e/orts to its cond)ct and promotion illegal recr)itment in this caseF, howeverslight his contri*)tion may *e$ 'he Executive $ecretary v. Court o# A""eals , %2'S :A -1 200%($

f the crime is committed *y a corporation or other )ridical entity, the directors,o8cers, employees or other o8cers thereof responsi*le for the o/ense shall *echarged and penali9ed for the crime, precisely *eca)se of the nat)re of the crimeand the penalty therefor$ A corporation cannot *e arrested and imprisoned; hence,cannot *e penali9ed for a crime p)nisha*le *y imprisonment$ Oowever, acorporation may *e charged and prosec)ted for a crime if the imposa*le penalty isne$ Even if the stat)te prescri*es *oth ne and imprisonment as penalty, a

corporation may *e prosec)ted and, if fo)nd g)ilty, may *e ned$ Ching v.Secretary of 0ustice , 81 SCRA <02 3200<4.

A crime is the doing of that which the penal code for*ids to *e done, or omittingto do what is commands$ A necessary part of the de nition of every crime is thedesignation of the a)thor of the crime )pon whom the penalty is to *e inJicted$Bhen a criminal stat)te designates an act of a corporation or a crime and prescri*esp)nishment therefor, it creates a criminal o/ense which, otherwise, wo)ld not existand s)ch can *e committed only *y the corporation$ )t when a penal stat)te doesnot expressly apply to corporations, it does not create an o/ense for which acorporation may *e p)nished$ Cn the other hand, if the State, *y stat)te, de nes acrime that may *e committed *y a corporation *)t prescri*es the penalty therefor to*e s)/ered *y the o8cers, directors, or employees of s)ch corporation or otherpersons responsi*le for the o/ense, only s)ch individ)als will s)/er s)ch penalty$

orporate o8cers or employees, thro)gh whose act, defa)lt or omission thecorporation commits a crime, are themselves individ)ally g)ilty of the crime$ Ching v. Secretary of 0ustice , 81 SCRA <02 3200<4. B1T S EE Consolidated Bank v. Court of *ppeals , < SCRA < 1 3200 4.

<. R$ %@$&: %+ M%&'! '# O(h$& D'/' $;A corporation, *eing an arti cial person, cannot experience physical s)/erings,

mental ang)ish, fright, serio)s anxiety, wo)nded feelings, moral shoc6 or socialh)miliation which are *asis for moral damages )nder Art$ 2214 of the ivil ode$Ho+ever% a cor"oration may have a good re"utation +hich% i# besmirched% may be aground #or the a+ard o# moral damages $ Mambulao *umber Co. v. Phili""ineNational Ban)% 22 S :A .&' 1' -(; AP' v. Court o# A""eals% .00 S :A &4' 1''-( .

0



A corporation, *eing an arti cial person and having existence only in legalcontemplation, has no feelings, emotions nor senses; therefore, it cannot experiencephysical s)/ering and mental ang)ish$ 7ental s)/ering can *e experienced only *yone having a nervo)s system and it Jows from real ills, sorrows, and griefs of lifeHall of which cannot *e s)/ered *y an arti cial person$ Prime (hite Cement Cor". v.AC, 220 S :A 10. 1''.(; *BC Ex"ress% nc. v. Court o# A""eals% 2. S :A 021''%(; Acme $hoe% -ubber & Plastic Cor". v. Court o# A""eals , 2 0 S :A 41%1'' (; $olid Homes% nc. v. Court o# A""eals , 24& S :A 2 4 1''4(; NPC v. Phili""

Brothers 9ceanic% nc. , . ' S :A 2' 2001($ +he statement in Peo"le v. Manero and Mambulao *umber Co. v. PNB , that a

corporation may recover moral damages if it >has a good rep)tation that is de*ased,res)lting in social h)miliation? is an obiter dictum. -ecovery o# a cor"oration +ouldbe under Articles :;% <= and <: o# the Civil Code% but +hich re/uires a clear "roo# o# malice or bad #aith. AB$>CBN Broadcasting Cor". v. Court o# A""eals , .01 S :A &-'1'''($

!i6ewise, an ed)cational corporationGs claim for moral damages arising from li*elfalls )nder Article 221' 4( of the ivil ode, which expressly a)thori9es the recoveryof moral damages in cases of li*el, slander or any other form of defamation, anddoes not 5)alify whether the plainti/ is a nat)ral or )ridical person$ +herefore, a

)ridical person can validly complain for li*el or any other form of defamation and

claim for moral damages$ 0ili"inas Broadcasting Net+or) v. Ago Medical andEducational Center , %%- S :A %1. 200&($

. CORPORATE NATIONALITY* 1 ,%E$ - 2SE L *-S #,C2$P2$*TE% 3S$ . 12 4

E6CEPTIONS * T EST 2F C 2,T$2LL#, 2 -,E$S #P '!;% '""! $; #*

3'4 E3ploitation of ,atural $esources Sec$ 1%0; Sec$ 2, Article M , 1'-4onstit)tion; $oman Catholic *postolic *dministrator of %avao" #nc. v.The L$C and the $egister of %eeds of %avao , 102 Ph !. 9< =19 > ($

+he registration of the donation of land to an )nincorporated religio)sorgani9ation, whose tr)stees are foreigners, wo)ld violate constit)tional prohi*itionand the ref)sal wo)ld not *e in violation of the freedom of religion cla)se$ +he fact

that the religio)s association >has no capital stoc6 does not s)8ce to escape theconstit)tional inhi*ition, since it is admitted that its mem*ers are of foreignnationality$ $ $ and the s"irit o# the Constitution demands that in the absence o# ca"ital stoc)% the controlling membershi" should be com"osed o# 0ili"ino citi4ens $?-egister o# !eeds o# -i4al v. 8ng $ui $i 'em"le , '4 Phil$ &- 1'&&($

f the foreign shareholdings in a landholding corporation exceed %0K, it is notthe foreign stoc6holdersG ownership of the shares which is adversely a/ected *ythe capacity of the corporation to own landHthat is, the corporation *ecomesdis5)ali ed to own land$ ,.1. $ummit Holdings% nc. v. Court o# A""eals , %&0 S :A1 ' 200&($

+he prohi*ition in the onstit)tion applies only to ownership of land; it does notextend to immova*le or real property as de ned )nder Article %1& of the ivil

ode$ Ctherwise, we wo)ld have a strange sit)ation where the ownership of immova*le property s)ch as trees, plants and growing fr)it attached to the landwo)ld *e limited to ilipinos and ilipino corporations only$ ,.1. $ummit Holdings%nc. v. Court o# A""eals , %&0 S :A 1 ' 200&($

354 Pu'lic 1tilities Sec$ 11, Art$ M , onstit)tion; People v. 4uasha , 9 Ph !.(

+he primary franchise, that is, the right to exist as s)ch, is vested in theindivid)als who compose the corporation and not in the corporation itself andcannot *e conveyed in the a*sence of a legislative a)thority so to do$ +he specialor secondary franchises are vested in the corporation and may ordinarily *econveyed or mortgaged )nder a general power granted to a corporation to dispose

&



of its property, except s)ch special or secondary franchises as are charged with ap)*lic )se$ ,.-.$. Business Cor". v. m"erial nsurance , 11 S :A .% 1' %($

+he onstit)tion re5)ires a franchise for the operation of a p)*lic )tility;however, it does not re5)ire a franchise *efore one can own the facilities needed tooperate a p)*lic )tility so long as it does not operate them to serve the p)*lic$

+here is a clear distinction *etween >operation? of a p)*lic )tility and theownership of the facilities and e5)ipment )sed to serve the p)*lic$ Tatad v. arcia" 0r. , 2 SCRA < 3199 4.

3 4 M';; M$ ' Sec$ 11 1(, Art$ MD , 1'-4 onstit)tion(

S%?& $; @ P$I$ . , amended *y P$I$s 1'1 and 1'4; ICL Cpinion #o$ 120, s$ of 1'-2; Sec$ 2, P$I$ &4 ; SE Cpinion, 2% 7arch 1'-.; ICL Cpinion 1 ., s$1'4.; SE Cpinion, 1& L)ly 1''1, MMD SE Q UA:+E:!R U!!E+ # , #o$ %HIecem*er, 1''1(, at p$ .1$

Ca'le #ndustry * > a*le +D operations shall *e governed *y E$C$ #o$ 20&, s$1'-4$ f A+D operators o/er p)*lic telecomm)nications services, they shall *etreated )st li6e a p)*lic telecomm)nications entity$? #+ 7emo irc)lar #o$ -3'3'&(

a*le +D as >a form of mass media which m)st, therefore, *e owned andmanaged *y ilipino citi9ens, or corporations, cooperatives or associations, wholly3owned and managed *y ilipino citi9ens p)rs)ant to the mandate of theonstit)tion$? ICL Cpinion #o$ '&, s$ 1''', citing Allied Broadcasting% nc. v.

0ederal Communications Commission% %.& $ 2d 40($

3 4 A @$&( ; # B?; #$;; Sec$ 11 2(, Art$ MD , 1'-4 onstit)tion(

3$4 W'&-T /$ T$;( 0ili"inas Com"ania de $eguros v. Christern% Huene#eld & Co.%nc. , -' Phil$ &% 1'&1F; !avis (inshi" v. Phili""ine 'rust Co. , '0 Phil$ 4%%1'&2F; Ha+ Pia v. China Ban)ing Cor" $, -0 Phil$ 0% 1'%-F($

3+4 I#@$;(/$#( T$;( '; (% Ph ! "" #$ N'( %#'!; Sec$ . a( *(, :$A$ 40%2,oreign nvestments Actof 1''2(

3 4 G&'# +'(h$& R?!$ Cpinion of ICL #o$ 1-, s$ 1'-', 1' Lan)ary 1'-'; SECpinion, #ovem*er 1'-', MM D SE Q UA:+E:!R U!!E+ # #o$ 13 7arch 1''0(;SE Cpinion, 1% Iecem*er 1'-', MM D SE Q UA:+E:!R U!!E+ # #o$ 2 3L)ne 1''0(

8" to +hat level do you a""ly the grand#ather rule? Palting v. San 0osePetroleum #nc. , 18 SCRA 92 319<<4 $

3h4 S"$ '! C!';; '( %#; Sec$ 1%0(

1)



IV. SEPARATE URIDICAL PERSONALITY AND DOCTRINE O PIERCINGTHE VEIL O CORPORATE ICTION

A. MAIN DOCTRINE* A C ORPORATION H AS A P ERSONALITY S EPARATE AND D ISTINCTROM ITS S TOCKHOLDERS OR M EMBERS . ,ardine !avies% nc. v. ,-B-ealty% nc. , % . S :A &&& 200&($

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 separate and distinct from those persons composing it as well as fromany other legal entity to which it may *e related$ +his separate and distinctpersonality is, however, merely a ction created *y law for conveyance and topromote the ends of )stice$ *BP v. Court o# A""eals% . % S :A .4& 2001(;Martine4 v. Court o# A""eals , %.- S :A 1.' 200%(; Prudential Ban) v. Alviar , % %S :A .&. 200&($

A corporation is an arti cial *eing vested *y law with a personality distinct andseparate from those of the persons composing it as well as from that of any other

entity to which it may *e related$ +he rst conse5)ence of the doctrine of legalentity of the separate personality of the corporation may not *e made to answerfor acts and lia*ilities of its stoc6holders or those of legal entities to which it may*e connected or vice versa $ 1eneral Credit Cor". v. Alsons !ev. and nvestment Cor". , &1. S :A 22& 2004(; Mc*eod v. N*-C , &12 S :A 222 2004(; 8y v.5illanueva , &2 S :A 4. 2004($

. A""! '( %#;*

3'4 &a5ority E6uity 2wnership and #nterlocking %irectorship @

Cwnership of a ma ority of capital stoc6 and the fact that ma ority of directors of a corporation are the directors of another corporation creates no employer3employee relationship with the latterTs employees$ %BP v. ,L$C , 18< SCRA 8 1

319904 $ Also $uldao v. Cimech $ystem Construction% nc. , &0 S :A 2& 200 (;8nion Ban) o# the Phili""ines v. 9ng , %'1 S :A &-1 200 ($

7ere ownership *y a single stoc6holder or *y another corporation of all ornearly all of the capital stoc6 of a corporation is not of itself s)8cient gro)nd fordisregarding the separate corporate personality$ $unio v. N*-C , 124 S :A .'01'-%(; Asionics Phili""ines% nc. v. N*-C% 2'0 S :A 1 % 1''-(; 0rancisco v. Me ia%. 2 S :A 4.- 2001(; Matutina ntegrated (ood Products% nc. v. CA , 2 . S :A %'01'' (; Manila Hotel Cor". v. N*-C , .%. S :A 1 2000(; $ecosa v. Heirs o# Er+in

$uare4 0ancisco , %.. S :A 24. 200%($

A corporate defendant in a case, against whom a writ of possession has *eeniss)ed, cannot )se the fact that it has o*tained controlling e5)ities in the corporateplainti/s to s)spend enforcement of the writ, for their separate )ridical personality,

and th)s their separate *)siness and proprietary interests remain$ $ilverio% ,r. v.0ili"ino Business Consultants% nc. , % S :A &-% 200&($

7ere s)*stantial identity of incorporators of two corporations does notnecessarily imply fra)d, nor warrant the piercing of the veil of corporate ction$ nthe a*sence of clear and convincing evidence to show that the corporatepersonalities were )sed to perpet)ate fra)d, or circ)mvent the law, thecorporations are to *e rightly treated as distinct and separate from each other$*aguio v. N*-C% 2 2 S :A 41& 1'' ($

Oaving interloc6ing directors, corporate o8cers and shareholders is not eno)gh )sti cation to pierce the veil of corporate ction in the a*sence of fra)d or other

11



p)*lic policy considerations$ 5elarde v. *o"e4 , %1' S :A %22 200%(; $esbreno v.Court o# A""eals , 222 S :A % 1''.($

354 Being Corporate 27cer8 eing an o8cer or stoc6holder of a corporationdoes not *y itself ma6e oneGs property also of the corporation, and vice>versa ,for they are separate entities, and that shareholders who are o8cers are in nolegal sense the owners of corporate property which is owned *y the corporationas a distinct legal person$ 1ood Earth Em"orium% nc. v. CA , 1'% S :A &%%

1''1($ +he mere fact that one is president of the corporation does not render the

property he owns or possesses the property of the corporation, since thatpresident, as an individ)al, and the corporation are separate entities$ Cru4 v.!alisay , 1&2 S :A %-4 1'-4(; Booc v. Bantuas% .&% S :A 24' 2001($

t is horn*oo6 law that corporate personality is a shield against personallia*ility of its o8cersHa corporate o8cer and his spo)se cannot *e madepersonally lia*le )nder a tr)st receipt where he entered into and signed thecontract clearly in his o8cial capacity$ ntestate Estate o# Alexander '. 'y v. Court o# A""eals% .& S :A 1 2001(; Consolidated Ban) and 'rust Cor". v. Court o#

A""eals , .& S :A 41 2001($

+he President of the corporation which *ecomes lia*le for the accident ca)sed*y its tr)c6 driver cannot *e held solidarily lia*le for the )dgment o*ligationarising from 5)asi3delict, since the fact alone of *eing President is not s)8cient tohold him solidarily lia*le for the lia*ilities ad )dged against the corporation and itsemployee$ $ecosa v. Heirs o# Er+in $uare4 0ancisco , %.. S :A 24. 200%($

Bhen the comp)lsory co)nterclaim led against corporate o8cers for theiralleged fra)d)lent act indicate that s)ch corporate o8cers are indispensa*leparties in the litigation, the original incl)sion of the corporation in the s)it doesnot there*y allow the denial of a speci c co)nter3claim *eing led to ma6e thecorporate o8cers personally lia*le$ A corporation has a legal personality entirelyseparate and distinct from that of its o8cers and cannot act for and on their*ehalf, witho)t *eing so a)thori9ed$ *a#arge Cement Phils.% nc. v. ContinentalCement Cor". , %%. S :A &22 200%($

3 4 %ealings Between Corporation and Stockholders8

+he fact that the ma ority stoc6holder had )sed his own money to pay part of the loan of the corporation cannot *e )sed as the *asis to pierce$ > t is)nderstanda*le that a shareholder wo)ld want to help his corporation and in theprocess, ass)re that his sta6es in the said corporation are sec)red$? *BP v. Court o#

A""eals% . % S :A .4& 2001($

Use of a controlling stoc6holderGs initials in the corporate name is not s)8cientreason to pierce the corporate veil, since *y that practice alone does it mean thatthe said corporation is merely a d)mmy of the individ)al stoc6holder$ Acorporation may ass)me any name provided it is lawf)l, and there is nothingillegal in a corporation ac5)iring the name or as in this case, the initials of one of

its shareholders$ *BP v. Court o# A""eals% . % S :A .4& 2001($ +he mere fact that a stoc6holder sells his shares of stoc6 in the corporation

d)ring the pendency of a collection case against the corporation, does not ma6es)ch stoc6holder personally lia*le for the corporate de*t, since the disposingstoc6holder has no personal o*ligation to the creditor, and it is the inherent rightof the stoc6holder to dispose of his shares of stoc6 anytime he so desires$ -emo%

,r. v. AC , 142 S :A %0& 1'-'(; PNB v. -itratto 1rou"% nc. , . 2 S :A 21 2001($

L)st *eca)se two foreign companies came from the same co)ntry and closelywor6ed together on certain pro ects wo)ld the concl)sion arise that one was thecond)it of the other, th)s piercing the veil of corporate ction$ Marubeni Cor". v.*irag% . 2 S :A 20 2001($

12



+he creation *y I P as the mother company of the three mining corporationsto manage and operate the assets ac5)ired in the foreclos)re sale lest theydeteriorate from non3)se and lose their val)e, does not indicate fra)d orwrongdoing and will not constit)te application of the piercing doctrine$ !BP v.Court o# A""eals% . . S :A .04 2001($

+he property of the corporation is not the property of its stoc6holders ormem*ers and may not *e sold *y the stoc6holders or mem*ers witho)t expressa)thori9ation from the corporationGs *oard of directors$ (oodchild Holdings% nc. v.-oxas Electric and Construction Com"any% nc. , %. S :A 2.& 200%($

3 4 2n Privileges En5oyed8 +he tax exemption cla)se in the charter of acorporation cannot *e extended to nor en oyed *y even its controllingstoc6holders$ Manila 1as Cor". v. Collector o# nternal -evenue , 2 Phil$ -'&1'. ($

3$4 2'ligations and %e'ts8 orporate de*t or credit is not the de*t or credit of the stoc6holder nor is the stoc6holderTs de*t or credit that of the corporation$'raders -oyal Ban) v. Court o# A""eals , 144 S :A 4-' 1'-'($

A corporation has no legal standing to le a s)it for recovery of certain parcelsof land owned *y its mem*ers in their individ)al capacity, even when thecorporation is organi9ed for the *ene t of the mem*ers$ $ulo ng Bayan v. Araneta%

nc $, 42 S :A .%4 1'4 ($Stoc6holders have no personality to intervene in a collection case covering the

loans of the corporation since the interest of shareholders in corporate property isp)rely inchoate$ $a+ v. CA , 1'& S :A 4%0 1''1(; and vice>versa 0rancisco MotorsCor". v. Court o# A""eals% .0' S :A 42 1'''($

+he ma ority stoc6holder cannot *e held personality lia*le for the attorneyGsfees charged *y a lawyer for representing the corporation$ *a"eral !ev. Cor". v.Court o# A""eals , 22. S :A 2 1 1''.($

Even when the foreclos)re on the corporate assets was wrongf)l done,stoc6holders have no standing to recover for themselves moral damages;otherwise, it wo)ld amo)nt to the appropriation *y, and the distri*)tion to, s)chstoc6holders of part of the corporationGs assets *efore the dissol)tion of thecorporation and the li5)idation of its de*ts and lia*ilities$ AP' v. Court o# A""eals%.00 S :A &4' 1''-($

+he o*ligations of a stoc6holder in one corporation cannot *e o/set from theo*ligation of the stoc6holder in a second corporation, since the corporation has aseparate )ridical personality$ C3H ndustrial and !ev. Cor" v. Court o# A""eals%242 S :A ... 1''4($

B. P IERCING THE V EIL O C ORPORATE ICTION *

1. S%?& $ %+ I# '#('( %#* 1nited States v. &ilwaukee $efrigerator Transit Co. , 1 2 $ . 2 3190 4.

+he notion of corporate entity will *e pierced or disregarded and the individ)als

composing it will *e treated as identical if the corporate entity is *eing )sed as acloa6 or cover for fra)d or illegality; as a )sti cation for a wrong; or as an alterego, an ad )nct, or a *)siness cond)it for the sole *ene t of the stoc6holders$1ochan v. oung , .&% S :A 204 2001(; !BP v. Court o# A""eals , .&4 S :A 2 ,.&- S :A &01, . . S :A .04 2001(; - & E 'rans"ort% nc. v. *atag , %22 S :A '-200%(;$ $ecosa v. Heirs o# Er+in $uare4 0ancisco , %.. S :A 24. 200%(; Martine4 v.Court o# A""eals , %.- S :A 1.' 200%(; Mc*eod v. N*-C , &12 S :A 222 2004($

As a general r)le, a corporation will *e loo6ed )pon as a legal entity, )nless and)ntil s)8cient reason to the contrary appears$ Bhen the notion of legal entity is)sed to defeat p)*lic convenience, )stify wrong, protect fra)d, or defend crime,the law will regard the corporation as an association of persons$ Also, the corporate

1'



entity may *e disregarded in the interest of )stice in s)ch cases as fra)d that maywor6 ine5)ities among mem*ers of the corporation internally, involving no rights of the p)*lic or third persons$ n *oth instances, there m)st have *een fra)d andproof of it$ or the separate )ridical personality of a corporation to *e disregarded,the wrong3doing m)st *e clearly and convincingly esta*lished$ t cannot *epres)med$ $uldao v. Cimech $ystem Construction% nc. , &0 S :A 2& 200 ($

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

>+he rationale *ehind piercing a corporationGs identity in a given case is toremove the *arrier *etween the corporation from the persons comprising it tothwart the fra)d)lent and illegal schemes of those who )se the corporatepersonality as a shield for )nderta6ing certain proscri*ed activities$ Oowever, in thecase at *ar, instead of holding certain individ)als or person responsi*le for analleged corporate act, the sit)ation has *een reversed$ t is the petitioner as acorporation which is *eing ordered to answer for the personal lia*ility of certainindivid)al directors, o8cers and incorporators concerned$ Oence, it appears to )sthat the doctrine has *een t)rned )pside down *eca)se of its erroneo)sinvocation$? Francisco &otors Corp. v Court of *ppeals , 09 SCRA 2319994.

+he notion of separate personality, however, may *e disregarded )nder the

doctrineH>piercing the veil of corporate ction?Has in fact the co)rt will often loo6at the corporation as a mere collection of individ)als or an aggregation of persons)nderta6ing *)siness as a gro)p, disregarding the separate )ridical personality of the corporation )nifying the gro)p$ Traders $oyal Bank v. Court of *ppeals ,2<9 SCRA 1 3199 4 $

Another form)lation of this doctrine is that when two 2( *)siness enterprisesare owned, cond)cted and controlled *y the same parties, *oth law and e5)ity will,when necessary to protect the rights of third parties, disregard the legal ction thattwo corporations are distinct entitled and treat them as identical or one and thesame$ 1eneral Credit Cor". v. Alsons !ev. and nvestment Cor". , &1. S :A 22&2004($

Piercing the veil of corporation ction is warranted only in cases when the

separate legal entity is )sed to defeat p)*lic convenience, )stify wrong, protectfra)d, or defend crime, s)ch that in the case of two corporations, the law will regardthe corporation as merged into one$ 5elarde v. *o"e4 , %1' S :A %22 200%($

+he legal ction of separate corporate existence is not at all times invinci*leand the same may *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* ectives or toshield an otherwise *latant violation of the prohi*ition against for)m3shopping$Bhile it is settled that the piercing of the corporate veil has to *e done withca)tion, this corporate ction may *e disregarded when necessary in the interest of

)stice$ -ovels Enter"rises% nc. v. 9cam"o , .'1 S :A 14 2002($

3'4 E6uita'le $emedy8 +he doctrine of piercing the corporate veil is an e5)ita*ledoctrine developed to address sit)ations where the separate corporate

personality of a corporation is a*)sed or )sed for wrongf)l p)rposes$ PNB v.-itratto 1rou"% nc.% . 2 S :A 21 2001($

Bhether the separate personality of the corporation sho)ld *e pierced hingeson the o*taining facts, appropriately pleaded or proved$ Oowever, any piercing of the corporate veil has to *e done with ca)tion, al*eit the o)rt will not hesitate todisregard the corporate veil when it is mis)sed or when necessary in the interest of

)stice$ After all, the concept of corporate entity was not mean to promote )nfairo* ectives$ 1eneral Credit Cor". v. Alsons !ev. and nvestment Cor". , &1. S :A 22&2004($

354 $emedy of Last $esort8 Piercing the corporate veil is remedy of last resortand is not availa*le when other remedies are still availa*le$ 1mali v. Court of

1$



*ppeals , 189 SCRA 29 319904. Bhen Umali said that all piercing cases areto hold stoc6holders personally lia*le < U7A! BAS OC:: !R B:C#N(

3 4 2'5ectives for *vailing of Piercing8 Piercing is not allowed )nless theremedy so)ght is to ma6e the o8cer or another corporation pec)niarily lia*lefor corporate de*ts$ ( #ndophil Te3tile &ill -orkers 1nion9PT -2 v.Calica , 20 SCRA <9 319924.

