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II. Concepts
THEORY OF CONCESSION Tayag v. Benguet Consolidated 26 SCRA 242 (1968) - A corporation is an artificial being created ipso jure. It is a creature without existence until it has received the imprimatur of the State acting according to law. o It cannot have rights or privileges higher than its creator o It cannot legitimately refuse obedience to acts of its state organs. o It is only a person by process of legal fiction. - CASE AT BAR: When a person dies intestate owning property in the country of his domicile (ie. USA) and in a foreign one (ie. Philippines), an administrator is had in both countries. o Administration in the domicile is the PRINCIPAL whereas the one in the foreign country is ANCILLARY. o An administrator appointed in a foreign state has no authority here. None can dispute the power of an ancillary administrator within the Philippines. STRONG & SOLEMN JURIDICAL PERSON Stockholders of Guanzon & Sons Inc. v. Register of Deeds of Manila 6 SCRA 373 (1962) - Where the purpose of the liquidation and distribution of corporate assets is to transfer title from the corporation to the stockholders based on their shares, such transfer can only be effected with a deed of conveyance. o A corporation is a juridical person distinct from the members composing it. o Properties owned by it are owned as an entity separate from its members. - While shares of stock constitute personal property, they do not represent property of the corporation since it has property of its own. o Owner of shares of stock does not own any of the corporations capital. o Owner of shares of stock owns a right to share in the corporations proceeds. CAN A DEFECTIVE ATTEMPT TO FORM A CORPORATION RESULT IN A PARTNERSHIP? Pioneer Insurance v. CA 175 SCRA 668 (1989) - Persons who attempt but fail to form a corporation and who carry on business under the corporate name occupy the position of partners inter se. o Their rights as members of the company to the property acquired by the company will be recognized. - One who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with other subscribers who engage in businesses under the name of the pretended corporation so as to be liable as such in an action for settlement of the alleged partnership. - A partnership relation will not be implied in the absence of an agreement. - CASE AT BAR: Bormaheco et al. contributed to the purchase of aircrafts intended for the new corporation proposed by Lim. However, Bormaheco et al. acquired no benefit because they were cheated by Lim. Lim Tong Lim v. Philippine Fishing Gear 317 SCRA 728 (1999) - Contributed capital in a partnership could be an intangible object (ie. industry) - Those acting as representatives of an ostensible corporate entity which is proven to be legally inexistent acts without authority and act at their own risk. o Party is estopped from denying the corporate existence. - Corporation by estoppels may apply to the alleged corporation and to a third party. - An unincorporated association, representing itself as a corporation will be estopped from denying its corporate capacity in a suit against it by a third person relying in good faith on such representation. - A third party, knowing an association to be unincorporated but nonetheless treated it as a corporation and RECEIVED BENEFITS from it may be barred from denying its corporate existence. - CASE AT BAR: Members of the ostensible corporation who reaped benefits will be liable as general partners.

III. Nature & Attributes of a Corporation

LIABILITY FOR TORTS Professional Services, Inc. v. CA 611 SCRA 282 (2010) - Though in theory, a hospital, as a juridical entity cannot practice medicine, in reality, it utilizes doctors, surgeons, and medical practitioners in the conduct of its business of facilitating medical & surgical treatment. - 3 LEGAL RELATIONSHIPS o Hospital Doctor practicing therein o Hospital Patient being examined/treated therein

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o Doctor Patient Regardless of its close relationship with the doctor, the hospital may be directly liable to the patient for its own negligence or failure to follow standards to which it should conform as a corporation. If the hospital holds out to the patient that the doctor is its agent, it can still be liable vicariously under Art. 2176 vis-a-vis the principle of apparent authority. o FACTORS THAT DETERMINE APPARENT AUTHORITY: (1) Implied manifestation of agency; and (2) Reliance upon it by the injured party CASE AT BAR: PSI is liable not under the doctrine of respondeat superior since there is no evidence of an employer-employee relationship. Rather, it is liable via ostensible agency and corporate negligence.

CORPORATE CRIMINAL LIABILITY West Coast Life v. Hurd 27 Phil. 401 (1914) - Corporations cannot commit a crime which malicious intent or purpose is required. - Criminal actions are limited to officials of such corporations. - A corporation cannot be arrested. - CASE AT BAR: Corporation charged with libel for printing and distributing circulars detrimental to Insular Life cannot stand. People v. Tan Boon Kong 54 Phil. 607 (1930) - A corporation can only act through its officers, agents, and where the business itself involves a violation of the law. - The manager thereof who fails to make the return of corporate receipts in violation of the law may be held criminally liable. Sia v. CA 121 SCRA 655 (1983) - CASE AT BAR: President of a corporation is sued for estafa for failing to account for the proceeds by virtue of the trust receipt agreement. o The President cannot be held liable for estafa on account of the corporations violation of the terms of the trust receipt which speaks only of the corporations liability. - An officer of a corporation can be held criminally liable for acts or omissions done in behalf of the corporation only where the law directly requires the corporation to do an act in a given manner. - Without a law making a corporate officer liable for a criminal offense committed by a corporation, the existence of criminal liability may not be said to be beyond doubt. - The partys intention must be ascertained in such a situation to determine if criminal liability was intended to result. Ching v. Secretary of Justice 481 SCRA 602 (2006) - CASE AT BAR: SVP of Philippine Blooming Mills was charged with estafa for matured trust receipts that were neither returned nor their value amounting to P 6.9M. - Failure to turn over the proceeds of the sale of goods covered by trust receipts to the entruster or to return said goods, if not sold, is a public nuisance to be abated by the imposition of penal statutes. [PD 115 punishes this without intent to defraud] - The law specifically makes officers, employees, or other employees responsible for the offense without prejudice to the civil liabilities of such corporation, board, or members thereof responsible for the offense. - A corporation may be charged for a crime if the imposable penalty is a fine [ POSSIBLY AN OBITER DICTUM; CARRIED AWAY] - CLASS NOTES: A corporation cannot be arrested or arraigned. There is yet no procedure to criminally prosecute a corporation. Consolidated Bank v. CA 356 SCRA 671 (2003) - Where the debtor received the goods subject to the trust receipt before the trust receipt itself was entered into, the transaction in question is a simple loan and not a trust receipt agreement. - It is a hornbook law that corporate personality is a shield against personal liability of its officers the officer acting as such cannot be made personally liable under a trust receipt where he entered into & signed the contract in his official capacity. CORPORATE NATIONALITY EXCEPTION: TEST OF CONTROLLING OWNERSHIP Gamboa v. Teves 652 SCRA 690 (2011) affirmed in G.R. 176579 (2012) - CAPITAL in PHIL. CONST. art. 12, 11 refers only to shares of stock entitled to vote in the election of directors, and thus, only to common shares. o It does not refer to the total outstanding stock which comprises both common & non-voting preferred shares. - Common Shares cannot be deprived of the right to vote in any corporate meeting and any provision in the Articles of Incorporation restricting the right of common shareholders to vote is invalid. o The right to participate in the control/management is exercised through voting in the election of directors since it is the Board who controls and manages the corporation.

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If capital included both voting & non-voting shares, it will amount to an abject surrender of our Telecomm industry to foreigners. SEC is vested with the power to suspend/revoke, after proper notice and hearing, the franchise/certificate of registration of corporations, partnerships, or associations, upon any of the grounds provided by law.

OWNERSHIP OF PRIVATE LAND Strategic Alliance Development Corp. v. Radstock Securities 607 SCRA 413 (2009) - GOCC can either be created by special charter or incorporated under the Corporation Code. - CASE AT BAR: Radstock, a foreign corporation with unknown owners is not qualified to own land in the Philippines. o Since Radstock is disqualified from owning lands, it is also disqualified from owning the rights to ownership over lands. o An assignor/seller cannot assign/sell something he does not own. o Assignment by PNCC of the real properties to a nominee to be designated by Radstock is a circumvention of the Constitutional prohibition against a private foreign corporation owning lands in the Philippines. Roman Catholic Apostolic Administration of Davao v. Land Registration Commission 102 Phil. 596 (1957) - CASE AT BAR: A parcel of land was sold in favor of Roman Catholic but the ROD denied its registration because it allegedly failed to meet the citizenship requirement. - CORPORATION SOLE: a special form of corporation usually associated with the clergy designed to facilitate the exercise of he functions of ownership of the church which was regarded as the property owner. o It consists of one person only and his successors (who will always be one at a time), in some station, who are incorporated by law in order to give them some legal capacities & advantages particularly that of perpetuity which in their natural persons they could not have. - Church properties acquired by the incumbent of a corporation sole pass ipso jure to his successors in office rather than his heirs, if any. - It is created to administer temporalities of the church where he belongs but also to hold & transmit the same to his successor. - It has NO NATIONALITY. As such, it cannot be considered as alien. - Framers did not have in mind the religious corporation sole when they provided the 60% ownership requirement. - A corporation sole is not the owner of the properties he may acquire but merely the administrator thereof and holds the same in trust for the church to which the corporation is a constituent part. PUBLIC UTILITIES People v. Quasha 93 Phil. 333 (1953) - CASE AT BAR: In registering the Articles, no disclosure was made that Americans were the real owners and not the dummy Filipino. o Person who did not disclose was charged with falsification of a public and commercial document - The Constitution does not prohibit mere formation of a public utility corporation without the required Filipino ownership. o What is prohibited is the granting of a franchise or other form of authorization for the operation of a public utility to a corporation already in existence but without the requisite Filipino ownership. - For mere formation of the corporation, disclosure is not essential. Also, the Corporation Law does not require it. - False narration for not revealing a certain fact is not punishable if there is no legal obligation to disclose the truth. Tatad v. Garcia 243 SCRA 436 (1995) - CASE AT BAR: The case involves the EDSA LRT Project wherein the facilities are owned by a HK-based corporation while operated by the DOST. - While a franchise is needed to operate facilities to serve the public, they do not by themselves constitute a public utility. - What constitutes a public utility is not their ownership but THEIR USE TO SERVE THE PUBLIC. - The Constitution does not require a franchise before one can own facilities needed to operate a public utility so long as it does not operate to serve the public. - There is a distinction between OPERATION of a public utility & OWNERSHIP of facilities used to serve the public. o OWNERSHIP: a relation in law by virtue of which a thing pertaining to one person is completely subjected to his will in everything not prohibited by law or concurrence with the rights of another. o OPERATION OF A RAIL SYSTEM as a public utility includes the transportation of passengers from one point to another; loading/unloading at a designated place; and movement of trains at a prescheduled times. - The right to operate a public utility may exist independently and separately from ownership of the facilities thereof. - Mere formation of a public utility corporation does not ipso facto make the corporation a public utility. o It only becomes so when it applies for a franchise certificate or any other form of authorization for that purpose.

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INVESTMENT TEST AS TO PHILIPPINE NATIONALS Unchian v. Lozada 585 SCRA 421 (2009) - A corporation organized under Philippine laws of which at least 60% of the capital stock outstanding and entitled to vote is owned & held by Filipino citizens and is considered a Philippine national. [ 3, RA 7042] GRANDFATHER RULE Palting v. San Jose Petroleum, Inc. 18 SCRA 924 (1966) - An order by the SEC allowing the sale of securities is not interlocutory. - CITIZEN: one who, under the Constitution and laws, has a right to vote for and qualified to fill offices. - A corporation controlled by a Panamanian corporation cannot exploit natural resources in the Philippines. - CASE AT BAR: Since it is not indirectly or directly owned by American citizens, it cannot invoke the Parity Rights from the Laurel-Langley Agreement. o Proof that American state grants the same rights to Filipinos is required. - Where a foreign corporation has an unusual and complicated capital structure and some provisions of its Articles are contrary to the Corporation law and corporate practice in the country and its shares are held by trustees under a Voting Trust Agreement, sale of its securities would work or tend to work fraud into Filipino investors.

IV. Separate Juridical Personality & Piercing the Veil

MAJORITY OF EQUITY OWNERSHIP & INTERLOCKING DIRECTORSHIP DBP v. NLRC 186 SCRA 841 (1990) - Ownership of majority of capital stock and the fact that majority of directors of a corporations are the directors of another corporation creates no employer-employee relationship with the latters employees. DEALINGS BETWEEN CORPORATION & STOCKHOLDERS Remo, Jr. v. Intermediate Appellate Court 172 SCRA 405 (1989) - A corporation is an entity separate and distinct from its stockholders. o While not in fact a person, the law treats a corporation as though it were a person by process of fiction or regarding it as an artificial person distinct & separate from individual stockholders. - This fiction can be disregarded when it is used to defeat public convenience, justify wrong, protect fraud, or used as an alter ego. o In such cases, the law considers it as an association of persons. - No cogent reason to pierce the veil when there is no intent to defraud. o Fraud must be established by clear and convincing evidence. - Amendment of the Articles thereby changing the corporate name does not indicate an evasion of payment by the corporation of its obligations to another. - Stockholders have the inherent right to dispose his shares of stock anytime he so desires. PIERCING THE VEIL OF CORPORATE FICTION U.S. v. Milwaukee Refrigerator Transit Co. 142 Fed. 247 (1905) - A corporation will be looked upon as a legal entity until sufficient reason to the contrary appears. - When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. - Where one corporation is organized and owned by officers & stockholders of another, making their interests identical, they may be treated as identical when the interest of justice require it. OBJECTIVES & EFFECT OF APPLICATION OF THE DOCTRINE Traders Royal Bank v. CA 269 SCRA 15 (1997) - Piercing the veil requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarily could be subject to, or distinguishes one corporation from a seemingly separate one, were it not for the existing fiction. - Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate personalities. - Piercing is merely an equitable remedy and may be awarded only in cases where the corporation fiction is used to bla-blabla.