Piercing is not availa*le when personal o*ligations of an individ)al are to *e

enforced against the corporation ( -obledo v. N*-C% 2.- S :A &2 1''%($Piercing doctrine is meant to prevent fra)d, and cannot *e employed when the

net res)lt wo)ld *e to perpetrate fra)d or a wrong$ 1regorio Araneta% nc. v. 'uasonde Paterno and 5idal , '1 Phil$ 4- 1'&2($

+he theory of corporate entity was not meant to promote )nfair o* ectives orotherwise, nor to shield them$ 5illanueva v. Adre , 142 S :A -4 1'-'($

+he attempt to ma6e the sec)rity agencies appear as two separate entities,when in reality they were *)t one, was a devise to defeat the law i$e$, in this caseno avoid lia*ilities )nder la*or lawsF and sho)ld not *e permitted$ Enri/ue4 $ecurity $ervices% nc. v. Cabota e , %' S :A 1 ' 200 (; where, the fra)d wascommitted *y petitioners to the pre )dice of respondent *an6$ Mendo4a v. Banco-eal !ev. Ban) , %40 S :A - 200&($

3 4 Basis &ust Be Clear Evidence8 +o disregard the separate )ridicalpersonality of a corporation, it is elementary that the wrongdoing cannot *epres)med and m)st *e clearly and convincingly esta*lished$ +he organi9ationof the corporation at the time when the relationship *etween the landowner andthe developer were still cordial cannot *e )sed as a *asis to hold thecorporation lia*le later on for the o*ligations of the landowner to the developer)nder the mere allegation that the corporation is *eing )sed to evade theperformance of o*ligation *y one of its ma or stoc6holders$ *uxuria Homes% nc.v. Court o# A""eals% .02 S :A .1& 1'''($

+he mere assertion *y a ilipino litigant against the existence of a >tandem?*etween two Lapanese corporations cannot *e the *asis for piercing, which can only*e applied *y showing wrongdoing *y clear and convincing evidence$ MarubeniCor". v. *irag% . 2 S :A 20 2001($

+o disregard the separate )ridical personality of a corporation, the wrongdoingm)st *e clearly and convincingly esta*lished$ t cannot *e pres)med$ n this case,the o)rt nds that the :emington failed to discharge its *)rden of proving *adfaith on the part of 7arind)5)e 7ining and its transferees in the mortgage andforeclos)re of the s)* ect properties to )stify the piercing of the corporate veil$!BP v. Court o# A""eals , . . S :A .04 2001($ Also Mc*eod v. N*-C , &12 S :A 2222004(; 8y v. 5illanueva , &2 S :A 4. 2004($

+he party see6ing for the piercing of the corporate veil has the *)rden of presenting clear and convincing evidence to )stify the setting aside of theseparate corporate personality r)le$ PNB v. Andrada Electric & Engineering Co. , .-1S :A 2%% 2002($

Application of the doctrine of piercing the corporate veil sho)ld *e done withca)tion$ A co)rt sho)ld *e mindf)l of the milie) where it is to *e applied$ t m)st *ecertain that the corporate ction was mis)sed to s)ch an extent that in )stice,fra)d, or crime was committed against another, in disregard of its rights$ +hewrongdoing m)st *e clearly and convincingly esta*lished; it cannot *e pres)med$Ctherwise, an in )stice that was never )nintended may res)lt from an erroneo)sapplication$ PNB v. Andrada Electric & Engineering Co. , .-1 S :A 2%% 2002($

3$4 ,ot *pplica'le to Theori!ing8 Piercing of the veil of corporate ction is notallowed when it is resorted )nder a theory of co3ownership to )stify contin)ed

1%



estate of the decedent, to escape lia*ility arising for a de*t, or to perpet)ate fra)dand=or conf)se legitimate iss)es either to promote or to shield )nfair o* ectives tocover )p an otherwise *latant violation of the prohi*ition against for)m shopping$Cnly is these and similar instances may the veil *e pierced and disregarded$ PNB v.

Andrada Electric & Engineering Co. , .-1 S :A 2%% 2002($

S?//'&: %+ P&%5'( @$ ' (%&;* Concept Builders" #nc. v. ,L$C , 2SCRA 1 9 3199<4 ; PNB v. -itratto 1rou"% nc. , . 2 S :A 21 2001(; 5elarde v.*o"e4 , %1' S :A %22 200%(; ,ardine !avies% nc. v. ,-B -ealty% nc. , % . S :A &&&200&($

+he a*sence of these elements prevents piercing the corporate veil$ *im v.Court o# A""eals , .2. S :A 102 Child *earning Center% nc. v. 'agorio , %4& S :A2. 200&(; 1eneral Credit Cor". v. Alsons !ev. and nvestment Cor". , &1. S :A22& 2004(; Nisce v. E/uitable PC Ban)% nc. , &1 S :A 2.1 2004($

. &'? C';$;*

Bhen the legal ction of the separate corporate personality is a*)sed, s)ch aswhen the same is )sed for fra)d)lent or wrongf)l ends, the co)rts have nothesitated to pierce the corporate veil$ Francisco v. &e5ia" <2 SCRA 8320014.

+he general r)le is that o*ligations inc)rred *y a corporation, acting thro)gh itsdirectors, o8cers or employees, are its sole lia*ilities$ Oowever, the veil with whichthe law covers and isolates the corporation from its directors, o8cers or employeeswill *e lifted when the corporation is )sed *y any of them as a cloa6 or cover forfra)d or illegality or in )stice$ Oere, the fra)d was committed *y petitioners to thepre )dice of respondent *an6$ Mendo4a v. Banco -eal !ev. Ban) , %40 S :A -200&($

ra)d and *ad faith on the part of certain corporate o8cers or stoc6holders maywarrant the piercing of the veil of corporate ction so that the said individ)al maynot see6 ref)ge therein, *)t may *e held individ)ally and personally lia*le for his orher actions$ *a#arge Cement Phils.% nc. v. Continental Cement Cor". , %%. S :A &22200%($

Oowever, mere allegation of fra)d or *ad faith, witho)t evidence s)pportings)ch claims cannot warrant the piercing of the corporate veil$ !BP v. Court o# A""eals , .&4 S :A 2 , .&- S :A &01, . . S :A .04 2001($

3'4 *cts 'y Controlling Shareholder8 Bhere a stoc6holder, who has a*sol)tecontrol over the *)siness and a/airs of the corporation, entered into a contractwith another corporation thro)gh fra)d and false representations, s)chstoc6holder shall *e lia*le soidarily with co3defendant corporation even whenthe contract s)ed )pon was entered into on *ehalf of the corporation$ ,amarco v. *ssociated Finance Co. , 19 SCRA 9<2 319< 4.

Bhere the corporation is )sed as a means to appropriate a property *y fra)dwhich property was later resold to the controlling stoc6holders, then piercing sho)ld*e allowed$ Heirs o# -amon !urano% $r. v. 8y , .%% S :A 2.- 2000($

354 *voidance of Ta3es8 +he plea to pierce the veil of corporate ction on theallegation that the corporations tr)e p)rpose is to avoid payment *y theincorporating spo)ses of the estate taxes on the properties transferred to thecorporations@ >Bith regard to their claim that the companiesF Ellice and 7argowere meant to *e )sed as mere tools for the avoidance of estate taxes, s)8ce itto say that the legal right of a taxpayer to red)ce the amo)nt of what otherwiseco)ld *e his taxes or altogether avoid them, *y means which the law permits,cannot *e do)*ted$? 1ala v. Ellice Agro> ndustrial Cor". , %1- S :A %.1 200.($

3 4 *voidance of Contractual Commitments or Civil Lia'ilities8 Cne cannotevade civil lia*ility *y incorporating properties or the *)siness$ Palacio v. Fely

1(



Transportation Co. , SCRA 1011 319<24 $ Also Mendo4a and oto)o v. Banco-eal !ev. Ban) , %40 S :A - 200&($

Bhen )sed to avoid a contract)al commitment against non3competition$ =illa$ey Transit" #nc. v. Ferrer , 2 SCRA 8 319<84 $

Bhere a de*tor registers his residence to a family corporation in exchange of shares of stoc6 and contin)es to live therein, then the separate )ridical personalitymay *e disregarded$ PBCom v. CA , 1'& S :A & 4 1''1($

3 4 *voiding Legal $estrictions8 +he corporate veil cannot *e )sed to shield anotherwise *latant violation of the prohi*ition against for)m3shopping$Shareholders, whether s)ing as the ma ority in direct actions or as the minorityin a derivative s)it, cannot *e allowed to triJe with co)rt processes, partic)larlywhere the corporation itself has not *een remiss in vigoro)sly prosec)ting ordefending corporate ca)ses and in )sing and applying remedies availa*le to it$0irst Phili""ine nternational Ban) v. Court o# A""eals , 2&2 S :A 2&' 1'' ($

3$4 Thinly9capitali!ed corporations8 &cConnel v. C* , 1 SCRA 22 319<14.

3+4 Parent9Su'sidiary $elations> *7liates * Commissioner o# nternal -evenuev. Norton and Harrison , 11 S :A 40%, 1'&%F; 'omas *ao Construction v. N*-C ,24- S :A 41 1''4F($

+he fact that a corporation owns all of the stoc6s of another corporation, ta6enalone, is not s)8cient to )stify their *eing treated as one entity$ f )sed to performlegitimate f)nctions, a s)*sidiaryGs separate existence shall *e respected, and thelia*ility of the parent corporation, as well as the s)*sidiary shall *e con ned tothose arising in their respective *)siness$ A corporation has a separate personalitydistinct from its stoc6holders and from other corporations to which it may *econd)cted$ +his separate and distinct personality of a corporation is a ctioncreated *y law for convenience and to prevent in )stice$ Nisce v. E/uitable PCBan)% nc. , &1 S :A 2.1 2004($

Oowever, mere ownership *y a single stoc6holder or *y another corporation of all or nearly all of the capital stoc6s of a corporation is not *y itself a s)8cientgro)nd to disregard the separate corporate personality$ +he s)*stantial identity of

the incorporators of two or more corporations does not warrantly imply that therewas fra)d so as to )stify the piercing of the writ of corporate ction$ +o disregardthe said separate )ridical personality of a corporation, the wrongdoing m)st *eproven clearly and convincingly$ Martine4 v. Court o# A""eals , %.- S :A 1.0200%($

3 4 uiding Principles in Fraud Cases *

-hy is there inordinate showing of alter9ego elements) • +here m)st have *een fra)d or an evil motive in the a/ected transaction, and

the mere proof of control of the corporation *y itself wo)ld not a)thori9epiercing;

•

+he corporate ction is )sed as a means to commit the fra)d or avoid theconse5)ences thereof; and• +he main action sho)ld see6 for the enforcement of pec)niary claims

pertaining to the corporation against corporate o8cers or stoc6holders$

:espondent corporations may *e engaged in the same *)siness or even sharethe same address,or have interloc6ing incorporators, directors or o8cers, in thea*sence of fra)d or other p)*lic policy consideration, does not warrant piercing theveil of corporate ction$ Mc*eod v. N*-C , &12 S :A 222 2004(, /uoting #romndo"hil 'extile Mill (or)ers 8nion v. Calica , 20& S :A '4 1''2(, and !el -osariov. N*-C , 1-4 S :A 444 1''0($

10



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

3'4 Factual Basis8 +he 5)estion of whether a corporation is a mere alter ego is ap)rely one of fact, and the *)rden is on the party who alleges it$ PNB v. AndradaElectric & Engineering Co. , .-1 S :A 2%% 2002($ Also Conce"t Builders% nc. v.N*-C% 2&4 S :A 1%' 1'' (; Heirs o# -amon !urano% $r. v. 8y% .%% S :A 2.-2000(; M- Holdings% *td. 5. Ba ar , .-0 S :A 14 2002($

354 1sing Corporation as Conduit or *lter Ego8Bhere the capital stoc6 is owned *y one person and it f)nctions only for the

*ene t of s)ch individ)al owner, the corporation and the individ)al sho)ld *edeemed the same$ *rnold v. -illets and Patterson" Ltd. , Ph !. < 3192 4 $

Bhen corporation is merely an ad )nct, *)siness cond)it or alter ego of anothercorporation, the ction of separate and distinct corporation entities sho)ld *edisregarded$ 'an Boon Bee & Co. v. ,arencio% 1 . S :A 20& 1'--($

+he o)rt agrees with the disposition of the appellate co)rt on the applicationof the piercing doctrine to the transaction s)* ect of this case$ Per the o)rtGsco)nt, the trial co)rt en)merated no less than 20 doc)mented circ)mstances andtransaction, which ta6en as a pac6age, indeed strongly s)pported the concl)sionthat respondent EQU +R was *)t an ad )nct, as instr)mentality or *)siness cond)it

of petitioner eneral Credit Corp. v. *lsons %ev. and #nvestment Corp. , 1SCRA 22 3200 4 $

#either has it *een alleged or proven that 7erryland is so organi9ed andcontrolled and its a/airs are so cond)cted as to ma6e it merely an instr)mentality,agency cond)it or ad )nct of ardale$ Even ass)ming that the *)sinesses of ardale and 7erryland are interrelated, this alone is not )sti cation for

disregarding their separate personalities, a*sent any showing that 7erryland wasp)rposely )sed as a shield to defra)d creditors and third persons of their rights$0rancisco v. Me ia , . 2 S :A 4.- 2001($

3 4 *voidance of ta3es8 <utivo Sons ardware v. Court of Ta3 *ppeals 1SCRA 1<0 319<14 ; *iddell & Co. v. Collector o# nternal -evenue , 2 S :A .21' 1($

Use of nominees to constit)te the corporation for the *ene t of the controllingstoc6holder who so)ght to avoid payment of taxes$ Marvel Building v. !avid , ' Phil$.4 1'&1( $

3 4 &i3ing9up 2perations> %isrespect to the Corporate Entity8

Employment of same wor6ers; single place of *)siness, etc$, may indicate alterego sit)ation$ La Campana Co?ee Factory v. /aisahan ng &anggagawa , 9Ph !. 1<0 319 4 Shoemart v. ,L$C" 22 SCRA 11 3199 ($

+he facts that two corporations may *e sister companies, and that they may *esharing personnel and reso)rces, witho)t more, is ins)8cient to prove that theirseparate corporate personalities are *eing )sed to defeat p)*lic convenience,

)stify wrong, protect fra)d, or defend crime$ Padilla v. Court of *ppeals , 0SCRA 208 320014.

Bhere two *)siness enterprises are owned, cond)cted, and controlled *y thesame parties, *oth law and e5)ity will, when necessary to protect the rights of thirdpersons, disregard the legal ction that two corporations are distinct entities andtreat them as identical$ $ibagat 'imber Cor". v. 1arcia , 21 S :A 40 1''2($

7ixing of personal acco)nts with corporate *an6 deposit acco)nts$ -amire4 'ele"hone Cor". v. Ban) o# America , 2' S :A 1'1 1' '($

3 4 Parent9su'sidiary> *7liated Companies8 3o""el 6Phil.7% nc. v. atco , 44Phil$ '4 1'% (; PH 5 !EC v. Court o# A""eals , 1-1 S :A ' 1''0($

1&



A s)*sidiary corporation has an independent and separate )ridical personality,distinct from that of its parent company, hence, any claim or s)it against the latterdoes not *ind the former and vice3versa$ ,ardine !avies% nc. v. ,-B -ealty% nc. , % .S :A &&& 200&($

A*sence of proof that control over a corporation is *eing )sed *y a mothercompany to commit fra)d or wrong, there wo)ld *e no *asis to disregard theirseparate )ridical personalities$ -amoso v. Court o# A""eals% .%4 S :A % . 2000(;1uatson nt l 'ravel and 'ours% nc. v. N*-C% 2.0 S :A -1& 1''0($

f )sed to perform legitimate f)nctions, a s)*sidiaryGs separate existence shall*e respected, and the lia*ility of the parent corporation as well as the s)*sidiarywill *e con ned to those arising in their respective *)sinesses$ Even when theparent corporation agreed to the terms to s)pport a stand*y credit agreement infavor of the s)*sidiary, does not mean that its personality has merged with that of the s)*sidiary$ M-. Holdings% *td. 5. Ba ar , .-0 S :A 14 2002($

3$4 uiding Principles in *lter9Ego Cases8• Ioctrine applies even in the a*sence of evil intent, *eca)se of the direct

violation of a central corporate law principle of separating ownership frommanagement;

• Ioctrine in s)ch case is *ased on estoppel@ if stoc6holders do not respect theseparate entity, others cannot also *e expected to *e *o)nd *y the separate

)ridical entity;• Piercing in alter ego cases may prevail even when no monetary claims are

so)ght to *e enforced against the stoc6holders or o8cers of the corporation$

3+4 %istinction Between Fraud Piercing and *lter9ego Piercing8 Lipat v.Paci(c Banking Corp. , 02 SCRA 9 3200 4 $

<. EF? (: C';$;*

3'4 Bhen )sed to conf)se legitimate iss)es$ 'ele"hone Engineering and $erviceCo.% nc. 5. (CC , 10% S :A .&% 1'-1($

Bhere corporate ction was )sed to perpetrate social in )stice or as a vehicle toevade o*ligations or conf)se the legitimate iss)es as in this case where theactions of management of the two corporations created conf)sion as to the properemployer of claimants(, it wo)ld *e discarded and the two corporations wo)ld *emerged as one$ A4cor Manu#acturing% nc. v. N*-C% .0. S :A 2 1'''($

354 Bhen )sed to raise technicalities$ Emilio Cano Ent. v. C - , 1. S :A 2'1 1' &($

. D?$ P&% $;; C!'?;$

3'4 #eed to *ring a new case against the o8cer$ McConnel v. Court o# A""eals , 1S :A 42. 1' 1($

A s)it against individ)al shareholders in a corporation is not a s)it against thecorporation$ ail)re to implead the corporations as defendants and merelyannexing a list of s)ch corporations to the complaints is a violation of d)e processfor it wo)ld in e/ect *e disregarding their distinct and separate personality witho)ta hearing$ PC11 v. $andiganbayan% . & S :A &.- 2001($

Altho)gh *oth lower co)rts fo)nd s)8cient *asis for the concl)sion that PVAand Phoenix Cmega were one and the same, and the former is merely a cond)it of the other the S)preme o)rt held void the application of a writ of exec)tion on a

)dgment held only against PVA, since the :+ o*tained no )risdiction over theperson of Phoenix Cmega which was never s)mmoned as formal party to the case$

+he general principle is that no person shall *e a/ected *y any proceedings to

2)



which he is a stranger, and strangers to a case are not *o)nd *y the )dgmentrendered *y the co)rt$ Padilla v. Court of *ppeals , 0 SCRA 208 320014 $

354 Bhen corporate o8cers are s)ed in their o8cial capacity when the corporationwas not made a party, the corporation is not denied d)e process$ Emilio CanoEnter"rises v. C - , 1. S :A 2'1 1' &($

3 4 Provided that evidential *asis has *een add)ced d)ring trial to apply thepiercing doctrine$ 0acinto v. Court of *ppeals , 198 SCRA 211 319914 ;

Arcilla v. Court o# A""eals , 21& S :A 120 1''2($

V. 3 CLASSI ICATIONS O CORPORATIONS

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

3'4 Pu'lic Corporation Sec$ ., Act #o$ 1%&'($354 4uasi9pu'lic Corporation. Marilao (ater Consumers Associates v. AC , 201

S :A %.4 1''1(;3 4 Private Corporation Sec$ ., Act 1%&'($

NovernmentGs ma ority shares does not ma6e an entity a p)*lic corporation$National Coal Co.% v. Collector o# nternal -evenue , % Phil$ &-. 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 acharter$ Bliss !ev. Cor". Em"loyees 8nion v. Calle a% 2.4 S :A 241 1''%($

+he test to determine whether a corporation is government owned or controlled,or private in nat)re is simple$ s it created *y its own charter for the exercise of ap)*lic f)nction, or *y incorporation )nder the general corporation law +hose withspecial charters are government corporations s)* ect to its provisions, and itsemployees are )nder the )risdiction of the ivil Service ommission, and arecomp)lsory mem*ers of the NS S$ Cam"aredondo v. N*-C , .12 S :A %4 1'''(

Bhile p)*lic *ene t and p)*lic welfare may *e attri*)ta*le to the operation of the ases onversion and Ievelopment A)thority IA(, yet it is certain that thef)nctions it performs are *asically proprietary in nat)reHthe promotion of economic and social development of entral !)9on, partic)larly, and the co)ntryGsgoal for enhancement$ +herefore, the r)le that prescription does not r)n againstthe State will not apply to IA, it *eing said that when title of the :ep)*lic has*een divested, its grantees, altho)gh arti cial *odies of its own creation, are in thesame category as ordinary persons$ $hi"side nc. v. Court o# A""eals% .&2 S :A..% 2001($

Altho)gh oy Sco)ts of the Philippines does not receive any monetary ornancial s)*sidy from the Novernment, and its f)nds and assets are not consideredgovernment in nat)re and not s)* ect to a)dit *y the CA, the fact that it receiveda special charter from the government, that its governing *oard are appointed *ythe Novernment, and that its p)rpose are of p)*lic character, for they pertain tothe ed)cational, civic and social development of the yo)th which constit)te a very

s)*stantial and important part of the nation, it is not a p)*lic corporation in thesame sense that m)nicipal corporation or local governments are p)*lic corporationsince its does not govern a portion of the state, *)t it also does not haveproprietary f)nctions in the same sense that the f)nctions or activities of government3owned or controlled corporations, is may still *e considered as s)ch, or)nder the 1'-4 Administrative ode as an instr)mentality of the Novernment, andit employees are s)* ect to the ivil Service !aw$ Boy $couts o# the Phili""ines v.N*-C , 1' S :A 14 1''1($

)t *eing a NC ma6es it lia*le for laws and provisions applica*le to theNovernment or its entities and s)* ect to the control of the Novernment$ Cervantesv. Auditor 1eneral , '1 Phil$ .&' 1'&2($

21



A government3owned or controlled corporation m)st *e organi9ed as a stoc6 ornon3stoc6 corporation$ +he 7 AA is not a government3owned or controlledcorporation *eca)se it is not constit)ted of capital divided into shares of stoc6, andneither is it a nonstoc6 corporation *eca)se it has no mem*ers$ 7 AA is agovernment instr)mentality vested with corporate powers to perform e8ciently itsgovernment f)nctions$ Manila nternational Air"ort Authority v. Court o# A""eals ,%'& S :A &'1 200 ($

eyond cavil, a NC has a personality of its own, distinct and separate fromthat of the government, and the intervention in a transaction of the C8ce of thePresident thro)gh the Exec)tive Secretary does not change the independentexistence of a government entity as it deals with another government entity$ P8Pv. Court o# A""eals , . - S :A '1 2001($

+he doctrine that employees of NC s, whether created *y special law orformed as s)*sidiaries )nder the general corporation law are governed *y the ivilService !aw and not *y the !a*or ode, has *een s)pplanted *y the 1'-4onstit)tion$ +he present doctrine in determining whether a NC is s)* ect to theivil Service !aw is the manner o# its creation , s)ch that government corporationscreated *y special charter are s)* ect the ivil Service !aw, while thoseincorporated )nder the general corporation law are governed *y the !a*or ode$PN9C>Energy !evelo"ment Cor". v. N*-C , 201 S :A %-4 1''1(; !avao City (ater

!istrict v. Civil $ervice Commission , 201 S :A &'. 1''1($Section .1 of orporation ode *iability o# !irectors and 9 cers ( is applica*le

to corporations which have *een organi9ed *y special charters since Sec$ % of orporation ode renders the provisions s)pplementarily applica*le to all

corporations, incl)ding those with special or individ)al charters, s)ch ascooperatives organi9ed )nder P$I$ 2 ', so long as those provisions are notinconsistent with s)ch charters$ Benguet Electric Coo"erative% nc. v. N*-C , 20'S :A && 1''2($

Bater districts can validly exists as corporate entities )nder PI 1'-, andprovided they are government3owned or controlled, and their *oard of directors andother personnel are government employees s)* ect to civil service laws and anti3graft laws$ 0eliciano v. Commission on Audit , %1' S :A . . 200%($

2. A; (% P!' $ %+ I# %&"%&'( %#*3'4 %omestic Corporation354 Foreign Corporation Sec$ 12.(

. A; (% P?&"%;$ %+ I# %&"%&'( %#*3'4 &unicipal Corporation354 $eligious Corporation Secs$ 10' and 11 (

Since in matters p)rely ecclesiastical the decisions of the proper ch)rchtri*)nals are concl)sive )pon the civil tri*)nals, then a ch)rch mem*er who isexpelled from the mem*ership *y the ch)rch a)thorities, or a priest or ministerwho is *y them deprived of his sacred o8ce, is witho)t remedy in the civil co)rts$

*ong v. Basa , . S :A 11. 2001($3 4 Educational Corporations Secs$ 10 , 104 and 10-; Sec$ 2&, $P$ lg$ 2.2(

3 4 Charita'le" Scienti(c or =ocational Corporations

3$4 Business Corporation

. A; (% N?/5$& %+ M$/5$&;*3'4 *ggregate Corporation

354 Corporation Sole Secs$ 110 to 11&; -oman Catholic A"ostolic Administrator o# !avao% nc. v. *-C and the -egister o# !eeds o# !avao City , 102 Phil$ &'1'&4F($

22



+he doctrine in -e"ublic v. 5illanueva , 11% S :A -4& 1'-2( and -e"ublic v.glesia ni Cristo , 124 S :A -4 1'-%(, that a corporation sole is dis5)ali ed toac5)ire=hold aliena*le lands of the p)*lic domain, *eca)se of the constit)tionalprohi*ition 5)alifying only individ)als to ac5)ire land and the provision )nder theP)*lic !and Act which applied only to ilipino citi9ens or nat)ral persons, has *eene3pressly overturned in !irector o# *and v. AC , 1% S :A &0' 1'- ($ 1

. A; (% L$ '! S('(?;*

3'4 %e 0ure C%&"%&'( %#354 %e Facto C%&"%&'( %# Sec$ 20(

3 4 C%&"%&'( %# 5: E;(%""$! Sec$ 21(

<. A; (% E ;($# $ %+ Sh'&$; Secs$ . and &(@3'4 Stock Corporation354 ,on9Stock Corporation

1Overturning affirmed in Republic v. Iglesia ni Cristo , 12( *C+ /0( 1&0$- Republic v. IAC , 1/0 *C+ 1/% 1&00-.

2'



VI. CORPORATE CONTRACT LAW

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

3'4 -ho *re Promoters)

>Promoter? is a person who, acting alone or with others, ta6es initiative info)nding and organi9ing the *)siness or enterprise of the iss)er and receivesconsideration therefor$ Sec$ .$10, Sec)rities :eg)lation ode :$A$ -4''F(

354 ,ature of Pre9incorporation *greements Secs$ 0 and 1; Bayla v. $ilang'ra c Co.% nc. , 4. Phil$ &&4 1'%2F($

3 4 Theories on Lia'ilities for Promoter@s Contracts Cagayan Fishing %ev.Co." #nc. v. Teodoro Sandiko , < Ph !. 22 =19 > $i!al Light A #ce Co."#nc. v. Pu'lic Service Comm. , 2 SCRA 28 =19<8> Caram" 0r. v. C* , 1 1SCRA 2 =198 > ($

2. %e Facto C%&"%&'( %# Sec$ 20(

3'4 Elements8 *rnold all v. Picci o , 8< Ph !. < 319 04.

y its fail)re to s)*mit its *y3laws on time, the A P may *e considered a de#acto corporation whose right to exercise corporate powers may not *e in5)iredinto collaterally in any private s)it to which s)ch corporations may *e a party$$a+ad aan v. Court o# A""eals , %&' S :A &1 200&($

. C%&"%&'( %# 5: E;(%""$! Sec$ 21; Salvatierra v. arlitos , 10 Ph !. =19 8> > *l'ert v. 1niversity Pu'lishing Co. , 1 SCRA 8 =19< > AsiaBan)ing Cor". v. $tandard Products , % Phil$ 1%& 1'2%F; Madrigal $hi""ing Co.% v.9gilvie , && C$N$ #o$ .&, p$ 4..1(

3'4 ,ature of %octrineo)nded on principles of e5)ity and designed to prevent in )stice and

)nfairness, the doctrine applies when persons ass)me to form a corporation andexercise corporate f)nctions and enter into *)siness relations with third persons$Bhere no third person is involved in the conJict, there is no corporation *y

estoppel$ A failed consolidation therefore cannot res)lt in a consolidatedcorporation *y estoppel$ *o4ano v. !e *os $antos , 24% S :A %&2 1''4(

A party cannot challenge the personality of the plainti/ as a d)ly organi9edcorporation after having ac6nowledged same when entering into the contract withthe plainti/ as s)ch corporation for the transportation of its merchandise$ 9hta!ev. Co. v. $teamshi" Pom"ey% %' Phil$ 114 1'2 ($ 2

A person who accepts employment in an )nincorporated charita*le associationis estopped from alleging its lac6 of )ridical personality$ Christian Children s 0undv. N*-C% 14% S :A -1 1'-'($

Cne who deals with an )nincorporated association which is not d)lyincorporated is not estopped to deny its corporate existence when his p)rpose isnot to avoid lia*ility, *)t precisely to enforce the contract against the action for thep)rported corporation$ #nt l E3press Travel v. Court of *ppeals" SCRA< 320004.

Under the law on estoppel incl)ding that )nder Sec$ 21 of orporation ode,those acting on *ehalf of an ostensi*le corporation and those bene2ted by it%)no+ing it to be +ithout valid existence% are held lia*le as general partners$ LimTong Lim v. Philippine Fishing ear #ndustries" #nc. , 1 SCRA 28 319994 $

354 T)% L$@$!;* 3 4 W (h &'? '# 3 4 W (h%?( &'?

2The sa e principle applied in Compania Agricole de Ultramar v. Re es , $ Phil. 1 1&11 but that case pertained to a co ercialpartnership which re3uired registration in the registry under the ter s of the Code of Co erce-.

2$



Bhen the incorporators represent themselves to *e o8cers of the corporationwhich was never d)ly registered with the SE , and engage in the name of thep)rported corporation in illegal recr)itment, they are estopped from claiming thatthey are not lia*le as corporate o8cers )nder Sec$ 2& of orporation ode whichprovides that all persons who ass)me to act as a corporation 6nowing it to *ewitho)t a)thority to do so shall *e lia*le as general partners for all the de*ts,lia*ilities and damages inc)rred or arising as a res)lt thereof$ Peo"le v. 1arcia , 241S :A 21 1''4(; Peo"le v. Pineda , N$:$ #o$ 114010, 1- April 1''4 )np)*($

. T RUST UND D OCTRINE

3'4 Commercial Common Law Premise8 E6uity versus %e'ts Art$ 22. , ivilode(

354 ,ature of %octrine8

Under the tr)st f)nd doctrine, the capital stoc6, property and other assets of thecorporation are regarded as e5)ity in tr)st for the payment of the corporatecreditors$ Comm. o# nternal -evenue v. Court o# A""eals% .01 S :A 1&2 1'''($

+he >tr)st f)nd? doctrine considers the s)*scri*ed capital stoc6 as a tr)st f)ndfor the payment of the de*ts of the corporation, to which the creditors may loo6 forsatisfaction$ Until the li5)idation of the corporation, no part of the s)*scri*ed

capital stoc6 may *e t)rned over or released to the stoc6holder except in theredemption of the redeema*le shares( witho)t violating this principle$ +h)sdividends m)st never impair the s)*scri*ed capital stoc6; s)*scriptioncommitments 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 S :A &0- 1'''($

+he re5)irement of )nrestricted retained earnings to cover the shares is *asedon the tr)st f)nd doctrine which means that the capital stoc6, property and otherassets of a corporation are regarded as e5)tiy in tr)st for the payment of corporatecreditors$ +he reason is that creditors of a corporation are preferred over thestoc6holders in the distri*)tion of corporate assets$ +here can *e no distri*)tion of assets among the stoc6holders witho)t rst paying corporate creditors$ Oence, anydisposition of corporate f)nds to the pre )dice of creditors is n)ll and void$ BomanEnvironmental !ev. Cor". v. CA , 1 4 S :A &%0 1'--($

3 4 T% P?& h';$ O)# Sh'&$; Secs$ -, %1, %. and 122, last paragraph; Phil. 'rust Co. v. -ivera , %% Phil$ % ' 1'2.F; $teinberg v. 5elasco , &2 Phil$ '&. 1'2'F(

3 4 R$; ;; %# %+ S?5; & "( %# A &$$/$#( B';$ %# B&$' h +he violation of terms em*odied in a s)*scription agreement, with are personal

commitments, do not constit)te legal gro)nd to rescind the s)*scription agreementsince s)ch wo)ld violate the +r)st )nd Ioctrine and the proced)res for the validdistri*)tion of assets and property )nder the orporation ode$ > n the instantcase, the rescission of the Pre3S)*scription Agreement will e/ectively res)lt in the)na)thori9ed distri*)tion of the capital assets and property of the corporation,there*y violating the +r)st )nd Ioctrine and the orporation ode, since the

rescission of a s)*scription agreement is not one of the instances when distri*)tionof capital assets and property of the corporation is allowed$? 2ng <ong v. Tiu ,01 SCRA 1 3200 4.

3$4 D ;(& 5?( %# %+ C%&"%&'($ A;;$(;>+he distri*)tion of corporate assets and property cannot *e made to depend

on the whims and caprices of the stoc6holders, o8cers or directors of thecorporation, or even, for that matter, on the earnest desire of the co)rt a /uo Wtoprevent f)rther s5)a**les and f)t)re litigationsG )nless the indispensa*leconditions and proced)res for the protection of the corporate creditors are followed$Ctherwise, the Wcorporate peaceG la)da*ly hoped for *y the co)rt will remainnothing *)t a dream *eca)se this time, it will *e the creditorsG t)rn to engage in

2%



Ws5)a**les and litigationsG sho)ld the co)rt order an )nlawf)l distri*)tion in *latantdisregard of the +r)st )nd Ioctrine$? 2ng <ong v. Tiu , 01 SCRA 1 3200 4 $

2/



VII. ARTICLES O INCORPORATION

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

+he articles of incorporation has *een descri*ed as one that de nes the charterof the corporation and the contract)al relationships *etween the state and the

corporation, the stoc6holders and the State, and *etween the corporation and itsstoc6holders$ *anu4a v. Court o# A""eals , %&% S :A &% 200&($

2. P&% $ ?&$ '# D% ?/$#('&: R$F? &$/$#(; Sec$ 1% and 1&(

3'4 *s to ,um'er and $esidency of #ncorporators Sec$ 10(t is possi*le for a *)siness to *e wholly owned *y one individ)al, and the

validity of its incorporation is not a/ected when he gives nominal ownership of onlyone share of stoc6 to each of the other fo)r incorporators$ +his arrangement is notnecessarily illegal, *)t it valid only *etween and among the incorporators privy tothe agreement$ t does not *ind the corporation which will consider all stoc6holdersof record as the lawf)l owners of their registered shares$ As *etween thecorporation on the one hand, and its stoc6holders and third persons on the other,the corporation loo6s only to its *oo6s for the p)rpose of determining who itsshareholders are$ Nautica Canny Cor". v. umul , %4. S :A %1& 200&($354 Corporate ,ame Secs$ 1-, 1% 1( and %2; -ed *ine 'rans. v. -ural 'ransit , 0

Phil$ &%'($

Parties organi9ing a corporation m)st choose a name at their peril; and the )seof a name similar to one adopted *y another corporation, +hether a business or anon"ro2t organi4ation , if misleading or li6ely to in )re the exercise of its corporatef)nctions, regardless of intent, may *e prevented *y the corporation having a priorright$ Ang Mga 3aanib sa glesia ng !ios 3ay 3risto Hesus v. glesia ng !ios 3ay !risto ,esus , .42 S :A 141 2001($

Similarity in corporate names *etween two corporations wo)ld ca)se conf)sionto the p)*lic especially when the p)rposes stated in their charter are also the same

type of *)siness$ 8niversal Mills Cor". v. 8niversal 'extile Mills nc. , 4- S :A 21'44($

Section 1- of orporation ode expressly prohi*its the )se of a corporate namewhich is > identical or dece"tively or con#usingly similar to that o# any existingcor"oration or to any other name already "rotected by la+ or is "atently dece"tive%con#using or contrary to existing la+s.D +he policy *ehind the foregoing prohi*itionis to avoid fra)d )pon the p)*lic that will occasion to deal with the entityconcerned, the evasion of legal o*ligations and d)ties, and the red)ction of di8c)lties of administration and s)pervision over corporations$ ndustrial-e#ractories Cor". v. Court o# A""eals , .'0 S :A 2&2 2002(; *yceum o# thePhili""ines v. Court o# A""eals% 21' S :A 10, 1& 1''.($

A corporation has no right to intervene in a s)it )sing a name, not even its

acronym, other than its registered name, as the law re5)ires and not another namewhich it had not registered$ *aureano nvestment and !ev. Cor". v. Court o# A""eals , 242 S :A 2&. 1''4($

+here wo)ld *e no denial of d)e process when a corporation is s)ed and )dgment is rendered against it )nder its )nregistered trade name, holding that> aF corporation may *e s)ed )nder the name *y which it ma6es itself 6nown to itswor6ers$? Pison>Arceo Agricultural !ev. Cor". v. N*-C% 24' S :A .12 1''4($

A corporation may change its name *y the amendment of its articles of incorporation, *)t the same is not e/ective )ntil approved *y the SE $ Phili""ine0irst nsurance Co. v. Hartigan , .% S :A 2&2 1'40($

2(



A change in the corporate name does not ma6e a new corporation, and has noe/ect on the identity of the corporation, or on its property, rights, or lia*ilities$-e"ublic Planters Ban) v. Court o# A""eals , 21 S :A 4.- 1''2(; P.C. ,avier &$ons% nc. v. Court o# A""eals , % 2 S :A . 200&($

3 4 P?&"%;$ C!'?;$ Secs$ 1% 2( and %2; 8y $iuliong v. !irector o# Commerce andndustry , %0 Phil$ &%1 1'1'F(

>+he *est proof of the p)rpose of a corporation is its articles of incorporationand *y3laws$ +he articles of incorporation m)st state the primary and secondaryp)rposes of the corporation, while the *y3laws o)tline the administrativeorgani9ation of the corporation, which, in t)rn, is s)pposed to ins)re or facilitatethe accomplishment of said p)rpose$? +herefore, the o)rt *r)shed aside thecontention that the corporations were organi9ed to illegally avoid the provisions onland reform and to avoid the payment of estate taxes, as *eing prohi*ited collateralattac6$ 1ala v. Ellice Agro> ndustrial Cor". , %1- S :A %.1 200.($

3 4 C%&"%&'($ T$&/ Sec$ 11(#o extension of term can *e e/ected once dissol)tion stage has *een reached,

as it constit)tes new *)siness$ Alhambra Cigar v. $EC , 2% S :A 2 ' 1' -($

Article 0& of the ivil ode >clearly limits any )s)fr)ct constit)ted in favor of acorporation or association to &0 years$ A )s)fr)ct is meant only as a lifetime grant$Unli6e a nat)ral person, a corporation or associationGs lifetime may *e extendedinde nitely$ +he )s)fr)ct wo)ld then *e perpet)al$ +his is especially invidio)s incases where the )s)fr)ct given to a corporation or association covers p)*lic land$?NHA v. Court o# A""eals , %& S :A 14 200&($

3$4 P& # "'! P!' $ %+ B?; #$;; Sec$ &1(Bell esta*lished in o)r )rispr)dence is the r)le that the residence of a

corporation is the place where its principal o8ce is located, as stated in its Articlesof ncorporation$ $ $ $ t now *ecomes apparent that the residence or domicile of a

)ridical person is xed *y >the law creating or recogni9ing? it$ Under Section 1% .(of the orporation ode, the place where the principal o8ce of the corporation is to*e located is one of the re5)ired contents of the articles of incorporation, whichshall *e led with the Sec)rities and Exchange ommission SE ($ Hyatt Elevatorsand Escalators Cor". v. 1oldstar Elevators% Phils.% nc. , %4. S :A 40& 200&($

Altho)gh the :)les of o)rt do not provide that when the plainti/ is acorporation, the complaint sho)ld *e led in the location of its principal o8ce asindicated in its articles of incorporation, )rispr)dence has, however, settled thatthe place where the principal o8ce of a corporation is located, as stated in thearticles, indeed esta*lishes its residence$ +his r)ling is important in determining theven)e of an action *y or against a corporation, as in the present case$ Hyatt Elevators and Escalators Cor". v. 1oldstar Elevators% Phils.% nc. , %4. S :A 40&200&(, citing D !!A#UEDA , P O ! PP #E C:PC:A+E ! AB 1''-(, p$ 1 2$

Place of residence of the corporation is the place of its principal o8ce$Clavecilla -adio $ystem v. Antillon , 1' S :A .4' 1' 4(

+he residence of its president is not the residence of the corporation *eca)se acorporation has a personality separate and distinct from that of its o8cers andstoc6holders$ $y v. 'yson Enter"rises% nc. , 11' S :A . 4 1'-2($

3+4 M # /?/ C'" ('! '( %# Sec$ 12(- -hy is ma3imum capitali!ation re6uired to 'e indicated)

3 4 S?5; & "( %# '# P' -?" R$F? &$/$#(; Sec$ 1.( +he entries in the articles of incorporation of the original iss)ances of shares of

stoc6 has a stronger weight that the stoc6 and transfer *oo6 in determining the

20



A)thority granted to a corporation to reg)late the transfer of its stoc6 doesnot empower the corporation to restrict the right of a stoc6holder to transfer hisshares, *)t merely a)thori9es the adoption of reg)lations as to the formalitiesand proced)re to *e followed in e/ecting transfer$ 'homson v. Court o# A""eals%2'- S :A 2-0 1''-($

y3laws are intended merely for the protection of the corporation, andprescri*e reg)lation, not restriction; they are always s)* ect to the charter of the corporation$ -ural Ban) o# $alinas% nc. v. CA , 210 S :A &10 1''2($

3 4 B:-L') "&%@ ; %#; '##%( ; & / #'($

354 Binding E?ects on By9laws8 China Banking Corp. v. Court of *ppeals ,2 0 SCRA 0

>#either can we concede that s)ch contract wo)ld *e invalid )st *eca)se thesignatory thereon was not the hairman of the oard which allegedly violated thecorporationGs *y3laws$ Since *y3laws operate merely as internal r)les among thestoc6holders, they cannot a/ect or pre )dice third persons who deal with thecorporation, )nless they have 6nowledge of the same$? PM Colleges v. N*-C , 244S :A % 2 1''4($

2. A %"( %# P&% $ ?&$ Sec$ % ( +here can *e no automatic dissolution simply *eca)se the incorporators failed

to le the re5)ired *y3laws )nder Sec$ % of orporation ode$ +here is no o)tright>demise? of corporate existence$ Proper notice and hearing are cardinalcomponents of d)e process in any democratic instit)tion, agency or society$ nother words, the incorporators m)st *e given the chance to explain their neglect oromission and remedy the same$? *oyola 1rand 5illas Homeo+ners v. CA% 24 S :A-1 1''4($

A corporation which has failed to le its *y3laws within the prescri*ed perioddoes not i"so #acto lose its powers as s)ch, and may *e considered a de #actocorporation whose right to exercise corporate powers may not *e in5)ired intocollaterally in any private s)it to which s)ch corporations may *e a party$$a+ad aan v. Court o# A""eals , %&' S :A &1 200&($ $a+ad aan v. Court o#

A""eals , %&' S :A &1 200&($. C%#($#(; Sec$ %4(

. A/$# /$#(; Sec$ %-(

>Admittedly, the right to amend the *y3laws lies solely in the discretion of theemployer, this *eing in the exercise of management prerogative or *)siness

)dgment$ Oowever this right, extensive as it may *e, cannot impair the o*ligationof existing contracts or rights$ $ $ f we were to r)le otherwise, it wo)ld ena*le anemployer to remove any employee from his employment *y the simple expediencyof amending its *y3laws and providing that his=her position shall cease to exist)pon the occ)rrence of a speci ed event$? $ala#ranca v. Philamli#e 6Pam"lona75illage Homeo+ners% .00 S :A % ' 1''-($

I6. CORPORATE POWERS, AUTHORITY AND ACTIVITIES

1. C%&"%&'($ P%)$& '# C'"' (: Art$ % , ivil ode; Secs$ . and %&; *and Ban) o# the Phili""ines v. C9A , 1'0 S :A 1&% 1''0F(

A corporation has only s)ch powers as are expressly granted to it *y law and *yits articles of incorporation, those which may *e incidental to s)ch conferredpowers, those reasona*ly necessary to accomplish its p)rposes and those whichmay *e incident to its existence$ Pili"inas *oan Com"any v. $EC% .& S :A 1'.2001($

')



3'4 C!';; '( %# %+ C%&"%&'($ P%)$&;* E3press> #mplied> and #ncidental

354 Wh$&$ C%&"%&'($ P%)$& L% $A corporation has no power except those expressly conferred on it *y the

orporation ode and those that are implied or incidental to its existence$ n t)rn, acorporation exercises said powers thro)gh its *oard of directors and=or its d)lya)thori9ed o8cers and agents$ $ $ n t)rn, physical acts of the corporation, li6e thesigning of doc)ments, can *e performed only *y nat)ral persons d)ly a)thori9edfor the p)rpose *y corporate *y3laws or *y a speci c act of the *oard of directors$$hi"side nc. v. Court o# A""eals , .&2 S :A ..% 2001($

Unless otherwise provided *y the orporation ode, corporate powers areexercised *y the oard of Iirectors, which they may delegate to either an exec)tivecommittee, o8cers or contracted managers$ +he delegation, except for theexec)tive committee, m)st *e for speci c p)rposes, which ma6es the o8cers theagents of the corporation, and accordingly the general r)les of agency as to the*inding e/ects of their acts wo)ld apply$ or s)ch o8cers to *e deemed f)llyclothed *y the corporation to exercise a power of the oard, the latter m)stspecially a)thori9e them to do so$ AB$>CBN Broadcasting Cor". v. Court o# A""eals ,.01 S :A &42 1'''($

2. 1 LT$* = #$ES %2CT$#,E 3'4 Concept

ontracts or acts of a corporation m)st *e made either *y the *oard of directorsor *y a corporate agent d)ly a)thori9ed *y the *oardHa*sent s)ch validdelegation=a)thori9ation, the r)le is that the declaration of an individ)al directorsrelating to the a/airs of the corporation, *)t not in the co)rse of, or connected withthe performance of a)thori9ed d)ties of s)ch director, are held not *inding on thecorporation$ Manila Metal Container Cor". v. PNB , &11 S :A %%% 200 ($

354 Types of 1ltra=ires *cts Sec$ %&(

A corporation has no power except those expressly conferred on it *y theorporation ode and those that are implied or incidental to its existence$ n t)rn, acorporation exercises said powers thro)gh its oard of Iirectors and =or its d)lya)thori9ed o8cers and agents$ Mon#ort Hermanos Agricultural !ev. Cor". v.Mon#ort , %.% S :A 24 200%($

First Type 1ltra =ires8 An ultra vires act is one committed o)tside the o* ectfor which a corporation is crated as de ned *y the law of its organi9ation andtherefore *eyond the power conferred )pon it *y law$ +he term > ultra vires > is>disting)ished from an illegal act for the former is merely voida*le which may *eenforced *y performance, rati cation, or estoppel, while the latter is void andcannot *e validated$? *trium &anagement Corp. v. Court of *ppeals , SCRA 2 320014.

Second Type 1ltra =ires8 Bhen the President enters into spec)lativecontracts, witho)t prior *oard approval, and witho)t s)*se5)ent s)*mission of those contracts to the oard for approval or rati cation, nor were the transactionsincl)ded in the reports of the corporation, s)ch contracts do not *ind thecorporation$ t m)st *e pointed o)t that the oard of Iirectors, not the President,exercises corporate powers$ $a2c Alcan & Cie v. m"erial 5egetable 9il Co.% nc. ,.&& S :A &&' 2001($

Nenerally, the acts of the corporate o8cers within the scope of their a)thorityare *inding on the corporation$ Oowever, )nder Article 1'10 of the #ew ivil ode,acts done *y s)ch o8cers *eyond the scope of their a)thority cannot *ind thecorporation )nless it has rati ed s)ch acts expressly or tacitly, or is estopped fromdenying them$ $ $ $ +h)s, contracts entered into *y corporate o8cers *eyond thescope of a)thority are )nenforcea*le against the corporation )nless rati ed *y the

'1



orporation$ (oodchild Holdings% nc. v. -oxas Electric Constructions Com"any%nc. , %. S :A 2.& 200%($

3 4 $ati(cation of 1ltra =ires *cts8 Pirovano v. %e la $ama SteamshipCo." #nc. , 9< Ph !. =19 > ; Carlos v. Mindoro $ugar Co. , &4 Phil$ .%.1'.2F; -e"ublic v. Aco e Mining Co. , . S :A . 1 1' .F; Crisologo ,ose v. Court o# A""eals , 144 S :A &'% 1'-'F; arden v. Benguet Consolidated &iningCo. , 8 Ph !. 1 0 =19 >4 $

Acts done in excess of corporate o8cersG scope of a)thority cannot *ind thecorporation$ Oowever, when s)*se5)ently a compromise agreement was on *ehalf of the corporation *eing represented *y its President acting p)rs)ant to a oard of IirectorsG resol)tion, s)ch constit)ted as a con rmatory act signifying rati cation of all prior acts of its o8cers$ National Po+er Cor". v. Alon4o>*egasto , %%. S :A .%2200%($

. E "&$;; P%)$&;

3'4 Enumerated Powers 3S$ ;. <4

354 E3tend or Shorten Corporate Term Secs$ .4 and -1 1F(

3 4 #ncrease or %ecrease Capital Stock Sec$ .-(

Iespite the *oard resol)tion approving the increase in capital stoc6 and thereceipt of payment on the f)t)re iss)es of the shares from the increased capitalstoc6, s)ch f)nds do not constit)te part of the capital stoc6 of the corporation )ntilapproval of the increase *y SE $ Central 'extile Mills% nc. v. N(PC , 2 0 S :A. -1'' ($

A red)ction of capital to )stify the mass layo/ of employees, especially of )nion mem*ers, amo)nts to nothing *)t a premat)re and plain distri*)tion of corporate assets to o*viate a )st sharing to la*or of the vast pro ts o*tained *yits oint e/orts with capital thro)gh the years, and wo)ld constit)te )nfair la*orpractice$ Madrigal & Co. v. amora , 1&1 S :A .&& 1'-4($

3 4 #ncur" Create or #ncrease Bonded #nde'tedness Sec$ .-(

3$4 Sell or %ispose of *ssets Sec$ %0( +he property of the corporation is not the property of the stoc6holders or

mem*ers, and as s)ch, may not *e sold witho)t express a)thority from the *oardof directors$ *iton ua v. Eternit Cor". , %'0 S :A 20% 200 ($

+he disposition of the assets of a corporation shall *e deemed to covers)*stantially all the corporate property and assts, if there*y the corporation wo)ld*e rendered incapa*le of contin)ing the *)siness or accomplishing the p)rposesfor which it was incorporated$ S)ch a sale or disposition m)st *e )nderstood asvalid only if it does not pre )dice the creditors of the assignor, which necessarilyimplies that the assignee ass)mes the de*ts of the assignor$ Caltex 6Phils.7% nc. v.PN9C $hi""ing and 'rans"ort Cor". , %'- S :A %00 200 ($

Sale *y oard of +r)stees of the only corporate property witho)t compliance

with Sec$ %0 of orporation ode re5)iring rati cation of mem*ers representing atleast two3thirds of the mem*ership, wo)ld ma6e the sale n)ll and void$ slamic!irectorate v. Court o# A""eals , 242 S :A %&% 1''4(; PeFa v. CA , 1'. S :A 4141''1($

3+4 #nvest Corporate Funds for ,on9Primary Purpose Endeavor Sec$ %2; %ela $ama v. &a9ao Sugar Central Co ., 2 SCRA 2 =19<9> (

3 4 %eclare %ividends Sec$ %.; ,ielson A Co. v. Lepanto Consolidated &ining Co. , 2< SCRA 0 =19<8> (

Stoc6 dividend is the amo)nt that the corporation transfers from its s)rpl)spro t acco)nt to its capital acco)nt$ t is the same amo)nt that can loosely *etermed as the >tr)st f)nd? of the corporation$ N'C v. CA% .11 S :A &0- 1'''($

'2



3h4 Enter into &anagement Contracts Sec$ %%; ,ielson A Co." #nc. v.Lepanto Consolidated &ining , 2< SCRA 0 =19<8> ; -ica#ort v. Moya , 1'&S :A 2%4 1''1F($ (hy the diGerence in rule bet+een entity and individual?