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Francisco Motors Corp v. CA 309 SCRA 72 (1999) - The RATIONALE behind piercing is to remove the barrier between the corporation from the persons composing it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. - If corporate assets could be used to answer for liabilities of individual directors, officers, and incorporators, it could easily prejudice the corporation, its own creditors, and even other stockholders. - When directors & officers of a corporation are unable to compensate a party for a personal obligation, it is far-fetched to allege that the corporation is perpetuating fraud or promoting injustice and be liable by piercing the veil. ATTEMPT TO NARROW THE OBJECTIVES FOR PIERCING Indophil Textile Mill Workers Union v. CALICA 205 SCRA 697 (1992) - In piercing, the corporation will be treated as a mere association of persons liability attaches directly to its officers & stockholders. - CASE AT BAR: The fact that businesses are related, that some employees are the same persons manning & providing for auxiliary services, and that offices are in the same compound is not sufficient to justify piercing. o The fiction is disregarded only if it is sought to hold officers directly liable for a corporate debt or obligation. o [Application of Fraud-Piercing Standards in an Alter Ego case] APPLICABLE TO THIRD PARTIES Gochan v. Young 354 SCRA 207 (2001) - DERIVATIVE SUIT: where corporate directors have breached the trust by their fraud, ultra vires acts, or negligence, and the corporation is unable or unwilling to institute a suit to remedy the wrong, a single stockholder may institute that suit, suing on behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to the stockholders. - Where shares of stock are in the name of the deceased, no final determination can be had without his estate being impleaded in that suit dealing with the registration of the shares in the names of the heirs. - The fact that the one bringing the suit are not stockholders (outsiders) does not make them non-parties to the case. AS AN EQUITABLE REMEDY PNB v. Ritratto Group Inc. 362 SCRA 216 (2001) - The mere fact that a corporation owns all the stocks of another corporation, by itself, is not sufficient to justify their being treated as one entity. - Piercing Doctrine is an EQUITABLE DOCTRINE developed to address situations where legal fiction is abused or used for wrongful purposes. - TESTS IN DETERMINING APPLICABILITY o Complete control of finances, policy, and business practice with respect to the transaction attacked (no separate mind, will, or existence); o Control is used to commit fraud or wrong in contravention of the plaintiffs rights; and o Control & breach must be the proximate cause of the injury or unjust loss complained of. - In applying the Alter Ego doctrine, courts should be convinced with the reality, not form, of how the corporation operated and the individuals relationship to the operation. REMEDY OF LAST RESORT Umali v. CA 189 SCRA 529 (1990) - CASE AT BAR: Piercing is not proper remedy when the corporation employed fraud in foreclosure proceedings. o Petitioners do not intend to hold the officers of the corporation personally liable. Rather, they are seeking the nullity of the foreclosure. NOT APPLICABLE TO THEORIZING OR TO ADVANCE/CREATE NEW RIGHTS OR INTEREST Boyer-Roxas v. CA 211 SCRA 470 (1992) - An officers power as an agent of the corporation must be sought from Statute, Charter, By Laws, or Acts of the Board. - CASE AT BAR: Did not allow piercing when it was employed to justify under a theory of co-ownership the continued use & possession by stockholders of corporate properties. Siain Enterprises v. Cupertino Realty Corporation 590 SCRA 435 (2009) - Clear evidence presented supported the fact that a corporations affiliates have received large amounts which became the consideration for the company execution of a real estate mortgage over its properties, the piercing doctrine shall be applied to support the fact that the mortgage was valid and supported by proper consideration.

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CLASSIFICATION OF PIERCING CASES General Credit Corp. v. Alsons Development & Investment 513 SCRA 225 (2007) - The first consequence of the doctrine of legal entity of separate personality of the corporation is that a corporation may not be made to answer for acts & liabilities of its stockholders or those entities to which it is connected or vice versa. - Whether separate personality should be pierced hinges on obtaining facts appropriately pleaded and proved. - 3 BASIC AREAS WHERE PIERCING IS ALLOWED o Defeat Public Convenience (Equity): corporation is used as vehicle for evasion of existing obligation. o Fraud Cases: corporation is used to justify wrong, protect fraud, or defend crimes o Alter-Ego Cases: corporation is merely a farce or business conduit of a person or organized to be a mere instrumentality. SUMMARY OF PROBATIVE FACTORS Concept Builders Inc. v. NLRC 257 SCRA 149 (1996) - The circumstances under which the juridical entity may be disregarded depends on the peculiar facts of a case. - PROBATIVE FACTORS that will justify the application of the piercing doctrine: o Stock ownership by one or common ownership of both corporations o Identity of directors & officers o Manner the corporate books are kept o Method of conducting business DISTINCTION BETWEEN FRAUD-PIERCING & ALTER EGO-PIERCING Lipat v. Pacific Banking Corp. 402 SCRA 333 (2003) - CLASS NOTES o Fraud: can be done once, pecuniary, must be clearly proven o Alter-Ego: habitually done, based on estoppel (if they dont respect the separate personality then why should we?) EQUITY PIERCING CONFUSE LEGITMATE ISSUES Telephone Engineering & Service Co. v. WCC 104 SCRA 354 (1981) - CASE AT BAR: Veil was pierced in a compensation case where the sister companies denied death benefits on the ground that no employee-employer relationship existed. RAISE LEGAL TECHNICALITIES Emilio Cano Enterprises v. CIR 13 SCRA 290 (1965) - CASE AT BAR: The corporation is a closed family corporation where its incorporators and directors belong to one single family. o The corporation and its members are considered as one. - To hold such entity liable for acts of its members is not to ignore the legal fiction but merely to give meaning to the principle that such fiction cannot be invoked if its purpose is to use it as a shield to further an end subversive of justice. - Having been sued in their official capacity their connection with the case must be deemed to be impressed with representation of the corporation. - Orders against them is, in effect, against the corporation Villa Rey Transit v Ferrer 25 SCRA 845 (1968) - Ends and purposes of the Corporation Law seeks to separate personal responsibility from corporate undertakings. - Where the corporation is substantially the alter ego of the covenantor to the restrictive agreement, it can be enjoined from competing with the covenantee. - CASE AT BAR: A covenant which is incidental to the sale & transfer of trade or business and purports to bind the seller not to engage in the same business in competition with the purchaser is lawful and enforceable. o Such are designed to prevent competition in the locality nor prevent it at all in a way or an extend injurious to the public. CASE FOR THINLY-CAPITALIZED CORPRATIONS McConnel v. CA 1 SCRA 722 (1961) - If a corporation is a mere instrumentality of the individual stockholder, the latter must individually answer for the corporate obligations. - CLASS NOTES: Thinly-capitalized corporations can be an indicator for fraud.

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Halley v. Printwell 649 SCRA 116 (2011) - Under the TRUST FUND DOCTRINE, a corporation has no legal capacity to release an original subscriber to its capital stock from the obligation of paying for his shares without valuable consideration, or fraudulently, to the prejudice of creditors. - Creditor is allowed to maintain an action upon any unpaid subscription & thereby steps into the shoes of the corporation for satisfaction of its debt. - A stockholder is personally liable for financial obligations of the corporation to the extent of his unpaid subscription. o Cannot invoke the corporate veil because it may be lifted to avoid defrauding corporate creditors. - Subscriptions to capital of a corporation constitute a fun to which creditors have a right t look for satisfaction of their claims. AVOIDANCE OR MINIMIZATION OF TAXES Yutivo Sons Hardware v. CTA 1 SCRA 160 (1961) - A corporation cannot be said to have been organized as a tax evasion device when there is no tax to evade. - Intention to minimize taxes, when used in the context of fraud, must be proven by clear & convincing evidence. - Taxpayer has legal right to decrease his taxes or avoid tem by means which the law permits and in good faith. - Mere understatement of tax does not prove fraud. FRAUD CASES Francisco v. Mejia 362 SCRA 738 (2001) - Legal fiction is abused if it is used for fraudulent means or wrongful ends. - If it is proven that the officer used the fiction to defraud a third party, or acted negligently, maliciously, or in bad faith, the corporate veil shall be lifted. ACTS BY CONTROLLING SHAREHOLDER NAMARCO v. Associated Finance Co. 19 SCRA 962 (1967) - A stockholder is guilty of fraud where, through false representation, succeeded in inducing another corporation to enter into an exchange agreement with the corporation he represented and over whose business he had absolute control and where it appears that said stockholder had full knowledge of the fact that his corporation was in no position to comply with the obligation which he had caused it to assume. o Said stockholder cannot seek refuge behind the main doctrine. o Solidarily liable with the corporation. ALTER EGO CASES Arnold v. Willits & Patterson Ltd. 44 Phil. 634 (1923) - CASE AT BAR: Where A entered upon the discharge of his duties under a contract with the firm of W&P and such firm organized as a corporation which took over all of its assets and continue to conduct business of the firm as a corporation dealing with A in the same manner as the firm had previously done, the corporation is bound by the contract which the firm made with A. - Where the capital stock is owned by one person and functions only for the benefit of such individual owner, the corporation and the individual should be deemed the same. MIXING UP OPERATIONS DISRESPECT TO CORPORATE ENTITY La Campana Coffee Factory v. Kaisahan ng Manggagawa 93 Phil. 160 (1953) - Attempt to make 2 factories appear as 2 separate businesses, when really they are one, is but a device to defeat the ends of law. Shoemart v. NLRC 225 SCRA 311 (1993) - CASE AT BAR: Shoemart & Moris Manufacturings incorporators & directors are the same except for 1; SM is the exclusive buyer of Moris products; housed in 1 building; Moris uses payrolls of Shoemart. Padilla v. CA 370 SCRA 208 (2001) - Participation by the GM of a corporation whose manager was also the chairman of the Board of another corporation in an action involving the first corporation cannot equate to participation by the second corporation. - The fact that 2 corporations may be sister companies and that they may be sharing personnel & resources, without anything more, is insufficient to prove grounds for piercing.

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PROVIDED THAT EVIDENTIAL BASIS ADDUCED DURING TRIAL TO APPLY TO PIERCING Jacinto v. CA 198 SCRA 211 (1991) - CASE AT BAR: Conflicting statements by Jacinto place doubt on his credibility anent his alleged participation in said transaction. o While on the face of the complaint there is no specific allegation that the corporation is a mere alter ego of the petitioner, subsequent developments from the stipulation of facts up to the presentation of evidence and the examination of witnesses unequivocally show that Metrobank sought to prove that the corporation and Jacinto are alter egos. o When evidence presented by one party, with the implied/express consent of the adverse party, as to the issues not alleged in the pleadings, judgment may be rendered validly as regards issues which shall be considered as if they have been raised in the pleadings. [implied consent = failure to object] o Jacinto was the corporation itself. There is no clear-cut delimitation between the personality of Jacinto as an individual and Inland Industries as a corporation.