. I/"! $ P%)$&;

Bhen the articles expressly provide that the p)rpose of the corporation was to>engage in the transportation of person by +ater ,? s)ch corporation cannot engagein the *)siness of land trans"ortation , which is an entirely di/erent line of *)siness,and, for which reason, may not ac5)ire any certi cate of p)*lic convenience tooperate a taxica* service$ *uneta Motor Co. v. A.!. $antos% nc $, & S :A -0' 1' 2($

A corporation whose primary p)rpose is to generate electric power has noa)thority to )nderta6e stevedoring services to )nload coal into its pier since it isnot reasona*ly necessary for the operation of its power plant$ NPC v. 5era% 140S :A 421 1'-'($

A corporation organi9ed to engage as a lending investor cannot engage inpaw*ro6er$ Phili"inas *oan Co. v. $EC , .& S :A 1'. 2001($

A mining company has not power to engage in real estate development$ Heirso# Antonio Pael v. Court o# A""eals% .42 S :A &-4 2001($

An o8cer who is a)thori9ed to p)rchase the stoc6 of another corporation hasimplied power to perform all other o*ligations arising therefrom s)ch as payment of the shares of stoc6$ nter>Asia nvestments ndustries v. Court o# A""eals , %0. S :A%&2 200.($

. I# $#('! P%)$&; +he act of iss)ing chec6s is within the am*it of a valid corporate act, for it as for

sec)ring a loan to nance the activities of the corporation, hence, not an ultra viresact$ Atrium Management Cor". v. CA , .&. S :A 2. 2001($

<. O(h$& P%)$&;

3'4 Sell Land and 2ther PropertiesBhen the corporationGs primary p)rpose is to mar6et, distri*)te, export and

import merchandise, the sale of land is not within the act)al or apparent a)thorityof the corporation acting thro)gh its o8cers, m)ch less when acting thro)gh thetreas)rer$ !i6ewise Articles 1-4% and 1-4- of ivil ode re5)ires that when land issold thro)gh an agent, the agentGs a)thority m)st *e in writing, otherwise the saleis void$ $an ,uan $tructural v. CA , 2' S :A .1 1''-(; A0 -ealty & !ev.% nc. v.!ieselman 0reight $ervices Co.% .4. S :A .-& 2002(; 0irme v. Bu)al Enter"risesand !ev. Cor". , %1% S :A 1'0 200.($

354 Borrow Funds +he power to *orrow money is one of those cases where even a special power

of attorney is re5)ired )nder Art$ 1-4- of ivil ode$ +here is invaria*ly a need of an ena*ling act of the corporation to *e approved *y its oard of Iirectors$ +hearg)ment that the o*taining of loan was in accordance with the ordinary co)rse of *)siness )sages and practices of the corporation is devoid of merit *eca)se theprevailing practice in the corporation was to explicitly a)thori9e an o8cer tocontract loans in *ehalf of the corporation$ China Ban)ing Cor". v. Court o# A""eals ,240 S :A &0. 1''4($

3 4 Power to SueUnder Sec$ . of orporation ode, in relation to Sec$ 2., where a corporation is

an in )red party, its power to s)e is lodged with its oard of Iirectors$ A minoritystoc6holder who is a mem*er of the oard has no s)ch power or a)thority to s)e onthe corporationGs *ehalf$ 'am (ing 'a) v. Ma)asiar , .&0 S :A %4& 2001(; $hi"sidenc. v. Court o# A""eals% .&2 S :A ..% 2001(; $$$ v. C9A , .-% S :A &%- 2002(;8nited Paragon Mining Cor". v. Court o# A""eals , %'4 S :A .- 200 ($

''



Bhere the corporation is real party3in3interest, neither administrator or a pro ectmanager co)ld sign the certi cate against for)m3shopping witho)t *eing d)lya)thori9ed *y resol)tion of the oard of Iirectors Esteban% ,r. v. 5da. de 9norio%. 0 S :A 2.0 2001F(, nor the Neneral 7anager who has no a)thority to instit)te as)it on *ehalf of the corporation even when the p)rpose is to protect corporateassets$ Central Coo"erative Exchange nc. v. Enciso , 1 2 S :A 40 1'--($

Bhen the power to s)e is delegated *y the *y3laws to a partic)lar o8cer, s)cho8cer may appoint co)nsel to represent the corporation in a pre3trial hearingwitho)t need of a formal *oard resol)tion$ Citiban)% N.A. v. Chua% 220 S :A 4&1''.($

or co)nsel to sign the certi cation for the corporation, he m)st speci cally *ea)thori9ed *y the oard of Iirectors$ BP *easing Cor". v. CA , %1 S :A % 200.(;Mariveles $hi"yard Cor". v. CA , %1& S :A &4. 200.($

f the petitioner is a corporation, a *oard resol)tion a)thori9ing a corporateo8cer to exec)te the certi cation against for)m shopping is necessaryHacerti cation not signed *y a d)ly a)thori9ed person renders the petition s)* ect todismissal$ 1on4ales v. Climax Mining *td. , %&2 S :A 04 200&(; !BP v. Court o#

A""eals , %%0 S :A 200 200%(; Public Estates Authority v. 8y , .42 S :A 1-02001(; Metro !rug !istribution% nc. v. Narcisco , %'& S :A 2- 2000 ($

3 4 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 vires to avoid anylia*ility arising from the iss)ance of resol)tion granting s)ch grat)ity pay$ *o"e4 -ealty v. 0ontecha , 2%4 S :A 1-., 1'2 1''&($

3$4 %onate

3+4 Enter Partnership or 0oint =enture $ Tuason A Co. v. Bolanos , 9 Ph !.10< 319 4 ; SE Cpinion, dated 2' e*r)ary 1'-0$

6. DIRECTORS, TRUSTEES AND O ICERS

1. D% (& #$ %+ C ENTRALI7ED M ANAGEMENT * P%)$&; %+ B%'& %+ D &$ (%&; Sec$ 2.;1amboa v. 5ictoriano , '0 S :A %0 1'4'F($

Section 2. expressly provides that the corporate powers of all corporations shall*e exercised *y the *oard of directors$ L)st as a nat)ral person may a)thori9eanother to do certain acts in his *ehalf, so may the *oard of directors of acorporation validly delegate some of its f)nctions to individ)al o8cers or agentsappointed *y it$ +h)s, contracts or acts of a corporation m)st *e made either *y the*oard of directors or *y a corporate agent d)ly a)thori9ed *y the *oard$ A*sents)ch valid delegation=a)thori9ation, the r)le is that the declarations of an individ)aldirector relating to the a/airs of the corporation, *)t not in the co)rse of, orconnected with the performance of a)thori9ed d)ties of s)ch director, are held not*inding on the corporation$ &anila &etal Container Corp. v. P,B , 11 SCRA

3200<4 $1

$ationale for :Centrali!ed &anagement; %octrine . Section 2. of theorporation ode explicitly provides that )nless otherwise provided therein, thecorporate powers of all corporations formed )nder the ode shall *e exercised, all*)siness cond)cted and all property of the corporation shall *e controlled and held*y a *oard of directors$ +he raison d etre *ehind the conferment of corporatepowers on the *oard of directors is not lost on the o)rtHindeed, the concentrationin the *oard of the powers of control of corporate *)siness and appointment of corporate o8cers and managers is necessary for e8ciency in any largeorgani9ation$ Stoc6holders are too n)mero)s, scattered and )nfamiliar with the

1 Also Re es v. RCPI !mplo ees Credit Union" Inc. , $&& *C+ '1& 2))/- #asuma v. Heirs of Cecilio $. De %illa , $&& *C+$// 2))/- Raniel v. &oc'ico , %1( *C+ 221 2))(-.

'$



*)siness of a corporation to cond)ct its *)siness directly$ And so the plan of corporate organi9ation is for the stoc6holders to choose the directors who shallcontrol and s)pervise the cond)ct of corporate *)siness$ Filipinas Port Servicesv. o , 18 SCRA 3200 4 $

> oard of Iirectors? is the *ody which 1( exercises all powers provided for)nder the orporation ode; 2( cond)cts all *)siness of the corporation; and .(controls and holds all property of the corporation$ ts mem*ers have *eencharacteri9ed as tr)stees or directors clothed with a d)ciary character$ t is clearlyseparate and distinct from the corporate entity itself$ Hornilla v. $alunat , %0& S :A220 200.($

A corporation is an arti cial *eing and can only exercise its powers and transactits *)siness thro)gh the instr)mentalities of its oard of Iirectors, and thro)gh itso8cers and agents, when a)thori9ed *y resol)tion or *y its *y3laws$ onse5)ently,when legal co)nsel was clothed with a)thority thro)gh formal *oard resol)tion, hisacts *ind the corporation which m)st *e held *o)nd the act)ations of its co)nsel of record$ !e *iano v. Court o# A""eals , .40 S :A .%' 2001($

>+he physical acts of the corporation, li6e the signing of doc)ments, can *eperformed only *y nat)ral persons d)ly a)thori9ed for the p)rpose *y corporate *y3laws or *y a special act of the *oard of directors$? 0irme v. Bu)al Enter"rises and!ev. Cor". , %1% S :A 1'0 200.(; $hi"side nc. v. Court o# A""eals , .&2 S :A ..%2001($

3'4 Theories on Source of Board Power *ngeles v. Santos , < Ph !. <9=19 > ($

Cne of the most important rights of a 5)ali ed shareholder or mem*er is theright to voteHeither personally or *y proxyHfor the directors or tr)stees who are tomanage the corporate a/airs$ +he right to choose the persons who will direct,manage and operate the corporation is signi cant, *eca)se it is the main way inwhich a stoc6holder can have a voice in the management of corporate a/airs, or inwhich a mem*er in a nonstic6 corporation can have a say on how the p)rposes andgoals of the corporation may *e achieved$ Cnce the directors or tr)stees areelected, the stoc6holders or mem*ers relin5)ish corporate powers to the *oard in

accordance with law$ Tan v. Sycip , 99 SCRA 21< 3200<4 $354 Board &ust *ct *s a Body Sec$ 2&; Board of Li6uidators v. eirs of

&a3imo &. /alaw , 20 SCRA 98 =19< > ; -amire4 v. 9rientalist Co. , .- Phil$.% 1'1-F; AcuFa v. Batac Producers Coo"erative Mar)eting Assn. , 20 S :A

&2 1' 4F($

A corporation, thro)gh its oard of Iirectors, sho)ld act in the manner andwithin the formalities prescri*ed *y its charter or *y the general law$ +h)s, directorsm)st act as a *ody in a meeting called p)rs)ant, otherwise, any action ta6entherein may *e 5)estioned *y any o* ecting director or shareholder$ e that as itmay, )rispr)dence tells )s that an action of the *oard of directors d)ring ameeting, which was illegal for lac6 of notice, may *e rati ed either expressly, *ythe action of the directors in s)*se5)ent legal meeting, or impliedly, *y the

corporationTs s)*se5)ent co)rse of cond)ct$ *o"e4 -ealty v. 0ontecha , 2%4 S :A1-. 1''&($

3 4 E?ects of :Bogus; Board < +he acts or contracts e/ected *y a *og)s *oardwo)ld *e void p)rs)ant to Art$ 1.1- of ivil ode *eca)se of the lac6 of >consent?$ slamic !irectorate o# the Phili""ines v. Court o# A""eals , 242 S :A%&% 1''4($

3 4 E3ecutive Committee Sec$ .&; Filipinas Port Services" #nc. v. o , 18SCRA 3200 4

2. B USINESS UDGMENT R ULE &onteli'ano v. Bacolod9&urcia &iling Co." #nc. , SCRA < =19<2> PSE v. Court of *ppeals" 281 SCRA 2 2 =199 > (

'%



f the ca)se of the losses is merely error in *)siness )dgment, not amo)ntingto *ad faith or negligence, directors and=or o8cers are not lia*le$ or them to *eheld acco)nta*le, the mismanagement and the res)lting losses on acco)nt thereof are not the only matters to *e proven; it is li6ewise necessary to show that thedirectors and=or o8cers acted in *ad faith and with malice in doing the assailedacts$ ad faith does not simply connote *ad )dgment or negligence; it imports adishonest p)rpose or some moral o*lig5)ity and conscio)s doing of a wrong, a*reach of a 6nown d)ty thro)gh some motive or interest or ill3will parta6ing of the

nat)re of fra)d$ 0ili"inas Port $ervices% nc. v. 1o , &1- S :A %&. 2004($#o co)rt can, as an integral part of resolving the iss)es *etween s5)a**ling

stoc6holders, order the corporation to )nderta6e certain corporate acts, since itwo)ld *e in violation of the *)siness )dgment r)le$ 2ng <ong v. Tiu , 01 SCRA1 3200 4.

Iirectors and o8cers who p)rport to act for the corporation, 6eep within thelawf)l scope of their a)thority and act in good faith, do not *ecome lia*le, whethercivilly or otherwise, for the conse5)ences of their acts, which are properlyattri*)ted to the corporation alone$ Benguet Electric Coo"erative% nc. v. N*-C , 20'S :A && 1''2($

. C OUNTER -VEILING D OCTRINES TO P ROTECT C ORPORATE C ONTRACTS

3'4 Theory of Estoppel or $ati(cation

+he principle of estoppel precl)des a corporation and its oard of Iirectors fromdenying the validity of the transaction entered into *y its o8cer with a third partywho in good faith, relied on the a)thority of the former as manager to act on *ehalf of the corporation$ Lipat v. Paci(c Banking Corp." 02 SCRA 9 3200 4.

n order to ratify the )na)thori9ed act of an agent and ma6e it *inding on thecorporation, it m)st *e shown that the governing *ody or o8cer a)thori9ed to ratifyhad f)ll and complete 6nowledge of all the material facts connected with thetransaction to which it relates$ :ati cation can never *e made on the part of thecorporation *y the same person who wrongf)lly ass)me the power to ma6e thecontract, *)t the rati cation m)st *e *y the o8cer or governing *ody havinga)thority to ma6e s)ch contract$ 5icente v. 1eralde4 , &2 S :A 210 1'4.($

+he admission *y co)nsel on *ehalf of the corporation of the latterGs c)lpa*ilityfor personal loans o*tained *y its corporate o8cers cannot *e given legal e/ectwhen the admission was >witho)t any ena*ling act or attendant rati cation of corporate act,? as wo)ld a)thori9e or even ratify s)ch admission$ n the a*sence of s)ch rati cation or a)thority, s)ch admission does not *ind the corporation$

Aguen4a v. Metro"olitan Ban) and 'rust Co.% 241 S :A 1 1''4($

%octrine of Laches or :Stale %emands;8 +he principle of laches or >staledemands? provides that the fail)re or neglect, for an )nreasona*le and)nexplained length of time, to do that which *y exercising d)e diligence co)ld orsho)ld have *een done earlier, or the negligence or omission to assert a rightwithin a reasona*le time, warrants a pres)mption that the party entitled to assert iteither has a*andoned it or declined to assert it$ -ovels Enter"rises% nc. v. 9cam"o ,.'1 S :A 14 2002($

354 Theory of *pparent *uthority Art$ 1--., ivil ode; -oodchild oldings" #nc. v. $o3as Electric Constructions Company" #nc. , < SCRA2 3200 4 Francisco v. S#S , SCRA =19< > Prime -hiteCement Corp. v. #*C , 220 SCRA 10 , 11 -11 =199 > <ao /a SinTrading v. C* , 209 SCRA < =1992>4.

f a corporation 6nowingly permits one of its o8cers to act within the scope of an apparent a)thority, it holds him o)t to the p)*lic as possessing the power to dothose acts, the corporation will, as against anyone who has in good faith dealt with

'/



it thro)gh s)ch agent, *e estopped from denying the agentGs a)thority$ $oler v.Court o# A""eals , .&- S :A &4 2001($

+he a)thority of a corporate o8cer dealing with third persons may *e act)al orapparent $ $ $ the principal is lia*le for the o*ligations contracted *y the agent$ +heagentG apparent representation yields to the principalTs tr)e representation and thecontract is considered as entered into *etween the principal and the third person$0irst Phili"ine nternational Ban) v. Court o# A""eals , 2&2 S :A 2&' 1'' ($

Persons who deal with corporate agents within circ)mstances showing that theagents are acting in excess of corporate a)thority, may not hold the corporationlia*le$ 'raders -oyal Ban) v. Court o# A""eals , 2 ' S :A 01 1''4($

Apparent a)thority may *e ascertained thro)gh 1( the general manner inwhich the corporation holds o)t an o8cer or agent as having the power to act, or,in other words the apparent a)thority to act in general with which is clothes them;or 2( the ac5)iescence in his acts of a partic)lar nat)re, with act)al or constr)ctive6nowledge thereof, within or *eyond the scope of his ordinary powers$ nter>Asianvestment ndustries v. Court o# A""eals% %0. S :A %&2 200.($

Bhen a *an6ing corporation, when an o8cers arranges a credit line agreementand forwards the same to the legal department at its head o8cer, and the *an6 didno disa8rm the contract, then it is *o)nd *y it$ Premier !ev. Ban) v. Court o#

A""eals , %24 S :A - 200%$A corporation cannot disown its PresidentGs act of applying to the *an6 for credit

accommodation, simply on the gro)nd that it never a)thori9ed the President *y thelac6 of any formal *oard resol)tion$ +he following placed the corporation and itsoard of Iirectors in estoppel in "ais @ irstly, the *y3laws provides for the powers of the President, which incl)des, exec)ting contracts and agreements, *orrowingmoney, signing, indorsing and delivering chec6s; secondly, there were alreadyprevio)s transaction of disco)nting the chec6s involving the same personalitieswherein any ena*ling resol)tion from the oard was dispensed with and yet the*an6 was a*le to collect from the corporation$ ,yco Sales Corp. v. B* FinanceCorp." 200 SCRA < 319914 $

Per its SecretaryGs erti cate, the fo)ndation had given its President ostensi*le

and apparent a)thority to inter alia deal with the respondent an6, and thereforethe fo)ndation is estopped from 5)estioning the PresidentGs a)thority to o*tain thes)* ect loans from the respondent an6$ *a"ula"u 0oundation% nc.% v. Court o#

A""eals , %21 S :A .2- 200%($

A ver*al promise given *y the hairman and President of the company to thegeneral manager and chief operating o8cer to give the latter )nlimited sic6 leaveand vacation leave *ene ts and its cash conversion )pon his retirement orresignation, when not an integral part of the companyGs r)les and policies, is not*inding on the company when it is witho)t the approval of the oard of Iirectors$3+o) v. Phili""ine Car"et Manu#acturing Cor". , %&4 S :A % & 200&($

orporate policies need not *e in writing$ ontracts entered into *y a corporateo8cer or o*ligations or prestations ass)med *y s)ch o8cer for and in *ehalf of

s)ch corporation are *inding on the said corporation only if s)ch o8cer actedwithin the scope of his a)thority or if s)ch o8cer exceeded the limits of hisa)thority, the corporation has rati ed s)ch contracts or o*ligations$ 3+o) v.Phili""ine Car"et Manu#acturing Cor". , %&4 S :A % & 200&($

+he acceptance of the o/er to p)rchase *y the cler6 of the *ranch of the *an6,and the representation that the manager had already approved the sale which infact was not tr)e(, cannot *ind the *an6 to the contract of sale, it *eing o*vio)sthat s)ch a cler6 is not among the *an6 o8cers )pon whom p)tative a)thority may*e reposed *y a third party$ +here is, th)s, no legal *asis to *ind the *an6 into anyvalid contract of sale with the *)yers, given the a*sol)te a*sence of any approval

'(



or consent *y any responsi*le o8cer of the *an6$ !BP v. 9ng , % 0 S :A 140200&($

Acts done in excess of corporate o8cersG scope of a)thority cannot *ind thecorporation$ Oowever, when s)*se5)ently a compromise agreement was on *ehalf of the corporation *eing represented *y its President acting p)rs)ant to a oard of IirectorsG resol)tion, s)ch constit)ted as a con rmatory act signifying rati cation of all prior acts of its o8cers$ National Po+er Cor". v. Alon4o>*egasto , %%. S :A .%2200%($

. J?'! '( %#; %+ D &$ (%&; '# T&?;($$; Secs$ 2. and 24; okongwei" 0r. v.SEC , 89 SCRA <=19 9> ($

3'4 A director m)st own at least one share of stoc6$ PeFa v. CA , 1'. S :A 4141''1(; !etective & Protective Bureau% nc. v. Cloribel , 2 S :A 2&& 1' '($

+he law does not re5)ire that a Dice3President *e a stoc6holder$ Baguio v. Court o# A""eals , 22 S :A . 1''.($

354 ene cial ownership )nder voting tr)st arrangement no longer 5)ali es Leev. C* , 20 SCRA 2 =1992> ($

. E!$ ( %# %+ D &$ (%&; '# T&?;($$;3'4 Iirectors Secs$ 2% and 2 ; Premium Marble -esources v. Court o# A""eals% 2 %

S :A 11($

orporations are re5)ired )nder Section 2 of the orporation ode to s)*mitto the SE within thirty .0( days after the election the names, nationalities, andresidences of the directors, tr)stees and o8cers of the orporation$ n order to 6eepstoc6holders and the p)*lic transacting *)siness with domestic corporationproperly informed of their organi9ation operational stat)s, the SE has iss)ed ther)le re5)iring the ling of the Neneral nformation Sheet$ Mon#ort Hermanos

Agricultural !ev. Cor". v. Mon#ort , %.% S :A 24 200%($

Bhen the names of some of the directors who signed the *oard resol)tion doesnot appear in the Neneral nformation Sheet led with the SE , then there is do)*twhether they were indeed d)ly elected mem*ers of the oard legally constit)ted to*ring s)it in *ehalf of the orporation$ Mon#ort Hermanos Agricultural !ev. Cor". v.Mon#ort , %.% S :A 24 200%($

354 +r)stee Secs$ '2 and 1.-(

3 4 CUMULATIVE V OTING Sec$ 2%; Cumulative =oting in Corporate Elections8#ntroducing Strategy in the E6uation" S OUTH C AROLINA L. R EV . 29 (

<. V' '# : # B%'& Sec$ 2'(

A *y3law provision or company practice of giving a stoc6holder a permanentseat in the oard wo)ld *e against the provision of Secs$ 2- and 2' of orporationode which re5)ires mem*er of the *oard of corporations to *e elected$ 1race

Christian High $chool v. Court o# A""eals% 2-1 S :A 1.. 1''4($. T$&/ %+ O $, H%! -%@$& P& # "!$

Iirectors may lawf)lly ll vacancies occ)rring in the *oard, and s)ch o8cials,as well as the original directors, hold3over )ntil 5)ali cation of their s)ccessors$1overnment v. El Hogar 0ili"ino , &0 Phil$ .'' 1'24($

+he remedy is /uo +arranto to 5)estion the legality and proper 5)ali cation of persons elected to the *oard$ Ponce v. Encarnacion , '% Phil$ -1 1'&.($

8. R$/%@'! %+ D &$ (%&; %& T&?;($$; Sec$ 2-; -oxas v. !e la -osa , %' Phil$ 0'1'2 F($

'0



Cnly stoc6holders or mem*ers have the power to remove the directors ortr)stees elected *y them, as laid down in $ection <I o# the Cor"oration Code. ?-aniel v. ,ochico , &14 S :A 221, 2.0 2004($

9. D &$ (%&; %& T&?;($$; M$$( # ; Secs$ %', &., &% and '2(

3'4 4uorum8

or stoc6 corporations, the >5)or)m? referred to in Section &2 of theorporation ode is *ased on the n)m*er of outstanding voting stoc6s$ or nonsto6corporations, only those who are actual% living mem*ers with voting rights shall *eco)nted in determining the existence of a 5)or)m d)ring mem*ersG meetings$Iead mem*ers shall not *e co)nted$ 'an v. $yci" , %'' S :A 21 200 ($

n stoc6 corporations, the presence of a 5)or)m is ascertained and co)nted onthe *asis of the outstanding ca"ital stoc) , as de ned *y Section 1.4 of theorporation ode$ 'an v. $yci" , %'' S :A 21 200 ($

Bhen the principle for determining 5)or)m for stoc6 corporations is applied *yanalogy to nonstic6 corporations, only those who are act)al mem*ers with votingrights sho)ld *e co)nted$ 'an v. $yci" , %'' S :A 21 200 ($

354 *'stention8 n a *oard meeting, an a*stention is pres)med to *e co)nted asan a8rmative vote inso#ar as it may be construed as an ac/uiescence in the

action o# those +ho voted a rmatively *)t s)ch pres)mption, *eing merely "rima #acie wo)ld not hold in the face of clear evidence to the contrary$ *o"e4 v. Ericta , %& S :A &.' 1'42($

10. C%/"$#;'( %# %+ D &$ (%&; Sec$ .0(

Iirectors and tr)stees are not entitled to salary or other compensation whenthey perform nothing more than the )s)al and ordinary d)ties of their o8ce,fo)nded on the pres)mption that directors and tr)stees render service grat)ito)sly,and that the ret)rn )pon their shares ade5)ately f)rnishes the motives for service,witho)t compensation$ )t they can receive rem)nerations for exec)tive o8cerposition$ (estern nstitute o# 'echnology% nc. v. $alas% 24- S :A 21 , 22. 1''4($

11. IDUCIARY D UTIES O D IRECTORS AND O ICERS

3'4 %irectors as Fiduciaries3 Pre9Corporation Code8 Palting v. San 0ose Petroleum" #nc. , 18 SCRA

92 .3 ,ature of %uties of %irectors and 27cers8 Prime -hite Cement

Corp. v. #*C , 220 SCRA 103199 4.

354 %uty of 2'edience

A corporation, thro)gh its oard of Iirectors, sho)ld act in the manner andwithin the formalities, if any, prescri*ed *y its charter or *y the general law$ *o"e4 -ealty% nc. v. 0ontecha , 2%4 S :A 1-. 1''&(

3 4 %uty of %iligence Sec$ .1; Stein'erg v. =elasco , 2 Ph !. 9 =1929> Bates v. %resser , 2 1 U.S. 2 , < L. E . 88, 0 S. C(. 2 =1919> Smith v. =an orkam , 88 A.2 8 8, S?"&$/$ C%?&( %+ D$!')'&$,198 ($

+o hold a director personally lia*le for de*ts of the corporation, and th)s piercethe veil of corporate ction, the *ad faith or wrongdoing of the director m)st *eesta*lished clearly and convincingly$ ad faith is never pres)med$ ad faith doesnot connote *ad )dgment or negligence$ ad faith imports a dishonest p)rpose$ad faith means aF *reach of a 6nown d)ty thro)gh some ill motive or interest$ad faith parta6es of the nat)re of fra)d$ Carag v. N*-C , &20 S :A 2- 2004($

'&



management, and s)ch a corporate controversy wo)ld call for SE ad )dicativeexpertise, not that of #!: $ %e $ossi v. ,L$C , 1 SCRA 2 319994.

Bhen the *y3laws provide for the position of >S)perintendent= Administrator,?it is clearly a corporate o8cer position and iss)es of reinstatement wo)ld *ewithin the )risdiction of the SE and not the #!: $ 9ng)ingco v. N*-C , 240 S :A1. 1''4($

Bhen the *y3laws provides that one of the powers of the oard is > tFo appoint

a 7edical Iirector, omptroller=Administrator, hiefs of Services and s)ch othero8cers as it may deem necessary and prescri*e their powers and d)ties,? thens)ch speci cally designated positions sho)ld *e considered >corporate o8cers?$

+he determination of the rights and the concomitant lia*ility arising from anyo)ster from s)ch positions, wo)ld *e intra3corporate controversy s)* ect to SE Gs

)risdiction$ 'abang v. N*-C% 2 S :A % 2 1''4($

+he fact that > omptroller? is not mentioned in the *y3laws does not)ndermine the appointment to s)ch position since )nder Sec$ 2& of orporationode, the oard of Iirectors is a)thori9ed to appoint s)ch other o8cers as it maydeem necessary$ n this case the *y3laws provided >and s)ch other o8cers as theoard of Iirectors may from time to time does t to provide for$ Said o8cers shall*e elected *y ma ority vote of the oard of Iirectors$? y3laws may and )s)allydo provide for s)ch other o8cers, and that where a corporate o8ce is notspeci cally indicated in the roster of corporate o8ces in the *y3laws of acorporation, the oard of Iirectors may also *e empowered )nder the *y3laws tocreate additional o8cers as may *e necessary$ ,acpil v. #nternational Broadcasting Corp. , 9 SCRA < 320024.

354 Powers of Corporate 27cers8Bhile the o)rt agrees that those who *elong to the )pper corporate echelons

wo)ld have more privileges, it cannot *e pres)me the existence of s)chprivileges or *ene tsHhe who claims the same is *)rdened to prove not only theexistence of s)ch *ene ts *)t also that he is entitled to the same$ 3+o) v.Phili""ine Car"et Manu#acturint Cor". , %&4 S :A % & 200&($

Even tho)gh a )dgment, decree or order is addressed to the corporation only,the o8cers as well as the corporation itself, may *e p)nished for contempt fordiso*edience to its terms, at least if they 6nowingly diso*ey the co)rtGs mandate,since a lawf)l )dicial command to a corporation is in e/ect a command to theo8cers$ Heirs o# 'rinidad de *eon 5da. !e -oxas v. Court o# A""eals , %22 S :A101 200%($

3 4 $ule on Corporate 27cer s Power to Bind Corporation An o8cerGspower as an agent of the corporation m)st *e so)ght from the stat)te, charter,the *y3laws or in a delegation of a)thority to s)ch o8cer, from the acts of the*oard of directors formally expressed or implied from a ha*it or c)stom of doing*)siness$ 5icente v. 1eralde4 , &2 S :A 210 1'4.(; Boyer>-oxas v. Court o#

A""eals , 211 S :A %40 1''2($

As a general r)le, the acts of corporate o8cers within the scope of theira)thority are *inding on the corporation, *)t when these o8cers exceeded theira)thority, their actions cannot *ind the corporation, )nless it has rati ed s)chacts or is estopped from disclaiming them$ -eyes v. -CP Em"loyees Credit 8nion% nc. , %'' S :A .1' 200 ($

3 4 President. People s *ircargo v. Court of *ppeals , 29 SCRA 1 0319984.

t is the oard of Iirectors, not the President, that exercises corporate powers$t m)st *e emphasi9ed that the *asis for agency is representation and a persondealing with an agent is p)t )pon in5)iry and m)st discover )pon his peril thea)thority of the agent$ $a2c Alcan & Cie v. m"erial 5egetable 9il Co.% nc.% .&&S :A &&' 2001($

$1



A corporation may not distance itself from the acts of a senior o8cer@ "thed)al roles of :om)lo $ S)gay sho)ld not *e allowed to conf)se the facts$" -.0.$ugay v. -eyes , 12 S :A 400 1' 1($

+he President is considered as the corporationGs agent, and as s)ch, his6nowledge of the repeal of a resol)tion in another )ridical person in which hiscorporation has an interest, is ascri*ed to his principal )nder the theory of imp)ted 6nowledge$ -ovels Enter"rises% nc. v. 9cam"o , .'2 S :A 14 2002($

+he President of the corporation which *ecomes lia*le for the accident ca)sed*y its tr)c6 driver cannot *e held solidarily lia*le for the )dgment o*ligationarising from 5)asi3delict, since the fact alone of *eing President is not s)8cient tohold him solidarily lia*le for the lia*ilities ad )dged against the corporation andits employee$ $ecosa v. Heirs o# Er+in $uare4 0ancisco , %.. S :A 24. 200%($

3 4 Corporate Secretary n the a*sence of provisions to the contrary, the corporate secretary is the

c)stodian of corporate recordsHhe 6eeps the stoc6 and transfer *oo6 and ma6esproper and necessary entries therein$ t is his d)ty and o*ligation to register validtransfers of stoc6 in the *oo6s of the corporation; and in the event he ref)ses tocomply with s)ch d)ty, the transferor3stoc6holder may rightf)lly *ring s)it tocompel performance$ 'orres% ,r. v. Court o# A""eals% 24- S :A 4'. 1''4($

Altho)gh the corporate secretaryGs d)ty to record transfers of stoc6 isministerial, he cannot *e compelled to do so when the transfereeGs title to saidshares has no "rima #acie validity or is )ncertain$ 7ore speci cally, a pledgor,prior to foreclos)re and sale, does not ac5)ire ownership rights over the pledgedshares and th)s cannot compel the corporate secretary to record his allegedownership of s)ch shares on the *asis merely of the contract of pledge$7andam)s will not iss)e to esta*lish a right, *)t only to enforce one that isalready esta*lished$ *im 'ay v. Court o# A""eals% 2'. S :A .% 1''-(; 'C* $alesCor". v. Court o# A""eals% .%' S :A .& 2001($

A sale that fails to comply with Sec$ %0 of orporation ode, cannot *einvalidated when the *)yer relies )pon a SecretaryGs erti cate con rminga)thority$ A secretaryGs certi cate which is reg)lar on its face can *e relied )pon*y a third party who does not have to investigate the tr)ths of the facts containedin s)ch certi cation; otherwise *)siness transactions of corporations wo)ld*ecome tort)o)sly slow and )nnecessarily hampered$ Esguerra v. Court o#

A""eals% 2 4 S :A .-0 1''4($

3 @4 Corporate Treasurer A corporate treas)rerGs f)nction have generally *een descri*ed as >to receive

and 6eeps f)nds of the corporation, and to dis*)rse them in accordance with thea)thority given him *y the *oard or the properly a)thori9ed o8cers$? Unless d)lya)thori9ed, a treas)rer, whose power are limited, cannot *ind the corporation in asale of its assets, which o*vio)sly is foreign to a corporate treas)rerGs f)nction$$an ,uan $tructural v. Court o# A""eals , 2' S :A .1, %& 1''-($

A corporate treas)rer whose negligence in signing a con rmation letter forredisco)nting of crossed chec6s, 6nowing f)lly well that the chec6s were strictlyendorsed for deposit only to the payeeGs acco)nt and not to *e f)rthernegotiated, may *e personally lia*le for the damaged ca)sed the corporation$

Atrium Management Cor". v. Court o# A""eals , .&. S :A 2. 2001($

3 4 Service of Summons on CorporationsCorporate Bookkeeper8 or p)rposes of determining proper service of

s)mmons to a corporation in a 5)asi3 )dicial proceeding *efore the #!: , a*oo66eeper can *e considered as an agent of the corporation within the p)rviewof the :)les of o)rt$ +he rationale of all r)les with respect to service of processon a corporation is that s)ch service m)st *e made to an agent or a

$2



re"resentative so integrated with the corporation s)ed as to ma6e it a "rioris)pposa*le that he will reali9e his responsi*ilities and )no+ +hat he should do+ith any legal "a"ers served on him. 'he boo))ee"er s tas) is one under consideration that his regular recording o# the cor"oration s Jbusiness accountsD and Jessential #acts about the transactions o# a business or enter"riseD sa#eguards the cor"oration #rom "ossible #raud being committed adverse to itso+n cor"orate interest $ Pabon v. N*-C% 2' S :A 4 1''-($

Prevailing $ule8 Section 11, :)le 1% of the 1''4 :)les of ivil Proced)re)ses the term >general manager? and )nli6e the old provision in the :)les of o)rt, it does not incl)de the term >agent?$ onse5)ently, the en)meration of persons to whom s)mmons may *e served is >restricted, limited and excl)sive?following the r)le on stat)tory constr)ction ex"ressio unios est exclusion alterius.

+herefore, the earlier cases that )phold service of s)mmons )pon a constr)ctionpro ect manager; 1 a corporationGs assistant manager; 2 ordinary cler6 of acorporation; . private secretary of corporate exec)tives; % retained co)nsel; &

o8cials who had charge or control of the operations of the corporation, li6e theassistant general manager; or the corporationGs hief inance and AdministrativeC8cer; 4 no longer apply since they were decided )nder the old r)le that allowsservice of s)mmons )pon an agent - of the corporation$ E.B. 5illarosa & PartnersCo.% *td. v. Benito , .12 S :A & 1'''($

1 . L IABILITIES O C ORPORATE O ICERS * Sec$ .1; =a!6ue! v. Bor5a , Ph !. <0=19 > Palay" #nc. v. Clave , 12 SCRA < 8 =109 > ; Pabalan v. N*-C% 1-%S :A %'& 1''0F; $ulo ng Bayan% nc. v. Araneta% nc. nc. , 42 S :A .%4 1'4 F;Mindanao Motors *ines% nc. v. C - , S :A 410 1' 2F($

C8cers of a corporation may *ecome lia*le for its loans when they have*reached their d)ty of diligence )nder Section .1 of the orporation ode$ *ratea v. Suico , 18 SCRA 01 3200 4 Singian" 0r. v. Sandigan'ayan , 8SCRA 8 3200 4.

+o hold a director personally lia*le for de*ts of the corporation, and th)s piercethe veil of corporate ction, the *ad faith or wrongdoing of the director m)st *eesta*lished clearly and convincingly$ ad faith is never pres)med$ ad faith doesnot connote *ad )dgment or negligence$ ad faith imports a dishonest p)rpose$ad faith means aF *reach of a 6nown d)ty thro)gh some ill motive or interest$ad faith parta6es of the nat)re of fra)d$ Carag v. N*-C , &20 S :A 2- 2004($

Nenerally, o8cers or directors )nder the old corporate name *ear no personallia*ility for acts done or contracts entered into for the corporation, if d)lya)thori9ed$ -e"ublic Planters Ban) v. Court o# A""eals , 21 S :A 4.- 1''2($

orporate o8cers who entered into and signed contracts on *ehalf of thecorporation in their o8cial capacities cannot *e made personally lia*le there)nderin the a*sence of stip)lation to that e/ect, d)e to the personality of thecorporation *eing separate and distinct from the persons composing it$ (estern

Agro ndustrial Cor". v. Court o# A""eals , 1-- S :A 40' 1''0(; -ustan Pul" &Pa"er Mills% nc. v. AC , 21% S :A & 1''2(; Ban/ue 1enerale Belge v. (alter Bull and Co. , -% Phil$ 1 % 1'%'( .

1(anlaon Construction !nterprises Co." Inc. v. )LRC" 2(& *C+ ''( 1&&(-.2*esulgon v. )LRC" 21& *C+ %/1 1&&'-.' *olden Countr +arms" Inc. v. $anvar Development Corp. , 21$ *C+ 2&% 1&&2- * , * -rading Corp. v. Court of Appeals ,

1%0 *C+ $// 1&00-.$$ummit -rading and Dev. Corp. v. Avenda o" 1'% *C+ '&( 1&0%- also %lason !nterprises Corp. v. Court of Appeals" '1)

*C+ 2/ 1&&&-.%Republic v. (er , Co." Ltd." 10 *C+ 2)( 1&//-./ %illa Re -ransit" Inc. v. +ar !ast Motor Corp. , 01 *C+ 2&0 1&(0-. ( +ar Corporation v. +rancisco" 1$/ *C+ 1&( 1&0/-.0+iloil Mar/eting Corp. v. Marine Dev. Corp. of t'e P'ilippines , 1(( *C+ 0/ 1&02-.

$'



A president cannot *e held solidarily lia*le personally with the corporationa*sent evidence of showing that he acted malicio)sly or in *ad faith$ EP1Constructions Co. v. CA , 210 S :A 2.0 1''2($

+he nding of solidary lia*ility among the corporation, its o8cers and directorswo)ld patently *e *aseless when the decision contains no allegation, nding orconcl)sion regarding partic)lar acts committed *y said o8cers and director thatshow them to have *een individ)ally g)ilty of )nmista6a*le malice, *ad faith, orill3motive in their personal dealings with third parties$ Bhen corporate o8cers anddirectors are s)ed merely as nominal parties in their o8cial capacities as s)ch,they cannot *e held lia*le personal for the )dgment rendered against thecorporation$ NPC. v. Court o# A""eals , 24. S :A %1' 1''4(; Emilio CanoEnter"rises% nc. v. C - , 1. S :A 2'1 1' &(; Arcilla v. Court o# A""eals , 21& S :A120 1''2($

An o8cer3stoc6holder who signs in *ehalf of the corporation to a fra)d)lentcontract cannot claim the *ene t of separate )ridical entity@ >+h)s, *eing a partyto a sim)lated contract of management, petitioner Uy cannot *e permitted toescape lia*ility )nder the said contract *y )sing the corporate entity theory$ +his isone instance when the veil of corporate entity has to *e pierced to avoid in )sticeand ine5)ity$? Paradise $auna Massage Cor"oration v. Ng , 1-1 S :A 41' 1''0($

3'4 $undown on 27cer s Lia'ilities. Tramat &ercantile" #nc. v. Court of *ppeals , 2 8 SCRA 1 3199 4 ; MAM -ealty v. N*-C% 2%% S :A 4'4 1''&(;N0A v. Court o# A""eals% .11 S :A 400 1'''(; Atrium Management Cor". v.Court o# A""eals% .&. S :A 2. 2001(; Malayang $amahan ng mgaMangga+ga+a sa M. 1reen2eld v. -amos , .&4 S :A 44 2001(; Po+tonConglomerate% nc. v. Agcolicol , %00 S :A &2. 200.(; H.*. Carlos Construction%nc. v. Marina Pro"erties Cor". , %21 S :A %2- 200%(; Mc*eod v. N*-C , &12 S :A222 2004($

Bhile the limited lia*ility doctrine is intended to protect the stoc6holder *yimm)ni9ing him from personal lia*ility for the corporate de*ts, a corporate o8cermay nevertheless divest himself of this protection *y vol)ntarily *inding himself tothe payment of the corporate de*ts$ 'oh v. $olid Ban) Cor". , %0- S :A &%% 200.($

+he corporate representatives signing as a solidary g)arantee as corporaterepresentative did not )nderta6e to g)arantee personally the payment of thecorporationGs de*t em*odied in the tr)st receipts$ Ie*ts inc)rred *y directors,o8cers and employees acting as s)ch corporate agents are not theirs *)t the directlia*ility of the corporation they represent$ As an exception, directors or o8cers arepersonally lia*le for the corporationGs de*t if they so contract)ally agree orstip)late$ 'u"a4 5 v. Court o# A""eals , %4 S :A .'- 200&($

354 Special Provisions in La'or Laws8 Since a corporate employer is an arti cialperson, it m)st have an o cer who can *e pres)med to *e the em"loyer , *eingthe >person acting in the interest of the( employer? as de ned in Art$ 2-. of the !a*or ode$ *.C. $ansom La'or 1nion9CCL1 v. ,L$C , 1 2 SCRA 2<93198<4.

3 4 2verturning the *.C. $ansom $uling8

orporate o8cers cannot *e held personally lia*le for damages on acco)nt of the employees dismissal *eca)se the employer corporation has a personalityseparate and distinct from its o8cers who merely acted as its agents$ Malayang$amahan ng mga Mangagaga+a sa M. 1reen2elds v. -amos% .&4 S :A 44 2001($

Cnly the responsi*le o8cer of a corporation who had a hand in illegallydismissing an employee sho)ld *e held personally lia*le for the corporateo*ligations arising from s)ch act$ Maglutac v. N*-C , 1-' S :A 4 4 1''0(;reiterated in 1ude4 v. N*-C , 1-. S :A %% 1''0(; Chua v. N*-C , 1-2 S :A .&.1''0(; -eahs Cor". v. N*-C% 241 S :A 2%4 1''4(; and for the separate )ridicalpersonality of a corporation to *e disregarded as to ma6e the highest corporate

$$



o8cer personally lia*le on la*or claims, the wrongdoing m)st *e clearly andconvincingly esta*lished$ !el -osario v. N*-C , 1-4 S :A 444 1''0($

orporate o8cers are not personally lia*le for money claims of dischargedemployees )nless they acted with evident malice and *ad faith in terminating theiremployment$ AH$KPhili""ines v. Court o# A""eals% 2&4 S :A .1' 1'' (; Nicario v.N*-C% 2'& S :A 1' 1''-($

A corporation, *eing a )ridical entity, may act only thro)gh its directors,

o8cers and employees and o*ligations inc)rred *y them, acting as corporateagents, are not theirs *)t the direct acco)nta*ilities of the corporation theyrepresent$ Brent Hos"ital% nc. v. N*-C% 2'2 S :A .0% 1''-($

n la*or cases, corporate directors and o8cers are solidarily lia*le with thecorporation for the termination of employment of corporate employees done withmalice or in *ad faith$ n this case, it is )ndisp)ted that the corporate o8cers havea direct hand in the illegal dismissal of the employees$ +hey were the one, who ashigh3ran6ing o8cers and directors of the corporation, signed the oard :esol)tionretrenching the employees on the feigned gro)nd of serio)s *)siness losses thathad no *asis apart from an )nsigned and )na)dited Pro t and !oss Statementwhich, to repeat, had no evidentiary val)e whatsoever$ 8ichico v. N*-C , 24. S :A.& 1''4($

3 4 Limiting the *.C. $ansom $uling to #nsolvent Corporation A.C. -ansom is not in point *eca)se there the corporation act)ally ceased

operations after the decision of the o)rt was prom)lgated against it, ma6ing itnecessary to enforce it against its former president$ Bhen the corporation is stillexisting and a*le to satisfy the )dgment in favor of the private respondent, thecorporate o8cers cannot *e held personally lia*le$ *im v. N*-C , 141 S :A .2-1'-'($

A.C. -ansom will apply only where the persons who are made personally lia*lefor the employeesG claims are stoc6holders3o8cers of employer3corporation$ n thecase at *ar, a mere general manager while admittedly the highest ran6ing localrepresentative of the corporation, is nevertheless not a stoc6holder and m)ch lessa mem*er of the oard of Iirectors nor an o8cer thereof$ !e 1u4man v. N*-C , 211

S :A 42. 1''2($3 4 1pholding the *.C. $ansom $uling8

Under the !a*or ode, in the case of corporations, it is the president whoresponds personally for violation of the la*or pay laws$ 5illanueva v. Adre , 142S :A -4 1'-'($

A.C. -ansom doctrine has *een reiterated s)*se5)ently in -estuarante *asConchas v. *lego , .1% S :A 2% 1'''(; Carmelcra#t Cor". v. N*-C% 1- S :A .'.1''0(; 5alderrama v. N*-C , 2& S :A % 1'' ($

Since a corporation is an arti cial person, it m)st have an o8cer who can *epres)med to *e the employer, *eing the >person acting in the interest of theemployer?Hthe corporation, in the technical sense only, is the employer$ +he

manager of the corporation falls within the meaning of an >employer? ascontemplated *y the !a*or code, who may *e held ointly and severally lia*le forthe o*ligation of the corporation to its dismissed employees$ N 3 nternational3nit+ear Cor". Phil. 5. N*-C , .'4 S :A 04 200.($

3 @4 %e(nitive 2verturning of *.C. $ansom $uling8

t is settled that in the a*sence of malice, *ad faith, or speci c provisions of law,a stoc6holder or an o8cer of a corporation cannot *e made personally lia*le forcorporate lia*ilities$ Mc*eod v. N*-C , &12 S :A 222 2004(, citing *and Ban) o# thePhili""ines v. Court o# A""eals , . % S :A .4& 2001(; Bogo>Medellin $ugarcanePlanters Asso.% nc. v. N*-C , 2' S :A 10- 1''-(; Com"lex Electronics Em"loyees

Assn. v. N*-C , .10 S :A %0. 1'''(; Acesite Cor". v. N*-C , %%' S :A . 0 200&(;

$%



Coca>Cola Bottlers Phils.% nc. v. !aniel , % 0 S :A %'% 200&(; $uldao v. Cimech$ystem Construction% nc. , &0 S :A 2& 200 (; $u"reme $teel Pi"e Cor". v.Barda e , &22 S :A 1&& 2004($

learly, in A.C. -ansom% :A#SC7, thro)gh its President, organi9ed :CSA: C toevade payment of *ac6wages to the 22 stri6ers$ +his sit)ation, or anything similarshowing malice or *ad faith on the part of Patricio, does not o*tain in the presentcase$ Bhat applies therefore is the r)ling F iFn $antos v. N*-C , 2&% S :A 4.1'' (F$ Mc*eod v. N*-C , &12 S :A 222 2004(; H.-. Carlos Construction% nc. v.Marina Pro"erties Cor". , %21 S :A %2- 200%(; Pam"lona Plantation Com"any v.

Acosta , &10 S :A 2%' 200 (; Elcee 0arms% nc. v. N*-C , &12 S :A 02 2004(; 8y v.5illanueva , &2 S :A 4. 2004($

$/



6I. STOCKHOLDERS AND MEMBERS

1. Sh'&$h%! $&; N%( C%&"%&'($ C&$ (%&;. 1arcia v. *im Chu $in g, &' Phil$ & 21'.%($

2. S?5; & "( %# C%#(&' ( Sec$ 0 42; 'rillana v. Lue4on Colegialla , '. Phil$ .-.1'&.F($

3'4 Purchase *greement. Bayla v. Silang Tra7c Co." #nc ., Ph !. 319 2 ($

354 Pre9#ncorporation Su'scription Sec$ 1(Bhen properties were assigned p)rs)ant to a pre3incorporation s)*scription

agreement, *)t the corporation fails to iss)e the covered shares, the ret)rn of s)chproperties to the s)*scri*er is a direct conse5)ence of rescission and does notamo)nt to corporate distri*)tion of assets prior to dissol)tion$ 2n <ong v. Tiu ,

SCRA <1 320024.3 4 $elease from Su'scription 2'ligation Tan v. Syci p , 99 SCRA 21<

3200< (; 5elasco v. Poi4at , .4 Phil$ -02 1'1-F; PNB v. Bitulo) $a+mill% nc. , 2.S :A 1' - 1' -F; National Exchange Co. v. !exter , &1 Phil$ 01 1'2-F(

3 4 -hen Condition of Payment Provided in By9laws. !e $ilva v. Aboiti4 & Co. ,%% Phil$ 4&& 1'2.($

. C%#; $&'( %# Sec$ 2(@ 3'4 C';h 3 4 S$&@ $3 4 Sh'&$;

354 P&%"$&(: 3 4 R$(' #$ E'&# # ;

Stoc6 dividends are in the nat)re of shares of stoc6, the consideration for whichis the amo)nt of )nrestricted retained earnings converted into e5)ity in thecorporationGs *oo6s$ *incoln Phil. *i#e v. Court o# A""eals , 2'. S :A '2 1''-($ '

. W'($&$ S(% ; Sec$ &(

. P':/$#( %+ B'!'# $ %+ S?5; & "( %# Secs$ and 4; *ingayen 1ul# ElectricPo+er Co. v. Balta4ar , '. Phil$ %0% 1'&.F($

A stoc6holder who is employed with the company, cannot sett3o/ his )npaids)*scription against his awarded claims for wages, where there has *een no call forthe payment of s)ch s)*scription$ A"odaca v. N*-C% 142 S :A %%2 1'-'($

<. D$! #F?$# : %# S?5; & "( % n Secs$ -, ', 40 and 41; Phili""ine 'rust Co. v.-ivera , %% Phil$ % ' 1'2.F; Miranda v. 'arlac -ice Mill Co. , &4 Phil$ 1' 1'.2F(

+he prescriptive period to recover on )npaid s)*scription does not commencefrom the time of s)*scription *)t from the time of demand *y oard of Iirectors topay the *alance of s)*scription$ 1arcia v. $uare4 , 4 Phil$ %%1 1'.'($

3'4 -ho &ay 4uestion a %elin6uency Sale Sec$ - and '($

. C$&( '($ %+ S(% Sec$ .(

3'4 ,ature of Certi(cate8 Tan v. SEC , 20< SCRA 0 319924 ; %e los Santos v.$epu'lic" 9< Ph !. 319 4 ; Ponce v. *lsons Cement Corp. , 9 SCRA<02 320024 ; Nautica Canning Cor". v. umul , %4. S :A %1& 200&(; C.N. Hodgesv. *e4ama , 1% S :A 10.0 1' &($

+he fact that the stoc6 certi cates registered in the name of one person arefo)nd in the possession of another stoc6holder does not prove that the possessor isthe owner of the covered shares$ A stoc6 certi cate is merely a tangi*le evidence of ownership of shares of stoc6$ ts presence or a*sence does not a/ect the right of

&The basis for deter ining the docu entary sta ps due on stoc! di4idends declared would be their boo! 4alue as indicated inthe latest audited financial state ents of the corporation, and not the par 4alue thereof. Commissioner of Internal Revenue v. LincolnP'il. Life Insurance Co. , '(& *C+ $2' 2))2-.