VI. Corporate Contract Law

NATURE OF PRE-INCORPORATION AGREEMENTS Bayla v. Silang Traffic Co. 73 SCRA 557 (1942) - Rules governing subscriptions and sales of shares are different. o Calls for unpaid subscriptions & assessment of stock do not apply to a purchase of stock. o The rule that the corporation has no legal capacity to release an original subscriber to its capital stock from its obligation to pay shares does not apply to a contract to purchase shares. - SUBSCRIPTION mutual agreement of subscribers to take & pay for stock of a corporation. - PURCHASE independent agreement between the individual and the corporation to buy shares of stock from it at a stipulated price. THEORIES ON LIABILITIES FOR PROMOTERS CONTRACTS Cagayan Fishing Development Co. v. Teodoro Sandiko 25 SCRA 285 (1968) - Before a corporation is said to be lawfully organized, many things need be done such as the filing of the Articles of Incorporation. - When a contract is entered into with a purported corporation before being incorporated thus having no legal existence it does not possess juridical capacity to enter into the contract. - Until organized, a corporation has no life and, therefore, no faculties. o BUT acts of promoters can be ratified by the corporation if and when it is subsequently organized. Rizal Light & Ice v. Municipality of Morong, Rizal 25 SCRA 285 (1968) - CASE AT BAR: the fact that a company is not completely incorporated at the time it was granted a Certificate of Public Convenience does not make the grant invalid. o Those entered into by promoters may be accepted or ratified when the corporation is duly organized. Caram, Jr. v. CA 151 SCRA 372 (1987) - A bona fide corporation should alone be liable for its corporate acts duly authorized by its officers, directors, & stockholders. - CASE AT BAR: Cannot hold one personally liable (though they were benefited) for compensation of the claimant for the services performed by him in the organization of the corporation. o Petitioners were not involved in the initial stages of the organization of the corporation. Rather, it was the promoter. o Petitioners are mere subsequent investors in the corporation that was later created. DE FACTO CORPORATION Arnold Hall v. Judge Piccio 86 Phil. 603 (1950) - Persons acting as a corporation may not claim rights of de facto corporations if they have not obtained CERTIFICATES OF INCORPORATION. - Immunity from collateral attack is granted to corporations claiming in good faith to be a corporation under this. - Personality of a corporation begins to exist only from the moment a certificate of incorporation is issued. - Even a de jure corporation may be terminated in a private suit for its dissolution between stockholders.

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CORPORATION BY ESTOPPEL Salvatierra v. Judge Garlitos 103 Phil, 757 (1958) - GENERAL RULE: a person who deals with an association in such a way to recognize its existence as a corporate body is estopped from denying the same in an action arising out of such transaction. - EXCEPTION: The doctrine is not applicable when FRAUD takes a part in said transaction. - An unincorporated association has no personality & would be incompetent to act and appropriate for itself the power & attributes of a corporation as provided by law. - Those who act or purport to act as representatives/agents do so without authority or without a principal is himself regarded as principal. Albert v. University Publishing Co. 13 SCRA 84 (1965) - One who has induced another to act upon his wilful misrepresentation that a corporation was duly organized and existing under the law is personally liable. - Person acting for a corporation with no valid existence is personally liable for contracts entered into as purported agent of the inexistent corporation. Lim Tong Lim v. Philippine Fishing Gear 317 SCRA 728 (1999) - See page 1. NATURE OF TRUST FUND DOCTRINE NTC v. CA 311 SCRA 508 (1999) - CAPITAL value of property or assets of a corporation - The capital subscribed is the total amount of capital that persons (shareholders/subscribers) have agreed to take and pay for, which need not necessarily be the par value of the shares. o Amount the corporation receives, inclusive of premiums in consideration of the original issuances of the shares. - STOCK DIVIDENDS amount that the corporation transfers from its surplus profits account to its capital account. - TRUST FUND DOCTRINE considers subscribed capital as a trust fund for payment of corporate debts to which creditors may look for satisfaction. o Until liquidation, no part of the subscribed capital may be returned or released to the stockholder except redemption of redeemable shares. RESCISSION OF SUBSCRIPTION AGREEMENT BASED ON BREACH Ong Yong v. Tiu 401 SCRA 1 (2003) - The Corporation Code, SEC, Rules of Court provide for appropriate intra-corporate remedies other than rescission. - Trust Fund Doctrine is the underlying principle in the procedure for distribution of capital assets. - INSTANCES OF DISTRIBUTION OF CORPORATE CAPITAL o Amendment of the Articles of Incorporation o Purchase of redeemable shares by the corporation notwithstanding existence of unrestricted retained earnings. o Dissolution & eventual liquidation - Distribution of corporate assets & property cannot be made to depend on the whims of stockholders, officers, or directors. - BUSINESS JUDGMENT RULE contracts entered into by the Board are binding upon the corporation and the courts will not interfere unless they are so unconscionable & oppressive tantamount to destruction of rights of minority. o Courts and other tribunals are wont to override the business judgment of the Board since the courts are not in the business of business. [Laissez faire vibe]

VIII. By-Laws
BINDING EFFECTS OF BY-LAWS Pena v. CA 193 SCRA 717 (1991) - By-laws of a corporation are its own private laws which substantially have the same effect as he laws of the corporation. They are, in effect, written into the charter. - By-laws are binding upon 3d parties. China Bank v. CA 270 SCRA 503 (1997) - In order to be bound, a third party must have acquired knowledge of the pertinent by-laws at the time the transaction or agreement between said third party and shareholder was entered into.

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IX. Corporate Powers & Authority

EXPRESS POWERS INVEST FUNDS FOR NON-PRIMARY PURPOSE ENDEAVOR Dela Rama v. Ma-ao Sugar Central 27 SCRA 247 - Investment of corporate funds in another corporation, if done pursuant to the corporate purpose, does not need approval of the stockholders. - However, when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of stockholders is necessary. o Board must be authorized by the stockholders representing 2/3 of its outstanding capital stock. ENTER PARTNERSHIP OR JOINT VENTURE Tuason & Co. v. Bolanos 95 Phil. 106 (1954) - There is nothing against a corporation being represented by another person, natural or juridical, in a suit in court. - Although a corporation has no power to enter into a partnership, it may enter into a joint venture with another when the nature of that venture is in line with the business authorized by its charter. ULTRA VIRES DOCTRINE Harden v. Benguet Consolidated Mining Co. 58 Phil. 140 (1953) - CASE AT BAR: Though the arrangement of the mining companies is prohibited by law, the shareholders cannot maintain an action to annul the contract by which such prohibited interest was acquired. o Even if illegal per se when only govt policy is at stake & no private wrong is committed, court will leave them be. RATIFICATION OF ULTRA VIRES ACTS Pirovano v. Dela Rama Steamship Co. 96 Phil. 335 (1954) - Where a corporation was given broad & almost unlimited powers to carry out purposes for which it was organized, among them to aid in any manner in the affairs, a donation made which benefited it is not an ultra vires act. - Illegal acts of a corporation contemplate the doing of an act contrary to law, morals, or public policy. o Cannot serve as basis for a court action, nor acquire validity by specific performance, ratification, or estoppels. - Ultra vires acts which are not illegal & void but are merely within the scope of the Articles of Incorporation are merely voidable and may become binding and enforceable when ratified cures the infirmity.

X. Directors, Trustees, & Officers

CENTRALIZED MANAGEMENT Filipinas Port Services v. Go 518 SCRA 453 (2007) - Except for some powers expressly granted by law to stockholders/members, the Board has sole authority to determine policies, enter into contracts, and conduct the ordinary business of the corporation within the scope of its charter, articles, bylaws, or provisions of the law. - The authority of the Board is restricted to the management of regular business affairs of the corporation unless more extensive power is expressly conferred. - The CONCENTRATION IN THE BOARD OF POWERS of control of the corporation and of appointment of corporate officers & managers is necessary for efficiency. - If the cause of the loss is merely error in judgment not amounting to bad faith or negligence, directors and/or officers are not liable. - Determination of necessity, for additional offices/positions is a management prerogative which courts are not wont to review absent any proof that such prerogative was done in bad faith or with malice. THEORIES ON SOURCE OF BOARD POWER Angeles v. Santos 64 Phil. 697 (1937) - The Board of the corporation is a CREATION OF THE STOCKHOLDERS and controls and directs the affairs of the corporation by delegation of the stockholders. o But the Board, in drawing themselves the powers of the corporation, occupies a position of trusteeship in relation to the minority of the stock in the sense that the board should exercise good faith, care, and diligence in the administration of corporate affairs. o Should protect the interest of both the majority & minority.

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BOARD MUST ACT AS A BODY Board of Liquidators v. Heirs of Kalaw 20 SCRA 987 (1967) - A corporate officer, entrusted with the general management & control of its business has implied authority to make any contract or do other acts necessary or appropriate for the conduct the ordinary business of the corporation. o He may, without special authority from the Board, perform all acts of an ordinary nature, which by usage or necessity are incident to his office and may bind the corporation by contracts in matters arising in the usual course of business. o General practice, custom, and policy can give a manager implied authority to bind the corporation even without authority of the Board. - Ratification by a corporation of an unauthorized act or contract by its officers relates back to the time of the act or contract ratified. - BAD FAITH does not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity & conscious doing of wrong. BUSINESS JUDGMENT RULE Montelibano v. Bacolod-Marcia Milling Co. 5 SCRA 36 (1962) - TEST TO BE APPLIED: Whether the act in question is in direct and immediate furtherance of the corporations business, fairly incident to the express powers & reasonably necessary to their exercise. o If so, the corporation has the power to do it. - Whether or not a valid & binding Resolution passed by the Board will cause losses or decrease the profits of the corporation, may not be reviewed by the courts. Philippine Stock Exchange v. CA 281 SCRA 232 (1997) - CASE AT BAR: PSEs management prerogatives are not under the absolute control of the SEC since the PSE is, after all, a corporation authorized by its franchise to engage in its proposed & duly approved business. - Questions of policy & management are left to the honest decision of the officers/directors and that courts are without authority to substitute their judgment for that of the Board. o Board is the business manager of the corporation and so long as it acts in good faith, its orders are not reviewable by the courts. Ong Yong v. Tiu 401 SCRA 1 (2003) - See page 9. COUNTER-VEILING DOCTRINES TO PROTECT CORPORATE CONTRACTS ESTOPPEL OR RATIFICATION Lipat v. Pacific Banking Corp 402 SCRA 339 (2003) - If a corporation knowingly permits one of its officers or other agents to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts. o The corporation will, as regards anyone dealing in good faith, be estopped from denying the agents authority. COUNTER-VEILING DOCTRINES TO PROTECT CORPORATE CONTRACTS DOCTRINE OF APPARENT AUTHORITY Woodchild Holdings v. Roxas Electric 436 SCRA 235 (2005) - The corporations property may not be sold by stockholders or members without express authority from its Board. o General principles of agency govern the relation between the corporation and its officers & agents subject to the Articles, by-laws, and the law. - Acts done by corporate officers beyond their authority cannot bind the corporation unless it is RATIFIED or is ESTOPPED from denying it. - The apparent power of an agent is to be determined by acts of the principal, not by the agent. - ELEMENTS OF APPARENT AUTHORITY o Acts justifying the belief in the agency. o Knowledge of the corporation o Reliance - Ratification is based on WAIVER or the intentional relinquishment of a known right. Francisco v. GSIS 7 SCRA 577 (1963) - A corporation cannot evade the binding effect produced by a telegram sent by its board secretary and the addressee cannot be blamed for relying on it. - Knowledge of facts acquired/possessed by an officer or agent of a corporation in the course of his employment & in relation to matters within the scope of his authority is notice to the corporation.

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CASE AT BAR: Silence and/or unconditional acceptance of subsequent remittances constitutes a binding ratification of the original agreement.

Prime White Cement Corp. v. IAC 220 SCRA 103 (1993) - Board may delegate specific powers to any of its officers. But the absence of such express delegation may still bind the corporation to the contract entered into when there is ratification. - IMPLIED RATIFICATION: silence, acquiescence, acts showing approval or adoption, acceptance of benefits, etc. - President of a corporation, as a general rule, can bind the corporation in a contract in the ordinary course of business provided it is reasonable under the circumstances. - A Board director or corporate officer cannot readily enter into a contract with his own corporation. [Self-Dealing vibe] o Conflict of interest o Directors are committed to seek maximum profits for the corporation - However, a directors contract with his own corporation is not in all instances void/voidable. If the contract is fair & reasonable under the circumstances, it may be ratified by the stockholders upon full disclosure of his adverse interest. Yao Ka Sin Trading v. CA 209 SCRA 763 (1992) - A contract by the President & Board Chairman without authority from the Board is void. - Though an agent acts without or in excess of his actual authority, if he acts within the scope of apparent authority conferred by the corporation which held him out to act as such, the corporation is bound. - If a person intentionally/negligently clothes its agents with apparent power to perform acts for it, the corporation will be estopped. Westmont Bank v. Inland Construction 582 SCRA 230 (2009) - GENERAL RULE: a corporation is not bound if the acts by the agents are not authorized by the Board. - A corporation should first prove that its agent is not authorized. If accomplished, the burden shifts to the other party to prove, by specific previous acts, that an officer or agent was clothed with apparent authority. RATIONALE FOR DOCTRINE OF APPARENT AUTHORITY Associated Bank v. Pronstroller - APPARENT AUTHORITY MAY BE ASCERTAINED THROUGH o General manner in which the corporation holds out an officer or agent as having the power to act; or o Acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of ordinary powers. QUALIFICATIONS OF DIRECTORS & TRUSTEES Gokongwei, Jr. v. SEC 89 SCRA 336 (1979) - A corporation may prescribe in its by-laws the qualities, duties, and compensation of directors, officers, and employees. - A stockholder has no vested right to be elected into the Board. o Buyers of corporate stocks do so with the knowledge that its affairs are dominated by a majority of the stockholders and he implied that the will of the majority shall govern in all matters within the limits. - Directors have the character of a FIDUCIARY RELATIONSHIP insofar as the corporation is concerned for the benefit of the stockholders. o It is against sound principles of corporate management to share sensitive information with a director whose fiduciary duty to loyalty may well require that he disclose this information to a competitive rival. - Another reason why a by-law provision forbidding a competitor to be such is because of the policy prohibiting cartels, combinations in restraint of trade, and unfair competition. Lee v. CA 205 SCRA 752 (1992) - Any director who ceases to own at least 1 share of capital stock of a corporation of which he is a director shall cease as a director thereof. - A VOTING TRUST AGREEMENT results in the separation of voting rights of a stockholder from his other rights (ex. receive dividends). ELECTION OF DIRECTORS & TRUSTEES Premium Marble Resources v. CA 264 SCRA 11 (1991) - All corporations duly organized under the Corporation Code are required to submit within 30 days to the SEC the names, nationalities, and residences of the directors, trustees, & officers elected.

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Valle Verde v. Africa 598 SCRA 202 (2009) - TENURE is the period during which the incumbent actually holds office. o It can be shorter than the term or longer (in cases of holdover situations) - TERM is the time during which the officer may claim to hold the office as a matter of right. o Not affected by a holdover situation. - HOLDOVER PERIOD is the time from the lapse of the 1 year from a members election to the Board & until his successors election & qualification. (not considered as a new term) - RATIONALE FOR THE 1 YEAR TERM: continued accountability to shareholders and the legitimacy of their decisions that bind the corporations stockholders be assured. [good corporate governance] COMPENSATION OF DIRECTORS Western Institute of Technology v. Salas 278 SCRA 216 (1997) - Directors/Trustees are not entitled to salary/compensation when they perform nothing more than the usual & ordinary duties of their office. o They are presumed to serve gratuitously. - WAYS BY WHICH BOARD MEMBERS CAN BE GRANTED COMPENSATION (aside from reasonable per diems) o There is a provision in the by-laws fixing their compensation; o Stockholders representing the majority of outstanding capital stock agree to it; o They render services to the corporation in a capacity other than director or trustee (ex. Chairman, Vice Chair, Treasurer, Secretary) DUTY OF DILIGENCE Steinberg v. Velasco 52 Phil. 953 (1929) - Creditors of a corporation have the right to assume that so long as there are debts & liabilities, the Board will not use its assets to purchase its own stock or to declare dividends to its stockholder when the corporation is insolvent. - Directors are bound to care for its property and manage its affairs in good faith and for violation of their duties, they are liable to account for the same as any other trustee. - If directors do acts clearly beyond their power, by reason of which a loss ensued or dispose of its property without authority, they will be required to make good the loss out of their private estates. - A director is bound to exercise ordinary skill and judgment and cannot excuse his negligence/unlawful acts on the ground of ignorance or inexperience. Sanchez v. Republic 603 SCRA 229 (2009) - DOCTRINE OF CORPORATE OPPORTUNITY holds personally liable corporate directors found guilty of gross negligence or bad faith in directing the corporate affairs resulting in damage or injury to the corporation, its stockholders, or members, and other persons. - 31 makes director-officers jointly & severally liable to third persons for gross negligence or bad faith in directing corporate affairs. o There is no need to invoke the doctrine of piercing the corporate veil. DUTY OF LOYALTY Mead v. McCullough 21 Phil. 95 (1911) - Where a director accepts a position incompatible with those as such director, it is presumed that he has abandoned his office as director of the corporation. POWERS OF CORPORATE OFFICERS Associated Bank v. Pronstroller 558 SCRA 113 (2008) - BoD may validly delegate some of its functions and powers to officers, committees, or agents the authority of such individuals to bind the corporation is generally derived from law, by-laws, or authorization from the Board, by habit, custom or acquiescence in the general course of business. PRESIDENT Peoples Aircargo & Warehousing Co. Inc v. CA 297 SCRA 170 (1998) - The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. - Absent a charter or bylaw provision to the contrary, the president is presumed to have the authority to act within the domain of the general objectives of its business and within the scope of his or her usual duties.

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WHO IS A CORP OFFICER? Gurrea v. Lezama 103 Phil. 553 (1958) - The only officers of a corporation are those given that character either by the Corporation Law or by its by-laws. o The rest can be considered merely as employees or subordinate officials. - CASE AT BAR: considering that plaintiff has been appointed manager by the board of directors and as such does not have the character of an officer, the conclusion is inescapable that he can be suspended or removed by said board of directors under such terms as it may see fit and not as provided for in the bylaws. - The fact that the manager of the corporation in the several statutes enacted by Congress is held criminally liable for violation of any of the penal provisions therein prescribed does not make him an officer of the corporation. Pardo de Tavera v. Tuberculosis Society 112 SCRA 243 (1982) - An appointment held at the pleasure of the appointing power is in essence temporary in nature. It is co extensive with the desire of the Board of Directors. o Hence, when the Board opts to replace the incumbent, technically there is no removal but only an expiration of term and, in an expiration of term, there is no need of prior notice, due hearing or sufficient grounds before the incumbent can be separated from office. - The employment of a corporate officer who under the Code of By-Laws hold office at the pleasure of the Board of Directors, may be terminated at anytime. Malting Industrial & Commercial Corp. v. Coros 633 SCRA 12 (2010) - Illegal dismissal of an officer or other employee of a private employer is properly cognizable by the Labor Arbiter. - Where the complaint for illegal dismissal concerns a corporate officer, however, the controversy falls under the jurisdiction of the SEC A position must be expressly mentioned in the By-Laws in order to be considered as a corporate office. o Thus, the creation of an office pursuant to or under a By-Law enabling provision is not enough to make a position a corporate office. The power to elect the corporate officers was a discretionary power that the law exclusively vested in the Board of Directors, and could not be delegated to subordinate officers or agents. o CASE AT BAR: The office of Vice President for Finance and Administration created by Matlings President pursuant to a by-law was an ordinary, not a corporate, office. NATURE OF EXERCISEOF POWER TO TERMINATE OFFICERS De Rossi v. NLRC 314 SCRA 245 (1999) - The SEC, and not the NLRC, has original and exclusive jurisdiction over cases involving the removal of corporate officers. o It has exclusive jurisdiction over controversies regarding the election and/or designation of directors, trustees, officers, or managers of a corporation, partnership, or association. o NOW it the RTC sitting as a Special Commercial Court - A corporate officers removal from his office is a corpor ate act. LIABILITIES OF CORP OFFICERS Vazquez v. de Borja 74 Phil. 560 (1944) - The mere fact that corporate personality is owing to a legal fiction and that it necessarily has to act thru its agents, does not make the latter personally liable on a contract duly entered into, or for an act lawfully performed, by them for and in its behalf. - Such legal fiction may be disregarded only when an attempt is made to use it as a cloak to hide an unlawful or fraudulent purpose. - CASE AT BAR: The fact that the corporation, acting thru Vazquez as its manager, was guilty of negligence in the fulfilment of the contract, did not make Vazquez principally or even subsidiarily liable for such negligence. Since it was the corporation's contract, its non-fulfilment, whether due to negligence or fault or to any other cause, made the corporation and not its agent liable. Palay Inc. v. Clave 124 SCRA 638 (1983) - GENERAL RULE, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. - EXCEPTION: Veil of corporate fiction may be pierced when: o It is used as a shield to further an end subversive of justice; or o For purposes that could not have been intended by the law that created it; or o To defeat public convenience, justify wrong, protect fraud, or defend a crime; or

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o To perpetuate fraud or confuse legitimate issues; or o To circumvent the law; or o As an alter ego President of real estate corporation cannot be held personally liable where he appears to be controlling stockholder absent sufficient proof that he used the corporation to defraud defaulting lot buyer. Mere ownership by a single stockholder or by another corporation of all or nearly all capital stock of corporation not sufficient ground for disregarding corporate personality.

RUNDOWN ON OFFICERS LIABILITIES Tramat Mercantile Inc. v. CA 238 SCRA 14 (1994) - Instances when personal liability of a corporate director, trustee or officer along with the corporation may so validly attach: o He assents to (a) patently unlawful act of the corp; (b)for bad faith & gross negligence in directing its affairs; or (c) for conflict of interest resulting in damages to the corp, its stockholders, or other persons; o Consents or does not object to issuance of watered stocks; o Agrees to hold oneself personally and solidarily liable with the corp; or o A specific provision of law makes one personally liable for a corp act.
XX SPECIAL PROVISIONS IN LABOR LAWS

A.C. Ransom Labor Union CCLU v. NLRC 142 SCRA 269 (1986) - Since AC Ransom is an artificial person, it must have an officer who can be presumed to be employer - The responsible officer of an employer corporation can be held personally, not to say even criminally, liable for non-payment of back wages. - Absent definite proof as to the identity of an officer or officers of the corporation directly liable for failure to pay backwages, the responsible officer is the president of the corporation solidarily with the corporation ---------------------------------------- END OF MIDTERMS ----------------------------------------------XI. Right of Stockholders & Members PRE-EMPTIVE RIGHTS Majority Stockholders of Ruby Industrial Corp. v. Lim 650 SCRA 461 (2011) - An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever officials of the corporation refuse to sue or are the ones to be sued or hold the control of the corporation. o The suing stockholder is regarded as the nominal party, with the corporation as the party in interest. - A stock corporation is expressly granted the power to issue or sell stocks. o The power is lodged in the Board and no stockholders meeting is required to consider it because additional issuances of shares of stock do not need approval of the stockholders. o What is only required is the board resolution approving the additional issuance of shares. - PRE-EMPTIVE RIGHT: right of the stockholder of a stock corporation to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. o It may be restricted or denied under the articles of incorporation, and subject to certain exceptions and limitations. o The stockholder must be given a reasonable time within which to exercise their preemptive rights. Upon the expiration of said period, any stockholder who has not exercised such right will be deemed to have waived it. - The validity of issuance of additional shares may be questioned if done in breach of trust by the controlling stockholders. o Even if the pre-emptive right does not exist, either because the issue comes within the exceptions in 39 or because it is denied or limited in the articles of incorporation, an issue of shares may still be objectionable if the directors acted in breach of trust and their primary purpose is to perpetuate or shift control of the corporation, or to freeze out the minority interest. - LIQUIDATION: It is the settlement of the affairs of the corporation, consisting of adjusting the debts & claims, of collecting all that is due the corporation, the settlement & adjustment of claims against it, and payment of its just debts. - CASE AT BAR: Since the corporate life of RUBY as stated in its articles of incorporation expired, without a valid extension having been effected, it was deemed dissolved by such expiration without need of further action on the part of the corporation or the State. - CASE AT BAR: majority stockholders eagerness to have the suspension order lifted or vacated by the SEC without any order for its liquidation evinces a total disregard of the mandate of 4-9 of the Rules of Procedure on Corporate Recovery. o Their obvious lack of any intent to render an accounting of all funds, properties and details of the unlawful assignment transactions to the prejudice of RUBY, minority stockholders and the majority of RUBYs creditors.

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RIGHT TO TRANSFER OR DISPOSE OF SHAREHOLDINGS Restriction on Transfers Lambert v. Fox 26 Phil. 588 (1914) - CASE AT BAR: An agreement not to sell, transfer, or dispose within a year any part of their shareholdings was entered into by 2 shareholders subject to a fine in case of breach. o One of the stockholders sold his stock within 9 months and against the protest of the other. - Where the suspension of the right to sell stock in a corporation has a beneficial purpose and results in the protection of the corporation as well as of the individual parties to the contract and is reasonable as to time, the suspension is legal. Right of Refusal Padgett v. Babcock & Templeton Inc. 59 Phil. 232 (1933) - CASE AT Bar: The restriction consisting in the word non-transferable appearing on the 12 certificates is illegal on the ground that it constitutes an undue limitation of the right of ownership and is in restraint of trade. It should be eliminated. - Shares of corporate stock being regarded as property, the owner of such shares may, as a general rule, dispose of them as he sees fit, unless the corporation has been dissolved, or unless the right to do so is properly restricted, or the owner's privilege of disposing of his shares has been hampered by his own action. Fleishcher v. Botica Nolasco 47 Phil. 583 (1925) - CASE AT BAR: By-Laws granted a preferential right to the corporation in buying its shares of stock from shareholders. - By-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects of the corporation provided they are not contradictory to the general policy of the laws of the land. - Under a statute authorizing by-laws for the transfer of stock of a corporation, it can do no more than prescribe a general mode of transfer on the corporate books and cannot justify an unreasonable restriction upon the right to sell. o Shares of stock of a corporation are personal property and the holder thereof may transfer the same without unreasonable restrictions. o The power to enact by-laws restraining the sale & transfer of stock must be found in the governing statute or charter. - Restrictions upon the traffic in stock must have their source in legislative enactments, as the corporation itself cannot create such impediments. o In the absence of such a power, cannot ordinarily inquire into or pass upon the legality of the transaction by which its stock passes from one person to another, nor can it question the consideration upon which a sale is based. o A by-law of a corporation cannot take away or abridge the substantial rights of stockholders. o The owner of corporate stock has the same uncontrollable right to sell or alienate, which attaches to the ownership of any other species of property. Remedy if Registration Refused Ponce v. Alsons Cement Corp. 363 SCRA 602 (2002) - Under 63, a transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. - It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. o From this time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises. - Mere indorsement by the supposed owners of the stock, in the absence of express instructions from them, cannot be the basis of an action for mandamus and that the rights of the parties have to be threshed out in an ordinary action. - One may own shares of corporate stock without possessing a stock certificate. o But a certificate of stock is the tangible evidence of the stock itself and of the various interests therein. In law, it is equivalent to ownership. - Considering that the law does not prescribe a period within which the registration should be effected, the action to enforce the right does not accrue until there has been a demand and a refusal concerning the transfer. CONTRACTS & AGREEMENT AFFECTING SHAREHOLDINGS Voting Trust Agreements Lee v. CA 205 SCRA 752 (1992) Already discussed above but its so nice you have to see it twice - Any director who ceases to own at least 1 share of capital stock of a corporation of which he is a director shall cease as a director thereof. - A VOTING TRUST AGREEMENT results in the separation of voting rights of a stockholder from his other rights (ex. receive dividends).