$(



the registered owner to dispose of the shares covered *y the stoc6 certi cate$-e"ublic v. Estate o# Hans Men4i , %4& S :A 20 200&($

A stoc6 certi cate is merely evidence of a share of stoc6 and not the share itself$*incoln Phil. *i#e v. Court o# A""eals , 2'. S :A '2 1''-($

A certi cate of stoc6 co)ld not *e considered iss)ed in contemplation of law)nless signed *y the president or vice3president and co)ntersigned *y thesecretary or assistance secretary$ Bitong v. Court o# A""eals% 2'2 S :A &0. 1''-($

354 J?'; -#$ %( '5!$ Ch'&' ($& %+ C$&( '($ %+ S(% * Bachrach &otor Co.v. Lacson Ledesma , < Ph !. <81 319 4 $

n order for a transfer of stoc6 certi cate to *e e/ective, it m)st *e properlyindorsed and that title to s)ch certi cate of stoc6 is vested in the transferee *y thedelivery of the d)ly indorsed certi cate of stoc6$ ndorsement of the certi cate of stoc6 is a mandatory re5)irement of law for an e/ective transfer of a certi cate of stoc6$ $a!on v. #*C , 20 SCRA 2 319924 $

+he r)le is that the endorsement of the certi cate of stoc6 *y the owner or hisattorney3in3fact or any other person legally a)thori9ed to ma6e the transfer shall *es)8cient to e/ect the transfer of shares only if the same is co)pled with delivery$

+he delivery of the stoc6 certi cate d)ly endorsed *y the owner is the operative actof transfer of shares from the lawf)l owner to the new transferee$ )t to *e validagainst third parties, the transfer m)st *e recorded in the *oo6s of the corporation$ Bitong v. Court of *ppeals" 292 SCRA 0 319984

Even when a formal Ieed of Assignment covering the shares was d)lyexec)ted, witho)t the endorsement and delivery of the covering certi cates of stoc6s, the covered shares cannot *e deemed to transferred and registered in thenames of the assignees$ $ural Bank of Lipa City v. Court of *ppeals , <<SCRA 188 320014 ; -ivera 5. 0lorendo , 1%% S :A %. 1'- ($

+he a*sence of a deed of sale evidencing the sale of shares of stoc6 does notnecessarily show irreg)larity since Section . of the orporation ode itself doesnot re5)ire any deed for the validity of the transfer of shares stoc6, it *eings)8cient that s)ch transfer *e e/ected *y delivery of the stoc6 certi cates d)lyendorsed$ -e"ublic v. Estate o# Hans Men4i , %4& S :A 20, .- 200&($

3 4 $ight to #ssuance Sec$ %; Balta4ar v. *ingayen 1ul# Elect. Po+er Co.% nc. , 1%S :A &22 1' &F($

3 4 Lost or %estroyed Certi(cates Sec$ . and 4.(

Bhile Sec$ 4. of orporation ode appears to *e mandatory, the same admitsexceptions, s)ch that a corporation may vol)ntarily iss)e a new certi cate in lie) of the original certi cate of stoc6 which has *een lost witho)t complying with there5)irements )nder said section$ t wo)ld *e an internal matter for the corporationto nd meas)res in ascertaining who are the real owners of stoc6 for p)rposes of li5)idation$ t is well3settled that )nless proven otherwise, the > stoc) and trans#er boo)D is the *est evidence to esta*lish stoc6 ownership$ SE Cpinion, dated 2-

Lan)ary 1''', addressed to 7s$ 7a$ ecilia Sala9ar3Santos($

3$4 Forged and 1nauthori!ed Transfers. 0. Santamaria v. ong/ong and Shanghai Banking Corp. , 89 Ph !. 80 319 14 ,eugene &arketing" #nc.v. Court of *ppeals , 0 SCRA 29 319994 $

8. S TOCK AND T RANS ER B OOK Secs$ ., 42 and 4%; Fua Cun v. Summer s , Ph !.0 =192 > &onserrat v. Ceran , 8 Ph !. <9 =19 > Chua uan v.

Samahang &agsasaka" #nc ., <2 Ph !. 2 =19 > 1son v. %iosomito , <1Ph !. =19 > EscaDo v. Filipinas &ining Corporation , Ph !. 1=19 > Bachrach &otors v. Lacson9Ledesma , < Ph !. <81 =19 > ,avav. Peers &arketing Corp. , SCRA < =19 <> ($

$0



1. Wh'( D%$; Sh'&$ R$"&$;$#(

Bhile shares of stoc6 constit)te personal property, they do not representproperty of the corporation i.e.% they are properties of the stoc6holders who ownthemF$ A share of stoc6 only typi es an ali5)ot part of the corporationGs property, orthe right to share in its proceeds to that extent +hen distributed according to la+and e/uity% *)t the holder is not the owner of any part of the capital propertiesF of the corporation, nor is he entitled to the possession of any de nite portion of itsassets$ +he stoc6holder is not a co3owner of corporate property$ $toc)holders o# 0.1uanson and $ons% nc. v. -egister o# !eeds o# Manila , S :A .4. 1' 2($

+he registration of shares in a stoc6holderGs name, the iss)ance of stoc6certi cates, and the right to receive dividends which pertain to the shares are allrights that Jow from ownership$ *im 'ay v. Court o# A""eals% 2'. S :A .% 1''-(;'C* $ales Cor". v. Court o# A""eals , .%' S :A .& 2001($

>As early as the case of 0isher v. 'rinidad , the o)rt already declared that > tFhedistinction *etween the title of a corporation, and the interest of its mem*ers orstoc6holders in the property of the corporation, is familiar and well3settled$ +heownership of that property is in the corporation, and not in the holders of shares of its stoc6$ +he interest of each stoc6holder consists in the right to a proportionatepart of the pro ts whenever dividends are declared *y the corporation, d)ring itsexistence, )nder its charter, and to a li6e proportion of the property remaining,)pon the termination or dissol)tion of the corporation, after payment of its de*ts$?Mobilia Products% nc. v. 8me4a+a , %&2 S :A 4. 200&($

2. R h( (% C$&( '($ %+ S(% +%& ?!!: P' Sh'&$; Sec$ %; 'an v. $EC , 20S :A 4%0 1''2F(

. P&$$/"( @$ R h(; Sec$ .'; !atu 'agoranao Benito v. $EC , 12. S :A 422 1'-.F;!ee v. $EC , 1'' S :A 2.- 1''1F($

. R h( (% T&'#;+$& %+ Sh'&$h%! # ; Sec$ .(

3'4 ,on9transfera'ility of &em'ership Secs$ '0 and '1($

354 $estriction on Transfers8 Lam'ert v. Fo3 , 2< Ph !. 88 3191 4.

9 $ight of $efusal * Padgett v. Ba'cock A Templeton" #nc. , 9 Ph !. 2 2319 4 $

Section . contemplates no restriction as to whom the stoc6s may *etransferred$ t does not s)ggest that any discrimination may *e created *y thecorporation in favor of, or against a certain p)rchaser$ +he owner of shares, asowner of personal property, is at li*erty, )nder said section to dispose them infavor of whomever he pleases, witho)t limitation in this respect, than the generalprovisions of law$ Fleishcher v. Botica ,olasco , Ph !. 8 3192 4 $

+he only limitation imposed *y Sec$ . is when the corporation holds any)npaid claim against the shares intended to *e transferred$ A corporation, either*y its *oard, its *y3laws, or the act of its o8cers, cannot create restrictions in stoc6transfers, *eca)se >:estrictions in the tra8c of stoc6 m)st have their so)rce inlegislative enactment, as the corporation itself cannot create s)ch impediment$ y3laws are intended merely for the protection of the corporation, and prescri*erelation, not restriction; they are always s)* ect to the charter of the corporation$?-ural Ban) o# $alinas v. CA , 210 S :A &10 1''2($

+he >right of rst ref)sal? is primarily an attri*)te of ownership$ onversely, awaiver thereof is an act of ownership$ +o allow the P NN to vote the se5)esteredshares for this p)rpose wo)ld *e sanctioning its exercise of an act of strictownership$ PC11 v. $EC , N$:$ #o$ -21--, .0 L)n. 1'-- )nrep$(

+he agreement of co3shareholders to m)t)ally grant the right of rst ref)sal toeach other, *y itself, does not constit)te a violation of the provisions of theonstit)tion limiting land ownership to ilipinos and ilipino corporations; if the

%1



3 4 Speci(ed $ecords Secs$ 4%, 4& and 1%1(

3 4 $emedies #f %enied8 &andamus on!ales v. P,B , 122 SCRA 893198 4 $

)rden of proof to show that examination is for improper p)rpose is on the partof the corporation$ -e"ublic v. $andiganbayan% 1'' S :A .' 1'''($

3$4 Con(dential ,ature of SEC E3aminations Sec$ 1%2(

9. A""&' ;'! R h( Secs$ -1 to - and 10&(

10. D$& @'( @$ S? (; nterim :)les for ntra3 orporate ontroversies; San &iguel Corp. v. /ahn , 1 < SCRA =1989> (

Bhere a corporation is an in )red party, its power to s)e is lodged with its *oardof directors or tr)stees$ An individ)al stoc6holder may *e permitted to instit)te aderivative s)it in *ehalf of the corporation to protect or vindicate corporate rightswhenever the o8cials of the corporation ref)se to s)e, or when a demand )ponthem to le the necessary action wo)ld *e f)tile *eca)se they are the ones to *es)ed, or *eca)se they hold control of the corporation$ n s)ch actions, thecorporation is the real party3in3interest while the s)ing stoc6holder, in *ehalf of thecorporation, is only a nominal party$ 0ili"inas Port $ervices% nc. v. 1o , &1- S :A%&. 2004($

+he whole p)rpose of the law a)thori9ing a derivative s)it is to allow thestoc6holders=mem*er to enforce rights which are derivative secondary( in nat)re,i$e$, to enforce a corporate ca)se of action$ -.N. $ymaco 'rading Cor" v. $antos ,% 4 S :A .12 200&($

A derivative action is a s)it *y a shareholder to enforce a corporate ca)se of action$ +he corporation is a necessary party to the s)it$ And the relief which isgranted is a )dgment against a third person in favor of the corporation$ Similarly, if a corporation has a defense to an action against it and is not asserting it, astoc6holder may intervene and defend on *ehalf of the corporation$ Chua v. Court o# A""eals , %%. S :A 2&' 200%($

A derivative s)it is an action *ro)ght *y minority shareholders in the name of

the corporation to redress wrongs committed against the corporation, for which thedirectors ref)se to s)e$ t is a remedy designed *y e5)ity and has *een theprincipal defense of the minority shareholders against a*)ses *y the ma ority$(estern nstitute o# 'echnology% nc. v. $alas% 24- S :A 21 1''4($

3'4 -ho &ay Bring the Suit 3 Chua v. Court of *ppeals , SCRA 2 9=200 >4

Since the ones to *e s)ed are the directors=o8cers of the corporation itself, astoc6holder, li6e petitioner r)9, may validly instit)te a derivative s)it to vindicatethe alleged corporate in )ry, in which case r)9 is only a nominal party while ilportis the real party3in3interest$ 0ili"inas Port $ervices% nc. v. 1o , &1- S :A %&. 2004($

Under Section . of the orporation ode, read in relation to Section 2., where

a corporation is an in )red party, its power to s)e is lodged with its *oard of directors or tr)stees$ An individ)al stoc6holder is permitted to instit)te a derivatives)it on *ehalf of the corporation wherein he holds stoc6s in order to protect orvindicate corporate rights, whenever the o8cials of the corporation ref)se to s)e,or are the ones to *e s)ed, or hold the control of the corporation$ n s)ch actions,the s)ing stoc6holder is regarded as a nominal party, with the corporation as thereal party in interest$ Chua v. Court o# A""eals , %%. S :A 2&' 200%($

n the a*sence of a special a)thority from the oard of Iirectors to instit)te aderivative s)it for and in *ehalf of the corporation, the president or managingdirector is dis5)ali ed *y law to s)e in her own name$ +he power to s)e and *es)ed in any co)rt *y a corporation even as a stoc6holder is lodged in the oard that

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11. R h( (% P&%"%&( %#'($ Sh'&$ %+ R$/' # # A;;$(; U"%# D ;;%!?( %# Sec$122(

3'4 %i?erent $ules for ,on9stock Corporations and Foundations Secs$ '%and '&; Section .% O( 2( c(, 1''4 # : ($

6III. CAPITAL STRUCTURE* SHARES O STOCK

1. C%# $"( %+ C'" ('! S(% Central 'extile Mills v. National (age andProductivity Commission% 2 0 S :A . - 1'' F($

y express provision of Sec$ 1. of orporation ode, paid3)p capital is thatportion of the a)thori9ed capital stoc6 which has *een *oth s)*scri*ed and paid$ $ $#ot all f)nds or assets received *y the corporation can *e considered paid3)pcapital, for this term has a technical signi cation in orporation !aw$ S)ch m)stform part of the a)thori9ed capital stoc6 of the corporation, s)*scri*ed and thenact)ally paid )p$ M$C >NAC8$ P *ocal Cha"ter v. National (ages and Productivity Commission% 2 ' S :A 14. 1''4($

+he term >capital? and other terms )sed to descri*e the capital str)ct)re of acorporation are of )niversal acceptance, and their )sages have long *eenesta*lished in )rispr)dence$ rieJy, capital refers to the val)e of the property orassets of a corporation$ +he capital s)*scri*ed is the total amo)nt of the capitalthat persons s)*scri*ers or shareholders( have agreed to ta6e and pay for, whichneed not necessarily *e, and can *e more than, the par val)e of the shares$ n ne,it is the amo)nt that the corporation receives, incl)sive of the premi)m if any, inconsideration of the original iss)ance of the shares$ N'C v. Court o# A""eals , .11S :A &0- 1'''($

+he o)tstanding capital stoc6 is de ned )nder Section 1.4 of the orporationode as >the total shares of stoc6 iss)ed to s)*scri*ers or stoc6holders whether ornot f)lly or partially paid as long as there is *inding s)*scription agreement(except treas)ry shares$? +h)s, 5)or)m is *ased on the totality of the shares whichhave *een s)*scri*ed and iss)ed, whether it *e fo)ndersG shares or commonshares$ *anu4a v. Court o# A""eals , %&% S :A &% 200&($

An >investment? is an expendit)re to ac5)ire property or other assets in orderto prod)ce reven)e$ t is the placing of capital or laying o)t of money in a wayintended to sec)re income or pro t from its employment$ >+o invest? is to p)rchasesec)rities of a more or less permanent nat)re, or to place money or property in*)siness vent)res or real estate, or otherwise lay it o)t, so that it may prod)ce areven)e or income$ President o# P! C v. -eyes , % 0 S :A %4. 200&($

An investment, *eing in the nat)re of e5)ity, and )nli6e a deposit of money or aloan that earns interest, cannot *e ass)red of a dividend or an interest on theamo)nt invested, for dividends on investments are granted only after pro ts orgains are generated$ President o# P! C v. -eyes , % 0 S :A %4. 200&($

2. C!';; '( %# %+ Sh'&$; Sec$ (Section of the orporation ode which prohi*its the classi cation of shares as

non3voting, except when they are expressly classi ed as preferred or redeema*leshares, will apply to corporation organi9ed )nder the old orporation !aw$ Section1%- of the orporation ode expressly provides that it shall apply to corporations inexistence at the time of the e/ectivity of the ode$ Castillo v. Balinghasay , %%0S :A %%2 200%($

3'4 Common Shares>A common stoc6 represents the resid)al ownership interest in the corporation$

t is a *asic class of stoc6 ordinarily and )s)ally iss)ed witho)t extraordinary rightsor privileges and entitles the shareholder to a "ro rata division of pro ts$?Commissioner o# nternal -evenue v. Court o# A""eals , .01 S :A 1&2 1'''($

%0



354 Preferred Shares $epu'lic Planters Bank v. *gana , 2<9 SCRA 1=199 > ($

• Participating and ,on9participating• Cumulative and ,on9cumulative• Par =alue and ,o Par =alue

>Preferred stoc6s are those which entitle the shareholder to some priority ondividends and asset distri*)tion$? Commissioner o# nternal -evenue v. Court o#

A""eals% .01 S :A 1&2 1'''($

354 $edeema'le Shares Sec$ -; $epu'lic Planters Bank v. *gana , 2<9 SCRA1 (>:edemption is rep)rchase, a reac5)isition of stoc6 *y a corporation which

iss)ed the stoc6 in exchange for property, whether or not the ac5)ired stoc6 iscancelled, retired or held in the treas)ry$ Essentially, the corporation gets *ac6some of its stoc6, distri*)tes cash or property to the shareholder in payment forthe stoc6, and contin)es in *)siness as *efore$ +he redemption of stoc6 dividendsprevio)sly iss)ed is )sed as a veil for the constr)ctive distri*)tion of cashdividends$ Commissioner o# nternal -evenue v. Court o# A""eals% .01 S :A 1&21'''($

3 4 Founder Shares Sec$ 4( 10

3 4 Treasury Shares Sec$ '; Commissioner v. Manning , S :A 1% 1'4&F($

3$4 Stock -arrants

3+4 Stock 2ptions

3 4 $e9Classi(cation of Shares>:eclassi cation of shares does not always *ring any s)*stantial alteration in

the s)*scri*erGs proportional interest$ )t the exchange is di/erentHthere wo)ld *ea shifting of the *alance of stoc6 feat)res li6e priority in dividend declarations ora*sence of voting rights$ Ret neither the reclassi cation nor exchange "er se yields

income for tax p)rposes$ $ $ n this case, the exchange of shares, witho)t more,prod)ces no reali9ed income to the s)*scri*er$ +here is only a modi cation of thes)*scri*erGs rights and privilegesHwhich is not a Jow of wealth for tax p)rposes$

+he iss)e of taxa*le dividend may arise only once a s)*scri*er disposes of hisentire interests and not when there is still maintenance of proprietary interest$?Commissioner o# nternal -evenue v. Court o# A""eals% .01 S :A 1&2 1'''($

. H:5& S$ ?& ( $; overnment v. Phil. Sugar Estates , 8 Ph !. 1 =1918> ($

. J?'; -R$%& '# '( %#

3'4 $eduction of Capital Stock Sec$ .-(:ed)ction of capital stoc6 cannot *e employed to avoid the corporationGs

o*ligations )nder the !a*or ode$ xMadrigal & Co. v. amora , 1&1 S :A .&&1'-4($354 Stock Splits3 4 Stock Consolidations

1) 5n Castillo v. 0aling'asa , $$) *C+ $$2 2))$-, the position that when the articles of incorporation pro4ide e6pressly a classof shares to ha4e the e6clusi4e right to 4ote and be 4oted for into the 7oard of 8irectors, that such shares would essentially befounder9s share was raised but not resol4ed by the Court.

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6IV. ACJUISITIONS, MERGERS AND CONSOLIDATIONS

A. A CJUISITIONS AND T RANS ERS

1. C%# $"( %+ E#($&"& ;$ %& E %#%/ ?# ( %& G% # %# $&#

2. T:"$; %+ A F? ; ( %#; T&'#;+$&; Edward 0. ,ell Co. v. Paci(c , 1 SCRA 1 ;PNB v. Andrada Electric & Engineering Co. , .-1 S :A 2%% 2002F(

As a r)le, a corporation that p)rchases the assets of another will not *e lia*le

for the de*ts of the selling corporation, provided the former acted in good faith andpaid ade5)ate consideration for s)ch assets, except when any of the followingcirc)mstances is present@ 1( where the p)rchasers expressly or impliedly agrees toass)me the de*ts; 2( where the transaction amo)nts to a consolidation or mergerof the corporations, .( where the p)rchasing corporation is merely a contin)ationof the selling corporation, and %( where the selling corporation fra)d)lently entersinto the transactions to escape lia*ility for those de*ts$ Mc*eod v. N*-C , &12 S :A222 2004(, reiterating Phili""ine National Ban) v. Andrada Electric & EngineeringCo.%, .-1 S :A 2%% 2002($

Bhen a corporation transferred all its assets to another corporation >to settle itso*ligations? that wo)ld not amo)nt to a fra)d)lent transfer$ Mc*eod v. N*-C , &12S :A 222 2004($

Even )nder the provisions of the ivil ode, a creditor has a real interest to goafter any person to whom the de*tor fra)d)lently transferred its assets$ Calte3 Phils. " #nc. v. P,2C Shipping and Transport Corp. , 98 SCRA 00 3200<4 $

. B?; #$;; E#($&"& ;$ T&'#;+$&;* *.%. Santos v. =as6ue! , 22 SCRA 11 <319<84 Laguna Trans. Co." #nc. v. SSS , 10 Ph !. 8 319<04 &cLeod v.,L$C , 12 SCRA 222 3200 4

Altho)gh the *)siness enterprise was operated )nder a partnership schemeand later transferred to a corporation, the *)siness enterprise is deemed to have*een in operation for the re5)ired two3year period as to come )nder the coverageof the SSS !aw$ $an 'eodoro !ev. v. $$$ , - S :A ' 1' .(; and since thecorporation ass)med all the assets and lia*ilities of the partnership, then thecorporation cannot *e regarded, for p)rposes of the SSS !aw, as having come into*eing only on the date of its incorporation *)t from the date the partnership startedthe *)siness$ 9romeca *umber Co. v. $$$% % S :A 11-- 1' 2($

Bhere a corporation is closed for alleged losses and its e5)ipment aretransferred to another company which engaged in the same operations, theseparate )ridical personality of the latter can *e pierced to ma6e it lia*le for thela*or claims of the employees of the closed company$ National 0ederation o# *abor 8nion v. 9"le , 1%. S :A 12% 1'- ($

Altho)gh a corporation may have ceased *)siness operations and an entirelynew company has *een organi9ed to ta6e over the same type of operations, it doesnot necessarily follow that no one may now *e held lia*le for illegal acts committed*y the earlier rm$ Pepsi9Cola Bottling Co." v. ,L$ C, 210 SCRA 2 31992 ($

> t sho)ld *e rather clear that, as bet+een the estate and the cor"oration% theintention of incorporation was to ma6e the corporation lia*le for past and pendingo*ligations of the estate as the transportation *)siness itself was *eing transferredto and placed in the name of the corporation$ +hat lia*ility on the part of thecorporation, vis3X3vis the estate, sho)ld contin)e to remain with it even after thepercentage of the estateGs shares of stoc6 in the corporation sho)ld *e dil)ted$? Buan v. *lcantara" 12 SCRA 8 3198 4 $

. EF? (: T&'#;+$&; Phividec v. Court of *ppeals , 181 SCRA <<9 =1990> ($

/)



B. M ERGER AND C ONSOLIDATION

1. C%# $"(; 3 &cLeod v. ,L$C , 12 SCRA 222 =200 >4 $A consolidation is the )nion of two or more existing entities to form a new entity

called the consolidated corporation$ A merger, on the other hand, is a )nionwhere*y one or more existing corporations are a*sor*ed *y another corporationthat s)rvives and contin)es the com*ined *)siness$ Since a merger orconsolidation involves f)ndamental changes in the corporation, as well as in the

rights of stoc6holders and creditors, there m)st *e an express provision of lawa)thori9ing them$ PNB v. Andrada Electric & Engineering Co.% .-1 S :A 2%% 2002($

2. P&% $ ?&$*3'4 Plan of &erger or Consolidation Sec$ 4 (354 Stockholders@ or &em'ers@ *pproval Sec$ 44(3 4 *rticles of &erger or Consolidation Sec$ 4-(3 4 *pproval 'y SEC Sec$ 4'(

As speci cally provided )nder Section 4' of the orporation ode, the mergershall only *e e/ective )pon the iss)ance of a certi cate of merger *y the Sec)ritiesand Exchange ommission SE (, s)* ect to its prior determination that the mergeris not inconsistent with the ode or existing laws$ Bhere a party to the merger is a

special corporation governed *y its own charter, the ode partic)larly mandatesthat a favora*le recommendation of the appropriate government agency sho)ldrst *e o*tained$ +he iss)ance of the certi cate of merger is cr)cial *eca)se notonly does it *ear o)t SE Gs approval *)t also mar6s the moment where)pon theconse5)ences of a merger ta6e place$ y operation of law, )pon the e/ectivity of the merger, the a*sor*ed corporation ceases to exist *)t its rights, and propertiesas well as lia*ilities shall *e ta6en and deemed transferred to and vested in thes)rviving corporation$ Poliand ndustrial *td. 5. N!C , % 4 S :A &00 200&($

Su'mission of Financial Statements $e6uirements8 or applications of merger, the a)dited nancial statements of the constit)ent corporations s)rvivingand a*sor*ed( as of the date not earlier than 120 days prior to the date of ling of the application and the long3form a)dit report for a*sor*ed corporation s( arealways re5)ired$ !ong form a)dit report for the s)rviving corporation is re5)ired if itis insolvent$ SE Cpinion 1%, s$ of 2002, 1& #ovem*er 2002($

. E $ (; %+ M$& $& %& C%#;%! '( %# Sec$ -0; Associated Ban) v. Court o# A""eals% 2'1 S :A &11 1''-F(

Crdinarily, in the merger of two or more existing corporations, one of thecom*ining corporations s)rvives and contin)es the com*ined *)siness, while therest are dissolved and all their rights, properties and lia*ilities are ac5)ired *y thes)rviving corporation$ Poliand ndustrial *td. 5. N!C , % 4 S :A &00 200&(; Mc*eodv. N*-C , &12 S :A 222 2004($

Bhen the proced)re for merger=consolidation prescri*ed )nder the orporationode are not followed, there can *e no merger or consolidation, and corporate

separateness *etween the constit)ent corporations remains, and the lia*ilities of

one entity cannot *e enforced against another entity$ PNB v. Andrada Electric &Engineering Co.% .-1 S :A 2%% 2002($

t is settled that in the merger of two existing corporations, one of thecorporations s)rvives and contin)es the *)siness, while the other is dissolved andall its rights, properties and lia*ilities are ac5)ired *y the s)rviving corporation$ +hes)rviving corporation therefore has a right to instit)te a collection s)it on acco)ntsof one of one of the constit)ent corporations$ Babst v. Court o# A""eals , .&0 S :A.%1 2001($

C. E ECTS ON E MPLOYEES O C ORPORATION

1. A;;$(; O#!: T&'#;+$&; $undo+ner !ev. Cor". v. !rilon% 1-0 S :A 1% 1'-'F(

/1



>+here is no law re5)iring that the p)rchaser of 7I Gs assets sho)ld a*sor* itsemployees $ $ $ the most that the #!: co)ld do, for reasons of p)*lic policy andsocial )stice, was to direct the *)yerF to give preference to the 5)ali ed separatedemployees of 7I in the lling )p of vacancies in the facilities$ M! $u"ervisors &Con2dential Em"loyees Asso. v. Pres. Assistance on *egal AGairs , 4' S :A %0$

2. B?; #$;;-E#($&"& ;$ T&'#;+$&; Central *!ucarera del %anao v. C* , 1SCRA 29 =198 > Comple3 Electronics Employees *ssn. v. ,L$C" 10SCRA 0 319994 ; u v. N*-C% 2%& S :A 1.% 1''&F; $unio v. N*-C , 124 S :A.'0 1'-%F; $an 0eli"e Neri $chool o# Mandaluyong% nc. v. N*-C , 201 S :A %4-1''1($

)rthermore, )nder the principle of a*sorption, a *ona de *)yer or transfereeof all, or s)*stantially all, the properties of the seller or transferor is not o*liged toa*sor* the latterGs employees$ +he most that the p)rchasing company may do, forreasons of p)*lic policy and social )stice, is to give preference of reemployment tothe selling companyGs 5)ali ed separated employees, who in its )dgment arenecessary to the contin)ed operation of the *)siness esta*lishment$ Barayoga v.