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RIGHTS TO INSPECT & COPY CORPORATE RECORDS Basis of Right Gokongwei Jr. v. SEC 89 SCRA 336 (1979) - The stockholders right of inspection of the corporations books and records is based upon their ownership of the assets and property of the corporation. o An incident of ownership of corporate property whether it be an equitable, beneficial, or a quasi-ownership. - This right is predicated upon the necessity of self-protection. - The inspection has to germane to the petitioners interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the corporation. Remedies if Denied: Mandamus Gonzales v. PNB 122 SCRA 489 (1983) - Right of inspection includes that the records must be kept at the principal office, inspection must be made on business days, the stockholder may demand a copy of the excerpts of the records or minutes , and refusal to allow such inspection shall subject the erring officer/agent to criminal or civil liability. - While seemingly enlarging the right of inspection, the new Code has prescribed LIMITATIONS to the same. o The one requesting it must not have been guilty of using improperly any information secured through a prior examination. o Person asking for such examination must be acting in good faith and for a legitimate purpose in making his demand. - CASE AT BAR: Although it is claimed that he has justifiable motives in seeking the inspection of the books of the respondent bank, he has not set forth the reasons and the purposes for which he desires such inspection, except to satisfy himself as to the truth of published reports regarding certain transactions entered into by the respondent bank and to inquire into their validity. o Admittedly he sought to be a stockholder in order to pry into transactions entered into by the respondent bank even before he became a stockholder. o His obvious purpose was to arm himself with materials which he can use against the respondent bank for acts done by the latter when the petitioner was a total stranger to the same. o PNB is not an ordinary corporation. Having a charter of its own, it is not governed, as a rule, by the Corporation Code. Criminal Sanction Under 144 Ang-Abaya v. Ang 573 SCRA 129 (2008) - For the penal provision in 144 to apply in cases of violation of a stockholder or members right to inspect corporate books/records under 74, the following REQUISITES must be present: o A director, trustee, stockholder or member has made a prior demand in writing for a copy of excerpts from the corporations records or minutes; o Any officer/agent of the concerned corporation shall refuse to allow the said director, trustee, stockholder, or member of the corporation to examine & copy such excerpts; o If such refusal is made pursuant to a resolution or order of the Board, liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal; and o Where the officer or agent of the corporation sets up the defense that the person demanding to examine and copy excerpts from the corporations records and minutes has improperly used any information secured thr ough any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand, the contrary must be shown or proved. - A criminal complaint for violation of 74 of the Corporation Code, the defense of improper use or motive is in the nature of a justifying circumstance that would exonerate those who raise and are able to prove the same. o Where the corporation denies inspection on the ground of improper motive or purpose, the burden of proof is taken from the shareholder and placed on the corporation. DERIVATIVE SUITS Derivative Suit Must Be Effected when Board of Governments Cannot Properly Exercise Business Judgment *Chua v. CA 443 SCRA 259 (2004) - A derivative action is a suit by a shareholder to enforce a corporate cause of action; the corporation is a necessary party to the suit. The suing stockholder is only regarded as a nominal party while the corporation is the real party in interest. - A stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation.

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Not every suit filed in behalf of the corporation is a derivative suit. o The minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. o Condition sine qua non that the corporation be impleaded as a party because not only is the corporation an indispensable party, but it is also the present rule that it must be served with process. The corporation must be joined as party because it is its cause of action that is being litigated and because judgment must be a res judicata against it.

Requisites of Derivative Suit San Miguel Corp v. Kahn 176 SCRA 447 (2001) - CASE AT BAR: The theory that de los Angeles has no personality to bring suit in behalf of the corporation because his stockholding is minuscule, and there is a conflict of interest between him and the PCGG cannot be sustained. - REQUISITES FOR A DERIVATIVE SUIT: o Party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material. o Has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and o Cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. Who May Bring the Suit Pascual v. Orozco - A stockholder in a corporation who was not such at the time when the alleged objectionable transactions took place, or whose shares of stock have not since devolved upon him by operation of law, cannot maintain derivative suits unless such transactions continue and are injurious to such stockholder or affect him especially or specifically in some other way. XII. Shares of Stock SHAREHOLDERS NOT CORPORATE CREDITORS Garcia v. Lim Chu Sing 59 Phil. 562 (1934) - The shares of stock of a banking corporation do not constitute an indebtedness thereof to the stockholder and, therefore, the latter is not a creditor of the former for such shares. - A stockholder's indebtedness to a banking corporation cannot be compensated with the amount of his shares in the same institution, there being no relation of creditor and debtor with regard to such shares. SUBSCRIPTION CONTRACT: PURCHASE AGREEMENT Bayla v. Silang Traffic Co. Inc. 73 Phil. 557 (1942) already taken up previously - Rules governing subscriptions and sales of shares are different. o Calls for unpaid subscriptions & assessment of stock do not apply to a purchase of stock. o The rule that the corporation has no legal capacity to release an original subscriber to its capital stock from its obligation to pay shares does not apply to a contract to purchase shares. - SUBSCRIPTION mutual agreement of subscribers to take & pay for stock of a corporation. - PURCHASE independent agreement between the individual and the corporation to buy shares of stock from it at a stipulated price SUBSCRIPTION CONTRACT: PRE-INCORPORATION SUBSCRIPTION Ong Yong v. Tiu 375 SCRA 614 (2002) SUBSCRIPTION CONTRACT: RELEASE FROM SUBSCRIPTION OBLIGATION Tan v. Sycip 499 SCRA 216 (2006) - A corporation can release a subscriber from liability on the subscription, in whole or in part, only with the express or implied consent of all of the shareholders, and only when there is no prejudice to corporate creditors. CERTIFICATE OF STOCK Nature of the Certificate Tan v. SEC 206 SCRA 740 (1992) - A certificate of stock is not necessary to render one a stockholder in a corporation. - A certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests therein.

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It is merely evidence of the holders interest and status in the corporation, his ownership of the share represented thereby, but is not in law the equivalent of such ownership. A certificate of stock is not a negotiable instrument. o Although it is sometime regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled with delivery, it is well-settled that it is non-negotiable, because the holder thereof takes it without prejudice to such rights or defenses as the registered owner/s or transferors creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel. o

De los Santos v. Republic 96 Phil. 577 (1955) - Shares of stock are personal property and may be transferred by endorsement of the corresponding stock certificate, coupled with its delivery. - CASE AT BAR: The one who claims to be the owner of the shares of stock as evidenced by certificate of stock has the burden of proving that he acquired it from the registered owner thereof or his duly appointed representatives. - CLASS NOTES: Certificates are mere evidence. Just because you hold it does not automatically translate into you being a stockholder. Stock and transfer book as the best evidence to determine who the real stockholder is. Ponce v. Alsons Cement Corp. 393 SCRA 602 (2002) taken up previously - Under 63, a transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. - It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. o From this time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises. - Mere indorsement by the supposed owners of the stock, in the absence of express instructions from them, cannot be the basis of an action for mandamus and that the rights of the parties have to be threshed out in an ordinary action. - One may own shares of corporate stock without possessing a stock certificate. o But a certificate of stock is the tangible evidence of the stock itself and of the various interests therein. In law, it is equivalent to ownership. - Considering that the law does not prescribe a period within which the registration should be effected, the action to enforce the right does not accrue until there has been a demand and a refusal concerning the transfer. Makati Sports Club Inc. v. Cheng 621 SCRA 103 (2010) - The right of a transferee to have stocks transferred to its name is an inherent right flowing from its ownership of the stocks. - The certificate is not a stock in the corporation but is merely evidence of the holders interest and status in the corporation, his ownership of the share represented thereby. o It expresses the contract between the corporation and the stockholder, but is not essential to the existence of a share of stock or the nature of the relation of shareholder to the corporation. - The corporations obligation to register is ministerial upon the buyers acquisition of ownership of the share of stock . o The corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers. Quasi-Negotiable Character of Certificate of Stock Bachrach Motor Co. v. Lacson Ledesma 64 Phil. 681 (1937) - Certificates of stock or of stock dividends are quasi negotiable instruments in the sense that they may be given in pledge or mortgage to secure an obligation. Razon v. IAC 207 SCRA 234 (1992) In order for a transfer of stock certificate to be effective, the certificate must be properly endorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. CASE AT BAR: The petitioners asseveration that he did not require an indorsement of the certificate of stock in view of his intimate friendship with the late Juan Chuidian cannot overcome the failure to follow the procedure required by law or the proper conduct of business even among friends. **Bitong v. CA 292 SCRA 503 (1998) - REQUISITES OF ISSUANCE OF A FORMAL CERTIFICATE OF STOCK o Certificates must be signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation. A mere typewritten statement advising a stockholder of the extent of his ownership in a corporation without qualification and/or authentication cannot be considered as a formal certificate of stock.

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Delivery of the certificate. No issuance of a stock certificate where it is never detached from the stock books although blanks therein are properly filled up if the person whose name is inserted therein has no control over the books of the company. o Par value, as to par value shares, or the full subscription as to no par value shares, must first be fully paid. o The original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from a stockholder. Certificate of stock itself, once issued, is a continuing affirmation or representation that the stock described therein is valid and genuine and is at least prima facie evidence that it was legally issued in the absence of evidence to the contrary. Books and records of a corporation which include even the stock and transfer book are generally admissible in evidence in favor of or against the corporation and its members to prove the corporate acts, its financial status and other matters including ones status as a stockholder. o They are ordinarily the best evidence of corporate acts and proceedings. o PAROL EVIDENCE may be admitted to supply omissions in the records, explain ambiguities, or show what transpired where no records were kept, or in some cases where such records were contradicted. Stock issued without authority and in violation of law is VOID and confers no rights on the person to whom it is issued and subjects him to no liabilities. REQUIREMENTS FOR A VALID TRANSFER OF STOCKS o Delivery of the stock certificate; o Certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and o To be valid against third parties, the transfer must be recorded in the books of the corporation.

Rural Bank of Lipa v. CA 366 SCRA 188 (2001) Delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the transferee. o Title may be vested in the transferee only by delivery of the duly indorsed certificate of stock. Right to Certificate of Stock for Fully Paid Shares Baltazar v. Lingayen Gulf Electrical Power Co 14 SCRA 522 (1965) - If a stockholder, in a stock corporation subscribes to a certain number of shares of stock, and makes partial payments for which he is issued certificates of stock, he is entitled to vote the latter, notwithstanding the fact that he has not paid the balance of his subscription which has been called for payment or declared delinquent. If a stockholder subscribes to a certain number of shares of stock and makes partial payment only, which is applied to corresponding stocks issued to him, but is declared delinquent as to the rest, with interest, it is held that previous payments on account of the capital, may not be first applied to interest, thus diminishing the voting power of the shares of stock already paid. Tan v. SEC 206 SCRA 740 (1992) - A certificate of stock is not a negotiable instrument. o Although it is sometime regarded as QUASI-NEGOTIABLE, in the sense that it may be transferred by endorsement, coupled with delivery, it is well-settled that it is non-negotiable, because the holder thereof takes it without prejudice to such rights or defenses as the registered owner/s or transferors creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel. - While Section 47(a) grants to stock corporations the authority to determine in the by-laws the manner of issuing certificates of shares of stock, however, the power to regulate is not the power to prohibit, or to impose unreasonable restrictions of the right of stockholders to transfer their shares. Forged & Unauthorized Transfers De los Santos v. Republic 96 Phil. 577 (1955) - Shares of stock are personal property and may be transferred by endorsement of the corresponding stock certificate, coupled with its delivery. o However, the transfer shall not be valid except as between the parties until it is entered and noted upon the books of the corporation. - CASE AT BAR: Where the plaintiffs were, at the time of the alleged sales in their favor of the shares stock in question, aware of sufficient facts to put them on notice of the need of inquiring into the regularity of the transactions and the title of the opposed vendors, they cannot validly claim, against the registered stockholder, the status of purchasers in good faith.

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The principal or beneficiary of the registered owner of shares of stock is entitled to invoke such rights as the registered stockholders may have under the law.

Santamaria v. HSBC 89 Phil. 780 (1951) A bona fide pledgee or transferee of a stock from the apparent owner is not chargeable with knowledge of the limitations placed on it by the real owner, or of any secret agreement relating to the use which might be made of the stock by the holder. Neugene Marketing Inc. v. CA 303 SCRA 295 (1999) The approval by the nominees is necessary for the validity and effectivity of the transfer of the stock certificates registered under their names. o CASE AT BAR: Not only did the transfers of stock in question lack the requisite approval, the private respondents categorically declared under oath that subject certificates of stock of theirs were stolen from the confidential vault of the Uy family and illegally transferred to the names of petitioners in the Stock and Transfer Book of NEUGENE. STOCK AND TRANSFER BOOK Fua Cun v. Summers 44 Phil. 704 (1923) A banking corporation has no lien upon its own stock for the indebtedness of the stockholders even when the by-laws provide that the shares shall be transferable only upon the books of the corporation and that no such transfer shall be made if the holder of the shares is indebted to the corporation. *In the absence of special agreement to the contrary, a subscriber for a certain number of shares of stock does not, upon payment of one-half of the subscription price, become entitled to the issuance of certificates for one-half the number of shares subscribed for. o Subscriber's right consists only in an equity entitling him to a certificate for the total number of shares subscribed for by him upon payment of the remaining portion of the subscription price . **An equity in shares of stock may be assigned, the assignment becoming effective as between the parties and as to third parties with notice. Monserrat v. Ceron 58 Phil. 469 (1933) - ISSUE: whether or not it is necessary to enter upon the books of the corporation a chattel mortgage constituted on common shares of stock in order that such mortgage may be valid and may have force and effect as against third persons. - As a necessary requisite to the validity of such transfer, the notation upon the said books of the corporation of a chattel mortgage constituted on such shares is not necessary to its validity. **Only the transfer or absolute conveyance of the ownership of the title to a share need be entered and noted upon the books of the corporation in order that such transfer may be valid. o Inasmuch as a CHATTEL MORTGAGE of the aforesaid title is not a complete and absolute alienation of the dominion and ownership thereof, its entry and notation upon the books of the corporation is not a necessary requisite to its validity. - TRANSFER: Any act by which property of one person is vested in another. - TRANSFER OF SHARES: Any means whereby one may be divested of and another acquire ownership of stock. Chua Guan v. Samahang Magsasaka Inc. 62 Phil. 472 (1935) The registration of the chattel mortgage in the office of the corporation was not necessary and had no legal effect. (citing Monserrat v. Ceron) It is a general rule that for purposes of execution, attachment and garnishment, it is not the domicile of the owner of a certificate but the domicile of the corporation which is decisive. *Only safe way to accomplish the hypothecation of shares of stock of a Philippine corporation is for the creditor to insist on the assignment and delivery of the certificate and to obtain the transfer of the legal title to him on the books of the corporation by the cancellation of the certificate and the issuance of a new one to him. *Uson v. Diosomito 61 Phil. 535 (1935) ISSUE: Whether a bona, fide transfer of the shares of a corporation, not registered or noted on the books of the corporation, is valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not. Right of the owner of the shares of stock of a corporation to transfer the same by delivery of the certificate is limited and restricted by the express provision that no transfer, however, shall be valid, except as between the parties, until the tran sfer is entered and noted upon the books of the corporation. o An attachment lien prevails over a prior unregistered bona fide stock transfer. *Escano v. Filipinas Mining Corp 74 Phil. 71 (1944)

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35 (now 63 of the Corporation Code), which requires the registration of transfers of shares of stock upon the books of the corporation as a condition precedent to their validity against the corporation and third parties, is also applicable to unissued shares held by the corporation in escrow. **REASON FOR REQUIRING THE RECORDING SAID TRANSFERS OF SHARES o To enable the corporation to know at all times who its actual stockholders are, because mutual rights and obligations exist between the corporation and its stockholders; o To afford to the corporation an opportunity to object or refuse its consent to the transfer in case it has any claim against the stock sought to be transferred, or for any other valid reason; and o To avoid fictitious or fraudulent transfers.

Bachrach Motor Co. v. Lacson Ledesma 64 Phil. 681 (1937) discussed above - Certificates of stock or of stock dividends are quasi negotiable instruments in the sense that they may be given in pledge or mortgage to secure an obligation. Nava v. Peers Marketing Corp. 74 SCRA 65 (1976) The corporation can include in its by-laws rules, not inconsistent with law, governing the transfer of its shares of stock. Stock subscription is a subsisting liability from the time the subscription is made. o The subscriber is as much bound to pay his subscription as he would be to pay any other debt. The right of the corporation to demand payment is no less incontestable. - CASE AT BAR: Where 110 stock certificate was issued to original subscriber representing that portion of his subscription which he paid for, the assignment of said subscribers corporate share is effective only between the parties to the transaction and the transferee cannot demand from the corporation the issuance of certificates of stock representing the paid subscribed shares. Validity of Transfers **Batangas Laguna Tayabas Bus Co. v. Bitanga 362 SCRA 635 (2001) - A transfer of shares is not valid unless recorded in the books of the corporation. - CASE AT BAR: the transfer of the shares of the group of Dolores Potenciano to the Bitanga group has not yet been recorded in the books of the corporation. Hence, the group of Dolores Potenciano, in whose names those shares still stand, were the ones entitled to attend and vote at the stockholders meeting of the BLTB. - Until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. o CASE AT BAR: Thus, the unrecorded transferee, the Bitanga group in this case, cannot vote nor be voted for. - 2-FOLD PURPOSE OF REGISTRATION o Enable the transferee to exercise all the rights of a stockholder (right to vote and to be voted for); and o To inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting; his vote can be properly counted to determine whether a stockholders resolution was approved, despite the claim of the alleged transferee . - PUNO. J, DISSENTING: The rule is intended to protect the interest of the corporation and third persons who may be prejudiced by the transfer of the shares of stocks. It follows, therefore, that as between the parties to the sale, the transfer shall be valid even if not recorded in the books of the corporation. Garcia v. Jomouad 323 SCRA 424 (2000) - ISSUE: Same as in the case of Uson v. Diosomito. - *All transfers of shares not so entered in the corporate books are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to subsequent purchasers in good faith, and, indeed, as to all persons interested, except the parties to such transfers. - All transfers not so entered on the books of the corporation are absolutely void; not because they are without notice or fraudulent in law or fact, but because they are made so void by statute. - *CASE AT BAR: Entry in the minutes of the meeting of the Clubs board of directors noting the resignation of Dico as proprietary member thereof does not constitute compliance with 63.

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Meaning of Unpaid Claims China Banking Corp. v. CA 270 SCRA 503 (1997) A membership share is quite different in character from a pawn ticket. - **UNPAID CLAIM: any unpaid claim arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transaction.

XIII. Capital Structure

CLASSIFICATION OF SHARES Preferred Shares & Redeemable Shares **Republic Planters Bank v. Agana, Sr. 269 SCRA 1 (1997) - PREFERRED SHARES OF STOCK: one which entitles the holder thereof to certain preferences over the holders of common stock. o Preferences are designed to induce persons to subscribe for shares of a corporation. - COMMON FORMS OF PREFERRED SHARES o Preferred shares as to assets. Gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation. o Preferred shares as to dividends. Shareholder is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid the holders of common stock. However, there is no guarantee that the share will receive dividends. - *REDEEMABLE SHARES OF STOCK: shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price. o Redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation. o Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. (exception to the general rule that a corporation cannot purchase its own shares other than from current retained earnings.) o This is subject to the condition that the corporation has, after redemption, assets in its books to cover debts/liabilities inclusive of capital stock. o *Redemption CANNOT BE MADE when corporation is insolvent or will cause insolvency. - Except as otherwise provided in the stock certificate, the redemption rests entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock. - INTEREST BEARING STOCKS on which the corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. HYBRID SECURITIES Government v. Philippine Sugar Estates Co. 38 Phil. 15 (1918) - 2 PRINCIPLES OF CAPITAL FORMATION IN CORPORATIONS: o EQUITY Securities: represent an ownership interest in the corporation and include both common & preferred stock. Usually grants voting rights to holder which allows participation in certain management aspects of the corporation. o DEBT Securities (Bonds): do not represent an ownership interest in the corporation but rather create a debtor-creditor relationship between the corporation and bondholder. Allows return to the investor whether or not corporation has unrestricted retained earnings. - CASE AT BAR: In determining whether the arrangement between the corporation was a contract of partnership or a loan arrangement, it was ruled that it was a partnership because: o Except for the first return from the sale to be devoted to the payment of capital, no period was fixed in the countract for repayment; o The amount of credit was not to be turned over at once but to be used by the borrowing company as needed; o Return on capital was not by a fixed interest rate but 25% of the profits earned from the borrowing company; o The lending company agreed to pay 25% of all general expenditures necessary for the development of its business; o Consent of the lending company was needed when the borrowing company desired to sell the land at below an agreed market price, but not when the selling price was above the benchmark figure; and o Lending company acted as treasurer of the enterprise. - CASE AT BAR: Although denominated as a loan agreement, the arrangement was actually a partnership. o The amount loaned constituting actual equity investment in the venture.

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EQUITY PLACEMENT Investor expects that returns shall be tied up with the success or loss of the operations of the corporation. (Risky vibe) No assurance of a dividend or an interest on the amount invested since it is subject to the performance of the corporation as an enterprise. No carrying cost on the part of the corporation since it is not bound to pay a return on the investment which can only be done if there are profits. Investment is generally non-withdrawalble for so long as the corporation has not been dissolved.

DEBT PLACEMENT Lender expects that money will be paid back. Looks at the ability of the corporation to pay back the loan. (Risk averse) Since relationship is contractual, the investor has a right to demand payment of the placement upon maturity. Investor places no stake in the results of the operations.

XIV. Acquisitions, Mergers, and Consolidations

ACQUISITIONS & TRANSFERS Types of Acquisitions/Transfers **Edward . Nell Co v. Pacific 15 SCRA 415 (1965) GENERAL RULE: Where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor. EXCEPTIONS: o Purchaser expressly or impliedly agrees to assume such debts; (ASSET ONLY) o Where the transaction is entered into fraudulently in order to escape liability for such debts. (ASSET ONLY) o Where the purchasing corporation is merely a continuation of the selling corporation; and (BUS. ENTERPRISE) o The transaction amounts to a consolidation or merger of the corporations; McLeod v. NLRC 512 SCRA 222 (2007) - As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets. See above for exceptions. - When a corporation transferred all its assets to another corporation to settle its obligations that would not amount to a fraudulent matter. CONSOLIDATION Union of two or more existing corporations to form a new corporation called the consolidated corporation. MERGER Union whereby one corporation absorbs one or more existing corporations, and the absorbing corporation survives and continues the combined business. All constituents, except the surviving corporation, are dissolved.

All the constituents are dissolved and absorbed by the new consolidated enterprise. No liquidation of the assets of the dissolved corporations. The surviving or consolidated corporation acquires all their properties, rights and franchises and their stockholders usually become its stockholders. The surviving or consolidated corporation assumes automatically the liabilities of the dissolved corporations, regardless of whether the creditors have consented or not to such merger or consolidation. Caltex Phils. Inc. v. PNOC Shipping & Transport Co. 498 SCRA 400 (2006) - CASE AT BAR: When PSTC assumed all the properties, business and assets of LUSTEVECO, PSTC also assumed all of LUSTEVECOs property which was stipulated in their Agreement. o PSTC cannot accept the benefits without assuming the obligations under the same Agreement. o PSTC cannot repudiate its commitment to assume the obligations after taking over the assets for that will amount to defrauding the creditors of LUSTEVECO. It will also amount in the failure of consideration since the obligations is part of the consideration for the transfer of the assets. The disposition of the assets of a corporation shall be deemed to cover substantially all the corporate property and assets, if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purposes for which it was incorporated. **While the Corporation Code allows the transfer of all or substantially all the properties and assets of a corporation, the transfer should not prejudice the CREDITORS of the assignor. o Creditor has a real interest to go after any person to whom the debtor fraudulently transferred its assets.