Asset Privation 'rust , %4. S :A '0 200&(, citing Manlimos v. N*-C% 'he Ne+5alley -imes Press v. N*-C $

n the case of a transfer of all or s)*stantially all of the assets of a corporationi$e$, *)siness enterprise transfers(, the lia*ilities of the previo)s owners to itsemployees are not enforcea*le against the *)yer or transferee, )nless a( the latter)ne5)ivocally ass)mes them; or *( the sale or transfer was made in *ad faith$Barayoga v. Asset Privation 'rust , %4. S :A '0 200&($

. EF? (: T&'#;+$&; Pepsi Cola %istri'utors v. ,L$C , 2 SCRA 8< 3199 4 &anlimos v. ,L$C , 2 2 SCRA 1 =199 > ; -obledo v. N*-C , 2.- S :A &21''%F; Pe"si>Cola Bottling Co. v. N*-C , 210 S :A 244 1''2(; !BP v. N*-C , 1-S :A -%1 1''0F; Coral v. N*-C , 2&- S :A 40% 1'' F; Avon !ale 1arments% nc.v. N*-C , 2% S :A 4.. 1''&F($

. M$& $&; '# C%#;%! '( %#; Filipinas Port Services v. ,L$C" 1 SCRA20 =1989> ; 0ili"inas Port $ervices v. N*-C% 200 S :A 44. 1''1F; National 8nionBan) Em"loyees v. *a4aro , 1& S :A 12. 1'--F(; 0irst 1en. Mar)eting Cor". v.N*-C , 22. S :A ..4 1''.($

. S" #-O ; S&C Employees 1nion9PT -2 v. Confessor , 2<2 SCRA 81=199<> ($

/2



6V. 3 REHABILITATION AND INSOLVENCY

1. C%&"%&'($ B'# &?"( : L'); # G$#$&'!3'4 overning Laws nsolvency Act, PI '023A, Sec)rities :eg)lation ode :A

-4''F( +he pertinent law concerning the s)spension of actions for claims against

corporation is Presidential Iecree #o$ '023A, as amended, partic)larly, section & d(,

and li6ewise Section c( thereof$ Phili""ine Airlines nc. v. PA* Em"loyees Association , &2& S :A 2' 2004($

354 Types of Bankruptcy Proceedings in the Philippines

3 4 $esolution on 0urisdiction #ssues in Bankruptcy Proceedings8 Ching v.*and Ban) o# the Phili""ines% 201 S :A 1'0 1''1($

2. S?;"$#; %# %+ P':/$#(;

3'4 #nsolvency Law Secs$ 2 to 1.(3 Sit)ation of the corporate de*tor3 #at)re of petition3 :e5)ired vote of creditors3 onse5)ences of approval=non3approval

354 P.%. GHI9* Sec$ & dF(, Sec$ &$10 of Sec)rities :eg)lation ode

3 4 #nterim $ules on Corporation $eha'ilitation s)pplanted SE :)les onPetition, SE 7emo, dated 4 Ccto*er 1''4(

. C%&"%&'($ R$h'5 ! ('( %#

3'4 ,ature of :$eha'ilitation;

:eha*ilitation contemplates a contin)ance of corporate life and activities in ane/ort to restore and reinstate the corporation to its former position of s)ccessf)loperation and solvency$ -uby ndustrial Cor". v. CA% 2-% S :A %%& 1''-(; Ne+0rontier $ugar Cor". v. -'C% Branch ;% loilo City , &1. S :A 0& 2004($

+he p)rpose of reha*ilitation proceedings is to ena*le the company to gain newlease on life and there*y allows creditors to *e paid their claims from its earnings$:eha*ilitation contemplates a contin)ance of corporate life and activities in ane/ort to restore and reinstate the nancially distressed corporation to its formerposition of s)ccessf)l operation and solvency$ +his is in consonance with the StateGso* ective to promote a wider and more meaningf)l e5)ita*le distri*)tion of wealthto protect investments and the p)*lic$ Metro"olitan Ban) & 'rust Co. v. A$BHoldings% nc. , &14 S :A 1 2004($

354 Basis of $TC Power to 1ndertake Corporate $eha'ilitation Secs$ & dFand , PI '023A, Sec$ &$10, Sec)rities :eg)lation ode(

Presently, the applica*le law on reha*ilitation petitions led *y corporations,partnerships or associations, incl)ding reha*ilitation cases transferred from theSec)rities and Exchange ommission to the :+s p)rs)ant to :ep)*lic Act #o$ -4''or the Sec)rities :eg)lations ode, is the nterim :)les of Proced)re on orporation:eha*ilitation 2000($ Ne+ 0rontier $ugar Cor". v. -'C% Branch ;% loilo City , &1.S :A 0& 2004($

Cn 1& Iecem*er 2000, the S)preme o)rt, in A$7$ #o$ 003-3103S , adopted thenterim :)les of Proced)re on orporate :eha*ilitation and directed to *e

transferred from the SE to :egional +rial o)rts, all petitions for reha*ilitation led*y corporations, partnerships, and association )nder P$I$ '023A in accordance withthe amendatory provisions of :ep)*lic Act #o$ -4''$ +he r)les re5)ire trial co)rtsto iss)e, among other things, a stay order in the >enforcement of all claims,whether for money or otherwise, and whether s)ch enforcement is *y co)rt action

/'



or otherwise,? against the corporation )nder reha*ilitation, its g)arantors ands)reties not solidarily lia*le with it$ Phili""ine Airlines v. 3urang)ing , .-' S :A &--2002($

3 4 SC #nterim $ules on Corporate $eha'ilitation8 t sho)ld *e stressed thatthe nterim :)les was enacted to provide for a s)mmary and non3adversarialreha*ilitation proceedings$ +his is in consonance with the commercial nat)re of a reha*ilitation case, which is aimed to *e resolved expeditio)sly for the *ene t

of all the parties concerned and the economy in general$ Ne+ 0rontier $ugar Cor". v. -'C% Branch ;% loilo City , &1. S :A 01 2004($

3 4 $e6uirements of Petition8 +he contents of the petition for corporatereha*ilitation are provided )nder :)le %, Section 2 6( of the nterim :)les onorporate :eha*ilitation, which among other things, prescri*e that the petitionneeds for a certi cation$ Chas -ealty and !ev. Cor". v. 'alavera% .'4 S :A -%200%($f extraordinary corporate action mentioned in :)le %, Section 2 6(, of the

nterim :)les are to *e done )nder the proposed reha*ilitation plan, the petitionerwo)ld *e *o)nd to ma6e it 6nown that it has received the approval of a ma ority of the directors and the a8rmative votes of stoc6holders representing at least two3thirds 2=.( of the o)tstanding capital stoc6$ Bhere no s)ch extraordinary corporate

acts, or one that )nder the law wo)ld call for a two3thirds 2=.( vote arecontemplated to *e done in carrying o)t the proposed reha*ilitation plan, then theapproval of stoc6holders wo)ld only *e *y a ma ority, not necessarily a two3thirds2=.(, vote, as long as, of co)rse, there is a 5)or)m$ Chas -ealty and !ev. Cor". v.'alavera , .'4 S :A -% 200%($

Bhen a petition for corporate reha*ilitation is led )nder the nterim :)les of Proced)re Noverning orporate :eha*ilitation, the rst d)ty of a co)rt is todetermine whether the petition is s)8cient as to form and s)*stance$ Cnce it issatis ed as to form and s)*stance, it iss)es an order staying enforcement of allclaims, whether for money or otherwise and whether s)ch enforcement is *y co)rtaction or otherwise, against the de*tor, its g)arantors and s)reties not solidarilylia*le with the de*tor$ $obre uanite v. A$B !ev. Cor". , %41 S :A 4 . 200&($

Summary of Procedure under the #nterim $ules. Ne+ 0rontier $ugar Cor".v. -'C% Branch ;% loilo City , &1. S :A 01 2004($

3$4 Stay 2rder> Purpose8 +he avowed o* ective of s)spending all actions againstthe distressed corporation when a management committee or reha*ilitationreceiver is appointed is to ena*le s)ch management committee or reha*ilitationreceiver to e/ectively exercise its powers free from any )dicial or extra3 )dicialinterference that might )nd)ly hinder or prevent the resc)e of the distressedcompany$ Oowever, this p)rpose can no longer *e e/ectively met in thepresent case as the proceedings herein have already *een pending for almostten years and have already reached this o)rt$ +he management committeehas *een )nd)ly *)rdened eno)gh, its time and reso)rces wasted *y theproceedings that too6 place *efore the :+ and the appellate co)rt$ Oence, the

decree of ann)lment of the previo)s proceedings in the lower co)rts will onlyres)lt in f)rther delay$ +he greater interest of )stice demands that we nowdispose of the iss)es raised in the present petition$ 'yson s $u"er Concrete% nc.v. Court o# A""eals , % 1 S :A % ' 200&(; $obre uanite v. A$B !ev. Cor". , %41S :A 4 . 200&(; Phili""ine Airlines nc. v. PA* Em"loyees Association , &2&S :A 2' 2004(; Phili""ine Airlines% nc. v. amora , &1% S :A &-% 2004($

esides, the other o* ect of s)spending all actions against a distressedcorporation, which is to treat all of its creditors on e5)al footing, is defeated *y thefact that the assailed )dgment of the 7e+ has already *een implemented thro)gha writ of exec)tion iss)ed *y the co)rt a /uo as early as L)ly 22, 1'' $ 'yson s$u"er Concrete% nc. v. Court o# A""eals , % 1 S :A % ' 200&($

/$



Under the nterim :)les, the :+, within ve &( days from the ling of thepetition for reha*ilitation and after nding that the petition is s)8cient in for ands)*stance, shall iss)e a Stay Crder appointing a :eha*ilitation :eceiver,;?;"$# # $#+%& $/$#( %+ '!! !' /;, prohi*iting transfers or enc)m*rancesof the de*torGs properties, prohi*iting payment of o)tstanding lia*ilities, andprohi*iting the withholding of s)pply of goods and services from the de*tor$ Anytransfer of property or any other conveyance, sale payment, or agreement made inviolation of the Stay Crder or in violation of the :)les may *e declared void *y the

co)rt )pon motion or motu "ro"rio $ Ne+ 0rontier $ugar Cor". v. -'C% Branch ;%loilo City , &1. S :A 01 2004($

-hen #t Becomes E?ective8 +he appointment of a management committeeor reha*ilitation receiver may only ta6e place after the ling with the SE of anappropriate petition for s)spension of payments$ +he concl)sion is inevita*le thatp)rs)ant to Section c(, ta6en together with Sections & d( and d(, a co)rt action isi"so ure s)spended only u"on the a""ointment o# a management committee or arehabilitation receiver. Barotac $ugar Mills% nc. v. CA% 24& S :A %'4 1''4(; 8nionBan) v. CA% 2'0 S :A 1'- 1''-($

%uration8 B.0. Homes% nc. v. Court o# A""eals% 1'0 S :A 2 2 1''0($

+he stay order is e/ective from the date of its iss)ance )ntil the dismissal of thepetition or the termination of the reha*ilitation proceedings$ PA* v. 3urang)ing , .-'S :A &-- 2002($

Parties Covered Bene(ted8 8nion Ban) o# the Phili""ines v. CA , 2'0 S :A1'- 1''-(; Modern Pa"er Products% nc. v. CA , 2- S :A 4%' 1''-(; 'raders -oyalBan) v. CA% 144 S :A 4-- 1'-'(; Chung 3a Bio v. AC% 1 . S :A &.% 1'--($

Claims Covered8 +he stay order is e/ective *oth against sec)re and)nsec)red creditors$ +his is in harmony with the principle of >e5)ality is e5)ity?$

Alemar s $ibal & $ons% nc. v. Elbinias , 1- S :A '% 1''0(; -CBC v. AC , 21. S :A-.0 1''2(; BP v. CA , 22' S :A 22. 1''%(; PC B v. CA% 142 S :A %. 1'-'(; Ne+0rontier $ugar Cor". v. -'C% Branch ;% loilo City , &1. S :A 01 2004($

nterim :)les m)st *e read and applied along with Section c( of P$I$ '023A,directing that )pon the appointment of a management committee, reha*ilitation

receiver, *oard or *ody p)rs)ant to the decree, >all actions? for claims against thedistressed corporation >pending *efore any co)rt, tri*)nal, *oard or *ody shall *es)spended accordingly$? PA* v. 3urang)ing , .-' S :A &-- 2002($

Strictly spea6ing, an action for e ectment led against the corporation sho)ld*e s)spended on the gro)nd that the SE has already created a managementcommittee )nder Pres$ Iecree #o$ '023A p)rs)ant to a petition for corporatereha*ilitation$ t m)st *e noted that the constit)tion of a management committee)nder Pres$ Iecree #o$ '023A, does not divest a co)rt of its )risdiction over thepending case *)t merely provides for the s)spension of the proceedings in the civilaction$ 'yson s $u"er Concrete% nc. v. Court o# A""eals , % 1 S :A % ' 200&($

+he e/ects of the stay order )nder the Sec$ *(, :)le % of the nterim :)les of Proced)re for orporate :eha*iliation which en oings the enforcement of all claims

against g)arantors and s)reties >who are not solidarily lia*le with the de*tor,?cannot apply to the letter of credit iss)ed in *ehalf of the de*tor3applicant since theo*ligation of the iss)ing *an6s )nder the letter of credit is primary and solidary$Metro"olitan (ater+or)s v. !a+ay , %.2 S :A &&' 200%($

Types of :Claims; Covered8 +he limitation of covered >claims? to those thatare pec)niary in nat)re is applica*le only to SE corporation reha*ilitationproceedings$ 0inasia nvestments v. CA% 2.4 S :A %% 1''%(; Phili""ine Airlinesnc. v. PA* Em"loyees Association , &2& S :A 2' 2004(; Cordova v. -eyes !a+ay *im Bernardo *indo -osales *a+ 9 cers , &2 S :A .00 2004($

/%



A >claim? is said to *e >a right to payment, +hether or not it is red)ced to )dgment, li5)idated or )nli5)idated, xed or contingent, mat)red or )nmat)red,disp)ted or )ndisp)ted, legal or e5)ita*le, and sec)red or )nsec)red$? Derily, theclaim against an airline company is a money claim for the missing l)ggages, anancial demand, that the law re5)ires to *e s)spended pending the reha*ilitationproceedings$ PA* v. 3urang)ing , .-' S :A &-- 2002($

+he )sti cation for the a)tomatic stay of all pending actions for claims is toena*le the management committee or the reha*ilitation receiver to e/ectivelyexercise its=his powers free from any )dicial or extra3 )dicial interference thatmight )nd)ly hinder or prevent the >resc)e? of the de*tor company$ +o allow la*orclaims to contin)e wo)ld only add to the *)rden of the management committee orreha*ilitation receiver, whose time, e/ort and reso)rces wo)ld *e wasteddefending claims against the corporation instead of *eing directed toward itsrestr)ct)ring and reha*ilitation$ -ubber+orld OPhils. % nc. v. N*-C% .0& S :A 4211'''(; .. S :A %.. 2000($ Also -ubber+orld 6Phils.7% nc. and ,ulie 9ng v. N*-C%.. S :A %.. 2000(; *ing)od Maggaga+a sa -ubber+orld% Adidas>Anglo v.-ubber+orld 6Phil.s7% nc. , &1. S :A 20- 2004($

3+4 Powers of &anagement Committee or the $eha'ilitation $eceiver Sec$, PI '023A; nterim :)les on orporate :eha*ilitation(

A management committee is tas6ed to manage, ta6e c)stody of and control allexisting assets, f)nds and records of the corporation, and to determine the *estway to protect the interest of its stoc6holders and creditors$ Punongbayan v.Punongbayan% ,r. , %'1 S :A %44 200 ($

n exercising the discretion to appoint a management committee, the o8cer ortri*)nal *efore whom the application was made m)st ta6e into acco)nt all thecirc)mstances and facts of the case, the presence of conditions and gro)nds

)stifying the relief, the ends of )stice, the rights of all the parties interests in thecontroversy and the ade5)acy and e/ectiveness of other availa*le remedies$ +hediscretion m)st *e exercised with great ca)tion and circ)mspection and only for areason strongly appearing to the tri*)nal or o8cer exercising )risdiction$ Cnce thediscretion has *een exercised, the pres)mption to *e considered is that the o8ceror tri*)nal has fairly weighed and appraised the evidence s)*mitted *y the parties$

,acinto v. 0irst (omen s Credit Cor". , %10 S :A 1%0 200.($S)mmons may validly *e served )pon any mem*er of the management

committee$ +here is nothing in the nterim :)les of Proced)re for orporate:eha*ilitation that provides that service of s)mmons on the corporation )nderreha*ilitation can only *e made on the chairman of the management committee$'yson s $u"er Concrete% nc. v. Court o# A""eals , % 1 S :A % ' 200&($

3 4 $TC 2rders #mmediately E3ecutory8 inally, it *ears stressing that )nderSection %, :)le 1 of the nterim :)les of Proced)re Noverning ntra3 orporateontroversies )nder :ep)*lic Act #o$ -4'', the prevailing party has the right tole a motion for the immediate exec)tion of a decision of )dgment$ *ao v. 3ing ,&00 S :A &'' 200 ($

3h4 *ppeal from the %ecision of the $TC Special Commercial Courts +he Cmni*)s Crder dated Lan)ary 1., 200. iss)es *y the :+ is a nal order

since it terminated the proceedings and dismissed the case *efore the trial co)rt; itleaves nothing more to *e done$ As s)ch, petitionerGs reco)rse is to le an appealfrom the Cmni*)s Crder$ #ew rontier S)gar orp$ v$ :+ , ranch .', loilo ity, &1.S :A 01 2004(

n this regard, A$7$ 003-3103S prom)lgated *y the o)rt on Septem*er %, 2001provides that a petition for reha*ilitation is considered a special proceeding giventhat it see6s to esta*lish the stat)s of a party or a partic)lar fact$ Accordingly, theperiod of appeal provided in paragraph *( of the nterim :)les :elative to themplementation of atas Pam*ansa lg$ 12' for special proceedings shall apply$

//



Under said paragraph 1' *(, the period of appeal shall *e thirty .( days, a recordof appeal *eing re5)ired$ #ew rontier S)gar orp$ v$ :+ , ranch .', loilo ity,&1. S :A 01 2004(

Oowever, it sho)ld *e noted that the o)rt iss)ed A$7$ #o$ 0%3'3043S onSeptem*er 1%, 200%, clarifying the proper mode of appeal in cases involvingcorporate reha*ilitation and intra3corporate controversies$ t is provided thereinthat all decisions and nal orders in cases falling )nder the nterim :)les of Proced)re Noverning ntra3 orporate ontroversies )nder :ep)*lic Act #o$ -4''shall *e appealed to the A thro)gh petition for review )nder :)le %. of the :)lesof o)rt to *e led within fteen 1&( days from notice of the decision or nal orderof the :+ $ #ew rontier S)gar orp$ v$ :+ , ranch .', loilo ity, &1. S :A 012004($

3 4 SEC Power to Li6uidate Corporation8 Al*eit )risdiction over a petition todeclare a corporation in a state of insolvency strictly lies with reg)lar co)rts, theSE possessed ample power )nder P$I$ '023A to declare a corporation insolventas an incident of and in contin)ation of its already ac5)ired )risdiction over thepetition to *e declared in the state of s)spension of payments in the twoinstances provided in Section & d( thereof$ 8nion Ban) o# the Phili""ines v.Conce"cion , &2& S :A 42 2004(

3 4 Basic %i?erences Between Suspension of Payments Proceedings under the #nsolvency Law and 1nder P% GHI9*

. I#;%!@$# : P&% $$ # ;

!i5)idation proceeding is one in rem so that all other interested personswhether 6nown to the parties or not may *e *o)nd *y s)ch proceedings$ Chua v.N*-C , 1'0 S :A &&- 1''0($

3'4 overning Law and 0urisdiction354 eneral E?ect of Corporate #nsolvency Proceedings3 4 V OLUNTARY I NSOLVENCY

3 4 Filing of Petition Sec$ 1%, nsolvency !aw(

3$4 E?ect of 2rder of #nsolvency Sec$ 1-, nsolvency !aw; !e Amu4ategui v.Macleod% .. Phil$ -0 1'1&F($Section 1- on the a)tomatic stay is no self3exec)tory; applications for

s)spension of proceedings m)st *e made in the vario)s co)rts where actions inpending$ 8nson v. Abeto% %4 Phil$ %2 1'2%($

3+4 INVOLUNTARY I NSOLVENCY Sec$ 20 to ..(3 4 4uali(cations of Petitioning Creditors

A foreign corporation which shows that it is a resident of the Philippines haslegal standing to petition for invol)ntary insolvency of a corporate de*tor$ $tatenvestment House% nc. v. Citiban)% N.A.% 20. S :A ' 1''1($

3h4 2rder to Show Cause Sec$ 21(; earing of petition Sec$ 2%(

3 4 *cts of #nsolvency and 2rder of *d5udication Sec$ 20(

3 4 &eeting of Creditors to Elect *ssignee Secs$ 2' and .0(

3 4 E?ects of 2rder of #nsolvency and *ppointment of $eceiver Secs$ .2, .%and .&; -adiola>'oshiba Phil. v. AC , 1'' S :A .4. 1''1F(

3!4 Li6uidation of *ssets and Payment of %e'ts Sec$ ..(

3/4 $emedies of Secured Creditors Sec$ 2', %. and &'(

3#4 Composition Sec$ .(

3%4 %ischarge Secs$ &2, %, and (

/(



A corporation cannot extend its life *y amendment of its articles of incorporation e/ected d)ring the three3year stat)tory period for li5)idation whenits original term of existence had already expired, as the same wo)ld constit)tenew *)siness$ Alhambra Cigar & Cigarette Manu#acturing Com"any% nc. v. $EC , 2%S :A 2 ' 1' -($

Bhen the period of corporate life expires, the corporation ceases to *e a *odycorporate for the p)rpose of contin)ing the *)siness for which it was organi9ed$PNB v. Court o# 0irst nstance o# -i4al% Pasig% Br. QQ , 20' S :A 2'% 1''2($

. M$(h% ; %+ L F? '( %# Sec$ 122; Board of Li6uidators v. /alaw , 20 SCRA98 =19< > ; $umera v. 5alencia , 4 Phil$ 421 1'.'F; BuenaRor v. Camarinesndustry , 10- Phil$ %42 1' 0F($

!i5)idation, in corporation law, connotes a winding )p or settling with creditorsand de*tors$ t is the winding )p of a corporation so that assets are distri*)ted tothose entitled to receive them$ t is the process of red)cing assets to cash,discharging lia*ilities and dividing s)rpl)s or loss$ P5B Em"loyees 8nion>N.8.B.E.v. 5ega% . 0 S :A .. 2001($

+here can *e no do)*t that )nder Secs$ 44 and 4- of orporation !aw, the!egislat)re intended to let the shareholders have the control of the assets of thecorporation )pon dissol)tion in winding )p its a/airs$ +he normal method of proced)re is for the directors and exec)tive o8cers to have charge of the winding)p operations, tho)gh there is the alternative method of assigning the property of the corporation to the tr)stees for the *ene t of its creditors and shareholders$>Bhile the appointment of a receiver rests within the so)nd )dicial discretion of the co)rt, s)ch discretion m)st, however, always *e exercised with ca)tion andgoverned *y legal and e5)ita*le principles, the violation of which will amo)nt to itsa*)se, and in ma6ing s)ch appointment the co)rt sho)ld ta6e into consideration allthe facts and weigh the relative advantages and disadvantages of appointing areceiver to wind )p the corporate *)siness$? China Ban)ing Cor". v. M. Michelin &Cie , &- Phil$ 2 1 1'..(

+here is nothing in Sec$ 122 which *ars an action for the recovery of the de*tsof the corporation against the li5)idator thereof, after the lapse of the said three3

year period$ > t immaterial that the present action was led after the expiration of the three years $ $ $ for at the very least, and ass)ming that )dicial enforcement of taxes may not *e initiated after said three years despite the fact that act)alli5)idation has not terminated and the one in charge thereof is still holding theassets of the corporation, o*vio)sly for the *ene t of all the creditors thereof, theassessment aforementioned, made within the three years, de nitely esta*lishedthe Novernment as a creditor of the corporation for whom the li5)idator iss)pposed to hold assets of the corporation$? -e"ublic v. Marsman !ev. Co.% %%S :A %1- 1'42($

Under Section 11 of the orporation ode, a corporation whose corporateexistence is terminated in any manner contin)es to *e a *ody corporate for three.( years after its dissol)tion for p)rposes of prosec)ting and defending s)its *yand against it and to ena*le it to settle and close its a/airs, c)lminating in thedisposition and distri*)tion of its remaining assets$ f the three3year extended lifehas expired witho)t a tr)stee or receiver having *een expressly designated *y thecorporation within that period, the *oard of directors or tr)stee( itself, may *epermitted to contin)e as >tr)stees? *y legal implication to complete thecorporation li5)idation$ Pe"si>Cola Products Phils.% nc. v. Court o# A""eals , %%.S :A &41 200%($

<. Wh% A&$ L '5!$ A+($& D ;;%!?( %# '# W # # -U" ,ational *'aca Corp.v. Pore , 2 SCRA 989 =19<1> Tan Tiong Bio v. Commissioner , 100 Ph !. 8<=19 <> elano v. Court of *ppeals , 10 SCRA 90 =1981> ($

/&



Altho)gh a corporate o8cer is not lia*le for corporate o*ligations, s)ch asclaims for wages, however, when s)ch corporate o8cer ceases corporate propertyto apply to his own claims against the corporation, he shall *e lia*le to the extentthereof to corporate lia*ilities, since 6nowing f)lly well that certain creditors hadsimilarly valid claims, he too6 advantage of his position as general manager andapplied the corporationTs assets in payment excl)sively to his own claims$ !e1u4man v. N*-C , 211 S :A 42. 1''2($

f the .3year extended life has expired witho)t a tr)stee or receiver having *eendesignated, the oard of Iirectors itself, following the rationale of the decision in1elano , may *e permitted to so contin)e as >tr)stees? to complete li5)idation; andin the a*sence of a oard, those having pec)niary interest in the assets, incl)dingthe shareholders and the creditors of the corporation, acting for and in its *ehalf,might ma6e proper representations with the appropriate *ody for wor6ing o)t anal settlement of the corporate concerns$ Clemente v. Court o# A""eals , 2%2 S :A414 1''&($

n 1elano case, the co)nsel of the dissolved corporation was considered atr)stee$ n the later case of Clemente v. Court o# A""eals , the oard of Iirectorswas permitted to complete the corporate li5)idation *y contin)ing as >tr)stees?$Under Sec$ 1%& >#o right of remedy in favor or against any corporation $ $ $ shall *eremoved or impaired either *y the s)*se5)ent dissol)tion of said corporation or *y

any s)*se5)ent amendment or repeal of this ode or of any part thereof$? +hisprovision safeg)ards the rights of a corporation which is dissolved pendinglitigation$ -eburiano v. Court o# A""eals% .01 S :A .%2 1'''(; 3necht v. 8nitedCigarette Cor". , .-% S :A %- 2002($