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EXAMPLES OF BADGES OF FRAUD: (1) Consideration is fictitious or inadequate; (2) Transfer is made by a debtor after suit has been begun and while it is pending against him; (3) Sale on credit by an insolvent debtor; (4) Evidence of large indebtedness/insolvency; (5) Transfer of all/substantially all property when insolvent/greatly embarrassed financially. **Even without the Agreement, PSTC is still liable because the disposition is a sale of all or substantially all of the assets of a corporation.

Business Enterprise Transfers A.D. Santos v. Vasquez 22 SCRA 1156 (1968) CASE AT BAR: Amador Santos was the sole owner (sole proprietor) and operator of the City Cab which was subsequently transferred to A.D. Santos Inc. where Amador was an officer. o Vasquez, one of its taxi drivers, coughed up blood and found that he had tuberculosis. o Vasquez filed a claim for compensation and reimbursement for amount spent as treatment. RULING: A.D. Santos Inc is liable. Although in truth the majority stockholder operated the business under a sole proprietorship scheme, it was subsequently transferred to the taxi cab company. - BUSINESS ENTERPRISE TRANSFERS: Transferee is liable for the liabilities of his transferor arising from the business enterprise transferred. Laguna Trans Co. Inc. v. SSS 107 Phil. 833 (1960) - Where a corporation was formed by, and consisted of members of a partnership whose business and property was conveyed and transferred to the corporation for the purpose of continuing its business, in payment for which corporate capital stock was issued, such corporation is presumed to have assumed partnership debts. Transferee is prima facie liable. o Members of the partnership may be said to have simply put on a new coat, or taken on a corporate cloak and the corporation is a mere continuation of the partnership. McLeod v. NLRC 512 SCRA 222 (2007) See above. Pantranco Employees Association v. NLRC 581 SCRA 598 (2009) *Where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is NOT, by that fact alone, liable for the debts and liabilities of the transferor. Pepsi Cola Bottling Co. v. NLRC 210 SRA 277 (1992) - *CASE AT BAR: Pepsi Cola Distributors Phils may have ceased business operations and Pepsi Cola Products Phils Inc. may be a new company but it does not necessarily follow that no one may now be held liable for illegal acts committed by the earlier firm. o The complaint was filed when PCD was still in existence. o Pepsi never stopped doing business in the Philippines. o The sale of products, purchases of materials, payment of obligations, and other business acts did not stop at the time PCD bowed out and PCPPI came into being. o No evidence presented that PCPPI, as the new entity or purchasing company is free from liabilities incurred by the former corporation. Buan v. Alcantara 127 SCRA 845 (1984) - Between the ESTATE and the CORPORATION, the intention of incorporation was to make the corporation liable for past and pending obligations of the estate as the transportation business itself was being transferred to and placed in the name of, the corporation. Equity Transfers PHIVIDEC v. CA 181 SCRA 669 (1984) - CASE AT BAR: PHIVIDECs act of selling PRI to PHILSUCOM shows that PHIVIDEC had complete control of PRIs business. o Rule is that if a parent-holding company assumes complete control of the operation of its subsidiarys business , the separate corporate existence of the subsidiary must be disregarded. *CASE AT BAR: In the interest of justice and equity, and to prevent the veil of corporate fiction from denying her the reparation to which she is entitled, that veil must be pierced and PHIVIDEC and PRI regarded as one and the same entity.

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MERGERS & CONSOLIDATIONS Concepts McLeod v. NLRC 512 SCRA 222 (2007) See above. Effects of Merger/Consolidation ** Associated Bank v. CA 291 SCRA 511 (1998) In the MERGER of two or more existing corporations, one of the combining corporations survives and continues the combined business, while the rest are dissolved and all their rights, properties and liabilities are acquired by the surviving corporation. Although there is dissolution of the absorbed corporations, there is no winding up of their affairs or liquidation of their assets, because the surviving corporation automatically acquires all their rights, privileges and powers, as well as their liabilities. *The merger, however, does not become effective upon the mere agreement of the constituent corporations. o It requires the approval by the SEC of the articles of merger which, in turn, must have been duly approved by a majority of the respective stockholders of the constituent corporations. o Merger shall be EFFECTIVE ONLY upon the issuance by the SEC of a certificate of merger. - Effectivity date of the merger is crucial for determining when the merged or absorbed corporation ceases to exist; and when its rights, privileges, properties as well as liabilities pass on to the surviving corporation. EFFECTS ON EMPLOYEES OF CORPORATION Asset-Only Transfers **Sundowner Development Corp. v. Drilon 180 SCRA 14 (1989) - The rule is that unless expressly assumed, labor contracts such as employment contracts and collective bargaining agreements are not enforceable against a transferee of an enterprise, labor contracts being in personam, thus binding only between the parties. o Labor contract merely creates an action in personam and does not create any real right which should be respected by third parties. - CASE AT BAR: There being no employer-employee relationship between the petitioner and the Mabuhay employees, Petitioner CANNOT be compelled to absorb the employees of Mabuhay and to pay them backwages. Business Enterprise Transfers **Central Azucarera del Danao v. CA 137 SCRA 295 (1985) - Sale of all or substantially all of the corporations assets does not insulate the seller from paying separation pay to its employees. o CASE AT BAR: [The employees] fate under the new owners appeared unprovided for. And there is no law requiring that the purchaser should absorb the employees of the selling company. o The most that the purchasing company may do, for reasons of public policy and social justice, is to give preference to the qualified separated employees of the selling company, who in their judgment are necessary in the continued operation of the business establishment. - CASE AT BAR: Inasmuch as there was no notice of termination whatsoever given to the employees of Central Danao coupled with the fact that no efforts were exerted by Central Danao to apprise its employees of the consequences of the sale or disposition of its assets to Dadeco, justice and equity dictate that private respondents be entitled to their termination or separation pay corresponding to the number of years of service with Central Danao until June 7, 1961. *Complex Electronics Employees Association v. NLRC 310 SCRA 403 (1999) - RUNAWAY SHOP: an industrial plant moved by its owners from one location to another to escape union labor regulations or state laws. o It is also used to describe a plant removed to a new location in order to discriminate against employees at the old plant because of their union activities. o Where the employer moves its business to another location or it temporarily closes its business for anti-union purposes. - In case of closures or cessation of operation of business establishments not due to serious business losses or financial reverses, the employees are always given separation benefits. - CASE AT BAR: Notwithstanding the financial losses suffered by Complex, such was, however, not the main reason for its closure. o Complex admitted that the main reason for the cessation of the operations was the pull-out of the materials, equipment and machinery from the premises of the corporation as dictated by its customers. o *It was actually still capable of continuing the business but opted to close down to prevent further losses.

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Equity Transfers Pepsi Cola Distributors v. NLRC 247 SCRA 386 (1995) - CASE AT BAR: While NLRC found that private respondent committed a minor procedural infraction when he went on sick leave from Nov. 88 to Dec. 88 without officially informing management or his immediate supervisor, the same cannot reasonably justify the penalty of outright dismissal from his employment. - *CASE AT BAR: Court cannot sustain petitioner PCDs subsequent act of dismissing private respondent for the second time by removing his name from the payroll of Jul 89 after reinstating him 63 days earlier, or on May 89 on the ground that it has already sold its business interests to Pepsi Cola Products Philippines, Inc. o The contention that the second dismissal of private respondent presents an issue separate and distinct from the issue of the earlier dismissal on Dec 88 is nothing but an attempt of PCD to evade liability for illegally dismissing private respondent and to shield the purchasing corporation, PCPPI, from the said liability. *Manlimos v. NLRC 242 SCRA 145 (1995) - CASE AT BAR: The change in ownership of the management was done bona fide and the petitioners did not for any moment before the filing of their complaints raise any doubt on the motive for the change. - It is within the employers legitimate sphere of management control of the business to adopt economic policies or make some changes or adjustments in their organization or operations that would insure profit to itself or protect the investment of its stockholders. o Employer may merge or consolidate its business with another, or sell or dispose all or substantially all of its assets and properties which may bring about the dismissal or termination of its employees in the process. o Such dismissal or termination should not however be interpreted in such a manner as to permit the employer to escape payment of termination pay. - *Sale or disposition must be motivated by good faith as an element of exemption from liability. o Where such transfer of ownership is in good faith, the transferee is under no legal duty to absorb the transferors employees as there is no law compelling such absorption. Mergers and Consolidations Filipinas Port Services v. NLRC 177 SCRA 203 (1989) Unless expressly assumed, labor contracts are not enforceable against a transferee of an enterprise, labor contracts being in personam. A transferor in bad faith may be held responsible to employees. - CASE AT BAR: Petitioner cannot be held liable for the payment of the retirement pay of private respondent while in the employ of DAMASTICOR. o It is the latter who is responsible for the same as the labor contract of private respondent with DAMASTICOR is in personam and cannot be passed on. Spin-offs **SMC Employees Union v. Confesor 262 SCRA 81 (1996) - CASE AT BAR: SMC-Union was informed by management that its divisions (Beer, Packaging, Feeds/Livestock, Magnolia & Agri) would undergo restructuring. Thereafter, Magnolia & Feeds/Livestock were spun off and became separate corporations (Magnolia & SMFI). o SMC-Union insisted that the bargaining unit of SMC would still include employees of the corporations that were separated. o SMC claimed otherwised. - RULING: transformation of the companies was a management prerogative and business judgment which the courts cannot look into unless it is contrary to law, public policy or morals. o Neither can we impute any bad faith on the part of SMC so as to justify the application of the doctrine of piercing the corporate veil. o Magnolia and SMFI became distinct entities with separate juridical personalities. Thus, they can not belong to a single bargaining unit.

xxXV. Rehabilitation and Insolvency

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XVI. Corporate Dissolution and Liquidation

METHODS OF LIQUIDATION Liquidation Pursued Thru a Trustee *Gelano v. CA 103 SCRA 90 (1981) - A corporation with a pending court action may still continue prosecuting or defending the same for 3 years AFTER its dissolution. - CASE AT BAR: Although private respondent did not appoint any trustee, yet the COUNSEL who prosecuted and defended the interest of the corporation in the instant case and who in fact in behalf of the corporation may be considered a trustee of the corporation at least with respect to the matter in litigation only. o There was substantial compliance with the requirements of the lawand as such, private respondent Insular Sawmill, Inc. could still continue prosecuting the present case even beyond the period of 3 years from the time of its dissolution. - The purpose in the transfer of the assets of the corporation to a trustee upon its dissolution is more for the protection of its creditor and stockholders. REINCORPORATION Chung Ka Bio v. IAC 163 SCRA 534 (1988) - CASE AT BAR: While we agree that the board of directors is not normally permitted to undertake any activity outside of the usual liquidation of the business of the dissolved corporation, there is nothing to prevent the stockholders from conveying their respective shareholdings toward the creation of a new corporation to continue the business of the old. - WINDING UP is the sole activity of a dissolved corporation that does not intend to incorporate anew. o If it does, HOWEVER, it is not unlawful for the old board of directors to negotiate and transfer the assets of the dissolved corporation to the new corporation intended to be created as long as the stockholders have given their consent.

XVII. Close Corporations

DEFINITION Gala v. Ellice Agro-Industrial Corp. 418 SCRA 431 (2003) - Collateral attacks on the legality of the purposes for which a corporation was organized are prohibited in this jurisdiction. - The concept of a CLOSE CORPORATION organized for the purpose of running a family business or managing family property has formed the backbone of Philippine commerce and industry. o A family corporation should serve as a rallying point for family unity and prosperity, not as a flashpoint for familial strife. o It is hoped that people reacquaint themselves with the concepts of mutual aid and security that are the original driving forces behind the formation of family corporations and use these tenets in order to facilitate more civil, if not more amicable, settlements of family corporate disputes. De Facto Close Corporation *Manuel R. Dulay Enterprises Inc. v. CA 225 SCRA 678 - CASE AT BAR: Dulay Enterprises is classified as a close corporation and consequently a board resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its president. o A corporate action taken at a board meeting without proper call or notice in a close corporation is deemed ratified by the absent director unless the latter promptly files his written objection with the secretary of the corporation after having knowledge of the meeting which, in this case, Virgilio Dulay failed to do. San Juan Structural v. CA 269 SCRA 564 (1997) - **CLOSE CORPORATION: one whose articles of incorporation provide that o All the issued stock of all classes (except treasury shares) shall be held of record by not more than 20 persons; o All issued stock of all classes shall be subject to one or more specified restrictions on transfer; and o Corporation shall not list in any stock exchange or make public offering of any of its stock of any class. o 2/3 of its voting stock should not be owned/controlled by another corporation which is not a close corporation within the meaning of this Code. - CASE AT BAR: Motorich does not become a close corporation, just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed capital stock. o A narrow distribution of ownership does not, by itself, make a close corporation.

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NO NECESSITY OF BOARD Naguiat v. NLRC 269 SCRA 564 - CASE AT BAR: Sergio F. Naguiat was the president of CFTI who actively managed the business. o Applying A.C. Ransom, he falls within the meaning of an employer as contemplated by the Labor Code, who may be held jointly and severally liable for the obligations of the corporation to its dismissed employees. - CASE AT BAR: Petitioners also conceded that both CFTI and Naguiat Enterprises were close family corporations owned by the Naguiat family. o Stockholders thereof who are actively engaged in the management or operation of the business and affairs of a close corporation shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance.

XVIII. Non-Stock Corporations & Foundations

DELINQUENCY OF MEMBERSHIP DUES *Valley Golf & Country Club v. Vda. De Caram 585 SCRA218 (2009) - The procedure under 67 of the Corporation Code for the stock corporations recourse on unpaid subscriptions is inapt to a non-stock corporation vis--vis a members outstanding dues. - Termination of membership shall have the effect of extinguishing all rights of a member in the corporation or in its property, unless otherwise provided in the articles of incorporation or the by-laws. - CASE AT BAR: The right of a non-stock corporation such as Valley Golf to expel a member through the forfeiture of the Golf Share may be established in the by-laws alone. - Generally in theory, a non-stock corporation has the power to effect the termination of a member without having to constitute a lien on the membership share or to undertake the elaborate process of selling the same at public auction . - The articles of incorporation or the by-laws can very well simply provide that the failure of a member to pay the dues on time is cause for the board of directors to terminate membership. o CASE AT BAR: Yet Valley Golf was organized in such a way that membership is adjunct to ownership of a share in the club; hence the necessity to dispose of the share to terminate membership. o When the loss of membership in a non-stock corporation also entails the loss of property rights, the manner of deprivation of such property right should also be in accordance with the provisions of the Civil Code. - Non-stock corporations and their officers are not exempt from the obligation imposed by Articles 19, 20, and 21 of the Civil Code, which provisions enunciate a general obligation under law for every person to act fairly and in good faith towards one another.

XIX. Foreign Corporation

LICENSE TO DO BUSINESS IN THE PHILIPPINES Rationale for Requiring License **Marshall-Wells v. Elser 46 Phil. 71 (1924) - Corporations have no legal status beyond the bounds of the sovereignty by which they are created. - A state may restrict the right of a foreign corporation to engage in business within its limits, and to sue in its courts. - By virtue of STATE COMITY, a corporation created by the laws of one state is usually allowed to transact business in other states and to sue in the courts of the forum. - The OBJECT of the Corporation Lawwas to subject the foreign corporation doing business in the Philippines to the jurisdiction of its courts. - The obtaining of the license prescribed the law is not a condition precedent to the maintaining of any kind of action in the courts of the Philippines by a foreign corporation. o But no foreign corporation shall be permitted to transact business in the Philippines unless it shall have the license required by law, and, until it complies with the law, shall not be permitted to maintain any suit in the local courts. CONCEPTS OF DOING BUSINESS IN THE PHILIPPINES; EFFECTS OF NOT OBTAINING LICENSE Jurisprudential Concepts of Doing Business Mentholatum v. Mangaliman 72 Phil. 525 (1941) - No general rule or governing principles can be laid down as to what constitutes doing or engaging in or transacting business. o Each case must be judged in the light of its peculiar environmental circumstances. - *The TRUE TEST, however, seems to be whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another.

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The term implies a continuity of commercial dealings and arrangements, and contemplates to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its organization. CASE AT BAR: Mentholatum Co., Inc., being a foreign corporation doing business in the Philippines without the license required by law, it may not prosecute this action for violation of trade mark and unfair competition.

Transactions Seeking Profit **Agilent Technologies v. Integrated Silicon Technology Phil. Corp. 427 SCRA 593 (2004) - A foreign corporation without a license is not ipso facto incapacitated from bringing an action in Philippine courts. - A license is necessary only if a foreign corporation is transacting or doing business in the country. - An unlicensed foreign corporation doing business in the Philippines may bring suit in Philippine courts against a Philippine citizen or entity who had contracted with and benefited from said corporation. [ BASED ON ESTOPPEL] o A party is estopped from challenging the personality of a corporation after having acknowledged the same by entering into a contract with it. The doctrine applies to foreign as well as domestic corporations. o This prevents a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes chiefly in cases where such person has received the benefits of the contract. Contract Test Pacific Vegetable Oil Corp. v. Singson - CASE AT BAR: Pacific was not considered as doing business in the Philippines under the contract that was

negotiated and perfected in the US and payment was to be made in San Francisco
o There was no need to obtain a license to do business before the foreign corporation can sue in Philippine courts. Aetna Casualty & Surety Co. v. Pacific Star Line 80 SCRA 635 (1977) - CASE AT BAR: The contract of insurance was entered into in New York and payment was made to the consignee in its New York branch. o *Since the Aetna Casualty & Surety Company is not engaged in the business of insurance in the Philippines but is merely collecting a claim assigned to it by the consignee, it is not barred from filing the instant case although it has not secured a license to transact insurance business in the Philippines. Transactions with Agents and Brokers Granger Associates v. Microwave Systems, Inc. 189 SCRA 631 (1990) - Term DOING BUSINESS implies a continuity of commercial dealings and arrangements and the performance of acts or works or the exercise of some of the functions normally incident to the purpose and object of its organization. - Where a single act or transaction, however, is not merely incidental or casual but indicates the foreign corporations intention to do other business in the Philippines, this constitutes doing or engaging in or transacting business in the Philippines. - If a foreign corporation operates in the Philippines without submitting to our laws, it is only just that it not be allowed to invoke them in our courts when it should need them later for its own protection. Different Rules on Trademark & Tradenames *Western Equipment & Supply Co. v. Reyes 51 Phil. 115 (1927) - An unregistered foreign corporation which has not personally transacted business in the Philippines, but which has acquired valuable goodwill and high reputation therein through the sale by importers and the extensive use within the Philippines of its products bearing either its corporate name or trade-mark, has a legal right to restrain an officer of the Government, who has full knowledge of those facts, from issuing a certificate of incorporation to residents of the Philippines who are attempting to organize a corporation for the purpose of pirating the corporate name of the foreign corporation and of engaging in the same business. o Purpose of such a suit is to protect its reputation, corporate name and goodwill which have been established through the natural development of its trade over a long period of years. o It does not seek to enforce any legal or contract rights arising from, or growing out of, any business which it has transacted in the Philippines. - It is the trade and not the mark that is to be protected. o A TRADE-MARK does not acknowledge any territorial boundaries, but extends to every market where the trader's goods have become known and identified by the use of the mark.

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Doctrine on Unrelated or Isolated Transactions Antam Consolidated v. CA 143 SCRA 288 (1986) EFFECTS OF FAILURE TO OBTAIN LICENSE On the Contract Entered Into Home Insurance Co. v. Eastern Shipping Lines 123 SCRA 424 (1983) - The objective of the law was to subject the foreign corporation to the jurisdiction of our courts. o The Corporation Law must be given a reasonable, not an unduly harsh, interpretation which does not hamper the development of trade relations and which fosters friendly commercial intercourse among countries. - *The present Corporation Code attaches a penal sanction and denies access to courts and administrative tribunals to foreign corporations doing business here without license. o Not necessary to declare the contract null and void even as against the erring foreign corporation. - Lack of capacity to sue by foreign corporation at time of execution of contract cured by its subsequent registration here. Standing to Sue Marshall-Wells v. Elser 46 Phil. 71 (1924) See page 29. - The obtaining of the license prescribed the law is not a condition precedent to the maintaining of any kind of action in the courts of the Philippines by a foreign corporation. o But no foreign corporation shall be permitted to transact business in the Philippines unless it shall have the license required by law, and, until it complies with the law, shall not be permitted to maintain any suit in the local courts. **Atlantic Mutual Inc. Co. v. Cebu Stevedoring Co, 17 SCRA 1037 (1966) - A foreign corporation ENGAGED IN BUSINESS in the Philippines can maintain suit in this jurisdiction if it is duly licensed. - If a foreign corporation is NOT ENGAGED IN BUSINESS in the Philippines, it can maintain such suit if the transaction sued upon is singular and isolated, in which case no license is required. Criminal Liability Under 144 Home Insurance Co. v. Eastern Shipping Lines 123 SCRA 424 (1983) See page 30. Pari Delicto Doctrine Top-Weld Mfg. V. ECED 119 SCRA 118 (1985) - CASE AT BAR: It was incumbent upon TOPWELD to know whether or not IRTI and ECED were properly authorized to engage in business in the Philippines when they entered into the licensing and distributorship agreements. o The very purpose of the law was circumvented and evaded when the petitioner entered into said agreements despite the prohibition of R.A. No. 5455. o Parties in this case being equally guilty of violating R.A. No. 5455, they are in pari delicto, in which case it follows as a consequence that petitioner is not entitled to the relief prayed for in this case. **Communication Materials v. CA 260 SCRA 673 (1996) - If a foreign corporation transacts business in the Philippines without such a license, it shall not be permitted to maintain or intervene in any action, suit, or proceeding in any court or administrative agency of the Philippines, but it may be sued on any valid cause of action recognized under Philippine laws. - *CASE AT BAR: Notwithstanding such finding that ITEC is doing business in the country, petitioner is nonetheless estopped from raising this fact to bar ITEC from instituting this injunction case against it. o A foreign corporation doing business in the Philippines may sue in Philippine Courts although not authorized to do business here against a Philippine citizen or entity who had contracted with and benefited by said corporation. o A party is estopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract with it. - *The doctrine of lack of capacity to sue based on the failure to acquire a local license is based on considerations of sound public policy. o It was never intended to favor domestic corporations who enter into solitary transactions with unwary foreign firms and then repudiate their obligations simply because the latter are not licensed to do business in this country. - Where the parties are equally guilty of violating the law, they are in pari delicto, in which case it follows as a consequence that petitioner is not entitled to the relief prayed for. Estoppel Doctrine Merril Lynch Futures Inc. v. CA 211 SCRA 824 (1992)

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CASE AT BAR: There would be no question that the Laras received benefits generated by their business relations with ML FUTURES. o Assuming that the Lara Spouses were aware from the outset that ML FUTURES had no license to do business in this country and MLPI, no authority to act as broker for it, it would appear quite inequitable for the Laras to evade payment of an otherwise legitimate indebtedness due and owing to ML FUTURES.

Proper Doctrine Eriks Ltd. v. CA 267 SCRA 567 (1997) - A foreign corporation without such license is not ipso facto incapacitated from bringing an action. - A license is necessary only if it is transacting or doing business in the country. - DOING BUSINESS: implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its organization. - CASE AT BAR: The grant and extension of 90-day credit terms by a foreign corporation to a domestic corporation for every purchase made unarguably shows an intention to continue transacting with the latter since in the usual course of commercial transactions, credit is extended only to customers in good standing or to those on whom there is an intention to maintain longterm relationship. - What is DETERMINATIVE of doing business is not really the number or the quantity of the transactions, but more importantly, the intention of an entity to continue the body of its business in the country. o Number and quantity are merely evidence of such intention. - ISOLATED TRANSACTION: a transaction or series of transactions set apart from the common business of a foreign enterprise in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of the business organization. SUITS AGAINST FOREIGN CORPORATIONS Jurisdiction Over Foreign Corporations General Corp. of the Philippines v. Union Insurance Society 87 Phil. 313 (1950) - If a foreign corporation has a license to do business, then SUMMONS to it will be served on the agent designated by it for the purpose, or otherwise in accordance with the provisions of the Corporation Law. - Where a foreign corporation actually doing business here has not applied for license to do so and has not designated an agent to receive summons, then service of summons on it will be made pursuant to the provisions of the Rules of Court. - Where a foreign insurance corporation engages in regular marine insurance business here by issuing marine insurance policies abroad to cover foreign shipments to the Philippines, said policies being made payable here, and said insurance company appoints and keeps an agent here to receive and settle claims flowing from said policies, then said foreign corporation will be regarded as doing business here in contemplation of law. - As long as a foreign private corporation does or engages in business in this jurisdiction (with or without license), it should and will be amenable to process and the jurisdiction of the local courts. o This is for the protection of the citizens. o Service upon any agent of said foreign corporation constitutes personal service upon the corporation and accordingly judgment may be rendered against said foreign corporation. Odd Doctrine Facilities Management Corp v. Dela Osa 89 SCRA 131 (1979) CONTRA Signetics Corp. v. CA 225 SCRA 737 (1993) BUT NOW SEE Avon Insurance PLC v. CA 278 SCRA 312 (1997)

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