. R$ # %&"%&'( %#* Chung /a Bio v. #*C , 1< SCRA 319884 $

6VII. CLOSE CORPORATION

1. D$ # ( %# Sec$ ' ; &anuel $. %ulay Enterprises v. Court of *ppeals , 22SCRA < 8 =199 > San 0uan Structural v. Court of *ppeals , 29< SCRA< 1 =1998> ($

+he concept of a close corporation organi9ed for the p)rpose of r)nning a

family *)siness or managing family property has formed the *ac6*one of Philippinecommerce and ind)stry$ +hro)gh this device, ilipino families have *een a*le tot)rn their h)m*le, hard3earned life savings into going concerns capa*le of providing them and their families with a modic)m of material comfort and nancialsec)rity as a reward for years of hard wor6$ A family corporation sho)ld serve as areward for years of hard wor6$ A family corporation sho)ld serve as a rallying pointfor family )nity and prosperity, not as a Jashpoint for familial strife$ t is hoped thatpeople reac5)aint themselves with the concepts of m)t)al aid and sec)rity that arethe original driving forces *ehind the formation of family corporations and )sethese tenets in order to facilitate more civil, if not more amica*le, settlements of family corporate disp)tes$ ala v. Ellice *gro9#ndustrial Corp. , 18 SCRA 13200 4 $

2. A&( !$; %+ I# %&"%&'( %# R$F? &$/$#(; Sec$ '4(3'4 Pre9Emptive $ights Sec$ 102(

354 *mendment Sec$ 10.(

. R$;(& ( %# %# T&'#;+$& %+ Sh'&$; Secs$ '- and ''(

. A &$$/$#(; 5: S(% h%! $& Sec$ 100(

. N% N$ $;; (: %+ B%'& Sec$ 101; Sergio F. ,aguiat v. ,L$C" 2<9 SCRA <=199 > ($

<. D$' !% ; Sec$ 10%(

. W (h &')'! '# D ;;%!?( %# Sec$ 10&(

()



Even prior to the passage of orporation ode which recogni9ed closecorporations, the S)preme o)rt had on limited instances recogni9ed the commonlaw rights of minority stoc6holders to see6 dissol)tion of the corporation$ 0inancingCor". o# the Phil. v. 'eodoro , '. Phil$ %0% 1'&.($

6VIII. NON-STOCK CORPORATIONS AND OUNDATIONS

1. Th$%&: %# N%#-S(% C%&"%&'( %# Secs$ 1% 2(, %., -4, -- and '% &(; Collector of #nternal $evenue v. Clu' Filipino #nc. de Ce'u , SCRA 21=19<2> Collector of #nternal $evenue v. 1niversity of =isayas , 1 SCRA<<9 =19<1> ($

A non3stoc6 corporation may only *e formed or organi9ed for charita*le,religio)s, ed)cational, professional, c)lt)ral, fraternal, literary, scienti c, social,civic or other similar p)rposes$ t may not engage in )nderta6ings s)ch as theinvestment *)siness where pro t is the main or )nderlying p)rpose$ Altho)gh thenon3stoc6 corporation may o*tain pro ts as an incident to its operation s)ch pro tsare not to *e distri*)ted among its mem*ers *)t m)st *e )sed for the f)rtheranceof its p)rposes$ Peo"le v. Menil , N$:$ 11&0&%3 , 12 Septem*er 1''' )nrep$F(

+he inc)rring of pro t or losses does not determine whether an activity is forpro t or non3pro t, and the co)rts will consider whether dividends have *een

declared or its mem*ers or that is property, e/ects or pro t was ever )sed forpersonal or individ)al gain, and not for the p)rpose of carrying o)t the o* ectives of the enterprise$ Manila $anitarium and Hos"ital v. 1abuco , 4 S :A 1% 1' .($

n a m)t)al life ins)rance corporation, organi9ed as a non3stoc6 nonpro tcorporation, the so3called >dividend? that is received *y mem*ers3policyholders isnot a portion of pro ts set aside for distri*)tion to the stoc6holders in proportion totheir s)*scription to the capital stoc6 of a corporation$ 9ne% a m)t)al company hasno capital stoc6 to which s)*scription is necessary; there are no stoc6holders tospea6 of, *)t only mem*ers$ And, t+o , the amo)nt they receive does not parta6e of the nat)re of a pro t or income$ +he 5)asi3appearance of pro t will not change itscharacter; it remains an overpayment, a *ene t to which the mem*er3policyholderis e5)ita*ly entitled$ -e"ublic v. $unli#e Assurance Com"any o# Canada , %4. S :A12' 200&($

2. N%#-A""! '5 ! (: %+ (h$ N'( %#'! '( %# L');

A foreigner may a mem*er or an o8cer of a non3stoc6 corporation$ Save for theposition of the Secretary, who m)st *e a ilipino citi9en and a resident of thePhilippines, the prohi*ition of foreign citi9ens *ecoming o8cers in corporationsengaged in *)siness does not apply to the activities of a non3stoc6 corporationwhich do not fall within the coverage of a nationali9ed ind)stry or area of *)sinessreserved *y law excl)sively to ilipino citi9ens$ SE Cpinion #o$ 12, series of 2002,21 #ovem*er 2002($

. C%#@$&; %# %+ N%#-S(% C%&"%&'( %# (% S(% C%&"%&'( %#

+he conversion of a non3stoc6 ed)cational instit)tion into a stoc6 corporation isnot legally feasi*le, as it violates Sec$ -4 of orporation ode that no part of theincome of a non3stoc6 corporation may *e distri*)ta*le as dividends to itsmem*ers, tr)stees or o8cers$ >+h)s, the ommission has previo)sly r)led that anon3stoc6 corporation cannot *e converted into a stoc6 corporation *y a mereamendment of the Articles of ncorporation$ or p)rposes of transformation, it isf)ndamental that the non3stoc6 corporation *e dissolved rst )nder any of themethods speci ed +itle M D of the orporation ode$ +hereafter, the mem*ers mayorgani9e as a stoc6 corporation directed to *ring pro ts or pec)niary gains tothemselves$ SE Cpinion dated 2% e*r)ary 200.; SE Cpinion dated 10Iecem*er 1''2($

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n the event of dissol)tion of a non3stoc6 corporation, its assets shall *edistri*)ted in accordance with the r)les as provided for )nder Secs$ '% and '& of orporation ode$ Unless, it is so provided in the Articles of ncorporation or y3!aws, the mem*ers are not entitled to any *ene cial or vested interest over theassets of the non3stoc6 corporation$ n other words, non3stoc6, non3pro tcorporations hold their f)nds in tr)st for the carrying o)t of the o* ectives andp)rposes expressed in its charter$ SE Cpinion dated 2% e*r)ary 200.; SECpinion dated 1. 7ay 1''2($

. Wh'( I; ' %?# '( %# Secs$ .0 and .% O(, # : of 1''4; Sec$ 2%, :even)e:eg)lations #o$ 2; :3#EIA :eg)lations #o$ 13-1, as amended(

ormal re5)irements of :ev$ :eg$ #o$ 2 are not mandatory and an entity may, inthe a*sence of compliance with s)ch re5)irements, still show that it falls )nder theprovisions of Sec$ of # : $ Collector v. 5.1. $inco Educational Cor". , 100 Phil$ 1241'& ($

. D ;;%!?( %# Secs$ '% and '&(

6I6. OREIGN CORPORATION

1. D$ # ( %# Sec$ 12.(

A foreign corporation is one which owes its existence to the laws of anotherstate, and generally, has no legal existence within the state in which it is foreign$

Avon nsurance P*C v. Court o# A""eals% 24- S :A .12 1''4(

A f)ndamental r)le of international )risdiction is that no state can *y its laws,and no co)rt which is only a creat)re of the state, can *y its )dgments anddecrees, directly *ind or a/ect property or persons *eyond the limits of that state$'imes% nc. v. -eyes , .' S :A .0. 1'41($

2. S('(?(%&: C%# $"( %+ %oing Business Art$ %%, Exec)tive Crder #o$ 22 ,Cmni*)s nvestment ode; Sec$ . d(, :$A$ #o$ 40%2, oreign nvestment Act of 1''1($

3'4 *pplication for License Secs$ 12% and 12&; Art$ %-, Cmni*)s nvestmentode(An )nlicensed foreign corporation doing *)siness in the Philippines cannot s)e

*efore Philippine co)rts; an )nlicensed foreign corporation not doing *)siness inthe Philippines can s)e *efore Philippine co)rts$ B. 5an uiden Bros.% *td v. 1'5*Manu#acturing ndustries% nc. , &2. S :A 2.. 2004($

A foreign corporation witho)t a license is not i"so #acto incapacitated from*ringing an action in Philippine co)rts$ A license is necessary only if a foreigncorporation is >transacting? or >doing *)siness? in the co)ntry$ Agilent 'echnologies $inga"ore 6P'E7 *td. v. ntegrated $ilicon 'ech. , %24 S :A &'. 200%($

354 $ationale for $e6uiring License to %o Business

+he p)rpose of the law in re5)iring that foreign corporations doing *)siness inthe co)ntry *e licensed to do so, it to s)* ect the foreign corporations doing*)siness in the Philippines to the )risdiction of the co)rts$ Ctherwise, a foreigncorporation illegally doing *)siness here *eca)se of its ref)sal or neglect to o*tainthe re5)ired license and a)thority to do *)siness may s)ccessf)lly tho)gh )nfairlyplead s)ch neglect or illegal act so as to avoid service and there*y imp)gn the

)risdiction of the local co)rts$ Avon nsurance P*C v. Court o# A""eals% 24- S :A.12 1''4($

+he same danger does not exist among foreign corporations that areind)*ita*ly not doing *)siness in the Philippines$ ndeed, if a foreign corporationdoes not do *)siness here, there wo)ld *e no reason for it to *e s)* ect to the

(2



transactions within the Philippine territory on a contin)ing *asis in its own nameand for its own acco)nt$ B. 5an uiden Bros.% *td v. 1'5* Manu#acturing ndustries%nc. , &2. S :A 2.. 2004(, citing D !!A#UEDA , P O ! PP #E C:PC:A+E ! AB -1. 2001($

*cts of Soliciations8 Solicitation of *)siness contracts constit)tes doing*)siness in the Philippines$ Marubeni Nederland B.5. v. 'ensuan , 1'0 S :A 10&$

2n #nsurance Business8 A foreign corporation with a settling agent in thePhilippines which iss)es twelve marine policies covering di/erent shipments to the

Philippines is doing *)siness in the Philippines$ 1eneral Cor". o# the Phil. v. 8nionnsurance $ociety o# Canton% *td.% -4 Phil$ .1. 1'&0($

A foreign corporation which had *een collecting premi)ms on o)tstandingpolicies is doing *)siness in the Philippines$ Manu#acturing *i#e ns. v. Meer , -'Phil$ .&1 1'&1($

Summary of %oing Business * +he principles regarding the right of a foreigncorporation to *ring s)it in Philippine co)rts may th)s *e condensed in fo)rstatements@ 1( if a foreign corporation does *)siness in the Philippines witho)t alicense, it cannot s)e *efore the Philippine co)rts; 2( if a foreign corporation is notdoing *)siness in the Philippines, it needs no license to s)e *efore Philippine co)rtson an isolated transaction or on a ca)se of action entirely independent of any*)siness transaction; .( if a foreign corporation does *)siness in the Philippines

witho)t a license, a Philippine citi9en or entity which has contracted with saidcorporation may *e estopped from challenging the foreign corporationGs corporatepersonality in a s)it *ro)ght *efore the Philippine co)rts; and %( if a foreigncorporation does *)siness in the Philippines with the re5)ired license, it can s)e*efore Philippine co)rts on any transaction$ M-. Holdings% *td. 5. Ba ar% .-0 S :A14 2002(; Agilent 'echnolgies $inga"ore 6P'E7 *td. v. ntegrated $ilicon'echnology Phil. Cor". , N$: #o$ 1&% 1-, 1% April 200%($

354 1nrelated or #solated Transactions. Eastboard Navigation% *td. v. ,uansmael and Co.% nc. , 102 Phil$ 1 1'&4(; *ntam Consolidated v. C A, 1

SCRA 288 3198 4$

Single or isolated acts, contracts, or transactions of foreign corporations are notregarded as a doing or carrying on of *)siness$ +ypical examples of these are the

ma6ing of a single contract, sale, sale with the ta6ing of a note and mortgage in thestate to sec)re payment thereof, p)rchase, or note, or the mere commission of atort$ n these instances, there is no p)rpose to do any other *)siness within theco)ntry$ M-. Holdings% *td. 5. Ba ar , .-0 S :A 14 2002($

Section 1.. of the orporation is clear in depriving foreign corporations whichare doing *)siness in the Philippines witho)t a license from *ringing or maintainingactions *efore, or intervening in Philippines co)rts$ +he law does not prohi*itforeign corporations from performing single acts of *)siness$ A foreign corporationneeds no license to s)e *efore Philippine co)rts on an isolated transactions$*oren4o $hi""ing v. Chubb and $ons% nc. , %.1 S :A 2 200%($

Even a series of transactions which are occasional, incidental and cas)alHnotof a character to indicate a p)rpose to engage in *)sinessHdo not constit)te the

doing or engaging in *)siness as contemplated *y law$ *oren4o $hi""ing v. Chubband $ons% nc. , %.1 S :A 2 200%($

Case9Law E3amples8• ollision of two vessels at the 7anila Oar*or$ !am"#schieGs -hederei 8nion v.

*a Cam"aFia 'ransatlantica , - Phil$ 4 1'04($• !oss of goods *o)nd for Oong6ong *)t erroneo)sly discharged in 7anila$ 'he

$+edish East Asia Co.% *td. v. Manila Port $ervice , 2& S :A .. 1' -($• nfringement of trade name$ 1eneral 1arments Cor". v. !irector o# Patens , %1

S :A &0 1'41(; 8niversal -ubber Products% nc. v. Court o# A""eals , 1.0 S :A10% 1'--($

($



• :ecovery of damages s)stained *y cargo shipped to the Philippines$Bula)hidas v. Navarro , 1%2 S :A 1 1'- ($

• Sale constr)ction e5)ipment to the Novernment with no intent of contin)ity of transaction$ 1on4ales v. -a/ui4a , 1-0 S :A 2&% 1'-'($

• :ecovery on a Oong6ong )dgment against a 7anila resident$ Hang *ung Ba) v. $aulog , 201 S :A 1.4 1''1($

• Appointment of local lawyer *y foreign movie companies who have registered

intellect)al property rights over their movies in the Philippines, to protect s)chrights for piracy@ >Be fail to see how exercising oneTs legal and property rightsand ta6ing steps for the vigilant protection of said rights, partic)larly theappointment of an attorney3in3fact, can *e deemed *y and of themselves to*e doing *)siness here$? Columbia Pictures nc. v. Court o# A""eals% 2 1 S :A1%% 1'' ($

,eed to *llege8 +he fact that a foreign corporation is not doing *)siness in thePhilippines m)st *e alleged if a foreign corporation desires to s)e in Philippinesco)rts )nder the >isolated transactions r)le$? *tlantic &utual #nc. Co. v. Ce'uStevedoring C o. , 1 SCRA 10 319<<4 ; Commissioner o# Customs v. 3.M.3.1ani , 1-2 S :A &'1 1''0($ 1

3 4 :Contract Test; of %oing Business8 Pacific =egeta'le 2il Corp. v.Singso n , A @'# $ D$ ; %# S?"&$/$ C%?&(, A"& ! 19 V%!., ". 100-A *etna Casualty A Surety Co. v. Paci(c Star Lin e , 80 SCRA < 319 4 ;8niversal $hi""ing *ines% nc. v. AC , 1-- S :A 140 1''0($

3 4 Transactions with *gents and Brokers8 ranger *ssociates v.&icrowave System s " #nc. , 189 SCRA < 1 319904 ; *a Chemise *acoste% $.A.v. 0ernande4 , 12' S :A .4. 1'-%(; $chmid & 9berly v. -,* , 1 S :A %'.1'--F; (ang *aboratories% nc. v. Mendo4a , 1& S :A %% 1'4%($

. D $&$#( R?!$; %# T&' $/'& '# T&' $#'/$; -estern E6uipment ASupply Co. v. $eye s , 1 Ph !. 11 =192 > ; *eviton ndustries v. $alvador , 11%S :A %20 1'-2F; Converse -ubber v. 8niversal -ubber , 1%4 S :A 1&% 1'-4F;Converse -ubber Cor". v. ,acinto -ubber & Plastic Co. , '4 S :A 1&- 1'-0F;8niversal -ubber Products% nc. v. CA , 1.0 S :A 10% 1'-%F; Puma$"ortschunh#abri)en -udol# !assler% 3.1. v. AC , 1&- S :A 2.. 1'--F; Phili"sEx"ort B.5. v. CA , 20 S :A %&4 1''2F($

. E $ (; %+ ' !?&$ (% O5(' # L $#;$*

3'4 2n the Contract Entered #nto8 ome #nsurance Co. v. Eastern ShippingLine s , 12 SCRA 2 3198 4 $

Sec$ ' of old orporation !aw was intended to s)* ect the foreign corporationdoing *)siness in the Philippines to the )risdiction of o)r co)rts and not to preventthe foreign corporation from performing single acts, *)t to prevent it from ac5)iringdomicile for the p)rpose of *)siness witho)t ta6ing the necessary steps to render itamena*le to s)it in the local co)rts$ Marshall>(ells Co.% v. Elser , % Phil$ 40 1'2%($

354 Standing to Sue Sec$ 1..; Marshall>(ells v. Elser , % Phil$ 41 1'2%F(

3 4 Criminal Lia'ility under Sec. JKK ome #nsurance Co. v. EasternShipping Lines , 12 SCRA 2 3198 4 $

3 4 Pari %elicto %octrine8 +he local party to a contract with a foreign corporationthat does *)siness in the Philippines witho)t license cannot maintain s)itagainst the foreign corporation )st as the foreign corporation cannot maintains)it, )nder the principle of "ari delicto $ Top9-eld &fg. v. ECE I , 119 SCRA118 3198 4.

1This o4erturned the pre4ious doctrine in Mars'all12ells as well as in In re Li3uidation of t'e Mercantile 0an/ of C'ina" etc. , /%Phil. '0% 1&'0-, that the lac! of authority of foreign corporation to sue in Philippine courts for failure to obtain the license is a atter of affir ati4e defense.

(%



But See8 Communication &aterials v. Court of *ppeal s " 2<0 SCRA <3199< ($

3$4 Estoppel %octrine8 A foreign corporation doing *)siness in the Philippinesmay s)e in Philippine co)rts altho)gh it is witho)t license to do *)siness hereagainst a Philippine citi9en who had contracted with and *een *ene ted *y saidcorporation and 6new it to *e witho)t the necessary license to do *)siness,)nder the principle of estoppel$ &errill Lynch Futures" #n c. v. C* , 211 SCRA82 319924 ; 1eorg 1rot ahn 1MBH & C. v. snani , 2.& S :A 21 1''%(; Agilent 'echnolgies $inga"ore 6P'E7 *td. v. ntegrated $ilicon 'echnology Phil. Cor". ,N$: #o$ 1&% 1-, 1% April 200%($

3+4 Proper %octrine8 Eriks Ltd. v. Court of *ppeals" 2< SCRA < 3199 4 $

<. S? (; A ' #;( %&$ # C%&"%&'( %#;*

3'4 0urisdiction 2ver Foreign Corporations Sec$ 1%, :)le 1%, :)les of o)rt;1eneral Cor". o# the Phil. v. 8nion nsurance $ociety o# Canton% *td. , -4 Phil$ .1.1'&0F; ,ohnlo 'rading Co.% v 0lores% -- Phil$ 4%1 1'&1F; ,ohnlo 'rading Co. v.

ulueta , -- Phil$ 4&0 1'&1F; Paci2c Micronisian *ine% nc. v. !el rosario , ' Phil$2. 1'&%F; 0ar East nt l m"ort and Ex"ort Cor". v. Nan)ai 3ogyo Co.% *td. , S :A 42& 1' 2F($

or p)rpose serving s)mmons a foreign corporation in accordance with :)le 1%,Section 1%, it is s)8cient that it *e alleged in the complaint that it is doing*)siness in the Philippines$ Hahn v. Court o# A""eals% 2 S :A &.4 1''4($

Bhen it is shown that a foreign corporation is doing *)siness in the Philippines,s)mmons may *e served on a( its resident agent designated in accordance withlaw; *( if there is no resident agent, the government o8cial designated *y law tothat e/ect; or c( any of its o8cers or agent within the Philippines$ +he mereallegation in the complaint that a local company is the agent of the foreigncorporation is not s)8cient to allow proper service to s)ch alleged agent; it isnecessary that there m)st *e speci c allegations that esta*lishes the connection*etween the principal foreign corporation and its alleged agent with respect to thetransaction in 5)estion$ 0rench 9il Mills Machinery Co.v. CA% 2'& S :A % 2 1''-($

354 2'5ection to 0urisdiction8 Appearance of a foreign corporation to a s)itprecisely to 5)estion the tri*)nalGs )risdiction over its person is not e5)ivalentto service of s)mmons, nor does it constit)te an ac5)iescence to the co)rtGs

)risdiction$ Avon nsurance P*C v. Court o# A""eals% 24- S :A .12, .24 1''4($

3 4 2dd %octrine8 Facilities &anagement Corp. v. %e la 2sa , 89 SCRA 1 1319 94 ; 0BA Aircra#t v. osa , 110 S :A 1 1'-1(; -oyal Cro+n nt l v. N*-C , 14-S :A & ' 1'-'(; (ang *aboratories% nc. v. Mendo4a , 1& S :A %% 1'-4($

Contra * +he sine /ua non re5)irement for service of s)mmons and other legalprocesses or any s)ch agent or representative is that the foreigncorporation is doing *)siness in the Philippines$ Hyo"sung MaritimeCo.% *td. v. CA , 1 & S :A 2&- 1'--(; Signetics Corp. v. C* , 22SCRA 3199 4 $

But ,ow See8 Avon nsurance P*C v. Court o# A""eals% 24- S :A .12 1''4($

3 4 Stipulation on =enue8 Bhen the contract s)ed )pon has a ven)e cla)sewithin the Philippines, it is deemed a con rmation *y the foreign corporation,even tho)gh not doing *)siness in the Philippines, to *e s)ed in local co)rts$*inger & 0isher 1MBH v. AC , 12& S :A &22 1'-.($

. R$; $#( A $#( Sec$ 124 and 12-(

3'4 Concept of :residence;8 $tate nvestment House v. Citiban) , 20. S :A '1''1($

(/



eing a resident agent of a foreign corporation does not mean that he isa)thori9ed to exec)te the re5)isite certi cation against for)m shoppingHwhile aresident agent may *e aware of actions led against his principal a foreigncorporation doing *)siness in the Philippines(, he may not *e aware of actionsinitiated *y its principal, whether in the Philippines against a domestic corporationor private individ)al, or in the co)ntry where s)ch corporation was organi9ed andregistered, against a Philippine registered corporation or a ilipino citi9en$Ex"ertravel & 'ours% nc. v. Court o# A""eals , %&' S :A 1%4 200&($

354 A complaint led *y a foreign corporation is fatally defective for failing to allegeits d)ly a)thori9ed representative or resident agent in Philippine )risdiction$Ne+ or) Marine Managers% nv. c. Court o# A""eals% 2%' S :A %1 1''&($

3 4 Bhen a corporation has designated a person to receive service of s)mmonp)rs)ant to the orporation ode, the designation is excl)sive and service of s)mmons on any other person is ine8cacio)s$ H.B. achry Com"any nt l v. CA ,2.2 S :A .2' 1''%(

8. L'); A""! '5!$ (% %&$ # C%&";. Sec$ 12'; 1rey v. nsular *umber Co. , 4Phil$ 1.' 1'.-(

9. A/$# /$#( %+ A&( !$; %+ I# %&"%&'( %# Sec$ 1.0(

10. M$& $& '# C%#;%! '( %# Sec$ 1.2; Art$ &1, Cmni*)s ode(

11. R$@% '( %# %+ L $#;$ Secs$ 1.% and 1.&; Art$ &0, Cmni*)s nvestment ode(

12. W (h &')'! %+ %&$ # C%&"%&'( %# Sec$ 1. (

66. PENALTY PROVISIONS O THE CODE

$ee D !!A#UEDA , 'he Penal Provision 8nder $ec. :UU o# the Cor"orationCode , + OE ! ABRE:S : ED EB , Dol$ M, #o$ 2 2' e*r)ary 1'' ($

1. P$#'!(: C!'?;$ +%& V %!'( %#; %+ (h$ P&%@ ; %#; %+ (h$ C% $ Sec$ 1%%(2. C&%;;-&$+$&$# $ Sec$ 24($. S"$ '""! '( %# Sec$ 4%($

. S(& ( P& # "!$; # C& / #'! L') (h$ ;;?$ %+ /'! $.

. H ;(%& '! B' &%?# %+ S$ . 1 3S$ . 190 1Q %+ (h$ C%&"%&'( %# L')4

Sec$ 1'0 was not intended to ma6e every cas)al violation of one of theorporation !aw provisions gro)nd for invol)ntary dissol)tion of the corporationand that the co)rt was entitled to exercise discretion in s)ch matters$ 1overnment o# P. . v. El Hogar 0ili"ino , &0 Phil$ .'' 1'24($

Penalties imposed in Sec$ 1'0 A( for the violation of the prohi*ition in 5)estionare of s)ch nat)re that they can *e enforced only *y a criminal prosec)tion or *yan action of /uo +arranto $ But these "roceedings can be maintained only by the

Attorney>1eneral in re"resentation o# the 1overnment. Harden v. Benguet Consolidated Mining Co.% &- Phil$ 1%1 1'..($

<. V %!'( %# %+ S$ . 1 5: %&$ # C%&"%&'( %#;

Sec$ 1.., which )nli6e its co)nterpart Sec$ ' of orporation !aw providedspeci cally for penal sanctions for foreign corporations engaging in *)siness in thePhilippines witho)t o*taining the re5)isite license, sho)ld *e deemed to have apenal sanction *y virt)e of Section 1%% of the orporation ode$ Home nsuranceCo. v. Eastern $hi""ing *ines , 12. S :A %2% 1'-.($

66I. MISCELLANEOUS

1. SEC P%)$& '# S?"$&@ ; %# Secs$ 10- and 1%.; PI '023A($2. S"$ '! C%&"%&'( %#; Sec$ %($

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clv corp outline

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